美國合眾銀行 (USB) 2012 Q4 法說會逐字稿

Welcome to the U.S. Bancorp fourth-quarter 2012 earnings conference call.

Following a review of the results by Richard Davis, Chairman, President, and Chief Executive Officer, and Andy Cecere, U.S. Bancorp's Vice Chairman and Chief Financial Officer, there will be a formal question-and-answer session.

(Operator Instructions)

This call will be recorded and available for replay beginning today at approximately noon Eastern Standard Time through Wednesday, January 23, at 12 o'clock midnight Eastern Standard Time.

I will now turn the conference call over to Judy Murphy, Director of Investor Relations for U.S. Bancorp.

Thank you, Christie, and good morning to everyone who has joined our call.

Richard Davis, Andy Cecere, and Bill Parker are here with me today to review U.S. Bancorp's fourth-quarter and full-year 2012 results and to answer your questions.

Richard and Andy will be referencing a slide presentation during their prepared remarks.

A copy of the slide presentation, as well and as our earnings release and supplemental analyst schedules, are available on our website at USBank.com.

I would like to remind you that any forward-looking statements made during today's call are subject to risk and uncertainty.

Factors that could materially change our current forward-looking assumptions are described on page two of today's presentation, in our press release, and in our Form 10-K and subsequent reports on file with the SEC.

I will now turn the call over to Richard.

Thank you, Judy.

Good morning, everyone.

2012 was a great year for our company and I am very proud to share our fourth-quarter and full-year results with you this morning.

I would like to begin with a few (technical difficulty) highlights on page three of the presentation.

U.S. Bancorp reported record net income of $5.6 billion, or $2.84 per diluted common share, for the year 2012.

We achieved record total net revenue of $20.3 billion, which was higher than the previous year by 6.2%, driven by growth in both net interest income and fee revenue.

We achieved industry-leading profitability with a return on average assets of 1.65% and a return on average common equity of 16.2% and an efficiency ratio of 51.5%.

And we realized positive operating leverage year over year.

Average loans grew by 6.9% over 2011 and we experienced strong year-over-year average deposit growth of 10.6%.

Credit quality continued to improve with a decline in net charge-offs of 26.2% and an 18.9% decrease in nonperforming assets, excluding covered assets.

Our capital position ended the year stronger with a Tier 1 common equity ratio of 9% and we were able to return $3.4 billion of our 2012 earnings to shareholders in the form of dividends and buybacks.

Now turning to slide four and our fourth-quarter highlights.

U.S. Bancorp reported net income of $1.4 billion for the fourth quarter 2012, or $0.72 per diluted common share.

Included in the current quarter was an $80 million expense accrual for the recently announced mortgage foreclosure settlement, which reduced EPS by $0.03.

Recall that the fourth quarter of 2011 included two notable items that increased EPS by $0.05.

Total net revenue of $5.1 billion was slightly higher than the same quarter of last year.

Excluding the prior-year merchant settlement gain, however, total net revenue grew by 5.6%.

Importantly, we achieved positive operating leverage year over year.

Total average loans grew year over year by 6.4% and, as expected, 1.5%, or 6% annualized, linked quarter.

We experienced strong growth in total average deposits of 9.2% over the prior year and 1.9% over the third quarter of 2012.

Credit quality continued to improve.

Total net charge-offs decreased by $70 million, or 13%, from the prior quarter.

You may recall that the third-quarter net charge-offs included $54 million of incremental charge-offs related to our regulatory policy clarification.

Non-performing assets, excluding covered assets, declined by 4.6% linked quarter.

We generated significant capital this quarter and ended the quarter with a Basel I Tier 1 common equity ratio of 9% and a Tier 1 capital ratio of 10.8%.

Our estimated Tier 1 common ratio under the most recent Basel III rules was 8.1%.

We repurchased 13 million shares of common stock during the fourth quarter.

Trends in our industry-leading performance metrics are shown on slide five.

Return on average assets in the fourth quarter was 1.62% and return an average common equity was 15.6%.

Both ratios declined from the prior quarter, primarily as a result of the mortgage foreclosure-related expense accrual.

As a reminder, our company's long-term goal is to achieve a normalized ROA in the range of 1.6% to 1.9% and an ROE between 16% and 19%.

Our net interest margin and efficiency ratio are shown in the graph on the right-hand side of slide four.

This quarter's net interest margin of 3.55% was 5 basis points lower than the same quarter of last year, and as expected, 4 basis points lower than the prior quarter's rate of 3.59%.

Andy will discuss the margin in more detail in a few minutes.

Our efficiency ratio for the fourth quarter was 52.6%.

Slightly better than the prior year, but higher than the previous quarter, primarily reflecting the $80 million mortgage-related settlement expense accrual that was included in our current quarter's results.

We continue to manage our operating expenses effectively and expect that this ratio will remain in the low 50%s going forward as we continue to invest and grow our businesses.

Turning to slide six, the Company has reported total net revenue in the fourth quarter of $5.1 billion, a slight increase over the prior year's quarter and a 1.3% decrease from the previous quarter.

As noted on the slide, the year-over-year increase in total net revenue would have been 5.6% excluding the impact of the fourth quarter of 2011 gain.

