富國銀行 (WFC) 2010 Q4 法說會逐字稿

Good morning, my name is Celeste and I will be your conference operator today.

At this time I would like to welcome everyone to the Wells Fargo fourth-quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session.

(Operator Instructions).

I would now like to turn today's call over to Jim Rowe.

Please go ahead, sir.

Good morning, thank you for joining our call today during which our Chairman and CEO, John Stumpf, and CFO, Howard Atkins, will review fourth-quarter 2010 results and answer your questions.

Before we get started I would like to remind you that our fourth-quarter earnings release and quarterly supplement are available on our website.

I'd also like to caution you that we may make forward-looking statements during today's call and that those forward-looking statements are subject to risks and uncertainties.

Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings including the Form 8-K filed today and the earnings release and quarterly supplement included as exhibits.

In addition, some of the discussion today about the Company's performance will include reference to non-GAAP financial measures.

Information about those measures, including a reconciliation of those measures to GAAP measures, can be found in our SEC filings and in the earnings release and quarterly supplement available on our website at WellsFargo.com.

I will now turn the call over to our Chairman and CEO, John Stumpf.

Thank you, Jim.

Good morning, everyone, and thanks for joining the call and, again, thanks for your interest in Wells Fargo.

I'm very pleased with our record results for the year and the fourth quarter which again demonstrate the power and momentum of our franchise.

We continue to focus on meeting the financial needs of our customers and, as a result, we grew revenue, loans, deposits and cross-sell as well as increased market share across our businesses.

We also experienced significant improvement in credit quality in the quarter, continuing the steady improvement we experienced throughout 2010.

The Wachovia merger continues to exceed all of our expectations and we are particularly pleased with the positive customer response we have received as we begin integrating the Wachovia stores in our eastern states.

In fact, for the second consecutive year Wells Fargo ranked number one among large banks in the American Customer Satisfaction Index.

Our internal metrics indicate greater customer retention and deepening customer relationships even as we completed increasingly complex merger activities.

For example, we've already replaced more than 5,000 Wachovia ATMs with all of our over 12,000 ATMs now on one operating platform.

Simply by offering our customers in the east the same Web-enabled envelope free ATMs we have in the west, ATM deposit transactions in our eastern markets increased 55%.

This is just one example of how we continue to execute our business model while serving our customers when, where and how they want to be served.

Deposit growth ranked strong throughout our Company with net checking account growth of 7.5% including California up 8.2% and Florida up 10%.

Since the merger we have grown core deposits by $53 billion while favorably changing the composition from higher cost CDs to lower cost checking and savings accounts.

In fact, listen to this, at the time of the merger 23% of our core deposits were in CDs compared with less than 10% today.

Just this past weekend we successfully completed the systems integration of our retail brokerage business.

As a consequence we now have over 15,000 financial advisors in all 50 states on one common platform, state of the art and very robust trading, planning and investment platform activities and capabilities.

This further enables cross-sell across banking, Wealth Management and brokerage customers nationwide.

Even as we celebrate the outstanding success of the Wachovia merger to date, we continue to focus intently on the remaining work ahead, converting the rest of the East Coast Wachovia banking stores to Wells Fargo throughout 2011.

Turning to the issue of regulatory reform, we have always been supportive of changes designed to better protect and serve consumers, businesses and the financial system.

In some cases, however, such as the currently proposed control of debit interchange fees, suggested changes may have unintended consequences for the US consumer which causes our industry some concern.

We believe that lawmakers should engage all constituents -- merchants, consumers and banks -- and take the necessary time to reach a reasonable and equable solution.

In that way we can all help make our regulatory and operating framework a positive one for customers, the banking industry and the overall health of the US economy.

As a company with more than 280,000 team members, our focus in this period of a new normal will be, as always, on how we best serve our customers by providing more value.

So we are focusing on reducing expenses, being more efficient and nimble, and increasing revenue by winning more customers and deepening existing relationships and thereby limiting the impact of regulatory reform costs on our customers.

Granted there will be some costs that will be passed along to customers.

We've begun to implement some changes and there are more to come.

But these decisions will always be made with the customer at the center.

As we work through these changes we will focus on three things -- providing our customers with choices and education about their options; rewarding customers for doing more business with us; and finally, offering meaningful value at fair prices.

With the evolving environment we are more convinced than ever that our commitment to helping our customers succeed financially will create the best long-term value for shareholders.

Now let me turn this over to Howard.

Thank you, John, and good morning, everyone.

My remarks will follow the slide presentation included in the quarterly supplement that's available on the Wells Fargo Investor Relations website.

I've got a lot of ground to cover this morning -- as shown on the slide labeled Fourth-Quarter Overview, I'd like to organize my remarks around five key areas.

First, our earnings were once again very strong, a record $3.4 billion in the fourth quarter.

Perhaps more important was the high quality of our results with broad-based revenue growth across a large number of our 80 plus businesses, an acceleration of checking and savings account deposit growth and now loan growth in total and in load portfolios other than the non-strategic portfolio which we've been running off.

Second, we had a significant improvement in credit quality in the quarter with non-performing loans and non-performing assets now down this quarter and net charge-offs down once again after having peaked over a year ago.

In terms of mortgage securitization, we continue to experience declining repurchase demands, outstanding demands in total are only about $2.1 billion right now and we consider the $1.3 billion reserve as of 12-31, 2010 to be adequate given what we are seeing from investors.

