美國合眾銀行 (USB) 2003 Q4 法說會逐字稿

Welcome to the U.S.

Bancorp's fourth quarter 2003 earnings conference call.

Following a review of the results by Jerry Grundhofer, Chairman, President, and Chief Executive Officer, and David Moffett, U.S.

Bancorp's Vice Chairman and Chief Financial Officer, there will be a formal question-and-answer session.

If you would like to ask a question, please press the star and 1 on your touch-tone phone, and press the star sign to withdraw.

This call will be recorded and available for replay beginning today at approximately 4:00 p.m. eastern through Tuesday, January 27th at 12:00 midnight eastern.

I will now turn the conference call over to [Mac McCullough], Senior Vice President of Investor Relations.

Thank you, Operator, and thanks to everyone for joining our call this afternoon.

If you have not yet received a copy of our earnings release and supplemental analysts' schedules, they are available under the financial and news release section of our website at www.usbank.com.

Jerry Grundhofer, our CEO, he'll open the call today.

Then David Moffett, our CFO, will provide details covering the fourth quarter and full-year 2003 performance.

Mike Doyle, our Chief Credit Officer, is also here with us today.

Let me start by covering a few housekeeping items before we begin.

First, will you notice that we restated our financial results for the spin-off of Piper Jaffray, which occurred on December 31st, 2003.

As a result of the spin-off, Piper Jaffray is accounted for in discontinued operations for all financial statement periods in this release.

On an operating basis Piper Jaffray added less than a penny to fourth quarter 2003 diluted earnings per share and approximately 2 cents to full-year 2003 diluted earnings per share.

Next, as disclosed on January 8th, 2004, we have adopted the fair value method of accounting for stock-based compensation, utilizing the retroactive restatement method to implement this accounting change.

As such, all financial statement periods in this release have been restated to incorporate compensation expense for the estimated fair value of all granted, modified, or settled employee stock options.

The impact of this change on continuing operations was 2 cents per share in the fourth quarter of 2003 and 6 cents per share for full-year 2003.

Finally, I would like to remind you that any forward-looking statements made during today's conference call are subject to risks and uncertainties.

Factors that could materially change our current forward-looking assumptions are detailed in our press release.

I will now turn the conference over to Jerry.

Mac, thank you.

And thank you for joining us today as we discuss fourth quarter 2003 and full-year 2003 results.

First I'd like to comment on our performance in 2003.

Throughout 2003 we communicated that we were targeting full-year earnings per share of $2, including the results of Piper Jaffray but excluding any cost related to the expensing of stock option.

Right up until the January 8th announcement that we elected to expense stock options, our first call consensus estimates were $1.99 for full year 2003 and 52 cents for the fourth quarter of 2003.

Looking at our actual 2003 results, excluding the cost associated with the expensing of stock option and including Piper Jaffray on an operating basis, we earned $2.01 for full-year 2003, exceeding the first call consensus estimate by 2 cents, and 52 cents for the fourth quarter of 2003, meeting first-call consensus estimates.

You can find a reconciliation of this on page 34 of the earnings release, and please call Mac if you have any questions regarding this.

As we look back on 2003, it's very clear that we're at an inflection point in both the direction of the economy and the priorities of this company.

First, we do see the economy improving.

However, as many of you have pointed out, and understand, it's too early for this to translate into meaningful improvements in revenue growth for the industry.

Specific to our company, 2003 organic revenue growth should come in around the median of the industry.

Due to our balance business mix it's doubtful that we'll ever be a top revenue performer in any one year. 2003 results for this industry provide some evidence of this, as peers with larger mortgage banking operations reported better revenue growth.

While our mortgage banking business unit had an outstanding year, it only accounts for 5% of total revenue, so it's never going to materially impact revenue growth for the entire company.

We believe that balance, consistent revenue growth will be rewarded and that's our objective.

Similarly, the majority of our peers, commercial lending continues to be weak, although we are starting to see late quarter growth in the middle market in certain regions of the country.

In addition, we saw many encouraging trends in underlying transaction and production volumes in 2003.

Not only indicating an improving economy but also illustrating the progress that we've made in building this franchise.