The Company's revenues benefited from continued growth in both our balance sheet and fee-based businesses, particularly mortgage, as we have significantly increased our market share over the past few years.

Average loan and deposit growth is summarized on slide seven.

Average total loans outstanding increased by over $13 billion, or 6.4% year over year.

Overall, excluding covered loans, a run-off portfolio, average total loans grew by 8.6% year over year and 2% linked quarter.

Once again, the increase in average loans outstanding was led by a strong growth in average commercial loans which grew by 18.4% year over year and 3.3% over the prior quarter.

Residential real estate loans also continue to show strong growth, 19% over the same quarter of last year and 5.3% over the prior quarter.

Within the other retail loan category, home equity line and loans continue to decline on average while auto loans and leases showed steady growth over both comparable periods.

We continue to originate and renew loans and lines for our customers.

New originations, excluding mortgage production, plus new and renewed commitments, totaled over $49 billion in the fourth quarter and totaled over $176 billion for the full year of 2012.

Total average revolving corporate and commercial commitments outstanding increased year over year by 15.6% and 2.5% on a linked-quarter basis while utilization remained stable at approximately 25%, basically where it has been through the entire year of 2012.

Total average deposits increased by $20.5 billion, or 9.2%, over the same quarter of last year and by $4.6 billion on a linked-quarter basis with growth in low-cost deposits particularly strong quarter over quarter.

Turning to slide eight and credit quality.

Total net charge-offs in the fourth quarter decreased by $70 million, or 13%, from the third quarter of 2012 while non-performing assets, excluding covered assets, decreased by $100 million, or 4.6%.

The ratio of net charge-offs to average loans outstanding declined to 0.85%, indicative of the high quality of our portfolio.

During the fourth quarter we released $25 million of reserves compared with $50 million in the third quarter and $125 million in the fourth quarter of 2011.

Given the mix and overall quality of our portfolio, we expect net charge-offs to be relatively stable to modestly down in the first quarter while non-performing assets will continue to trend lower.

Andy will now give you a few more details about our fourth-quarter results.

Thanks, Richard.

Slide nine gives you a view of our fourth-quarter 2012 results versus comparable time periods.

Our diluted EPS of $0.72 was 4.3% higher than the fourth quarter of 2011 and 2.7% lower than the prior quarter.

Slide 10 details notable items that impacted earnings in the fourth quarters of 2012 and 2011.

As previously mentioned, the current quarter included an $80 million foreclosure-related settlement expense accrual that reduced EPS by $0.03.

In the fourth quarter of last year non-interest income included a $263 million litigation settlement gain related to the termination of a merchant processing referral agreement.

We also booked $130 million expense accrual related to other mortgage servicing and foreclosure-related matters.

On a net basis, these two items increased EPS by $0.05 in the fourth quarter of 2011.

The key drivers of the Company's fourth-quarter earnings are summarized on slide 11.

The $70 million, or 5.2%, increase in net income year over year was the result of a slightly higher net revenue, slightly lower expense, and a decrease in the provision for credit losses.

Excluding the net after-tax impacts of the notable items detailed in slide 10, net income year over year was higher by approximately 17%.

Net interest income increased year over year by $110 million, or 4.1%.

The favorable variance was largely driven by the $17.1 billion increase in average earning assets.

In addition to strong growth in [low-cost] deposits and reduced rates on wholesale funding.

The 5.8% growth in average earning assets includes planned increases in the securities portfolio as well as growth in average total loans and loans held for sale.

As expected, the net interest margin of 3.55% was 5 basis points lower than the same quarter of last year, primarily due to the increase in lower yielding investment securities partially offset by growth in low-cost deposits, lower-cost wholesale funding, and a reduction in cash balances held at the Fed.

Non-interest income declined by 4.2% year over year, primarily due to the settlement gain recorded in 2011.

Excluding this prior-year gain, non-interest income was higher by 7.4%.

Mortgage banking revenue was strong year over year, largely reflecting a 27% increase in production and improved gain on sale margins and higher servicing revenue.

Also contributing to fee income growth were increases in trusts and investment management fees, retail and corporate payments revenue, commercial products revenue, and investment products fees and commissions.

These positive variances were partially offset by a 6.3% decrease in merchant processing, the net result of higher volumes offset by lower rates and the reversal of a revenue share accrual in the fourth quarter of 2011.

In addition, ATM processing services revenue was lower, the result of a re-class within occupancy expense, and other income declined as the fourth quarter of 2011 included a $29 million Visa gain.

Non-interest expense was lower year over year by $10 million, or 0.4%.

The majority of the favorable variance can be attributed to the net $50 million impact of the notable items listed on slide 10 as well as lower ORE and FDIC insurance expense partially offset by an increase in professional services, primarily due to the mortgage servicing review related projects, higher compensation and benefits expense, and an increase in tax credit investment costs and technology expense.

Net income was lower on a linked-quarter basis by $54 million, or 3.7%, primarily due to the $80 million settlement expense accrual.

Excluding this charge, net income was essentially flat to the third quarter as a result of a 1.3% decline in net revenue partially offset by a 9.2% reduction in the provision for credit losses.

