美國合眾銀行 (USB) 2013 Q4 法說會逐字稿

Welcome to U.S. Bancorp's fourth-quarter 2013 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 EST through Wednesday January 29 at 12 midnight EST.

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

Thank you, Tiffany, 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 2013 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 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 2 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, and good morning, everyone.

Thanks for joining our call.

I will begin with a few highlights from U.S. Bank's 2013 full-year results on page 3 of the presentation.

U.S. Bancorp reported record net income of $5.8 billion for the full year of 2013 or $3.00 per diluted common share.

We achieved industry-leading profitability with a return on average assets of 1.65%, a return on average common equity of 15.8%, and an efficiency ratio of 52.4%.

Total average loans grew by 5.6% and average deposits grew a strong 6.3% year-over-year.

Credit quality continued to improve with a 30.1% decline in net charge-offs and a 13.2% decrease in non-performing assets excluding covered assets.

Our capital position ended the year stronger with a Tier 1 common equity ratio of 9.4%.

In total, we returned $4 billion or 71% of our 2013 earnings to our shareholders in the form of dividends and buybacks.

Turning to slide 4 and our quarterly highlights, U.S. Bancorp reported net income of $1.5 billion for the fourth quarter of 2013 or $0.76 per diluted common share.

Total average loans grew by year-over-year by 5.7% and as expected, 1.5% or 6% annualized on a linked-quarter basis.

We experienced strong loan growth in total average -- strong growth in total deposits of 5.4% over the prior year and 1.8% or 7.2% annualized on a linked-quarter basis.

Credit quality remains strong.

Total net charge-offs decreased by 4.9% from the prior quarter while total non-performing assets declined linked quarter by 7.9%.

We continued to generate significant capital this quarter.

Our common equity Tier 1 ratio estimated using the final Basel III capital regulations was 8.8% at December 31 and we returned 65% of our earnings to shareholders during the fourth quarter through dividends and the repurchase of 13 million shares of common stock.

Slide 5 provides you with a five-quarter history of our performance metrics and they continue to be ranked among the best in the industry.

Return on average assets in the fourth quarter was 1.62% and return on average common equity was 15.4%.

Moving over to the graph on the right, you can see that this quarter's net interest margin was 3.40% as anticipated, a few basis points lower than the third quarter.

Our efficiency ratio for the fourth quarter was 54.9%, higher than previous quarters due to the seasonally higher expenses and the impact of accounting presentation changes related to investments and tax advantaged projects.

These changes did not impact net income attributable to U.S. Bank and Andy will discuss them in more detail in a few minutes.

As we have stated in the past, our goal is to maintain an efficiency ratio in the low 50s by continuing to manage expenses in relation to revenue trends while continuing to invest in and grow our businesses.

And we do expect the efficiency ratio to return to the low 50s in 2014.

Turning to slide 6, the Company reported total net revenue in the fourth quarter in the fourth quarter of $4.9 billion, a 4.4% decrease from the prior year and essentially equal to the third quarter.

The decline in revenue year-over-year was largely driven by lower mortgage banking revenue as well as a decrease in net interest income.

Linked quarter, a decrease in noninterest income driven again by lower mortgage banking revenue, was offset by seasonally higher revenues in other business lines and an increase in net interest income.

Average loan and deposit growth is summarized on slide 7. Average total loans outstanding increased by over $12 billion or 5.7% year-over-year and 1.5% on a linked-quarter basis.

Overall excluding covered loans a runoff portfolio, average total loans grew by 7.3% year-over-year and 1.9% linked quarter.

Once again the increase in average loans outstanding was supported by strong growth in average total commercial loans, which grew by 7.8% year-over-year and 1.3% over the prior quarter.

Total average commercial real estate also increased over the prior quarters with an average loans going by 6.7% year-over-year and 2.1% linked quarter.

Residential real estate loans continued to show strong growth, 17.6% year-over-year and 3.2% over the prior quarter.

Within the retail loan categories, average credit card loans and auto loans and leases were both higher year-over-year and linked quarter, while average home equity lines and loans continued to decline.

The rate of decline in this category, however, has slowed considerably over the past few quarters.

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

New originations excluding mortgage production plus new and renewed commitments totaled approximately $50 billion in the fourth quarter, up 4% linked quarter.

Total average revolving commercial and commercial real estate commitments continue to grow at a faster rate than loans increasing year-over-year by 10.1% and 2.7% on a linked-quarter basis.

Line utilization edged down slightly again this quarter to approximately 23%.

Total average deposits increased by over $13 billion or 5.4% over the same quarter of last year and by $4.5 billion or 7.2% annualized a linked-quarter basis with growth in low-cost interest checking, money market, and savings deposits particularly strong on a year-over-year basis.

Turning to slide 8 and credit quality, total net charge-offs in the fourth quarter decreased by $16 million or 4.9% from the third quarter of 2013 while nonperforming assets excluding covered assets decreased by $67 million or 3.6%.

The ratio of net charge-offs to average loans outstanding in the fourth quarter declined to 0.53% from 0.57% in the third quarter.

During the fourth quarter, we released $35 million of reserves, $5 million more than in the previous quarter and $10 million more than in the fourth quarter of 2012.

Given the mix and quality of our portfolio, we currently expect total nonperforming assets to remain relatively stable in the first quarter of 2014 while we expect a level of net charge-offs to increase modestly in the first quarter 2014 as commercial and commercial real estate recoveries declined relative to the current quarter.

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

Thanks, Richard.

Slide 9 gives you a view of our fourth-quarter 2013 results versus comparable time periods.

Our diluted EPS of $0.76 was 5.6% higher than the fourth quarter of 2012 and equal to the prior quarter.

The key drivers of the Company's fourth-quarter earnings are summarized on slide 10.

The $36 million or 2.5% increase in net income year-over-year was primarily the result of lower provision for credit losses and well-managed expense, partially offset by lower net revenue.

Net interest income declined year-over-year by $50 million or 1.8%, the result of a 2.3% increase in average earning assets which was more than offset by a 15 basis point decrease in net interest margin.

The $7.3 billion growth in average earning assets year-over-year included increases in average total loans and investment securities.

Offsetting a portion of the growth in these categories was a $5.8 billion reduction in average loans held for sale reflecting lower mortgage origination activity versus the same quarter of last year and a $3.8 billion reduction in average other earning assets primarily due to the deconsolidation of a number of community development entities in the third quarter of 2013.

The net interest margin of 3.40% was 15 basis points lower than the fourth quarter of 2012 primarily due to lower rates on investment securities as well as growth in the portfolio and lower rates on loans partially offset by lower rates on deposits and a reduction in higher cost long-term debt.

Noninterest income declined by $173 million or 7.4% year-over-year primarily due to mortgage banking revenue, which reflected lower origination and sales revenue.

Lower corporate payments revenue, products revenue, the results of lower government-related transactions also contributed to the decline.

Government spending was down about 18% year-over-year.

Growth in several fee categories helped to offset these unfavorable variances including growth in retail payments, merchant processing, trust and investment management fees, deposit service charges, commercial products revenue, and investment product fees.