On reg reform, I'll spend some time discussing the actual Q4 impacts as well as our evolving cost estimates and how we are thinking about the issues here.

And on capital, we had a 12% annualized internal capital generation in the fourth quarter.

Our capital ratios are higher than they've ever been.

In terms of Basel III Tier 1 common, we had approximately a 7% ratio and our objective, of course, is to build Tier 1 common while at the same time returning capital to shareholders at a more normal level.

On slide 3 you can see our earnings have been very strong every quarter since the merger with Wachovia.

We earned a total of $24.6 billion over the past eight quarters, including the record $3.4 billion earned in the fourth quarter which represents a 15% return on tangible common.

Our earnings increased 9% linked-quarter annualized and 21% year over year, producing a $0.61 earnings per share in the fourth quarter.

As a reminder, a year ago our EPS was $0.08 a share, but that reflected the $0.47 reduction for the TARP preferred stock dividend including the redemption of TARP in the fourth quarter of 2009.

Apart from TARP our EPS was up 11% year over year on a 10% larger base of diluted average shares outstanding.

Now there were a number of items in the fourth quarter that affected revenue and earnings and demonstrate the quality of our results.

As you can see on slide 4, I'd like to go over some of these in some detail.

First, the full-quarter revenue impact from Reg E was $431 million pre-tax in the quarter, up $51 million from the third quarter.

If you remember the changes here started in the middle of the third quarter.

As more customers opt in and we make product changes we expect this revenue impact to diminish progressively over the next two years and I'll have more to say about that in a moment.

Continued -- we continue to earn income on our PCI commercial loans that were sold at gains or otherwise favorably resolved, we had $99 million of PCI resolution, loan resolution income in the quarter, down $103 million from the third quarter.

Given the fact that we marked the Wachovia loan portfolio at the widest credit spreads in the cycle, and given the success we've had in resolving problem loans, loan resolution income has actually averaged about $186 million in the eight quarters since the merger.

And we see some additional potential for additional resolution income as the economy and markets improve, but of course with fewer loans to work out and hard to predict exactly when that may occur.

We had equity gains of $317 million in the quarter compared with $131 million in the third quarter.

Now this is a more regular source of earnings for our Company; we've averaged about $195 million of gains in the past four quarters.

Largely from the private equity portfolio and given the relatively buoyant stock market there's some potential for additional gains going forward here.

We had $268 million of bond losses, almost all due to the sale of our lowest yielding securities which we repositioned at higher rates prevailing at quarter end and early first quarter.

This will offset almost all of the equity gains in the quarter.

Merger integration expenses totaled $534 million, up $58 million from the third quarter.

If you remember, we said that the fourth quarter of 2010 and first quarter of 2011 would be the peak quarters roughly in terms of the integration.

These expenses of course will go away after we finish the integration in late 2011 and early 2012.

In the quarter we made a $400 million charitable contribution to the Wells Fargo Foundation.

We typically contribute about 1% of annual earnings each year to the Foundation, so the fourth-quarter contribution covers three full years of estimated funding and estimated expenses for the Foundation.

We typically have higher expenses in the last quarter of each year.

If you look at the advertising, travel and equipment expenses in the quarter, which is where most of the seasonality occurs, Q4 was higher than Q3 by over $300 million.

Foreclosed asset expense was $452 million, up $86 million from the third quarter.

These costs will remain elevated in the near term before declining as problem assets decline.

Next, reflecting the improvement in credit quality, we had an $850 million reserve release in the quarter and we expect additional releases in the future absent significant deterioration in the economy.

I'll discuss in a moment some additional items in our mortgage business including an increase in repurchase reserves, higher foreclosure costs and volume-related expenses in that business.

Now, while I like to say our earnings are our earnings, I've noted these particular items on this slide, which includes more unders than overs, simply to underscore the very high quality of our earnings in the fourth quarter.

Slide 5, our earnings growth in the fourth quarter was driven by two main factors, one of which was the very strong revenue that we had in the quarter.

In the next few slides I'll highlight for you just how strong and just how broad-based our revenue was across products, across segments, across geography and across customers.

Given the fact that we operate and cross-sell across 80 some odd different businesses, our quarterly revenue has been relatively diverse in most quarters, but in this quarter particularly so.

Two-thirds of our businesses generated revenue growth in the quarter in the aggregate producing 12% linked-quarter annualized revenue growth.

Over 60% of the Company's $21.5 billion in fourth-quarter revenue came from businesses that produced double-digit revenue growth.

This revenue growth was broad-based across all product lines.

We began seeing signs of some loan demand two quarters ago and in the fourth quarter that translated into an increase of loan outstandings which were up 2% in total and up 6% linked-quarter annualized in portfolios other than the non-strategic loans we were running off.

We've had strong core deposit growth now for many quarters and in the fourth quarter checking and savings account growth accelerated to 17% annualized from the prior quarter.

As John mentioned, about 90% of our core deposits are now in the form of checking and savings reflecting the success we've had in gaining, retaining and building household and business relationships.

Mortgage originations were up 27%.

We had a continued increase in client assets and wealth brokerage and retirement which were up 12% annualized.

Trust and investment fees which included brokerage and investment banking fees rose 15%.

So you can see across many, many product lines very strong growth.

On slide 6, each of our business segments had a solid quarter.

Community Banking earned $2 billion in profits on $13.5 billion in revenue, core product sales in this business reached $7.1 million sales in the west, up 17% from a year ago, and grew at double digits in the east year over year.

Sales were strong in both consumer and small business and across geographies.