On a linked-quarter basis net interest income was flat as growth in average earning assets, which grew by $3.3 billion, was offset by a 4 basis point decline in net interest margin, primarily due to the repricing of the investment securities portfolio and lower loan rates.

The average balance of our investment securities portfolio was $72.9 billion in the fourth quarter, $4.1 billion higher than the fourth quarter of 2011 and just slightly higher than the previous quarter.

On a linked-quarter basis, non-interest income was lower by $67 million, or 2.8%.

This unfavorable variance was primarily the result of a decrease in mortgage banking revenue.

Although mortgage production was higher linked quarter by approximately 2.7%, applications were lower by 6.7%.

The change in mortgage banking revenue also reflected a lower gain on sale margin and $16 million increase in the addition to the reps and warranties repurchase reserve to cover the 2004 and 2005 vintage Freddie Mac loans.

Other income also declined linked quarter as a result of the net effect of the third quarter credit card portfolio sale gain and the write-down of our investment in Nuveen.

On a linked-quarter basis non-interest expense was higher by just $77 million, primarily due to the $80 million settlement expense.

Going forward, as a result of this settlement, professional services expenses will decline as the costs associated with the mortgage servicing review, which have been running approximately $50 million per quarter, end.

Turning to slide 12, our capital positions remain strong and continues to grow.

Based on our assessment of the full impact of the current proposal rules for Basel III standardized approach, we have estimated that our Basel III Tier 1 common equity ratio was approximately 8.1% at December 31 versus 8.2% at September 30.

At 8.1% we are well above the 7% Basel III minimum requirement and above our targeted ratio of 8%.

Slide 13 provides updated detail on the Company's mortgage purchase related expense and the reserve for expected losses on repurchases and make-whole payments.

As we indicated in December, after discussions with Freddie Mac we booked additional reserves to address the put-back risk of the loans originated in 2004 and 2005.

Consequently, the addition to the reps and warranty repurchase reserve this quarter was $16 million higher than in the third quarter of 2012.

Our outstanding repurchases and make-whole request balances at December 31 was $139 million compared with $118 million at September 30.

We continue to expect mortgage repurchase requests to remain fairly stable over the next several quarters.

I will now turn the call back to Richard.

Thanks, Andy.

2012 was a record-setting year for US Bank.

We achieved record earnings and record total net revenue resulting in industry-leading performance metrics.

Further, we continued to invest in our businesses and strategically acquired new partners.

We added more customers and grew market share.

We maintained strong and growing capital and liquidity positions.

And we returned $3.4 billion of the Company's earnings to our shareholders and next year we expect to return more.

In 2013 we will celebrate the 150th anniversary of U.S. Bank.

Since our charter was signed in 1863 we have managed through the times of prosperity and adversity.

We have grown by investing in our business through acquisition.

We have learned from and capitalized on the lessons of our past and become what we are today -- a company with a well-diversified business model and a prudent risk management, a company with the ability to produce consistent and predictable and repeatable results.

We are focused on the future and continuing to build momentum into 2013 for the benefit of our customers, our employees, our communities, and our shareholders.

That concludes our formal remarks.

Andy, Bill, and I would now be happy to answer questions from the audience.

(Operator Instructions) John Arfstrom, RBC Capital.

Good morning.

Question for you on loan growth; good average loan growth but it looks like the trade-in loans are maybe even a little bit higher, a little bit better.

Curious if there is anything notable about the growth and if you have noticed any change in sentiment of the borrowers, maybe positive or negative, early on in the year.

Yes, John, this is Richard.

It is pretty much the same story.

I think the fiscal cliff uncertainty caused the very last couple of weeks to be a bit muted.

But if you take quarter four and look into quarter one, I think at the end of the day you're going to see a pretty sustainable range of that 4% to 6% annualized.

We came in at the high end of that range in quarter four.

I think we are on track for the high end of that for quarter one, but I wouldn't jump outside of that range based on what I am seeing.

I don't think that people care as much about the debt ceiling and the debate that will occur later in the quarter as they do about the bottom line to their paychecks as they did about the fiscal cliff.

But I do think it is still a fairly uncertain environment and people at the first of the year aren't jumping on anything new.

Okay.

Then you touched on it, but maybe if you could provide us a little more color on how you are thinking about capital allocation on 2013.

You talked about returning more money to shareholders, but just walk us through your thought process.

Thanks, John.

This is Andy.

Our goal has always been a 60% to 80% return, the combination of dividends and buybacks.

We were within that range in 2012.

We would expect and we plan to be within that range in 2013.

That is how we submitted CCAR, and as discussed, we will hear back somewhere towards the end of March regarding the results.

And, Richard, you said more, I believe was the phrase in your comments.

Yes, I did.

We are in the lower end of that 60% to 80% range.

It is our goal to move further into that range.

I doubt that we will get to 80% and part of the reason for that is we are still investing in the Company.

You guys are allowing us to do that and I think we are getting good returns for those investments, but the CCAR results will be known in a couple of months.

We have put in a request that we think is very fair and reasonable and will help us move that deeper into the 60% to 80% range.