Noninterest expense declined modestly year-over-year by $4 million or 0.1%.

The modest decrease was primarily the result of lower professional services expenses due to a reduction in mortgage servicing review-related costs and the positive impact from an $80 million mortgage foreclosure-related regulatory settlement accrual in the fourth quarter of 2012.

These favorable variances were offset by higher benefits expense, primarily pension-related, and higher tax-advantaged project costs including the accounting presentation changes in the current quarter.

In the fourth quarter, we changed the presentation of some tax credit-related items in our income statement.

These changes were not significant and had no impact on EPS.

The impact of the change is shown on the chart on this slide.

These changes in addition to a favorable conclusion of some state tax matters reduced the effective tax rate to 23.8% on a tax equivalent basis in the fourth quarter.

This new presentation will continue in future periods.

However in the first quarter of 2014, we also expect to adopt new accounting guidance recently issued by FASB, which will move noninterest expense on certain tax credit investments to tax expense.

Including all of these changes we expect our tax rate in 2014 to be about 29% on a tax equivalent basis.

Net income was lower on a linked-quarter basis by $12 million or 0.8% primarily as a result of seasonally higher expense partially offset by lower provision for credit losses.

On a linked-quarter basis, net interest income was higher as the $4.5 billion increase in average earning assets was only partially offset by a modest decline in the net interest margin.

The increase in average earning assets was the result of growth in loans and securities partially offset by a reduction in average loans held for sale.

The net interest margin of 3.40% was 3 basis points lower than the third quarter primarily due to the growth in lower tax -- lower rate investment securities as well as strong deposit growth, which resulted in higher cash balances at the vet.

On a linked-quarter basis, noninterest income was lower by $21 million or 1%.

Again, this unfavorable variance primarily reflected the decline in mortgage banking revenue as well as seasonally lower corporate and interest revenue.

Partially offsetting the decline in these revenue categories was an increase in retail payments, trust and investment management fees, commercial product revenue, and other income.

On a linked-quarter basis, noninterest expense was up $117 million or 4.6%, driven by higher costs related to tax-advantaged projects, including the accounting presentation changes, seasonally higher professional services expense and the timing of marketing and business development projects.

Given normal first-quarter seasonality and FASB's new accounting guidance related to tax credit investments, we expect first-quarter 2014 expense to be similar to the third quarter of 2013.

Turning to slide 11, our capital position is strong and continues to grow.

Based on our assessment of the final rules for the Basel III standardized approach, we estimate that our common equity Tier 1 ratio at December 31 was 8.8%, up from 8.6% at September 30.

At 8.8%, we are well above the 7% Basel III minimum requirement and above our targeted ratio of 8%.

In the fourth quarter we returned 30% of our earnings to shareholders in the form of dividends and 35% through the repurchase of 13 million shares of stock for a total return of 65%.

Our tangible book value per share rose to $14.41 at December 31, representing an 11.9% increase over the same quarter of last year and a 4.3% increase over the prior quarter.

In early January, we completed and submitted our 2014 capital plan to the Federal Reserve.

We are now waiting for regulatory approval to raise our dividend and continue our stock buyback program in 2014.

Finally, slide 12 provides updated detail on the Company's mortgage, repurchase-related expense and reserve for expected losses on repurchases and make whole payments.

Direct and warranties repurchase reserve was $83 million at December 31, compared with $176 million at September 30.

The decline in the reserve reflected the December agreement with Freddie Mac that resolved substantially all repurchase obligations related to reps and warranties made on loans sold to Freddie Mac between 2000 and 2008.

The $53 million settlement was reflected in net realized losses for the quarter.

I will now turn the call back to Richard.

Thanks, Andy.

I'm very proud of our 2013 results.

We achieved record earnings while we managed through a challenging economic environment and a significant pullback in mortgage banking activities as well as an environment of regulatory and legislative change and uncertainty.

We continued to invest in our businesses throughout 2013 both organically and through acquisitions.

For example, we added a small municipal bond trustee business in March, strengthening our position as the number one provider of municipal trustee and agency services in the United States.

And in November, we announced the acquisition of Quintillion Ltd., an Ireland-based full-service hedge fund administrator, further extending our alternative investment servicing network in Europe.

And we began the new year with an announcement of the purchase of the Chicago branch franchise owned by RBF Citizens Financial Group.

This investment will nearly double our market share in this great market within our footprint, strengthening our position, and adding products, services, and convenience for new and existing customers as well as value for our shareholders.

These acquisitions combined with our ongoing investment in innovative product enhancements, services, and people have enabled us to continue to grow our balance sheet and our fee-based businesses and gain market share.

U.S. Bank's performance metrics continue to be best in class.

We are focused on the future, building our Company to perform as we have in the past, producing consistent, predictable, repeatable results 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 our audience.

(Operator Instructions).

Erika Najarian, Bank of America.

Good morning.

My first question is on the loan demand outlook for this year.

Richard, it's clear that your bank has been a market share taker over the past several years but as you look out into this year, are we at an inflection point in terms of loan demand picking up based on what you are hearing from your corporate customers and the activity levels that you may be seeing on the consumer side?

Erika, I believe that's true, and I will tell you what, I think it may be a tale of two halves of the year.

I think 2014 starts looking a lot like 2013, where people continue to husband cash and kind of hold off until they see some of the earlier spring sentiment that comes about and whether or not consumers are going to spend and therefore corporations are going to invest.

I will tell you as you know the first trigger in that transaction of people spending is the deposits actually going down and our deposits grow and I'm glad they are for the extent that we are getting more customers but to the extent that they use their deposits first, they will then use their line of credit second.

Then they will extend more credit later in the cycle.

And we are not seeing as much of that yet as we like to at the early stages.

The sentiment, however, is completely different.

The sentiment is stronger than it's been in all these last Januarys.

People are much more willing to talk about future investments.

I think consumers are starting to think about doing things to add to their house or spend more money for improvements and maybe some discretionary items they hadn't before.

And so my intuition tells me we are on the verge and the advent of increasing sentiment for consumer spending, but I think we will see it second half of the year and I think this spring will really tell the tale.

In our Company as you know in order to offset the expected and predicted reduction in mortgage refinances, we are continuing to spend energy on becoming a market share leader on purchases and we also as you know, introduced that we're doubling our indirect lending and leasing program over the next few years and even already we are seeing a significant increase in the auto loan volume that we would have otherwise had even over a year ago up over 30% from fourth quarter of 2012.

So I believe that our ability to offset the mortgage and predicted mortgage change, keep market share positions there, and add other consumer products like small business, credit card, and indirect, I think we are positioned quite nicely.

I just think it's going to be the second half where you will see the most likely balance sheet impacts that will follow the sentiment we are hearing today.

Got it and as a follow-up question for Andy, could you give us a sense of where you stand in terms of complying with the LCR proposals as they are currently written?

And how we should think about potential balance and margin impact for the balance of the year?

Thanks, Erika.

There are still some questions with regard to the final rules and the interpretation, but I will tell you that we increased the securities portfolio to $80 billion in the fourth quarter and we are expecting to increase it to $85 billion by the end of the first quarter.