For example, we ended 2003 with approximately 5 million active consumer and small business checking accounts, a 4.7% increase over where we started this year.

This was a significant improvement over the 3.5% growth that we achieved in 2002.

Full-year loan production volume in the retail branches increased 32% over 2002.

Sales of investment product in the retail branches increased 16% over 2002.

Debit card transaction volumes increased 22% over full-year 2002.

Transaction volumes in our industry-leading corporate payment systems businesses, which includes corporate travel and entertainment card and purchasing cards, increased a full 13% over 2002.

Retail payment systems card transaction volumes and merchant processing transaction volumes have shown steady year-over-year improvements on a quarterly basis in the second half of 2003, both achieving a 7% growth rate in the fourth quarter of 2003.

Reflecting the success we've had in reducing the risk profile of our company, as well as the strengthening economy over all, credit quality improved significantly in the fourth quarter of 2003.

Net charge-offs declined 8% from the third quarter of 2003 to $285 million, or 95 basis points on average loans, their lowest level since the fourth quarter of 2001.

Nonperforming assets declined 18% from the third quarter of 2003 to 1.1 billion, or 97 basis points of loans, the lowest level since the first quarter of 2002.

We expect both net charge-offs and nonperforming assess to continue to decline from fourth quarter levels.

Turning to the priorities of the company, 2003 concluded a five-year period dominated by three large transformational acquisitions and their resulting integration activity.

We now have a company that's uniquely positioned to achieve consistent earnings growth as a result of our balanced business mix, advantage scale, reduced risk profile, and low-cost leadership position and our emphasis on customer service.

Our first priority in 2004 and longer term will be the creation of organic revenue growth by leveraging the breadth of this franchise and taking advantage of our broad product offerings to further penetrate our diverse customer bases.

We have many opportunities to sell additional product to existing customers and this will be our highest priority in 2004.

For those of you who know us well, you know that when we say we'll do something you can count on execution.

We also intend to extend our cost and execution leadership position.

Our tangible efficiency ratio in the fourth quarter, excluding Piper Jaffray, was 38.9%.

We will continue to focus on the creation of operating leverage, growing revenues faster than expenses, which will result in a lower tangible efficiency ratio, but we will still continue to make investments in high-growth opportunities.

We are approved approximately $600 million of new investment in 2003 with approximately 36% of these dollars allocated to revenue enhancement projects.

The Safeway in-store initiative that we announced in the third quarter of 2003 is an example of where we are spending these dollars.

We've opened 32 locations in the fourth quarter and have plans to open another 30 in the first quarter of this year.

Finally, we'll drive organic revenue growth by continuing to improve the quality of our customer service.

We have many initiatives underway to continue to make progress in this area in 2004.

In fact, by the end of the fourth quarter of 2004 all 52,000 employees at U.S.

Bancorp will have completed our most current customer service training course, where we share the latest information regarding customer service trends and establishing customer service standards.

Our second priority in 2004 and longer term is to return 80% of earnings to shareholders in the form of dividends and or share repurchases.

In the fourth quarter of 2003, we returned approximately 90% of earnings to shareholders in the form of dividends declared and shares repurchased.

In addition, and I'm sure not unnoticed by our shareholders, the spin-off of Piper Jaffray created approximately $880 million of value for our loyal shareholder base, which, by the way, is not included in the 45.4% total shareholder return that we achieved in 2003.

Finally, we continue to produce industry-leading returns on assets and equity, coming in at 2.05% and 19.4% respectively in the fourth quarter of 2003.

And as you all know, we are an industry leader in the generation of capital.

We're optimistic about our prospects for 2004 and look forward to operating the company in an improving economy.

Let me turn this over to David to give you more details on the fourth quarter and full-year results.

Thanks, Jerry.

I'm going to focus my comments on operating income, excluding Piper Jaffray, since the best represents the company on a go-forward basis.

For full-year 2003, start with the $2.01 that Jerry mentioned earlier.

The $2.01 does not include the impact of expensing stock options or merger-related expense.

It does it include Piper Jaffray on an operating basis.

So the full-year EPS number that you need to keep in mind on an ongoing basis is $2.01, less 6 cents for expensing stock options, less 2 cents for Piper Jaffray's operating earnings, for a total of $1.93.