All right, thank you.

Paul Miller, FBR Capital Markets.

Thank you very much.

On your mortgage production side, do you break out what you do for retail versus wholesale?

We don't break that out, but let me give you a couple facts, Paul, just to maybe round out some of the story.

Right around 69% of our production was refinance activity and a gain on sale margins that you see are down a bit.

But I think an important fact, too, is the application because we book the majority of our revenue at app -- our net apps or our gross apps, both of them.

We are down about 6.7%.

Now some of that can be attributed to the seasonality factor that occurs in the fourth quarter, particularly around the holiday season.

We still expect the first half of the year to be relatively strong from a mortgage perspective, but the fourth quarter was down a bit principally due to seasonality.

And then when you say gain on sale margins are down slightly was it mainly -- was that due to seasonality or is that more of a -- did you do more wholesale versus retail in the quarter?

Probably a combination of a little bit of both.

If I do my gain on sale from a perspective of apps, it was down maybe 10 or 15 basis points.

Okay.

Then on your loan growth are you seeing any different -- I know Wells Fargo talked about seeing a lot of C&I and whatnot in the late part, in December as people are trying to get some things done before the fiscal cliff.

Did you see the same thing or -- could you just add some color around that?

Not really.

I wouldn't have brought it up.

I knew you would ask and the M&A activity was higher at year's end for all the reasons that people are trying to time and sequence their activities before our fiscal cliff possibility, but not notable.

To us it was not a real impact.

As I said, everything kind of slowed down at the very end of the year.

That happens anyway.

But to more of a screeching halt just because people were waiting to see what happened and there is a bit of that recovery in the first few weeks, as John's question might have belied.

But if you take the two quarters in total I don't think you will see any distinction about that fiscal cliff when it is all said and done.

For us, I would like to give you color on loan differences by geography or loan type or customer, and it really isn't much different than the last couple of quarters we have had in 2012.

For us, it is a lot more of the same.

I guess the recession ended 14 quarters ago as I am told.

Probably doesn't feel like it to all of us, but whatever recovery we have been under continues to be slow and methodical.

And we are feeling the exact same thing.

Just a little bit better every month, every quarter, but it's so small you have to go back and add it together just to notice it.

We are seeing that same phenomenon, not much to report.

Thank you very much.

John McDonald, Sanford Bernstein.

Good morning.

Andy, what are some of the puts and takes for the net interest margin looking forward and what is your best guess on the near-term outlook for the NIM?

John, so we talked about the fact that we expected the fourth quarter to be down 4% to 6%; it was down 4%.

I would expect a similar decline in the first quarter, perhaps a little bit more because the first quarter is seasonally lower with regard to loan fees, both on the wholesale as well as retail side.

So down similar level, perhaps a bit more, because of loan fees.

Okay.

If rates stay low, the longer they stay low does the reinvestment rate pain begin to ease eventually?

When does that happen if rates stay where they are today?

Yes, it does, John.

So the reinvestment risk right now is that $2.5 billion that runs off every month and I'm putting it back on in a conservative fashion.

The differential in spreads, or rate, is about 70 to 75 basis points.

Because the duration is not that long, as I move into the end of this year and into 2014 that starts to compress because what is coming off now is at a lower rate.

So that will dissipate over time.

Okay.

With the loan growth dynamics that Richard talked about do you still hope to grow net interest income this year?

That is our goal.

Yes.

Okay.

And then on credit, Richard, you still expect charge-offs to move lower but it sounds like maybe at a slower pace.

And then just what was the outlook on reserve releases?

The answer is yes and slightly, a little bit more, but we are coming to an end on reserve releases.

So we are at 85 basis points for the portfolio and we have always said, especially with our credit card business, we should be at about 1%.

So we are going to move below that 85 probably into the high 70s.

Reserve releases come down to zero over the course of the next few quarters because it should and our reserve coverage is sufficient.

Both has always been and will be, I think, well within the range of what some of the regulators have been seeking because we don't want to under reserve or prepare for over the cycle.

Our credit portfolio has been really, really predictable.

If you just draw a straight line, you can just keep drawing it was a sloping settling curve on charge-offs and a continued kind of transition to lower non-performs for a little bit longer.

Bill, do you want to add any color to that?

We are getting at the bottom for some of the gross charge-off rates.

If you look at credit cards, autos, even some of the commercial; some of the commercial real estate categories are pretty strong now.

So on the wholesale side some of the impact will be really on the recovery levels that we see, which those are more difficult to project so we might see a little bit up and down based on recovery levels.

But overall it is just still working out some of the residual residential mortgage and home equity, which will still take another year or two.

And regarding the new FASB proposals suggesting a life of loan expected loss approach, do we have to start thinking or do you have to start thinking ahead to that now or is it too early yet?

Well, we are certainly going to comment on it now.

There is the comments due from the industry and we will comment on it between now and April.

Probably the biggest area of impact which is still the most uncertain is credit cards.

Credit cards take big reserves and it is just not clear what life of loan means on an open line of credit like that.

So a lot more work to be done.

And it is not affecting your reserving behavior right now?

No.

No, no.

It's not changing.