That will impact margin a few basis points, similar to what you saw this quarter and that again is our current expectation.

We are still working both sides of the balance sheet, the right and left hand side, and working through the questions, but right now $85 billion end of quarter one.

Got it, thank you.

Betsy Graseck, Morgan Stanley.

Sorry, I was on mute.

So I just wanted to run through the discussion that you had.

It was pretty quick on the accounting changes.

Maybe you could help us understand why you chose to take the accounting change you did this quarter and then you've got the follow-up in first quarter.

Right, Betsy, this is Andy.

Starting in the fourth quarter, we moved the amortization of some guaranty tax credits from tax expense to noninterest expense.

Then we also moved some third-party share of losses.

We moved the entire third-party share of losses on syndicated tax credits to noninterest expense where the related losses are recorded.

And then finally in the fourth -- in the first quarter of 2014, we're going to move some low income housing costs from expense to tax.

So the net of all that is what we talked about on page 10, the impacts you there, which lower our tax rate and increase our expense.

But you'll see a little bit of a reversal in the first quarter so when we are all said and done, our TEV rate for next year will be about 29% and our expense in the first quarter we expect to be closer to what it was in the third quarter of this year.

Okay, so this is really -- 4Q is really a transitory towards a new normal which is similar to your old normal?

Correct.

That's correct, Betsy.

Secondly, I had a question on the AmEx partnership that you announced recently.

I did want to just understand how you are planning on leveraging that and can you with the AmEx partnership get to that closed loop for the cards that you would be working with them on to a greater degree than you even have [done]?

Yes, this is Richard.

It's a marketing and sponsorship partnership for our customers on a high wealth category who have many times said that they have both cards in their wallets.

They've got the U.S. Bank flex card but they also have the AmEx card.

We also wanted to recognize that I'm not trying to get into their closed loop, so it is not a transaction activity.

It's not a system activity for U.S. Bank.

It's more of the brand.

So we will still have the U.S. Bank-branded AmEx card for our top customers.

They will have the ability to have the very high-end treatment that an AmEx customer receives.

They will also be able to be branded U.S. Bank and receive some of the products and services that they receive now as our top customers.

So it's a little bit more than branding but it's a lot less than anything more sophisticated than you might think as it relates to trying to work closed loop or change tracks, if you will.

We are still a Visa/MasterCard-originating Company but for this very small core of customers.

We actually think sometimes if you can't beat them, join them, and AmEx has a particularly exceptional product, the very highest for services even in and above the credit card needs of customers.

So I think it was the right thing to do.

It's not going to move the needle a lot, but we are satisfied with the early stage announcement and I think our customers are happy with it as well.

Okay, just while we are on card, I know that on your website you are very vocal about the fact that you are tracking fraud and everything else but you've also been very vocal as a firm with regard to taking fraud prevention forward.

So I don't know if you could comment at all on what you are thinking in a post-Target world around moving towards tokenization or EMV.

Yes, I am a big supporter of progress in all of those protective areas.

Also, as being the Chair of the Clearinghouse, we are working on tokenization in cloud use for some of those protections and encryptions.

I guess what I would say to you is it's disappointing that with the retailer fraud that has occurred, it certainly is a burden on the banks because we have most of our customers as well that are affected if they used in this case some of those merchants that were affected and so we are moving to reproduce all new cards for those customers.

They're doing it through a methodical process for those who have fraud or we know they have fraud or they worry they have fraud, they are getting cards reissued immediately, both credit and debit, to the extent that we will eventually track every customer who we think could have been affected by that time and period, we are reissuing all of those cards.

We're not announcing it as a broad event.

We're just indicating to our customers that as it goes we want to make sure they are protected and that their information isn't out in the open, say, a year from now when people aren't paying attention.

More germane to the issue, Betsy, is one of my concerns is a chip, an EMV is not necessarily the end point.

It's just another step in the journey and as we get to mobile banking and you look at cloud and other encryptions, it would be interesting to see whether or not we have to stop now and go back to chip EMV or if we really want to leapfrog that and get to the more I think provocative outcome, which is going to be the necessary standard not many years from now.

And whether the marketplace reacts and how they react to the breaches that have occurred at some of the more recent merchants it's going to be yet to be seen.

So banks will be at the ready.

It is a bank merchant partnership; merchants would have to change the terminals and their willingness to spend the money to have chip receiving cards.

We have to reissue cards on chip.

Every one of our customers who travels overseas has been getting a chip card for years because it's necessary over in Europe and some places in Canada.

But I think that story will be told in the next couple of months.

Ask me again in April and we will see how it has settled.

But I think there's one school of thought that says let's put all of our energy on the more sophisticated end point of mobile banking and cloud encryption.

Others might say we haven't got the time to waste.

Let's jump through the chip PIN and you will end up getting to the other point a little later.

We will be open to either one because we are an acquirer; we are an issuer; we are deep in the conversation.

There's other alternatives even that I haven't mentioned, but we will do what's right, whatever the marketplace wants.

And as banks have proven with merchants, together we will get the right answer because we all want customers to feel safe.

Okay, and in terms of timeframe and spend from your perspective, is it something that -- it's obviously ongoing.

People had said that may be the chip PIN tokenization would be a three to five-year time frame.

Do you feel like that might be a little bit sooner?

And would we see any of this in the expense line or is it too small?

Chip has a deadline of 2015, so it would be in the next couple of years.

It's more expensive to issue a chip card for sure than a magnetic stripe, but it's not going to break anybody's bank.

The receipt is probably more of an issue on the merchant side where they'd have to reprogram all of their terminals.

And I'm talking small businesses as well as the large merchants where they would have to change out terminals.

And some merchants, you know, buy those terminals.

So that's a fixed cost they would have to change.

Many others will lease those terminals, which might be a bit easier for that transition.

Those are the kind of fundamentals that will come through the economic review of this, but you and I both know there will be a political and maybe a regulatory view of this that might change those outcomes and either force one solution or another based on the concerns from politicians and the protection of citizens or regulators' concerns for our consumer protection.

I think there's a lot of studying to be done because the simple answer isn't just go from one to the other because that's only one step in a longer journey.

But I do think in the next 90 days we will have a better sense as this settles and people decide where the risk is.

I will close with this, though.

To the extent that other information that is not card-related gets taken or the fraudulent operator has information access to things that are more than card-related, we should all be quite concerned because at the end of the day the banks will bear the burden in most cases.

14 months from now one of my customers has been a victim of some fraud that is been in (inaudible) data that was taken from a card situation, and all of a sudden my fraud levels are higher than second quarter of 2015.

I probably will never be able to trace it to anyone circumstance but it will just be a higher environment more risk, it would be like having more breakage off the shelves.

So we all have to be much smarter and we are spending a lot of time outside of the card area watching for fraud behaviors and watching and monitoring activities to protect customers.

What that means, Betsy, is more customers are going to have to be tolerant when a really good bank has the protection of them first and foremost and says I just discovered fraud or potential fraud.

I disrupted your environment for a minute because I want to either change your account number or stop a transaction because I feel like you're going to be a victim if we don't stop it now.