The comparable number for the fourth quarter is 50 cents, which is the 52 cents Jerry mentioned early, less 2 cents for expensing stock options.

Piper Jaffray's operating results had less than a penny impact on the fourth quarter.

Now let me address a few quarterly trends before I discuss full-year 2003 results for the business units.

Revenue growth in the quarter, excluding securities gains and losses, were flat to the third quarter of 2003, which is consistent with historical seasonal results.

As a reminder, on link quarter basis, our revenue typically declines in the first quarter, shows the best growth of the year in the second quarter, drops off slightly but still grows in the third quarter, and is typically flat in the fourth quarter.

Revenue increased 3% over the fourth quarter of 2002 adjusted for acquisitions and one-time items.

The net interest margin decreased one basis point from the third quarter of 2003 to 4.42%, primarily reflecting growth in lower-yielding investment securities as a percent of total earning assets and a decline in the margin benefit from the net free funds due to lower interest rates.

We expect the net interest margin to decline in the first quarter in the absence of increased commercial loan activity.

Noninterest expense, excluding mortgage servicing impairment or repairment was down approximately 13 million from the third quarter of 2003 and decreased approximately 6 million from the fourth quarter of 2002, adjusted for acquisitions and one-time items.

Commercial lending continues to be weak.

Average commercial loans declined 1.9 billion from the third quarter of 2003, while commercial real-estate loan balances were flat.

Average retail loans increased approximately 900 million from the third quarter of 2003 and the annualized 8.3% growth rate.

The growth was primarily driven by home equity lending, which including home equity loans in a first lien position that are booked in the residential mortgage area was up an annualized 14.7% from the third quarter.

Noninterest-bearing deposits fell in the quarter to 29.6 billion from 31.9 billion in the third quarter as mortgage banking activities slowed and government deposits continued to decline.

Noninterest-bearing deposits in the retail branches continued to grow in the fourth quarter, increasing at an annualized 7.6% rate from the third quarter.

Adjusted for acquisitions, low-cost core deposits, which includes noninterest-bearing deposits, interest checking accounts, money market accounts, and savings accounts, grew in excess of 8% in the branches in the fourth quarter of 2003 compared to the fourth quarter of 2002.

Turning to full-year business unit results, as you might expect revenue growth was impacted by weakness in the economy early in the year and the lack of commercial loan growth throughout the entire year.

Wholesale banking recorded operating earnings of $1.2 billion for the full year 2003, a 7.1% increase over 2002.

Revenue increased 1.9% driven by a 36.5% deposit growth and a 17.9% increase in cash management fees, helping to offset a 2.8% decline in average loan balances.

Noninterest expense, excluding amortization of intangibles, declined 8.8%, due primarily to reductions in litigation and write-down of lease residuals.

Net charge-offs declined from 96 basis points of average loans in 2002 to 0.89% of average loans for 2003.

Consumer banking recorded operating earnings of $1.7 billion for full-year 2003, an 11% increase over 2002.

Total revenue, excluding securities gains and losses, increased 5.7% as average retail loans, including residential mortgage, increased 14.7%.

Noninterest bearing deposits increased 6.3%, and now money market and savings deposits increased 13.9%.

Mortgage banking fees grew 11.4%, deposit service charges grew 3.7%, and investment product fees grew 13.6%.

Excluding intangible amortization, noninterest expense increased 1.7%, due primarily to higher personnel expense.

Net charge-offs improved from 88 basis points of average loan in 2002 to 75 basis points on an average loans in 2003.

Private Client, Trusts and Asset Management, including the impact of State Street Corporation Trust acquisition, recorded operating earnings of 506 million for full-year 2003, a 10.9% increase over 2002.

Revenue grew 10.7%, due primarily to the State Street acquisition.

On a positive note, revenues in this business have increased at a 7 to 8% annualized rate over the last -- or the past two quarters of 2003 as equity market valuations and new account generation are driving improved growth.

Expense control is outstanding in 2003 as expenses, excluding intangible amortization and the impact of State Street, declined 2.1% from the full year 2002.

Payment services recorded operating earnings of $733 million for the full year 2003, a 13.6% increase over full-year 2002 after adjusting for the impact of portfolio sales in the third and fourth quarters of 2002.