Okay, great.

Last thing for me, does the foreclosure settlement costs, Andy, that $50 million a quarter, will that pretty much end in the first quarter and be done with that right away?

Well, we experienced about $50 million in quarters three and four.

We may have a little bit of a tale on that in the first quarter, $5 million to $10 million, but then it will go away.

Okay, thank you.

Erika Penala, Bank of America.

Good morning.

My first question was just a follow-up to John's.

In terms of the foreclosure review expense of $50 million is that directly going to impact the bottom line so we shouldn't expect the Bank to reinvest it back into the franchise?

Yes, this is Richard.

The answer is, yes.

That is the cost that we had primarily to third-party overseers.

The entire mortgage servicing business has gotten more expensive because of the new rules, some of which will get finalized in a week or two from the CFPB.

But under the consent order the rules have been very stringent and so we have many, many more employees and run rate costs to managing a servicing portfolio than we used to.

Those do not change, but the $50 million that Andy cited were primarily to third-party overseers and that does end.

And, yes, we can reinvest that back in the Company.

So we shouldn't necessarily just lop off $50 million from the second-quarter run rate expense?

No, you could.

You could, absolutely.

I am saying but there are other costs that we are not talking about which are still burdened in there on a comparative period from prior period.

It is a lot more expensive to run a mortgage servicing business than it used to be.

We are up to it; we are making enough to offset it.

But I didn't want you to think that $50 million was all of the incremental cost of doing this business, because it has gotten a lot more expensive over the last couple of years.

I see.

Thank you for that.

Just my second question is on capital return.

Your message on capital return is always dead consistent.

If we are just sort of looking at what could be different from this year versus last in the process of the CCAR, what was interesting to me and some investors is in the adverse case scenario the Fed is now requiring to stress test against rate shocks, which clearly impacts securities portfolio.

I guess as you went through the process I understand the color you may give us may be limited, but does the adverse case scenario even matter?

Have you thought about your application for this year?

And is the message from the Fed as they think about accelerating capital return from the banks, as credit risk diminishes do we have to start thinking about AOCI risk on a go-forward basis?

So, Erika, certainly the adverse case matters but in our case anyway the severely adverse case was more of the binding constraint from the perspective of capital return.

And that was the harsher economic downturn and the lower GDP, the higher unemployment.

And that was a more material factor, particularly related to credit costs, for our numbers.

With regard to OCI, as we have talked, we are keeping our own cushion 50 basis points over and above what we project to be our SIFI buffer of 50.

That is how we get to the 8%.

And that is to accommodate the fluctuations and volatility that occurs with OCI and that is why we keep that cushion.

Okay, thank you.

Ken Usdin, Jefferies.

It is actually Ian Foley for Ken.

Just wanted to ask a couple questions on the mortgage business.

Specifically, if volume does start to fade next year, when we look at expenses how much is fixed versus variable and how quickly can you kind of bring those expenses down if you do see a fall off?

I would say that the variable expense component of the mortgage business, depending upon the type of production and where it is originated from, would be anywhere between 25% and 40%.

We have been very careful not to build the church for Easter Sunday.

We are able to accommodate all of our volume today, but we have got a pretty good variable capability of reducing quickly, adding quickly.

As you look at the future, while it may be higher refis today, we are building this bank to handle new purchases and to be a market leader in that area.

Which is why we are spending so much care on high quality today, because that will affect the reputation we have for the clients that will use us and new purchase money when rates are to go up and we start replacing the refi activity.

So we are going to over perform to service quality, we are going to have more than enough people in all the places today, but we can adjust very, very quickly.

It is one of our best talents around here and you can well bet that we won't be caught with overhang if there is a change somewhere along the way.

Okay.

My second question is more involved in the servicing side.

I think with the refis people often overlook what it means for the MSR and revaluation.

I was just hoping you guys could comment on kind of how the hedging strategy has changed and if refi rates do decline what that could mean for just the servicing income stream in general?

Thanks.

Our mortgage team is very good at the hedging process here.

Our net hedge results this quarter was about $29 million gain versus about $9 million last quarter and about the same level, $30 million, a year ago.

So we are very conservative in our approach and we do try to take into account, we do take into account all the factors that you described.

Okay, thanks for taking my question.

Nancy Bush, NAB Research LLC.

Richard, could you just comment on the QM; what your general impressions were of the QM and whether you think there is going to be an impact to the QM on other retail lending?

So my impressions are actually very positive.

I thought they did a nice job of what I will call a soft landing against what would otherwise have been a risk of really muting a slow but assured recovery.

Not only is the 43% debt to income a fair assumption and a fair starting point, but the very, very slow transition they are going to have with the Freddy/Fannie rules standards and being able to imply those for quite some time, I'm not going to say it is not a non-issue but it is not a huge issue.

I think they gave us a lot of time to manage that.

Never mind, we have the whole rest of 2013 to get it right.

So I think for the industry it is something more like 5% to 10% impact.

We would be in that same range.

And I believe that as we look over the course of time, if I look at it in the cold light heart of day, if some of those rules had been around for the industry, particularly the subprime and non-bank providers, we actually would have had a better outcome and have less of a problem.