We saw linked-quarter loan growth in auto, private student lending and SBA lending.

And as shown on slide 6, many diverse businesses within the Community Bank had linked-quarter double-digit revenue growth.

Now global remittance, an interesting one, is an interesting example of the traction we are getting in our revenue growth from the combination with Wachovia.

Remittance transaction volume increased 41% to $1.42 billion in 2010.

The global remittance business is benefiting from revenue synergies with Wachovia with over 30% of the increase in dollar volume in the fourth quarter coming from Wachovia stores that have converted to Wells Fargo.

Now this was a product that was not offered at Wachovia stores prior to the merger.

Our Wholesale Banking group earned $1.6 billion on $5.8 billion in revenue.

This business had linked-quarter loan growth for the first time since the merger including loan growth in commercial banking, commercial real estate, asset-backed finance, capital finance, government banking, equipment finance and international.

Wholesale Banking has grown revenue consistently for many quarters, in fact many years, as it has gained more customers and cross sold deposits -- I'm sorry, cross sold deeper into its relationships.

This revenue growth in the quarter also reflects merger synergies.

For example, in investment banking revenue coming from our commercial customers -- that was up 44% in large part as more of our [current] relationships use Wells Fargo securities to underwrite their bond and equity financings.

Our wealth, brokerage and retirement business had solid linked-quarter revenue growth, up 18%, as client assets grew to $1.3 trillion, up 12% linked-quarter annualized.

Client demand for managed account relationships continued to be strong as managed account assets grew 30% annualized from the third quarter.

Brokerage lines of credit increased 18% annualized.

We now have more than 15,000 financial advisors who are increasingly focused on meeting our customers' total financial needs and who originated loans up 50% in this group in 2010.

This business is an increasingly important growth business for us and an increasingly important source of cross-sell.

On slide 7, as you can see, the main reason our revenue has been so strong and so consistent is that our business model leads to greater market share and greater share of wallet.

In the fourth quarter retail cross-sell for all households combined was 5.7 up from 5.47 a year ago.

Cross-sell was up about 4% in the west and up even more in the east as Wachovia stores adopt the Wells Fargo sales model.

We still have what we think is roughly a 20% revenue growth opportunity in the east simply by increasing cross-sell in the east up to the west cross-sell of 6.14.

Importantly, on slide 7 we show the market share data starting with the first quarter after the merger through the last available quarter, and there are two things I'd point out about the market share data.

First, you can see just how much market share we've gained after having put the two companies together at the end of 2008.

And second, you can see just how broad-based our market share growth has been in virtually every type of financial services that households and businesses need and want.

Before turning to credit quality I would like to make a few points about the mortgage business on slide 8.

Mortgage banking non-interest income increased $258 million in the fourth quarter.

Not coincidentally we also had approximately $200 million higher operating expenses in the quarter to process all these originations -- an example of our ability to modify capacity and variable expenses up and down as volume ebbs and flows.

On slide 8, for purposes of analysis, we've broken down mortgage fees into component parts, originations and servicing.

On the origination side the total gain on origination activities was $2.5 billion in the fourth quarter, but that included $464 million provided for repurchase reserves, up $94 million from the third quarter.

This addition primarily reflected an increase in loss severity projections even though unresolved repurchase demands are down again in the quarter.

The $2.9 billion gain from origination activities was up 27% from the third quarter on a 27% increase in originations.

All in servicing revenue was $240 million in the quarter.

I'm often asked where in the income statement we account for higher residential foreclosure costs.

And in fact the present value of projected residential mortgage foreclosure costs is reflected in the MSR valuation, so when foreclosure expenses are projected to rise, the full higher expected costs reduce current period earnings through a reduction in the MSR.

As you can see on this slide, we reduced the value of our MSR by $143 million in the fourth quarter for higher projected servicing and foreclosure costs.

We review and adjust our servicing and foreclosure cost projections within our MSR valuation each quarter and have been adding to this cost for several quarters now to reflect the current higher cost environment.

The ratio of MSRs as a percent of loan service for others was 86 basis points, up slightly from 72 basis points in the third quarter simply due to the higher mortgage rates in the quarter.

But we expect we will once again be at the lower end of the peers on this metric.

Let me now shift to credit quality starting on slide 9.

In addition to building the franchise, the second key reason our earnings were so strong in the quarter was because credit quality improved significantly.

Charge-offs declined again as they have in every quarter since the fourth quarter of 2009 and are now 29% below the peak.

We've indicated in the past that given our particular loan portfolio mix the peak of non-performers would lag the peak in charge-offs.

Non-performing loans appear now to have peaked and we're down $2.1 billion in the fourth quarter with new inflows dropping significantly and outflows accelerating.

Provision expense was $2.99 billion, down $456 million, including an $850 million reserve release and reflecting the $256 million quarterly reduction in losses.

Absent a significant deterioration in the economy we expect future reductions in the allowance for loan losses.

Our allowance for credit losses stands at $23.5 billion at year end, that's 6.1 times quarterly charge-offs.

In addition, the PCI non-accretable difference of $13.4 billion represents about 29.5% of the remaining PCI unpaid principal balance.

On slide 10, not only were charge-offs down in the quarter, but virtually all of our leading credit metrics point to continued improvement.

As I mentioned, non-performing assets were down linked-quarter for the first time since the merger with Wachovia, down 6%.

Non-performing loans declined $2.1 billion from the third quarter with reductions in C&I, commercial real estate construction and each of the consumer loan categories.