I think this recent episode in the last couple of months might help consumers realize that their protection really is worth a bit of a disruption if it protects them in the long-term.

So there's some good learning that will come out of this and I think banks and merchants should work together and we have in the past probably more in the future to protect customers and make them feel we all have their best interests at heart.

It's going to be a while.

Okay, great.

Thanks for that color on that.

Moshe Orenbuch, Credit Suisse.

Great, thanks.

The question that I had is you talked about you've been able to improve the capital position of the Company based upon the earnings even though you returned 65% of capital during the full-year 2013.

How should we think about that?

Is that -- should that number be higher as we go forward given that you have been able to actually do both?

Moshe, it's Richard.

I will start.

We have said for as long as I actually can remember that we would return 30% to 40% of our earnings in the form of dividends and 30% to 40% in the form of buybacks.

2013.

The full year was 71%.

The quarter was 65%.

And so we are in that -- [below] that range.

I will also say to you because the leading follow-up question is as it relates to one of those two measures is currently limited by the Federal Reserve CCAR process at 30% and at this point, we are going to continue to abide by those general rules and follow the guidance that we are being given to stay at that parameter.

There will be a time I hope that the Fed will say certain banks have earned their permission to go back to allowing the dividends to be what they think is reasonable and supportable.

In that case we probably would float above that 30% level but we are not eager to do it at this stage and we have plenty of room and opportunity on the buyback side to still stay within that range of 60% to 80%.

We like the 20% left for ourselves because we do expect to be an acquirer.

We expect to take opportunities when something comes along particularly in trust for a payment and I will tell you that there's a great deal of innovation and R&D that we are spending money on, much of which will eventually come to bear fruit.

Some of it will prove that we will learn what doesn't work but you actually in this environment now banks that used to be innovators and in this environment you want us to be.

You want us to be either leaders or fast followers and work with a lot of other companies and expertise that we might not necessarily have ever had in our legacy.

So 60% to 80% is right in the sweet spot.

We are at 71% and I think right now where we are is a good indicator of where we will be for 2014.

Moshe, I would add that we were at 8.6% in the third quarter dropping to 8.8%.

A good part of that increase was a reduction in the pension debit, which is a reduction to capital.

The pension debit went down because rates went up, so that's a one-time phenomenon and I would expect us in 2014 to sort of be in that 8.5% range for most of the year.

Got you, just kind of as a follow-up on the idea, Richard, you touched on the idea of acquisitions and you've actually announced a branch acquisition recently.

What's the environment like for those types of acquisitions?

You know, they are still one off, Moshe.

We are always interested in deepening our depth where we have a branch network so we like branches, as you know, and we are going to be probably a net grower, small but net grower over the next year.

It they might not be in exactly the same place.

They might be in partnerships with universities or grocery stores or things but we like adding branches and the opportunity to double down like in Chicago is worthwhile.

If any of our 25 states currently had an opportunity like that, we would be interested.

What you know I'm not interested in is jumping states or getting a handful of branches in a state where you really have no critical mass or even in the MSA, where you can't build enough distinction to call out market leadership.

I also don't see us doing a full bank transaction unless the transaction is still attractive because of the risks I've talked about before that align with picking up the problems and the legacy issues you may not ever be able to know at due diligence and you simply can't price for.

So I think deals like branch-related end-market transactions and the two deals we highlighted in our earnings call here today, fund services or even European businesses or payments or trusts are things you can expect to see more of and we do have a number of toes in the water in those opportunities but none will move the needle.

But over time they add up.

Great, thanks so much.

Matt O'Connor, Deutsche Bank.

Good morning.

As we look at the payments business and the fees were up about 3% year-over-year, obviously the government piece is a drag, but looking towards 2014, it should be much less of a drag from here.

How should we think about the revenue growth in that combined segment?

I'm thinking just the payment fees overall, not just the government fees.

Right.

Good question, Matt.

So first, this quarter a lot of the merchant activities driven by same-store sales, and same-store sales were up about 3% domestically and about 4% globally.

So Europe actually outdid the US in that regard.

We were way down this year by the government side of the equation.

As we said in the call, government spend was down about 17%, 18% year-over-year.

I think that will begin to stabilize next year and I think you should expect the total payments category to get closer to what is our normal long-term growth there but not quite to that level until same-store sales starts to increase a point or two.

So the anchor that we saw this year on the corporate payments I think will begin to diminish as we get into 2014.

Matt, it's Richard.

Just as a reminder, the total payments space for us is about a quarter of our revenue.

Corporate payments is about 20% of that quarter and government is about 20% of that space.

So it's not a big driver but we like it.

We're going to stay with it.

I don't believe that you have the same kind of future trajectory, negative trajectory that we've had in the last two years with both the sequester and the ending of the work.

So for us, we will be glad we stayed with it.

We had to carry it across the transom at the same time mortgages fees were falling but I think that they both have some stability going into 2014 and I think we will be glad we stuck with it.

But it's not as big as it looks and it's more of a headline but it's worth staying with because I think it starts to turn the corner in 2014.

Okay, just separately, the Chicago branch deal, have you talked about the potential earnings impact from that or I'm sure there is both some cost savings and some investments that you might be making how all that nets out?

For 2014, Matt, it's not material to our number.

There will be a little branch consolidation, but for that it's really an opportunity to be more present in a really big city.

What I am hoping for is that the synergies to the 100 branches we have will be as powerful as the ability to incite kind of new growth in the 100 that we are picking up and there will be just new more pervasive across Chicagoland.

It's a great market for us.

I've got great leadership there and we've actually kind of been managing over our skis a little bit in terms of our exposure, our marketing and our visibility, and I think we now have a chance to catch up to it.

If I could grow more there, I would continue to do so.

So I guess the infrastructure that you have now and the marketing you've been doing, it's all scalable?

There's not going to be an expense kind of ramp up as you --?

No, there will not be.

That's what I was trying to say, pretty much all the fixed costs are already there.

We're just going to have something nice to make it more visible.

Got it, makes sense.

Thank you very much.

Paul Miller, FBR.

Thank you very much.

Going back to your loan portfolio, one of the areas that you've really done a great job is your residential mortgages and I believe most of them are jumbos.

Can you talk a little bit about -- I think they are ARMs.

Am I correct?

How is the jumbo market?

Because we are hearing that it's very overheated definitely coming out of the West Coast, where large banks out there are competing very aggressively in that market.

Paul, actually most of our growth is in a product called smart refinance and a high-quality branch-originated refinance product for our core customers.

And that is what's driving it.

A lot of that is short -- it's not a 30-year product.

It's a shorter product.

We are seeing a phenomenon occur just like you are seeing in the total markets business, refinancing activity is starting to go down.

So that volume will start to go down but on the flipside, home-equity line of credit activity is increasing so those of the trends I think you'll start to see into the next few quarters.

Bill, do you want to add --?

And we are active in the jumbo space.

We have been all along and it's pretty much targeted towards our private client type customer and many of those are ARMs.

Is that mainly coming out of your private client product mix I guess?

A good chunk of it.

Some of it comes out through the branches in states like California, where you have such high home values.