So I actually think they were quite good.

What it means to the rest of the other loans, I don't think it has an infectious impact yet.

I only say that because I haven't heard that as one of the next steps.

I think there is plenty of other things to work on with the CFPB, particularly non-banks and other activities related to deposit gathering and service charges and things.

Nancy, I think undoubtedly it will start to take on non-mortgage activity, things that are asset-based but are not necessarily in the same category as the high-risk or bringing down the world.

So probably over the next few years we will see some of the same attributes, but I don't think that they are at all immediate.

And I don't think when they do come they will be that bad.

Question for you, Andy, or maybe for both of you.

There was an article in the Wall Street Journal a couple of days ago about the fact that the banks are not making public their Basel leverage ratios.

Could you just comment on that?

They inferred or implied that there was a risk-weighting asset kind of trickery going on.

Could you just give me your commentary on that?

Sure.

In our case, Nancy, our risk-weighted asset number to total GAAP assets is about 88%, so we don't have a big difference.

The differentials for a bank like us in our business model is just not that material.

If you think about our leverage ratio, it is not significant.

In fact, it's higher on a Tier 1 number versus our Tier 1 common number so it isn't a material impact for our company.

Thank you.

Greg Ketron, UBS.

Maybe a bigger picture question, and if you look at revenue growth in 2012 compared to 2011 you guys put up some very nice revenue growth in light of the environment.

And as you look into 2013 with maybe slower loan growth, maybe the rest of the mortgage weakens in the second half of this year which remains to be seen, and you think about revenue growth in 2013, how do you think about that?

What are the areas that you think you can achieve it?

Do you expect it to actually slow compared to 2012?

I will go first.

We do expect it to slow compared to 2012 because we are prudent and careful.

And I tell you that because I also promise you positive operating leverage for 2013, so that just means we are going to be watching our expenses.

Greg, if you have followed the story for the last five or six years, you and your peers have allowed us to be pretty aggressive in spending, in catching up on our CapEx, some of our acquisitions, and some of our investments in the Company have been pretty high.

And yet we continue to keep our expense relationship to revenue quite good.

That is what we are going to continue to do, but we are on the tail end of that area of investing so extensively.

And so the good news is this is a good year for us to keep our expenses more run rate related, more in check from not having to play any kind of catch up.

It is going to be perfect because revenue is expected to grow a little bit less than last year.

Still positive; they will both grow.

Revenue will grow; expenses will grow by less.

We will grow the balance sheet.

We will have positive operating leverage.

We will make good net income, but each will be muted from the year before.

And if by any chance things start to get better and the world warms up and we can benefit from that then the expenses are easily adjusted.

We can be more aggressive in some of our investments inside the Company more organic.

So we have got a pretty good ability to move those levers quickly.

But I want to make sure it's heard clearly, we will grow revenue but we will just grow it at a pace that is commensurate with the kind of expenses that are needed to keep that in positive operating.

I would also comment that we have a couple businesses that are at the early stages of the growth curve -- our commercial products group, our great bond business, municipal underwriting, our wealth management area.

All areas that I think will grow in an accelerated fashion in 2013.

Great.

I guess along those lines maybe things that we are not seeing that is coming through revenue growth.

Do feel like the U.S. Bancorp business model has even more leverage when we see the business conditions improve and we actually could see even more positive operating leverage generated as a result of that?

We do.

Greg, we do.

In fact, one of my favorite lines around here is we might be doing really well in tough times, but we are building the Bank to be great in great times.

That is a real important distinction because we are able to handle the muted environment, but when things get good, and they get good fast when that happens, we want to be out in front.

The highest debt rating in the business, the reputation we have been able to create over our service quality and some of these new businesses that have kind of rounded out the rest of the capabilities for this company are serving us really well right now.

But those are the things that we are really meant, I think, the kind of profitability we want in good times.

So I'm quite optimistic about it.

We used to call it a window of opportunity where our high position -- compared to our peers the high quality of the Company, the balance sheet was serving us benefits.

That window has been open longer than I thought it would and it is getting lighter as time passes.

[My close] with our staff is better now at leveraging our strength.

They are more proud of the Company.

They are more assured the Company is distinctively performing better in most categories.

They take that story to the customer and they do a better job of developing better relationships and getting more business.

So I am quite robust in my comments about what this will do for us when times start to get better.

We just need to get over the trends and as an industry till the economy warms up again.

Okay, great.

Thank you.

Todd Hagerman, Sterne, Agee.

Good morning, everybody.

A couple questions, just Andy going back to your comments in terms of reps and warranties and the repurchase request remaining relatively stable.

Just curious with the settlement now and basically capturing all the vintages and the improved dialogue with the GSEs, is there a sense that -- I guess what I am saying or suggesting is on a go-forward basis the requests are more in line with the production?

Or alternatively why wouldn't we necessarily see more of a decline in terms of those requests relative to these settlements in the dialogue?

I think it is just a timing factor, Todd.

So I don't expect a blip like we saw this last quarter, like we saw last year.

As the vintages increase I do not expect that.

It will work down over time, but in the short term I think it will just be relatively stable, because it takes a fair bit of time for the requests to work their way through the process.