Total non-performing inflows were down 13% and outflows increased 21%.

Criticized classified assets were down roughly 10%.

Apart from some definitional changes, the biggest decline we've had so far in this cycle.

We also continue to see a reduction in loans 90 plus days past due and still accruing, which have declined now for four consecutive quarters, commercial loans 90 days or more past due improved significantly from the third quarter, down 40%.

And finally, early-stage delinquencies declined from the third quarter, quite a positive development actually since fourth quarter is usually a seasonally higher quarter for delinquencies, as you can see from the fourth quarter of 2009.

On slide 11, this improvement in credit quality in large part reflects the success we've had over the last two years and into the fourth quarter reducing higher risk asset portfolios.

On this slide we show the decrease in our higher risk non-strategic portfolios since the merger with Wachovia which are now down a total of almost $55 billion with 32% over the past two years.

This portfolio has been reduced significantly in the aggregate and in each type of portfolio we have decided to exit.

Now while these portfolios do have an interest yield, they are breakeven at best after considering charge-off rates and workout and loan resolution costs and, of course, these loans also tie up a lot of capital, so this portfolio will continue to decline.

The PCI portfolio continued to perform better than expected.

Over the past two years we've have only had to add about $1.6 billion to the reserves related to PCI loans in the commercial portfolio.

Due to improved expected cash flows in the PCI portfolio, largely the Pick-a-Pay portion of that portfolio, and also due to commercial loans that have already been resolved.

We've released a total of $5.3 billion of non-accretable difference with $1.5 billion recognized in earnings since the merger from loan resolutions and $3.7 billion recognized through accretable yield over the life of the loans.

Again this was not a big factor in the fourth-quarter results.

While the non-accretable balance has absorbed $22 billion of losses related to PCI loans, we have $13.4 billion of non-accretable difference remaining covering, as I said before, 29.5% of the remaining unpaid principal balance.

Actual quarterly losses have been declining and were $836 million in the fourth quarter on the PCI portfolio compared to a $2.8 billion eight-quarter average.

In other words, actual quarterly losses in the PCI portfolio are down significantly, which is what you'd expect after working with these assets for two years now.

On slide 12, talk about mortgage securitization.

Last quarter we gave you a lot of detail regarding the quality of our servicing portfolio and our repurchase reserves; let me provide just a few updates for you this quarter.

As you can see on the slide, our residential servicing portfolio is predominately comprised of agency paper, nearly half of the loans in the servicing portfolio were originated through our retail channels and less than 2% were subprime at origination.

The majority of originated or acquired non-traditional product, such as Pick-a-Pay, Wells Fargo debt consolidation and home equity, is on our balance sheet and therefore losses on these loans have been handled through loan loss reserves and PCI non-accretable and therefore have no repurchase risk.

Quality of our servicing portfolio is reflected in our low delinquency and foreclosure rate.

As of the end of the third quarter, the most recently available quarter publicly, we continue to have the lowest delinquency and foreclosure rate among large bank peers.

Our delinquency and foreclosure rate continued to decline in the fourth quarter and was down at around 8% which is counter to typical higher fourth-quarter seasonality.

In fact, we've not seen the delinquency rate improve during the fourth quarter in at least the last 10 years.

It's also down significantly from a peak of 8.96% a year ago.

Our outstanding agency repurchasing demands -- repurchase demands continued to decrease in the fourth quarter with both the number and the dollar volume of demands outstanding down nearly 50% from the second-quarter peak.

Total outstanding agency demands are down to $1.5 billion and the most problematic vintages in terms of losses continue to be 2006 through 2008; we saw new demands in those vintages drop for the third consecutive quarter in Q4.

New non-agency repurchase demands, based on loan count, have declined now for three consecutive quarters with only $137 million of repurchases in the fourth quarter.

The repurchase demand levels reflect the quality of our non-agency portfolio.

In terms of private securitizations in the non-agency portfolio, 70% are jumbo loans, 81% were prime loans at origination, 58% were originated prior to 2006.

We have an insignificant amount of home equity in this portfolio and approximately 50% of our private securitizations do not have traditional reps and warranties and therefore by definition are not subject to repurchase risk.

Now the segment of the private securitizations where we might have the possibility of higher risk, which would be the combination of sub prime 2006-2007 vintages, with reps and warranties and with current LTVs, close to 100%.

That combination represents only 6% of the total private securitizations, in other words less than 0.5% of total securitizations.

Let me now touch on regulatory reform on slide 13 and talk a little bit about Q4 impacts and how we're thinking about the issue more generally.

First on Reg E.

If you remember Reg E went into effect in the middle of the third quarter, so Q4 was the first full quarter impact.

We calculated about a $270 million after-tax impact in the fourth quarter that's very consistent with our prior guidance on the subject.

We expect 2011 quarterly averages impacts to decline over time, perhaps into the $215 million to $240 million after-tax range, as we benefit from higher opt-in rates and product changes.

Now I should mention we are being very measured in our approach here -- first because we want to make sure that our customers understand all their options and can make an informed choice; and second because our first priority, in the east at least, is to complete the integration.

On the Credit Card Act, if you remember, that also went into effect in the third quarter of last year where we had a $30 million impact and a $50 million impact in the fourth quarter.

That of course is now already in our run rate.

We have a much smaller impact from this act for us than for all of our large peers who have much larger credit card businesses.

On FDIC, we expect the FDIC quarterly expenses to increase by about $40 million after-tax starting in the second quarter of 2011.