And then on your securities portfolio, you talk about that and you wanted to grow that to about $85 billion.

What type of duration with the new stuff coming on are you shooting for?

We are keeping it pretty short, about half floaters, half fixed and you can think in the term of 3, 3 1/2 years.

Okay, thanks a lot, guys.

Ken Usdin, Jefferies.

Good morning, Richard and Andy.

The question just big picture as far as revenue growth and operating leverage, slide 6 of the deck shows that the year-over-year revenue growth has still been decently negative largely because of the mortgage comps and the payments.

But as we look ahead, and Richard, to your point about getting the efficiency ratio back down towards the low 50s, can you help us understand the dynamic?

Do you think --?

How close are we to the point of getting that year-over-year comp in revenues back to positive?

Then how also do you think expenses can kind of trend along with that?

So you know, we do kind of manage the Company.

The governor is revenue and we when put our profit plan together late last year we worked from a bottoms up and we figured out what the revenue growth would be and as I have told you before, the plan would be that expenses will be less than that.

So I can tell you that our intent is to have positive operating leverage.

I won't take one quarter at a time because we are fairly heavy second and third quarter positive and then without government in the fourth quarter we have that fall off and quarter one is a tougher quarter just because of new year expenses.

But we are looking for positive operating leverage first and foremost, Ken, in 2014.

Now the other thing I said, the code for that though is since we are not expecting revenue growth to be overly robust, we expect it to be at least as good if not more of what you have seen in the last year or two, we are going to watch our expenses and we have a good run rate of expenses to start with.

We've been part of some regulatory consent orders through a mortgage, which was a fairly expensive task that we've now used some of those monies and reallocated other compliance activities.

Perhaps seeing an undue increase in expenses in order to run the Company safely but at the same token, but for merit increases and necessary capital expenditures, finishing what we started this will be a year that we will let some of our investments follow through to some fruition and we won't start a lot of new things.

That's U.S. Bank's way of watching expenses.

We don't pad expenses because we never get over our skis.

We don't go out and create an environment where we have a consultant come in and give us a new program and start reducing people who are working for us.

We typically just watch every single 30 days to make sure we don't do something that the revenue won't allow us to.

So you have to trust us.

We're going to continue to deliver positive operating leverage because it is how we grow the Company.

It's how you end up making the success that you can count on predictable, but as each month goes we will adjust as we always do, but I think we are expecting revenue to be strong enough to allow for some expense growth, but we are going to watch our nickels and dimes until this environment is assuredly on its feet and there's a recovery well afoot and we don't see that quite yet so it is going to watch everything we do.

I really appreciated the questions early on regarding the non-bottom-line impact of the accounting changes that we talked about with some of our tax credits because we want you all to know that's not a material -- it's not at all an impact on the bottom line and it's more on the landscape issue for quarter four.

We are committed to staying low in the 50s in its efficiency because we are going to let revenue growth faster than expenses.

So nothing has changed, I guess what I'm trying to say.

But for this little bit of a blip, we're going to continue to deliver for you all but I will tell you there will be a year, probably not this one, where revenue is going to really take off for a lot of reasons and we will let expenses go a little higher than they might this year but they still will stay well below that and the way to you-all's heart is to keep efficiency positive and make sure operating leverage is the way to drive the bottom line and I'm feeling pretty good about it.

Okay, great.

And just a question within the expenses and one little one on the tax thing.

You mentioned, Andy, the benefit in the pension side on the capital side.

Are you going to see a pension benefit and is that built into your expectation for the first-quarter expenses for this year?

Yes and yes.

Can you help us understand the magnitude of that?

So you know the increase that we saw from 2012 to 2013 is going to almost go back to the level it was in 2012 in terms of the pension expense.

It went up $140 million or so and it will go down about that same range.

Okay, and then just on the last thing on the taxing, so the minority interest piece, I don't think you talked about that.

That kind of had been running at a minus 40 so does that now also continue at the same plus 15 range given those changes?

There will be no further change in the minority interest piece.

So it'll kind of stay from here.

Okay, just credit -- your comment about first-quarter charge-offs being up and reserve releases a little bigger this quarter, can you just talk to us about how do you continue to expect any more reserve lead to go ahead?

We do -- we had strong improvement in credit in the fourth quarter and we anticipate will have continued improvement in credit in the first quarter.

Losses will be up a little bit really not because of the charge-off side but really because of the wholesale recovery side.

We've had some significant wholesale recoveries in the last few quarters and it's unlikely that those will continue.

Thanks, guys.

Eric Wasserstrom, SunTrust Robinson Humphrey.

Good morning, thanks very much.

Just a couple of questions please.

The first is your GAAP assets look like they went up a little less than 1% but your Basel III risk-weighted assets went up a little over 1.5.

Can you just explain what accounted for the difference?

Commitments.

Off-balance-sheet commitments.

Got it, primarily lending commitments I'm assuming?

Correct.

And that's what we talked about the fact that our commitment levels are growing more rapidly than our outstandings, which is a good thing in the long-term.

And on a 10% annualized basis and that's the principal driver.

Thank you.

You and several other institutions have announced the discontinuation of deposit advanced products.

What -- how should we think about the influence of that on either the fee or NII line items?

This is Richard.

I will go first.

I'll let Andy talk about the financials.

It is not significant, first of all.

But I am disappointed that the product is -- has gone because it was probably the most popular customer product I think I have ever had as a banker.

It met a need.

It was very transparent, it was very clear, but it simply just didn't meet the tenets of the regulatory review of total APR in a certain calculation in the general sense that people were otherwise being harmed.

So of course we have moved along and followed the guidance and we are now ending the product even to this month and we will wind it down in the next couple.

What I am more interested in is trying to find replacement of such products so that we can find something for those consumers that will otherwise stay in the protected banking industry where there is oversight and protections which I support greatly.

And we are working now with the regulators, primarily the OCC, to see if we can develop some kind of a replacement product.

It's too new to have that, so we haven't got that built into our plan.

So as we really expect it will be a second half loss and most of the impact falls to spread income, but I will leave it to Andy to give a little more dimension.

Right, so as Richard said, we would expect very little impact in the first half of the year, given that we are going to continue with our current customers until midyear.

In the second half of the year, the product earns approximately $50 million a quarter.

It goes through loan fees or net interest income.

That would be the impact -- if the product in and of itself went away but as Richard mentioned, we are working on alternatives and we will keep you updated on the impacts as we work through those alternatives.

Thanks, and just following on and this is my last question.

Given the influence of this change as well as the liquidity guidance that you provided earlier in the call, how should we now be thinking about the net interest margin over the next several quarters?

The net interest margin absent the CAA issue that we just talked about and the securities build is relatively stable.

So the principal change will be the securities bill.

The securities bill impacts managed risk margin, the rate, but has no impact on net interest income at all.

It comes on at fairly neutral spreads.

So we will continue to update you on that.

I would expect the build in the first quarter to impact us by about 3 basis points, similar to what you saw in the fourth quarter.

Thanks very much.

Keith Murray, ISI.

Good morning.

Could you just touch on the strength that you had in the commercial products this quarter and the sustainability of that?