Revenue, excluding 2002 portfolio sales, increased 2.6%, due primarily to a 10.9% increase in corporate payment products revenue and an 8.5% increase in credit and debit card revenue.

Merchant processing revenue declined 1% from full-year 2002 as investments in the business that are accounted for are the contra revenues and decreased economic activity impacted 2003 results.

Full-year noninterest expense, excluding intangible amortization, declined 5.3%, primarily reflecting cost savings realized due to the completion of the NOVA integration.

Net charge-offs declined from 4.5% of average loans in 2002 to 4.1% of average loans in 2003.

Transaction volumes in this business unit have increased steadily in the second half of 2003, including a pickup in volumes at NOVA, which we believe will translate into improved revenue growth in 2004.

Turning to credit quality, nonperforming assets declined $170 million to 12.9% during the quarter to 1.1 billion at December 31, 2003, or 97 basis points of loans [enorio].

We expect nonperforming assets to continue to decline further.

Net charge-offs fell on a link quarter basis to $286 million as the dollar amount of net retail charge-offs remained flat to the third quarter, and total commercial net charge-offs, including C&I, commercial leasing and commercial real estate declined by approximately $25 million.

Total loan delinquency trends continue to improve, and again, we expect net charge-offs to trend lower.

As our average -- as our asset coverage ratios increased in the quarter, the allowance for credit losses to nonperforming loans was 232% at December 31, up from 202% at September 30th.

It allows for credit losses to period-in-loans at December 31, was 2%, up from the 198 at September 30th.

Our capital ratios remain strong.

We are comfortably above the minimum regulatory targets to achieve well cap life status with a tier 1 capital ratio of 9.2% and a total capital ratio of 13.6%.

Tangible common ratio ended the quarter at 6.5%, comfortably above our 6.25% target.

In addition, we repurchased 15 million shares of common stock in the fourth quarter.

As we enter 2004, we remain focused on certain objectives.

First, we will achieve our stated long-term earnings per share growth goal of 10%.

Second, we will continue to focus on organic growth and the creation of operating leverage.

Third, we will continue to enhance our already high levels of customer service.

Finally, we will remain disciplined in our desire to reduce volatility and in improving the risk profile of the organization.

This concludes our prepared comments.

We will now take questions from institutional investors and analysts.

Again, if you do have a question, please press the star and 1 on your touch-tone phone at this time.

Our first question comes from John McDonald of UBS.

Please go ahead.

Hi, David.

Hi, Jerry.

I was wondering, David, could you give us a little bit of color on what the margin outlook is for the year, and in terms of rate sensitivity how you're positioned going into 2004?

From a rate sensitivity point of view, I think we're very well positioned going into 2004.

We've taking a number of actions over the course of the last two quarters to reduce the liability sensitivity we had going into the third quarter, and we've made considerable progress in that, and I don't -- I feel very good about where we're positioned.

I don't think that we will have any major change in the position going into the first quarter, so I think we're fairly comfortable where we are at the end of December.

In terms of margin, I think the issue with the margin is going to be resumption of commercial loan growth.

Over time, our mix of our balance sheet has shifted because of the deposit growth and lack of commercial loan growth to a higher levels of securities and retail loans.

And without the loan growth on the commercial side, I think we do run some risk of margin compression in the beginning of the year.

I don't think it will be the kind of decrease we had in 2003, but I do think we will see some lower margin, particularly in the first and second quarter, until we see some rebound in the commercial side.

David, just to follow up, how do you feel about further leveraging up with the securities portfolio?

We're going to continue to maintain, as we have always had an equity asset ratio of 10%, and we've remained consistent through time at that level, so we will not have any additional leverage in the balance sheet going into the first quarter or for the rest of the year, for that matter.

Just to clarify, so you're put neutral to rates right now?

Yeah, we are.

Maybe I could just ask Jerry.

We've seen a couple of big bank mergers recently.

In light of that, could you remind us what your appetite is for bank and other types of acquisitions?

John, it hasn't changed our appetite at this company at all.

We're dedicated and focused on delivering 80% to our shareholders, and the acquisition appetite will be for smaller deals as we talked about before, so it really hasn't changed my position or our position of our company.