Since approximately 80% of our total funding is from core customer deposits, a real competitive advantage for us.

The FDIC changes will have a much smaller impact on Wells Fargo than on those companies who are more wholesale or more market funded.

Now on debit interchange fees, as John mentioned, this topic is still being -- it's still being debated and we would suggest there's a wide range of potential outcomes, including obviously no impact if this regulation is not implemented.

Based on the facts as we know currently, a place marker for this would be around $250 million plus or minus per quarter initially.

But I want to emphasize that this is just an approximation and is very, very, very preliminary.

We believe there's still a lot of work to be done on this so we will have to see where this goes, when it goes and indeed if it goes into effect.

Regulatory reform and its impact on the banks and its customers is still a work in progress.

Through its direct impact on checking, debit and credit cards reg reform will clearly place additional costs on the nation's payment system, some of which will need to be borne in the form of higher fees by the consumers and businesses who benefit from the significant ongoing investment the banking industry makes in maintaining a viable payment system.

We believe this is about revenue though, not simply about fees and gaining more business and more customers by having the right value proposition across all payment products will be an important part of our response.

The second part of our response to reg reform will also be to step up our efforts to be cost competitive in the marketplace.

So on slide 14 let me describe some of the things you can expect on expenses.

As I mentioned earlier, we had $533 million of Wachovia merger integration expenses in the fourth quarter.

This expense will decline as the integration activities start to wind down in 2011 and there could be some small tail into the first quarter of 2012.

While credit quality continues to improve; we still have higher than normal costs associated with loan resolutions and loss mitigation, including both personnel and foreclosed asset expenses.

We expect these expenses will decline moderately in 2011 and then perhaps more significantly.

And we provided here again some range of potential expense levels for loan resolution and loss mitigation costs in both 2011 and 2012 compared with the $827 million of actual expense in the fourth quarter of 2010.

In the third quarter of 2010 we closed the separate branch network of Wells Fargo Financial -- by the way, a very good example of the economies of scale we can achieve with Wachovia -- and we expect additional cost saves as the Wells Fargo Financial portfolio is reduced over time.

As mentioned earlier, we had a $400 million charitable contribution to the Wells Fargo Foundation in the fourth quarter covering three years of estimated expenses and funding for the Foundation and our current view is that that will of course go to zero in the next two years as a result.

As I mentioned, advertising, travel and equipment expenses in the fourth quarter were seasonally higher than the average quarterly run rate, so that will be somewhat lower all other things constant in 2011 and 2012 in the fourth-quarter number that you see.

And finally, as we've mentioned before, we are working on a companywide expense initiative that's focused on process improvements, improving time to market, reducing complexity in our product lines and eliminating redundancies and we'll provide much more comprehensive details on this by the middle of this year.

Finally, on slide 15, our capital ratios continued to increase in the fourth quarter driven by strong internal capital generation of $3.5 billion, up 12% annualized.

Tier 1 common grew to 8.37%, up 36 basis points from the third quarter.

That ratio is well above our average of 7% Tier 1 common from 2001 to 2007.

Under the Basel capital proposals we estimate our Tier 1 common capital ratio at 6.9% in the fourth quarter.

Now as we wait to hear from our regulators on our capital plan submission we remain eager to increase our dividend and hope to eventually -- and I emphasize eventually -- return to a more normalized pay-out ratio of at least 30% and to engage in repurchasing shares in step with continued capital growth.

We also expect to redeem those trust preferred securities that are callable and that would no longer be considered Tier 1 capital under new regulations.

While of course all of this is subject to regulatory approval, I would highlight that our capital is very strong, it's been growing steadily through industry-leading internal capital generation, credit quality has clearly improved and we have shed significant asset risk now from our balance sheet.

So in summary, our fourth quarter continued to demonstrate the Company's ability to earn strong and consistent earnings.

Our results in the fourth quarter in our view were high-quality driven by broad-based revenue growth and significant improvement in credit quality and our capital position is strong and continues to grow.

With that I'd like to now open up the call for questions.

(Operator Instructions).

John McDonald, Sanford Bernstein.

Hi, good morning.

Howard, a question on just liquidity.

If we look at your cash, your Fed fund sold position, it's grown dramatically in the last year; it looks about $72 billion average in the fourth quarter.

Just wondering why is it you seem to be sitting on so much cash and liquidity and what will be the criteria for you to start putting some of that to work?

Well, John, we do have a lot of liquidity and that's really the result of having such strong deposit growth.

As I mentioned earlier, 7% checking account and savings account growth just in the fourth quarter and, as you know, our deposit growth has surpassed our loan growth in the last period of time.

Obviously we'd love to see more loan demand, we're beginning to see some of that now, and we think that the cash that we have on the balance sheet positions us very well for when loan growth does materialize.

And of course, should interest rates go up enough we can consider adding more to the bond portfolio which we've been reluctant to do in a significant way so far just given what we think may be the very low level of long-term interest rates that have been prevailing.

So you view this as offense -- this isn't really defense of getting ready for new liquidity requirements or anything like that?

No, this is not about --

Total offense, John.

-- required to hold more liquidity.

This is simply we've been incredibly successful in growing deposits and, as you know, we've always tried to do the right thing for our balance sheet and earnings.

So this is just very offensive and positioning for the future.

Okay.

The second question on expenses, on the page 14 slide, first, why did the Wells Fargo Financial wind-down costs last for three years?