It's across many categories.

We had a good quarter in high-grade underwriting.

We had a good quarter in order credit activity, FX, just across many categories.

I attribute this back to some of the investments we've made over the years in terms of building those capabilities both with people, products, and services and technologies.

So that is a real positive story for us and I would expect it to continue into 2014.

It's Richard.

Every once in a while you get that moment and you can actually prove something, and so here we were three or four years ago talking about taking our wholesale bank and moving it from regional to national, creating scale, hiring people in New York and Charlotte and you say, well, when are you going to see the benefits?

This is a great example of where that's starting to show up and coming in a more consistent basis.

We have always been a bank to a number of large customers, Fortune 100 customers, but we always didn't have all the products and services.

The last few years we got a chance to become more important to them and their syndicated line of credit.

We moved up in their view of being a trusted partner and now we get the fee businesses as well more often than we used to and that's exactly where this kind of benefit shows up years later.

Okay, thanks.

Could you give us some color on what the magnitude of any equity gains were this quarter?

It was minimal.

So if you look at the other income line, you will actually see an improvement but that was more a function of the third quarter having some negatives.

The fourth quarter was relatively neutral.

Okay, thanks.

They just lastly, the repurchase, the reserve and repurchase costs going forward, how should we think about this quote unquote more normal run rate for that line item?

You know, so we have the $753 million with Freddie here in the fourth quarter and we are down to a level that we are probably still a little bit higher than where we would be over the long-term but we are starting to get to a level that I think is more normal in terms of historic levels.

So we're not quite there but it's not going to be a material change on a go-forward basis.

Okay, thank you very much.

Chris Mutascio, KBW.

Good morning.

Thanks for taking my questions.

Andy, first I've got a quick question for you.

On the expense given the guidance for first quarter being closer in line with previous third quarter, does that imply that there was a good bit of pull forward of business development and marketing expenses that occurred this quarter?

Not necessarily pull forward.

It's just a seasonal impact that we typically see.

So if you look at the expense increase from third quarter to fourth quarter, about half of it was the tax-related and then about half of it was things like legal and professional and marketing expense and if you look at our history, Chris, you'll see that the fourth quarter is seasonally higher in those categories and then seasonally comes down in the first quarter.

Okay, that's fair.

Bill, a question for you.

Could we see -- going back to the reserves for a little bit and I think I ask the question almost every time I see you, can we see the pace of reserve releases actually pick up from here?

It has been pretty steady around $30 million, $35 million or so but I had a bank yesterday that released more reserves in terms of taking the reserve ratio down in one quarter than you guys have done in four quarters.

And BofA now has a lower reserve ratio than you do.

So I was kind of wondering given the continued improvement in credit quality, could the pace of the reserve releases pickup in 2014?

Yes, I will speak for our bank, right?

I don't think so.

What we are down, what we are left with is really improvement in residential mortgage and home equity.

Those are really the only two portfolios where there's still work to be done in terms of the fallout from the recession.

So absent that, I would say we are steady as she goes for the moment, but there's probably not lots of reserve release.

Chris, it's Richard.

One of the things I hope you guys like about us is we are not that interesting and [volatile].

And this is a great example.

We didn't have anywhere near the same credit issues in the first place.

We didn't have to build the reserves in the first place and we've been very steady and methodical and thoughtful, all in line with regulator views and accountant views to make sure that we are not living on and counting on these reserve releases and you shouldn't either because it's not sustainable.

I think you will see a lot more of what we've done in the past until we get to a point of stability where all of a sudden then we're all going to stop having reserve releases and in a forward view there should be a day when banks are growing loans, balance sheets growing, and we are adding to our reserves at a level equal to and higher than the current day because those are for future loan charge-offs.

So I think we are probably closest to most (inaudible) the inflection point but this year we will have a little bit more but we haven't relied on it to get to this point.

We are not counting on it to get through this year or the next one either.

Richard, I tend to agree with you.

It just gets a little frustrating when I see bank stocks go up on reserve releases and you guys are more prudent going for a full cycle and you don't get credit for the quality of earnings.

But in any event, that's a (multiple speakers)

I hadn't noticed.

(multiple speakers)

If I could just follow up one with Bill, from your comments it seems like you believe the reserve to loan ratio for your individual bank will be higher as -- than it was previous to the crisis, whether it's from a re-regulatory process or what have you.

So one in a quarter to 150 previous to the cycle, we're going to be somewhat higher than that?

Well, the first thing you have to do is look at the difference in mix and we do have a fairly large card portfolio relative to the size of our balance sheet relative to our peers.

So that's obviously going to keep (inaudible) higher and then again as Richard said, we just didn't go up as much so we are just not going to go down as much.

But over the course of time, 1.53 charge-offs, right?

And we think over the course of time, long time this bank is a 1% charge-off.

With FAS 114 and other areas we want to make sure we stay aligned with that and for our investors we think to the extent we can stay within the bounds of all the rules and not create these volatilities that would occur with giving away too much and then build it back when we don't need it, but again in line with rules and regulations, we would love to stay as steady as we can and have the appropriate level.

It actually serves as another form of capital if you have a good reserve portfolio for loans that could go bad but for reasons we all know, I don't think any bank isn't under where their long-term run rate will be and we know in the last few years if we didn't take risks as an industry on loans when we shouldn't have but we are probably at a record low position that we are going to start building that back.

So don't anyone be disappointed when charge-off rates start to move up, provision releases stop and provision builds start.

That's actually a pretty good sign that we are all getting back to doing what we are supposed to do, which is make loans to qualified people and every once in a while one doesn't get paid back.

Fair enough.

Thank you very much, Richard.

Steve Scinicariello, UBS.

Good morning, everyone.

I just wanted to circle back to the Chicago branch acquisition for a moment.

I'm just curious as you kind of look at the long-term potential opportunity there, do you see the greatest potential benefit over the long-term from ramping up loan growth or cross-selling and further penetrating customer base in that market?

Just kind of curious how you look at that long-term potential benefit.

Where is the biggest source of opportunity for you?

Steve, good question.

You know if we had our druthers and we started from the bottom we would always be the top one, two, or three in every market in terms of consumer, small business, and wealth management.

First of all because you are pervasive enough to matter, you are in someone's life where they are near their work, near their home, in between, and now on and mobile technology you are pervasive to them.

That's our goal.

I'm not going to get out of markets where I'm sixth or seventh if we are still good for the shareholders but I would love to move up in every market to top three.

Chicago is going to take a while but we're going to move up now to seventh or eighth.

In terms of branch distribution, we might get into the top five and if we can find other deals to cobble together, maybe more grocery partners and things, we could get into the top three or four.

That's really what we are headed toward.

[PIN] scale matters, right?

So every time you run an ad in the Chicago Tribune or we do something on mobile technology, for Chicagoland, we do a sponsorship of something and partner with the city or some of the suburbs, it all just goes so much further and so much deeper and so much better.

Employees are more enthused.

We get more kind of a reputation build and it's one of the greatest cities in the country so it's also worth investing there for our long-term because it is a pretty loyal market.