We've had very nice results over the last quarter with people understanding how disciplined we are and what we're doing and we're going to continue to do that.

Great.

Thanks.

Our next question comes from Tom McCandless of Deutsche Bank Securities.

Please go ahead.

Good afternoon.

Hi, Tom.

Hi.

Two unrelated questions, if I may.

You made reference with discussion around noninterest-bearing deposits, and throughout your press release it talks about a lot of the sequential quarter decline being attributable to government-related deposits.

Is there something else going on there other than just, you know, some behavioral change among your new customer base?

Have you lost customers, or is this likely to continue at this pace?

What should we expect with respect to noninterest-bearing deposits, or is there some seasonality with respect to that?

Tom, this is is David.

I think there's a couple things you have to focus on.

One is, the government had a change in the way that they are going to compensate banks for delivering services to the Federal Government, and that was by far the most significant change in demand deposits for the quarter.

The second thing, and our comments covered this, is we are seeing growth in the number of retail accounts, and we've had a 4% increase year-over-year in accounts.

However, I will tell you that as the economy improves, I think it's reasonable to expect that companies will begin to use their cash balances as opposed to borrowing.

I think that's the pattern we're seeing today.

If you look at deposit growth on the commercial side year-over-year it's been extraordinary.

And I think that's really a reflection of liquification de-leveraging on the business side.

We would expect, if the economy continues to grow, those cash balances on the business side would decline and people begin to borrow.

So we think that's a very natural evolution to an improving economy, and that's what we would expect next.

So I don't think you'll see the kind of growth rates we've had, even taking out the impact of the change in the government compensation in 2004.

Tom this is Jerry.

If you look at our basic banking business -- our metropolitan and community banking franchises -- during the quarter they had almost an 8% annualized growth rate, so that's much more indicative of really what we're doing.

The government change in pricing and the way they compensate us had a continued effect in this quarter.

Okay.

Well, just to follow up on that, and I did capture the comments about the branch originating, noninterest-bearing deposits year-over-year up 8%, but could you share with us, How much of the linked quarter decline and noninterest-bearing deposits do you think is attributable to the government changing the way it pays banks versus your customers beginning to utilize more cash?

I mean, roughly, is it 60/40, or --.

About half a billion dollars would be just government related, okay, and about a half a billion dollars in our mortgage banking, which we are the recipient of companies that are related to the real-estate business, and title companies, and that was about half a billion.

That's a billion dollars right there -- in those two.

Okay.

Thank you, Jerry.

Then the second unrelated question has to do with the merchant processing business.

Could you discuss a little bit what's going on with your portfolio as the dollars of volume appears to have subsided a little bit going into the fourth quarter, maybe perhaps reflecting a reduction in the number of merchants the way you all count them up.

Is that a normal seasonal trend?

I think what you saw, I think it was a couple things.

One is, actually -- merchant volume actually improved during the quarter.

The number of merchants really kind of comes and goes, because, as you know, the merchants -- there are a lot of small businesses.

We're heavily dominated by small business, and the merchants, many times you'll have situations where they're either bankrupt or there are other situations.

I don't pay a lot of attention to the number of merchants, but to the volume I think is more indicative, and particularly if you look at -- in the third and fourth quarters together, I think there's a pronounced improvement relative to the first half of the year, and I think that's more indicative of the trend.

And, Tom and Jerry, you will see we are very confident you will see higher growth rates for NOVA in the first quarter.

Based on --.

Based on the fact that during the year of 2003, we had placed in -- or in effect were some contra revenues that now are in the run rate, and we haven't lost business.

We, in fact, gained business, so that's in the run rate for 2004, and those are deals we had to make to keep businesses when we acquired them a number of years ago.

So that's in the run rate.

You will see that.

It sort of has math fair activity.

We're very pleased with their performance and their activity.

So basically some price concessions have just about run their course?

Is that what you're saying?

That's correct.

Thanks so much.

Thanks, Tom.

We'll take our next question from Nancy Bush of NAB Research.

Please go ahead.

Good afternoon.

Hi, Nancy.

Question for you.