It's not the wind-down costs, it's the ongoing costs of keeping the portfolio going.

There is a loan portfolio there, the debt consolidation portfolio.

And as that portfolio matures over time we'll be able to pull the costs down, further integrate into the existing retail system.

But, John, the store costs are all out.

Okay, okay, got it.

And then on that slide, it seems from looking at that that you could have some meaningful expense leverage in 2012.

And the question I hear a lot and I'm sure you get is, will you let any of this fall to the bottom line or is there a long list of investment projects that this is going to get redirected to?

And feel free to answer that it will be some of both.

First of all, we are not under investing today.

We think this company as a growth company we invest in growth opportunities, we opened stores this last year, we've added tons of bankers, more feet on the street.

So, as we get to 2012, if we see some great investment opportunities that are incrementally above where we are today we'll do that, otherwise this will flow to the bottom line.

But we are not under investing today and this is not to redirect some place because we have to make an investment some place.

Right, right.

Okay, that's very clear, thank you.

Last thing on mortgage.

I know you don't give out the number, but directionally did the origination gain on sale margins come down materially in the fourth quarter?

And can you give some just directional magnitude on that?

And do you expect further contraction again in early 2011?

In terms of the spread on gain on sales is what you're saying, John?

Yes, yes.

There wasn't a material change in the quarter.

Was not?

No.

Since volume -- volume really drove the change in --?

As I said, we put aside the repurchase reserve provision, the origination fee and non-interest income was up roughly the same as the origination volume.

Okay.

And could you comment at all on what your thoughts are going into this year on those margins holding up?

The industry has consolidated, so on average margins are not going to change very much.

But what will drive margins up and down is the level of interest rates and volume and the industry is adding and subtracting capacity.

So it really is going to be a function of demand overall.

Okay, thanks, guys.

Matt O'Connor, Deutsche Bank.

Hi, good morning, this is David Ho on behalf of Matt.

A question on the Tier 1 common, it rose by 36 basis points in the fourth quarter under Basel I.

I'm curious to see why you don't see an increase under Basel III?

Because of, again, some evolving definitional changes, number one.

And number two, because we had some real growth in risk weighted assets.

Got it.

That was the only question.

Thank you.

Betsy Graseck, Morgan Stanley.

Good morning.

A couple of questions.

One is on capital management and, Howard, you mentioned that you've got the dividend share buybacks reinvestment.

Can you just prioritize how you're thinking about that?

Does the 30% payout come first and then everything else follows after that?

I think the point I'd try to make, Betsy, is that there are really things that we're focused on right now.

We want to start getting the dividend back up to a more normal pay-out ratio, we think that's important, appropriate and time to reward our shareholders in that fashion.

Number two, share repurchase simultaneously is important in combination with a higher dividend.

And clearly want to call the TruPS which has an immediate impact on both earnings and Tier 1 common and doesn't cost us anything from a capital perspective.

So all three of those things are important and represent an important part of our capital management.

Because when you talked about doing the buybacks you were talking about doing the buybacks in step with capital growth.

Well, here's sort of conceptual construct.

As you know, a company that's growing capital at twice the rate of its asset growth can return a lot more than 30% of its capital back to its shareholders and still grow capital.

So when we think about total return of capital to shareholders, it's really the combination of dividend and share repurchase that we're thinking about and that number could be more than just the 30% dividend pay-out ratio.

Right, okay.

And I was wondering how you think about what kind of capital you feel you need to run the business under Basel III?

I realize that you put out the 6.9% in the discussion here on page 15.

I'm just wondering what are some of the major elements that differentiate the Basel I versus the Basel III, because we didn't get any detail on that.

And how do you plan on managing that going forward?

I'm just trying to understand what kind of active capital level you have.

Okay, well let me try this way.

First, as you know, historically we've always run the Company with very strong capital ratios.

The 7% Tier 1 common that we had prior to 2008 was at the top-end of the industry and served us pretty well when we went to buy Wachovia.

Our Tier 1 common today under Basel I is now 20% higher than that already strong capital ratio.

So on a Basel I basis we already think the Company is being operated at very, very strong capital levels.

And of course given our capital generation we'll see how high that goes.

If that translates back to roughly a 7% Tier 1 common under Basel III, that also feels about right to us and that's before taking into account other things that the regulators may require that appears to be about where the regulators are coming out now on Basel III.

So, 7% Basel III, 8 to 8.25 on Basel I for Tier 1 common feels like an appropriate kind of target for us going forward.

Yes, Betsy, I'd just add this, I absolutely agree with where -- because, Howard, we've talked about this a lot at this Company.

I think the part that Basel III got right was around calibrating the risk.

And this company just runs with a lot less risk.

If you look at how we fund our balance sheet, the level of core deposits, the kind of credit and other risks that we take and manage and so forth, running at about a 7% Basel III kind of number give or take seems like that's strong capital.

And so the RWAs that you've got in the Basel III is point in time what you have today or does that include mitigation?

No mitigation, we don't feel that mitigation is necessary.

Because again, remember, as John mentioned, we will have a much smaller impact from Basel III than the other banks because we don't have the same --.

Risk profile.

-- risk level other companies do.

And it's a quite significant advantage for us and will not lead us to have to take mitigating actions from where we are given how rapidly our capital has been growing.

And anything on the M&A front outside of the depository business?

Any --?

Well, the biggest issue right now is finishing Wachovia.

We've had operators that look at things that could or could not be interesting like there's consolidation going on in the industry, but we simply want to -- we're over two-thirds through this and we want to really do this exceedingly well.