So for us it's a step toward getting in the top most pervasive companies and the two or three really, really big companies that are legacy and we are legacy in a couple of other big markets and legacy always has to worry that they are going to get old and become part of an old-fashioned paradigm and we're going to try to protect ourselves where we are really big and where we are not big, we are going to be that really vicious competitor that comes up and tries to reset the paradigm and get people to pay attention to us.

So this deal was perfect on all accounts.

Financially it just accrues because it's scale and because it allows us to extend in a market that's going to grow because Chicago will grow.

It makes total sense but I know you said you are more than willing to look at more of these types of transactions in other markets.

The question I have is do you think you might get the opportunity?

Just curious what your thoughts might be on that?

I know more -- I think we are considered a disciplined buyer and so the deals you will never know are the ones that came and went because we said there's no way we are going to pay that for that but every once in a while one comes along where the motivation of the seller and our interest is high, the price is good for both parties including the shareholders and this is one of those that came together.

So if those circumstances align again, we will do more of these deals because we think it's the right way to take advantage especially in an unfinished kind of unsettled market where until things are normal again some people will have the need to shed assets.

Others like us will be interested in acquiring assets where they make sense and kind of jumpstart the organic trip that otherwise happens in normal times.

So if we don't do another deal the branches will be fine but if more come along on these terms, we will take them.

Perfect, thank you so much.

Mike Mayo, CLSA.

I was trying to gauge your conviction level that loan growth is coming back.

On the one hand, Richard, you're expressing optimism that we've heard from several other bank CEOs.

On the other hand what I think I heard you guys say is that loan utilization declined down to 23%, that your customers aren't drawing down their deposits, which is a leading indicator, that you don't expect a whole lot of loan growth the next quarter or two and that you yourselves are still watching your nickels and dimes a lot given some uncertainty.

So I know you've been more conservative than most over the years and we are all trying to figure out the pace of loan growth.

What sort of leading indicator is sentiment or is this just informal?

Is this a gut feel?

Just any other color on loan growth.

Mike, to Erica's question number one, I think I said is a tale of two halves and I was confessing that it's solely sentiment from my customers and my bankers that tells me that things are better than they have been.

It is not on the balance sheet.

It's not evidential at all which is why I went on to agree with you that first deposits gets used, then lines that are already outstanding get used and then new lines get created.

We haven't seen any of that so it is purely sentiment and perhaps it's a lot of just pent-up long-overdue demand to get things moving.

But sentiment is always the leading indicator, right?

So I think as I said before, spring will tell this story more than most springs and that the second half will be what the sentiment yields as will results or it will be nothing more than sentiment and we will be talking in April and again in July as -- at least we see at least consistent loan growth in the 6% plus annualized loan growth.

We've been doing it through the whole recession, no reason we can't keep doing it.

But at the same time, you have heard us before we are not going to compete on term, on structure.

We are going to compete on rate and we can continue to do that and rates are seeing a little bit of compression so we will be thoughtful about it.

But you repeated what I said, which is that it is simply sentiment.

I don't have evidence yet and when the evidence starts, the best news I will have for you is that deposits are drawing down, lines are getting used, and people are starting to show an interest in being involved.

I said before, too, that I do think that perhaps different than almost any other recovery coming from a recession that it will not be the consumer that blinks first.

It will be the businesses, meaning the consumer is not going to evidence like it always has a real strong sense that we are now ready, get ready, we are going to buy.

I think the businesses are going to have to finally incentivize that interest -- incentivize the product creation through innovation or pricing and start pulling consumers across to start investing.

As long as consumers are starting to feel better and the products are more interesting and the pricing is more attractive, I think that's the magic that will pull this one out.

But for the first time I think businesses will draw through this recovery and it really has a lot to do with their behaviors in an above whatever sentiment we are hearing from consumers.

One follow-up.

You talked about the trade-off between price and loan growth and as a low-cost producer you can probably afford to charge lower rates on the loans but you have seen compression across the board on your loans.

Are you close to a tipping point where you say hey, we shouldn't charge a whole lot less or as long as you are growing some NII, it's okay?

I would say our pricing is going to be relatively stable, Mike, on a go-forward basis.

All right, thank you.

Matt Burnell, Wells Fargo Securities.

Good morning, thanks for taking my question.

Just I guess to focus on one area of loan growth specifically it looked like commercial real estate outstandings were rising at a faster pace in the fourth quarter than they have on a year-over-year basis.

We've heard from a number of competitors particularly in the Southeast that that is a growing area of competition.

What is your sense in your markets as to the demand for commercial real estate opportunities and looking into 2014?

How competitive has the pricing gotten?

Well, I will start with the demand.

We have seen pretty good demand on the coast and in the Southeast, as you mentioned, that was our -- the Southeast was our fastest-growing market in the fourth quarter.

And we have heard from our clients that they are seeing more demand for their product, whether it's storage or build to suit, more than just the multifamily that we have seen in the past several quarters.

So we are seeing a pickup in demand, which is positive.

And then on the pricing, I think to the extent there has been pricing compression, I think that's mostly behind us.

I think the pricing is fairly stable right now.

So we have seen -- we saw good demand in the fourth quarter and expect it to continue next year.

If I can follow up with a question on the capital market side, Richard, you have obviously been quite correctly optimistic particularly for your own business over the last couple of years.

As we head into a higher rate cycle, there's concerns I think across the broader market that demand for fixed income underwriting may come down a little bit.

Demand potentially conversely for equity underwriting may increase.

How are you looking at that business heading into 2014 in terms of some of the bigger picture trends that are affecting interest rates?

You know, Matt, I think I still see 2014 looking a lot like 2013.

You have got leverage lending and middle market activity still pretty high.

You've got syndicated issuance still getting better over time, primarily refinancing from that refinancing as opposed to new transactions creates a bit of a downward pressure on yields.

We have got loan growth, looking seasonally best in the Western market and particularly seasonally high in food and ag, some of the retail groups.

As it relates to more traditional lending, that's where we would see -- and expected, by the way, everything is performing as we thought it would, just kind of slow annuity-like.

As it relates to the more sophisticated transactions, what we are seeing in the capital markets are particularly deal events, event action-oriented items were someone wants to buy another company or make a particular transaction in the market to create some additional financing, and we are there now where we didn't used to be and we can handle those activities.

But kind of following the conversation with Mike, the sentiment isn't necessarily any stronger than it was to generate a sense that that's going to be different in 2014, but it's not worse than it was in 2013.

It just seems to be kind of a slow, steady part of the recovery and I think the very high end of the market reflects exactly what the low-end is, which is careful, thoughtful, event-driven but taking advantage when the chance comes along.

And the whole economy is still uneven so there are people who have something they want to get rid of and there are others who find value in it and that's kind of where we are until we see something more predictable.

Bill, do you want to add to that?

I think in terms of the capital markets activity, I think 2013 was obviously a very good year for refinancing and higher rates may moderate that a little bit but there's still a lot of acquisition activity and that will generate -- that will clearly generate bond activities, so we anticipate that we will benefit from that.

Okay.

Thanks for taking my questions, gentlemen.

Marty Mosby, Guggenheim.

Good morning.