You made a comment about lowering the risk profile of the company, and obviously, you know, continuing improvement in credit quality is part of that, but is there something more to that?

I mean, are you still going through loan books somewhere and, you know, turning away business?

What more can you do with the company to lower the risk profile, excluding improvements in credit quality?

I'll make a general comment.

I've got Mike Doyle here, our Chief Credit Officer.

He can talk, too, Nancy.

Part of it is just a continued trend that we have put in place to really get our entire company on the same page, which has taken a number of years, and we're really getting there, and you're going to see improved quality just because of that.

And we are -- we said that the numbers in the prior quarter sort of we felt belied our progress on the credit side, and I think this was the first quarter where you've seen really significant improvement and sort of broken the back, certainly, of credit in our company, and I feel -- from the standpoint of losses -- and we feel very comfortable with that.

But having said that, we continue to focus on it, we always now are continuing to look at other ways to try to increase volumes without increasing our risk profile.

We think we can do that, Nancy, and we think that will be the benefactor of that in the quarters to come, although we still think it's going to be weak.

We are really dedicated in turning our efforts toward variable rate commercial lending.

Mike, do you want to?

I'll just add to that a little bit, Jerry Nancy, on the consumer side, as Jerry or David commented earlier, we were flat on the net charge-offs quarter over quarter.

Normally, in this part of the year you'd see an uptick in the net charge-offs on the consumer side.

You didn't see that this year, and I think that's indicative of our strategy, which has been over time, and this has taken several years to accomplish, but as some of the legacy portfolios have been rolling off we've been replacing those portfolios with better quality credits over the last several years, so our quality is getting better and better naturally through that process.

On the commercial side, to Jerry's point, we brought a lot of cultures together here that had a lot of different risk profiles associated with those, and likewise, we've seen those problems begin to resolve themselves.

We do have pockets that we've talked about before, like leveraged lending, that we're continuing to work on, but that, in this quarter, showed also significant progress.

Of the 25 million David mentioned earlier, reductions in commercial, 11 million of that was in leveraged lending.

The other 14 was across the broad commercial portfolios.

And through our underwriting today, the new deals we're originating on the front end, as you see these problems resolve themselves, the new deals that are coming in are better quality, so that's going to result in lower risk overall and should position us very well in the future if we have another cycle to reduce the overall volatility that we had through this cycle.

That's ultimately the goal.

Nancy, one more comment.

I might add, we are just seeing an unprecedented lack of usage on our lines of credit.

In fact, we're getting business, but people just aren't borrowing.

I certainly have never seen it.

They're going to have to borrow sometime, but, you know, as we've said, we've seen some pockets, middle market in particular, where it looks like there's some positive signs, and as we go forward, maybe all of our markets -- but we'll reflect that, hopefully -- but again, we're not really counting on that.

If I could also ask, David, just to comment on the duration and the bond portfolio, please, where it went during the quarter?

Yeah.

The duration of the bond portfolio dropped from a little over 4.2 years to 3.6 years, and that's really the result of the reinvestment of the cash flow and the floating rate product.

So that's helped us.

And then we're going to continue to do that.

Great.

Thank you.

We'll take our next question from Rodrigo Quintonilla of Merrill Lynch.

Please go ahead.

Hi, good afternoon.

Hi.

Rodrigo.

I was wondering whether you can comment on credit leverage to what extent it's been built into your 10% EPS growth aspiration?

And if not, given that we've seen other banks releasing reserves, what kind of thinking or metrics do you have in mind before feeling comfortable about releasing reserves later in '04/'05?

Rodrigo, I think, as Jerry pointed out, we are still concerned and still see weakness in the overall commercial loan demand which we think reflects an overall concern and uncertainty over the outlook.

So our point of view would be that we would continue to cover our charge-offs with provisioning, and we believe that our reserve is adequate and consistent with our overall risk profile.

We are making progress.

As Jerry has pointed out, we do see improvements in the nonperforming.

We still see improvements in charge-offs.

But you also might note that we still have high levels.

We still have over a billion dollars in nonperforming assets, and as a result of that, we have to be cautious, although we're very optimistic that we're going to see improvements in that.

But I would expect to you see us to continue to cover our charge-offs in the foreseeable future.