I mentioned in the past we have an interest in growing our insurance distribution business and we're doing a lot of things organically.

But there are some opportunities as that industry consolidates and the wealth brokerage retirement business and asset management -- those are other areas that we have I think opportunities to play a larger role, in many cases just serving our existing customers.

So if there are things that are opportunistic, terrific.

If there are things that are not opportunistic, we have so much to do organically.

And you know this.

The Wachovia thing really did change the reach of this Company; it was such a wonderful merger and acquisition it really gave us a lot of what we needed to play on the national stage in many of our businesses.

Right, that's why I was wondering if there were any fill-in's in the non-depository businesses that you might have on the radar screen?

Well, yes.

Well, sure.

Like I said, some of the wealth and asset management things and some in distribution.

But there's not a big gaping hole in our product suite or our menu that's problematic for us today -- either geography or product.

Okay.

And then just last on the TruPS, callable TruPs.

I'm looking at about $4.6 billion in callable TruPS right now.

Is that accurate or am I off on that number?

We have, as you know, about $21 billion in total.

Some of that will convert by its terms to qualifying forms of preferred.

And we have about $11 billion or $12 billion left that theoretically could be callable.

If you were to pay up?

No, just callable.

Okay.

All right, great.

Thanks.

Brian Foran, Nomura.

I guess as a follow-up to that last one, there's still a decent sized gap between net income and net income to common.

So is working down preferred dividends an opportunity as well?

Well again, to the extent that that represents qualifying capital, we're not going to call stuff that represents qualifying capital.

Okay.

And then just more broadly on recapture.

USB kind of mentioned 50% as a guess for the overall recapture rate across all the regulatory stuff that's happening and seemed to kind of indicate it will happen starting in 2011 versus 2012.

If I put everything you're saying together is that translating to a [roughly similar] ballpark or how should we think about overall recapture rates and timing?

Brian, we've not given a number, Brian, and we are -- we are busy about changing some products, looking for ways to add value and get paid for that.

But we've not -- for us, we don't even know what the debit thing will be yet, that's still in play.

We've just not given a number on that.

And frankly it depends on what you call recapture because, as we said before, some of this is going to be fee increases, some of it's going to become -- is going to be expense management.

Some of it is going to come from greater volume as we increase the value proposition to our customers.

So again, I don't know how to do math on that.

You know, we are trying to look at a balanced approach on a multidimensional approach.

Some of it will -- we have -- different customers have different levels of profitability with us.

We've not been sitting around here just hoping.

We've been working very hard about strengthening our relationship model.

In fact, the relationship model we employ here is probably the best thing -- the best anecdote to what is happening in the regulatory form arena, because as we deepen relationships profitability grows exponentially as we add products [arithmetically].

So I think it's a work in progress.

If I could follow up this way, I mean some of the stuff that is going to happen seems like maybe annual fees on debit cards, maintenance fees on low balance accounts, stuff that's going to be not particularly popular with customers.

So, is it better to move with the industry on that, or is it better to kind of wait and be the last one to do that and kind of gauge how customers move around and maybe pick up market share by still offering a free product?

I think it's best to serve your customers and put their interest -- they understand we have to get paid.

Nobody can operate a business at a loss and we are going to get paid differently, so it might not be an increase.

And like Howard mentioned, we are also tightening our belt and we are going to try to drive our costs down so we can be more competitive.

So I think it's a -- I don't know that it's an earlier or later kind of thing.

It's about serving customers and stake -- and evolve.

We are always evolving.

In fact, if you look back, I have been with the industry 35 years and what we got paid for a checking account was very different 35 years ago than it was 20 years ago than it is today.

So things change.

And again, not to make too fine a point about it, as we said, this is about the customer and the revenue we earn from the customer not about the fee.

Great, thank you.

Joe Morford, RBC Capital Markets.

Thank.

Good morning, everyone.

I just -- question on the loan growth.

The C&I increase is very encouraging this quarter; I just wondered if you could talk a little bit more about the drivers to that.

Was it actual increase in line utilization rates, was it more new clients?

And what about, generally, your expectations as we head into the first half of 2011 here?

Joe, it's more on new clients and not on -- utilization rates really have not changed.

That still is dry powder.

But we are out winning more relationships and it's more in that area.

Joe, as you know from public data, there has been an increase in total loans in the system the last quarter or two.

But as I pointed out on the market share tables, we've increased market share and that tells you that we've been picking up relationships during this period.

Great, okay --.

But we are hearing more comments from our customers that -- where a year ago you didn't hear as much about "I'm thinking of adding a plant or adding some people or doing this or whatever," you're hearing more of that today.

But typically what happens is you see some run down in deposit balances then you see the borrowing.

Right, okay.

Thanks.

And then just a couple quick questions on the mortgage repurchase stuff.

I guess first, have you explored at all a possible settlement with the GSEs of the outstanding pipeline of claims or have they approached you at all?

And then also, the provision for losses, while overall still low, was up from the last several quarters.

You talked about increased severity.

Is that primarily on the private label side or across the board and any other comments you could share there would be helpful?

Again, the loss severity is just our estimate based on what we're seeing in both portfolios.

As we've indicated, the larger of the two issues for us is still the agency side of it.

We've had virtually nothing on the private side.

And as far as a global settlement, again as we've said before, this is a rapidly declining issue for us and we think we're very well reserved.

So I'm not sure a settlement would make a lot of sense.