Okay.

Then just in terms of your provision have kind of varied over the course of the year.

Can you give us a sense of kind of where you find that settling out relative to that request outlook?

Yes, the provision blipped a couple of quarters and the principal reason for that blip was the increase in the time frame that the GSEs were looking at.

So for example, you saw a $16 million increase this quarter that was entirely due to that increase in vintage, the 2005 and 2004.

So again, absent that, which I do not expect any more changes going forward, I would expect that to moderate and go downward.

Okay.

Then just finally, on the mortgage side, one of the things that has been a focal point -- every one has a good outlook in terms of at least the first half of 2013.

But I am curious, specifically for U.S. Bancorp, what is being done on the front end as the companies look to ramp up the production side relative to that refi that at some point is going to tail off.

Your servicing income continues to grow fairly steadily, but I am just kind of curious what you are doing to prevent a more significant decline in mortgage revenues on a go-forward basis, particularly as refis slow.

This is Richard.

We continue to add people.

So we are actually flying into the face of the wind here by continuing to believe that until the refi business is assuredly slowing, which we thought two years ago, we thought a year ago, and I actually don't think even this year it will slow.

But if it did we can handle it per the earlier question.

But we are actually putting more into it, so until it isn't strong we are going to be stronger.

So we are putting more and more into that business, Todd, and building market share value.

As I mentioned, we are also probably putting a little bit more in even than some of our peers because we want our service quality to be top quality.

We want people to want to do business with us because they will come back again in the future when they are looking for a purchase as opposed to refi.

We want to be a market share leader in both circumstances.

I will tell you what you already know, but unless the refis just absolutely hit some saturation, which they haven't so far and nobody has ever figured out how many times people can refinance a house.

They seem to be able to do that endlessly.

But when that happens it is probably going to be as a result of rates starting to trip up.

When rates start to move up there are other things in the Company's balance sheet and income statement that actually will offset the loss of what would be mortgage momentum.

And then we will turn it into a different spread on a different, more purchase-related portfolio and we will be getting benefits somewhere else.

So it may not be an exact moment in time, but we actually see that to be a pretty good transition when that happens.

But more importantly, we are adding more and more to our business and growing it right now while refis are strong and then able to turn that in a heartbeat if and when that moment comes that we have talked about.

Great, thanks very much.

Moshe Orenbuch, Credit Suisse.

Great, thanks.

Given your comments about revenue growth and operating efficiency and kind of slightly positioning the Company for a better environment, can you talk a little bit about what areas you would likely want to reinvest the most to drive more growth?

Where do you think you can be the most competitive?

So Andy teased it out a minute ago when we mentioned that we have got some business lines that are still in kind of their teenage years.

Our capital markets system of our wholesale lines of business, wealth management for sure.

Those investment curves are behind us, Moshe, but the benefits are still ahead of us.

In fact, in a couple of cases they have been actually net negative to bottom line in this course of getting them to where they are now.

So we have got some natural intracompany opportunities that will mature in another year.

It gives them the chance, no matter what the environment is, to get better and stronger.

The second thing is we are continuing to build into our technology and our infrastructure the mobile banking and mobile payments capability, which you know is -- everybody has a little of that, but that is one of our sweet spots.

If you think about U.S. Bank a couple of years ago, you will like us for a lot of the reasons not the least of which is you like our payments business.

What you would expect us now is to make that payments business more than corporate, more than government, more than merchant, and more now mobile payments for all consumers.

And by the recent acquisition of FSV, the pre-payment company, and some of the other activities we have been doing in payments you should expect a lot more from us there.

A real leadership position.

That investment curve is probably in its middle stages, but already parts of it are going to start driving some benefits.

Those are fee-based opportunities that don't exist today that we haven't yet been able to bring to the income statement.

So I am quite optimistic about our own intracompany maturity and the things that we have invested in that will start coming to bear.

And that is why I said we will do well even in tough times.

When times get really good all that stuff gets kind of a troubling effect and it is all very positive.

Just one other quick follow up and that is on a somewhat related topic.

In the past you've have talked originally thinking to try to recapture the lost revenue from Durbin by pricing up your checking account product and then wanted to be more competitive.

How do you see that shaking out from a competitive standpoint, the core retail banking offering product in your markets?

So we did two things there.

We promised you that we would still get to that 50% recovery, but we told you we are not quite there yet and we are not there yet.

Two things have happened because we have given ourselves more time.

One is we are just growing a lot more net customers.

You guys don't suffer through us talking about net customers and going through that because it is a real hard number to measure and everybody can say it.

So I just don't waste our time on that.

But the fact is that our numbers would belie in hindsight that we are growing the Company.

We don't have our free checking product which is a good thing, because we do have customers now that are here on purpose.

They don't have second and tertiary accounts that really don't make any money.

We have established a relationship on a package basis where we can add attributes and/or upsell them into something more reasonable for which they know they are buying and for which they have value for.

On top of that we have taken at the same time on consumers and we have gotten really good at small business.

Rick Harnack is the Head of Consumer Banking who is retiring next month.

He actually succeeded me in running Consumer Banking and Small Business.