On a related note, Jerry, two years ago or three years ago, at the time of the merger, you felt comfortable saying that this franchise could grow in the low teen range, maybe 12%, and not surprisingly with the recession you lowered that to about 10%.

What do you need to see to go back to a low teen sort of target for long-term EPS?

Well, we've been very clear that 10% is our goal, consistent 10% with consistent earnings, and that's where we're headed.

Again to answer your question, not for us but for the industry overall, obviously, you'd have to have more of the halcyon days where companies are investing and we get substantial growth in commercial lending and other businesses, and you have your asset management and other businesses doing very well because the market is doing well, which, in fact, that is beginning to occur if you look at our trust and investment income from this quarter.

We finally got help, the first time really in the three years, Rodrigio, since we've been together as a company.

But we are focusing on 10%, that's where we're headed and anything above that would really be something that is much more economy-driven.

Thank you so much.

Our next question comes from Mike Mayo with Prudential.

Please go ahead.

Hi.

Hi, Mike.

How you doing?

The buy-backs, what was the average price that you bought back stock during the quarter?

And should we expect the same pace of buy-backs this year?

Well, let me start with the volume.

As we've said, we're going to return 80% of our shareholders' earnings in the form of buy-back and dividend.

We've made the dividend increase very clear, which we did in the fourth quarter.

We did not start buying back stock until the middle -- until the latter part of the quarter, so by definition, we will obviously pick that up in the first quarter, so you wouldn't see an acceleration in the first quarter.

But we would be consistently buying back stock throughout the year based on the estimates of our earnings and the overall direction of our capital, but we're committed to those targets, and we think the increase would -- of volume would increase.

The average was somewhere between 27 and $28, roughly.

I don't know the exact number, but it's somewhere between there.

And how high would it make sense to still buy back stock?

Well, Mike, it's a long ways from here.

It would be in the high 30's.

And with regard to the securities portfolio, looks like it was ramped up quite a bit for the quarter and for the year.

The period -- like 8 billion higher for the quarter and 15 billion higher for the year.

How do you think about the leveraging up of the securities portfolio?

Clearly it's been the right move, given the right environment, but how long do you keep that on?

Mike, here's our sort of operating model.

Our goal is to keep our financial leverage at equity asset at 10, and we continue to do that, and to the extent we get funding growth and declines in commercial, we'll continue to hold investment securities.

Now, quite frankly, what we're hoping is that all total loan growth, which would need to be improved by commercial, would begin to absorb some of the cash flow on the -- from the bond portfolio.

We're getting about $800 to $900 million of cash flow from the bond portfolio every month.

And right now, until we see the loan grow, we're going to continue to invest on a very short-term floating rate basis.

And that's one reason we hold the securities available for sale, is in the event we get loan growth that exceeds that, we can obviously sell securities.

But the reason we've stayed relatively short is because we do expect loan growth to occur, and we need that cash flow to continue to finance loan growth.

But at the same time, we don't want to factor overall deposit pricing strategy, our marketing programs we have in the consumer side, so we're going to continue to do everything we can to grow deposits without interfering too much with the asset side.

And the last question, back to acquisitions, Jerry, we've heard you.

You're not going to go out and do big deals, but the environment's changed since the last quarterly earnings conference call.

You have both Bank America, now J.P. Morgan.

Would you consider a merger of equal?

You can't just completely swear off and not talk about deals with anyone, or can you?

Mike, it's changed for Fleet and Bank America and for J.P.

Morgan Chase and Bank One.

It hasn't changed for U.S. Bancorp.

So a merger of equal, you wouldn't even talk to someone about the possibility?

Those typically have not done very well, Mike.

If you look at the history of them they haven't done very well.

So we're very focused on giving back 80% to our shareholder and increasing their value in our company, and the last ten years haven't done too badly, and over 800% in the last year over 45% without Piper, so that's -- to some extent that's like selling your company but owning it yourself.

We're going to continue to focus on it.

We're going to drive our strategic goals, which we've talked to you about and we're going to create shareholder value.

We've done that before.

We're going to do it again.

Thank you.

Thank you.

We'll take our next question from Jason Goldberg with Lehman Brothers.

Please go ahead.

Thank you.