As you can imagine, most of the questions have been asked but I had two technical questions I wanted to follow-up on.

You had mentioned in the tax line that there was a state benefit I think.

What was the magnitude of that this quarter?

It impacted the rate by about 1%, Marty.

Okay, and then lastly on the mortgage repurchase reserves, there was a change in reserve of about $30 million.

With the geography in that, that's a benefit or a reduction of expenses that's probably in other expenses, is that correct?

It's actually an increase in mortgage revenue and it's a reassessment.

We reassess our reserve levels every quarter and adjust to what we think is the appropriate level and that's reflected in mortgage revenue.

Okay, that's right.

Thanks, I appreciate it.

Nancy Bush, NAB Research, LLC.

Good morning, guys.

A question.

You have had a great deal of success over the past few years with your loan production offices outside of your traditional banking markets and could you just speak to what percentage of your commercial revenues are now coming out of those offices and are there plans for expansion into other markets?

Do you mean for the middle market or in corporate?

So we have what we call an adjacent state program, so for instance we have our folks in one market managing Michigan and managing Pennsylvania.

We have others managing Indiana and managing Georgia.

That has worked quite well for us, so what we have done is we have a local input print management team that has people also in adjacent states, where we have enough of a reputation of [halo].

We have people know who we are.

At the middle market level if you don't have branches, you have to be valuable to these folks in a different way because you have to give them up on more of the cash management, treasury management products and some of the servicing that would be more technical and more mobile.

That's how we are having success there.

It's probably 4% to 5% of our total.

It is not a very big number.

It is not intended to be because I do think at a certain level, that is how you get to the point where you have branches.

On the larger end we can do business in all 50 states because the corporate customers, it's not even in the first three questions of whether or not you have branches nearby.

They are not looking for that and so we are a full on national provider in both corporate and commercial real estate.

But as it relates to middle market, it's probably a 4% to 5% impact on our total.

And (inaudible) we were to find a very large branch acquisition in an adjacent state, it's going to stay that way because we're just going to really drill down where people know us best and have the ability if they want us to use our services on the ground.

Okay, thank you.

Brian Foran, Autonomous Research.

Good morning, just a couple quick follow-ups.

On the commitment growth you saw, I know every business is different, every line is different, but is there any kind of historical rule of thumb you would look to for the typical lag between commitments turning into funded balances?

This is Bill.

I would say we have sort of exceeded the historical lag so normally by this time in an expansionary period you would be seeing the lines being drawn more than they are today.

I think some of our categories are down 10% in terms of normal utilization levels, so I think we are still all anticipating when this confidence turns into investment.

I would agree with that and I would say that surprisingly they are all down a lot, very much the same.

In terms of traditional history, commercial real estate is usually last in, last out in terms of problems and in terms of growth and that's probably the same in this cycle.

But if you get anything from small business to commercial real estate specialty products to community banking, they are all down.

In fact even more than, Bill, our collective utilization for the wholesale credits for this Company was at 38% kind of level and we are at 23%.

And that's on well over $100 billion so that in its own right is just a huge place.

Bill said it right, we are in a places we've never been.

There's nowhere to go but up but then next month if we go down again, we will say one more time.

But I like the fact that it's pent-up opportunity.

It is even better.

It's one step better than an unknown line or a loan at this stage because these are people paying for it.

They're paying us to have the privilege to have the line.

They want to have the access to it.

In fact we keep growing lines over a 11% last year so that they are planning to do something and that kind of feeds my sentiment issue, my answer to Mike Mayo, which is actually that number get stronger, not weaker.

So we've got a lot of canaries in the mine.

They are all chirping, but nothing is happening yet.

That's very helpful.

On the commercial products, I guess just a follow-up or clarification, when I think I heard you say 2014 should look a lot like 2013, we should be working off the 2013 full-year base, not the run rate from the fourth quarter for that line item, right?

Correct.

Then lastly on -- just when I think about capital and I guess it touches on the question I think Eric asked, RWA growth versus asset growth.

When I look at some of the other super regionals who are in that advanced approach bucket, mega regionals whatever you want to call them, RWAs have been falling even as assets have been growing for the past two to three quarters.

And I wonder is that a pent-up opportunity for U.S. Bank or because some of your peers had more punitive noninvestment grade securities and things like that, are they just reversing out of capital penalty you never had to begin with?

I can't tell you what others are doing.

It will tell you ours is pretty straightforward.

First of all, while we are in an advanced approach as a bank, the ratio we are giving you is the standardized approach because that is our binding constraint.

That is the lower ratio.

Just a pretty simple equation that's basically commitments that are causing the off balance sheet growth.

Thank you, I appreciate it.

John McDonald, Sanford Bernstein.

Good morning, guys.

Two quick follow-ups.

Andy, on net interest income, you mentioned the net interest margin outlook for the first quarter.

Do you hope to grow the net interest income dollars?

I guess the balance sheet still growing but you might have some seasonality in terms of day count pressure I guess.

What would be the outlook for the net interest income dollars?

Good question, John.

All things being equal, I would expect to be relatively stable but the second -- the first quarter has two fewer days than the fourth quarter and that in of itself cost us about $30 million, $35 million.

Okay, everything -- otherwise you expect it to be flattish?

Pretty close, yes.

Okay, then on the expenses you gave the outlook for the first quarter.

Would you expect the expenses to be declining from the first quarter?

In other words are there seasonal items that inflate the first-quarter expenses as well?

No, I would say the first quarter is sort of a normal quarter in terms of activity.

There are some things that are higher like FICO expense, some things that are lower like legal and professional, but overall it's relatively representative.

Okay, so to the extent the first-quarter efficiency ratio is below the year, it's really the seasonal pressure on some of the fee income lines?

Yes, the first quarter is a seasonally low quarter in terms of fees particularly in the payments business, card and merchant, it's the lowest quarter of the year.

There is no holiday and you've got the paydowns on the credit cards, so it's always our recovery quarter but that's when things pick up in quarters two and three.

Okay.

Thanks, guys.

Kevin Barker, Compass Point.

Good morning, could you talk about the non-QM market?

Do you expect to participate in it?

And if so, do you expect it to have just an incremental uptick in residential loan growth on your balance sheet?

Well, we are going to participate in the non-QR market and much of it is very similar to what we do today.

So again, we do offer today interest-only loans to private client type customers.

We do offer lower loan-to-value loans that might not meet the 43% [that didn't] come in the QM.

So on a go forward basis, it doesn't have a material impact on the types of loans that we are going to be putting on our balance sheet.

That's right.

And QM-related you're going to find, Kevin, that we really don't have any kind of impact at all to our origination.

Would you change anything about the product, whether it's term or rate in order to take in account the risk associated with non-QM lending?

No, we recognize the risk and we have mitigated it with either higher down payments in general to your customers, that type of thing.

So we believe that we have the offsets built into the underwriting.

Okay, thank you.

This is Judy back again.

Thanks, everyone, for listening to our call today and with that if you do have any follow-up questions, certainly feel free to call myself or John O'Connor and we will hopefully touch base.

Thank you.

Thanks, everybody.

Thank you.

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