The thing he did that I didn't do when I ran it was he took Small Business and put it on the map for our company.

We are now a very capable and an industry-leading small-business provider, both checking accounts and loans and lines.

And, Moshe, that has been a huge benefit kind of under-the-water mark.

You can't see it under the surface, but it is a huge driver for the Company.

It is driving a big part of the closure of some of that fee businesses that we lost through Durbin or some of the CARD Act or things like that because now we just have more of those customers.

They are buying stuff, paying for it.

They are aware of it and they want it.

And so I am pretty excited about what that caused us to do, which was get good at more things for more people.

But we are still not quite where we needed to be to recover all that fee.

We will have to do it again over the course of time.

I think mobile payment is going to be one, tying my last question, is going to be one of the things that will help us to derive a new revenue stream that doesn't exist today.

Thanks so much.

Kevin Barker, Compass Point.

Good morning.

(multiple speakers) advantage of your residential originations for HARP in the fourth quarter?

It was about 11% again.

It has been pretty stable.

Okay.

And would you expect an increase in volume due to the changes in reps and warrants provision rules that were implemented by the FHFA on January 1?

Essentially no.

We are not a big HARP company and so those are small nuances for us, Kevin.

But our company, based on the ways we originated in the first place, we just don't have a lot of our volume attributed to that.

So when you saw last year a lot of the volume in refis was HARP related it was a good question to ask is when does that start to slow?

For us it won't matter in the first place.

It was never a big part.

Those new reps and warranties and things coming out are very de minimus for us and they are not going to change our forecast.

You mentioned a major increase in the servicing costs due to deregulation.

Are there anything you can do or any mitigating factors that you can implement in order to lower those servicing costs on a go-forward basis?

The answer is of course, and that comes in the form of getting better at it, centralizing more of it, automating more of it.

But a fair amount of it is a derivative of what started out as a settlement discussion with the big five mortgage servicers, which we weren't part of; then the consent order.

Now what we are waiting for is what will be the final servicing rules that CFPB owes everybody by January 21.

Wherever those will be I suspect there won't be any more onerous than the consent orders provided, which requires us to do very, very high bar servicing.

So for instance, as an example, a thing called single point of contact.

If you were a customer in a modified situation, we have to assign you a person.

You get Andy Cecere.

But if Andy Cecere were unavailable anytime for you then you have to know that Richard Davis will be there for you.

And Andy and Richard always have to be there, one of the two of them.

If perchance they are not, then we have to make sure that Bill is there and that you know Bill is taking over.

Very, very tedious, right?

So I suspect that might be an overreaction to a consent order process to make sure that we all get something right that wasn't at the level they wanted it.

So that is the kind of cost we are bearing today that weren't around a couple of years ago.

Is it worth it?

It is a better servicing model I am sure, but I think the new rules will give us a steady answer.

So 90 days from now on this call ask me again and we will tell you looking back what the final rules look like.

I suspect they will be more expensive than they were before rules.

I suspect for our company they might actually be less than they are today, because we are trying to overperform in the consent order to make sure we can get out of it.

So if you were to estimate the additional cost to service a mortgage as compared to what it was two years ago, would you say it is double what it was?

It is probably 25% to 50% higher.

If it were double we would get out of the business because there isn't that much margin, but it's a new run rate that we have had in the Company now for six quarters.

So for us it would only be upside if it were to be lesser than it is today.

If it were the same, then we are already bearing the burden and we can manage to it because the overall business is worthwhile.

But I don't expect it to get worse.

The good news for us is that I think we are at our high-water mark and we will look forward to, I think, some sustainable new results.

And that is when we will go back to consolidating and automating and getting the rules set.

Once we know it is permanent then we can lock down a final protocol.

And it is the back-end costs that have gotten more expensive.

As the housing market improves, we see fewer and fewer people with underwater mortgages so over time (multiple speakers) the volumes will go down over the next two to three years.

But overall you would expect core servicing expenses to be roughly, would you say, 25% to 30% higher than what they were on a normalized basis when delinquency levels were much lower?

Kevin, I only give you that number to tell you it is not zero and it is not 100%.

I don't know what it is.

We actually don't think of it that way, because we don't think we are in a permanent circumstance.

Again, I will answer that question in 90 days when we figure out and look back on the new servicing rules.

It will be higher than it used to be, but it won't be inordinately too high to want to stay in business.

Thank you very much.

That does conclude our question-and-answer session for today.

I hand the presentation back over to management for any further comments or closing remarks.

I just want to thank you all for giving us the support you have given us last year.

Much as I wish we had some huge banner headlines to give you, I am kind of glad we don't.

I also appreciate the fact that we try to tell you what we know when we know things, even including -- we have an opportunity for a public disclosure we will tell you what we see.

We will continue to refresh that in March when we get another chance to be in a public setting.

We value transparency and consistency and predictability, and we are going to continue to deliver that to you.

So thank you for a good year.

Great.

Thanks, everyone, for listening to our results.

If you do have any follow-up questions, please feel free to call myself or Sean O'Connor in Investor Relations.

Thanks and have a good day.

This does conclude today's conference call.

You may now disconnect.