Good afternoon.

Hi, Jason.

The drop in average loans -- in average commercial loans is greater than peers and is even more pronounced on a period-end basis.

Is there anything else going on in there other than obvious [inaudible] mediation and just lack in demand?

Is there kind of market share shifts or business that you're kind of still running off?

Jason, this is Jerry.

No, there isn't.

I mean, I can categorically say that.

It's not the case.

In fact, commitments are going up, but people just aren't borrowing.

Maybe our customer base, after the last few years, is of the quality -- I think it's being reflected in some of our most recent trends, and what I've said before, the fact that our performance on nonperformers and charge-offs in prior quarters belied what we felt was a strengthened overall loan quality.

So I can only attribute it to that, and we are focusing on it, and I think when these things come back we will come back as well as anyone else.

I really do.

Okay.

Then secondly, you mentioned kind of some pockets of strength in the middle market segment.

Any particular geographies that are showing more strength than others?

Yeah, St. Louis and Kansas City area, a few places in the west in Nevada and the mountain area, in Utah, Nebraska, and Iowa.

A little strength, interestingly, in our old Cincinnati market, and looking at some very good pieces of business there, and hopefully that will -- is a harbinger for other parts of the country.

Still weak in the upper midwest and Minneapolis in particular, and Milwaukee, but I think we're making progress there, too, but we are just are going to focus on it and ensure that we get our fair share.

And I do believe, Jason, we will.

We are focusing on it, and when it comes, we will get it.

Thanks.

That's helpful.

Thank you, Jason.

Our next question comes from Steve Wharton of Lumis Sales.

Please go ahead.

My question was answered.

Thanks.

We'll move on to Betsy Graseck of Morgan Stanley.

Please go ahead.

Thanks.

Could you give us an update on your initiative for the in-store branches and the timing of the roll-out of those branches over the next year?

Yeah.

In the first quarter we'll open up another 30 or 35, and then the residual, which is about 100 more, will be completed by the end of September.

Excuse me, yeah, by the end September we should have them all rolled out for the Safeway initiative.

And on that subject, we've heard a little bit on some of the ones we opened in California with the strike that's occurred, but that only affects about 11 to 15.

I can't recall which one it was, it's 11 or 15 of the branches that we have opened in California.

Okay.

And then just an update on how you expect those to come in, in terms of profitability.

Is it at the same rate that you had previously been thinking of, between 18 to 30 months, or has that shortened or elongated given the deposit cycle now?

I think, Betsy, you're right there in the ballpark, 18 to 24 months.

We're very comfortable with it.

We know it's a proven winner.

We've got the right kind of people in the market, we've hired the right people, we've trained them, and we're ready to go, and we feel very, very good about the entire -- this entire project.

So the deceleration in the deposit growth rate hasn't changed your outlook for break-even there?

It has not, not at all.

We'll take our next question from Jon Balkind of Fox-Pitt Kelton.

Please go ahead.

Thanks.

Good afternoon, guys.

Hi, John.

Just wanted to follow up on the loan growth question.

Most of the industry has reported so far is expecting sort of a back-half rebound.

I'm just wondering, based on the conversations your people are having with their customers in your various markets, what are the customers saying?

Is it a lack of demand?

Is it improved profitability and cash flow so they don't need to borrow?

Is it disintermediation?

Trying to get at whether there's any structural economic issues that could prevent us from seeing loan growth all year.

John this is Jerry.

There's no question that the customers are feeling better.

There is no question about that.

They're feeling better about the economy.

They're feeling better about their companies.

I think there's no reason to believe your outlook and your time frame isn't one that's very plausible.

I'm not sure it will happen, but my sense is that that will happen as well.

And so there's nothing holding them back except themselves and their reluctance to believe that they can invest and continue to make money.

And I think they're feeling much better about that right now.

I do.

Sounds good.

Thanks, Jerry.

Mike, do you want to -- Mike Doyle?

No, I think you're right on the money, Jerry.

We have no further questions.

I'd like to turn the program back over to management for any concluding comments.

Thank you, Operator, and thanks to everyone for joining us today.

Please give me a call if you have any questions.

Thank you very much.

Thank you.

This does conclude today's teleconference.

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