Joe, I think of it in these terms -- this is a very issuer or company specific kind of thing.

And you've got to look out what's going on, what you have in the portfolio, percentages prime, percentage current and all of that.

Because it might make sense for one company -- again, very unique by company.

Okay, that makes sense.

Very helpful, thanks.

Thank you, Joe.

Paul Miller, FBR Capital Markets.

Thank you very much.

Now that you're becoming more of a national franchise, is there any one area where you're seeing more economic growth or more loan demand or more positive comments than -- like is it the South or is it California?

Yes, sure.

We see -- there's things that are different.

Texas tends to be -- our business there is doing quite well.

So I think it depends on where the states are or the areas of the country that are into certain economies.

Where you have a housing basis for the economy that's more difficult.

Where there's energy or agriculture it tends to be a little better.

So it reflects that.

But I would say the general mood is, and the general feeling is that while it's tepid so far there is a recovery in place.

Things are better than they were a year ago -- not as good as they need to be, not as good as they will be hopefully and jobs are still the big issue.

But surely there's a little more spring in the step of our customer, business and consumer.

And then on the deposit side, I mean you're the best deposit base out there.

But is it a case that your liquidity is really building up?

Are you starting to push out some non-core deposits or just trying to maybe not be such a good deposit gatherer in this market?

Because eventually this stuff will move out.

Well remember the deposits that we're talking about here that we've been gathering are checking accounts and savings accounts, they're not CDs and time deposits.

So in effect the way we've been thinking about and pricing CDs is not to take the higher cost money and just continue to get the growth and customer operating balances is really what this is all about.

And what that really says is we've been successful at growing the number of customers who are doing business with us and getting more of their operating balances and not that we're pricing to get more time deposits.

Paul, we are really focusing this Company on checking account, what I would call transactional deposit growth, because what that means is you're winning households.

It's one of my favorite things to do every morning when I get here is read the deposit report from the day before, because when you're growing checking accounts you're growing households.

And the checking account and the mortgage frankly are about two of the biggest hooks you can get.

And when we see Florida last year, we grew checking accounts by 10%.

We all know Florida did not grow households by 10%, they might have been even or maybe there was an outflow last year.

So we are gaining share and the same thing is true in New Jersey and even in California here, we grew by over 8%.

And while those deposits might not be that valuable today because we're going to invest them, let me tell you, that is our lifeblood.

We're going to like those and those relationships a lot.

We like them a lot today, we're going to like them even more in the future.

Okay, thanks a lot.

Thanks a lot, gentlemen.

Ed Najarian, ISI Group.

Good morning.

I just want to maybe follow up a little bit on John's initial question about how much liquidity you have on the balance sheet.

There was a line in your third-quarter 10-Q that talked about being able to at some point invest a lot of excess liquidity into investment securities.

And I'm sort of wondering what your thoughts are in terms of how you would invest that and what kind of thresholds we would need to see from an interest-rate standpoint for you to think about investing more aggressively in terms of some of that excess liquidity.

And then I also have a follow-up question.

Thanks.

Well, the best way we can invest that liquidity is if we get loan growth, right.

And we think we are particularly well leveraged for loan growth.

We gave you the data on loan outstanding increases.

But I should also mention that while loans have not done up significantly we have been very active in growing the number of new lines and committed facilities.

So, once loan demand actually comes back it could come back pretty quickly here for us.

In terms of the investment portfolio, we've been saying for many quarters now that we've been keeping our powder dry.

We did do some investing in the fourth quarter when rates started moving up and we actually, as I mentioned, sold some of the lowest yielding securities we've had in the portfolio and repositioned that up into the higher yields that were prevailing at the end of the quarter.

I can also tell you, Ed, that if you look back historically at securities that we bought for the portfolio, typically that has been mortgage-backed securities, just plain vanilla agency mortgage-backed securities, which we think is good for our portfolio given the long duration of our liabilities.

And secondly, we typically in the past have not bought securities of that kind unless rates were up in the sort of 5%-ish level or higher.

Now that's a yield level that may have been more relevant for the past than for the future, so I'm not suggesting necessarily that that's the right benchmark going forward.

But throughout most of 2010 at least mortgage-backed security yields just felt awfully low to us relative to both history and relative to earnings that were coming through for us in the mortgage business.

I take it we should think about you not being too aggressive in terms of investing in terms of growing the MBS portfolio unless we see a material additional pickup in rates?

Yes.

And again, that could change because the one thing that could change that thought a little bit is we do have to look at the total balance sheet and we don't want to have our liability durations moving too far too fast away from our asset duration.

So we are trying to keep a relatively balanced balance sheet.

But all other things aside, yes, we prefer seeing higher yields before beginning to load up on the portfolio.

But, Ed, you're asking the right question because there's a lot of earnings power there.

I mean there's a lot of -- when you look at the spread we're getting on those excess dollars today it's minimal.

So there's a real opportunity.

Okay, great.

Okay, thanks.

And then just a follow up question has to do with mortgage servicing income and the rate positioning of your servicing portfolio.

Prior to the third quarter we went through a number of quarters where you were getting market-related MSR valuation gains net of the hedge as rates were falling.

In the third and fourth quarter that didn't happen, in fact there was, it looked like a net loss this quarter and I'm looking at the table on the top of page 43.

And I'm just wondering, you've always traditionally talked about how the servicing portfolio was a natural offset to the origination side of the business.

And I'm just wondering if you are adopting sort of a view that rates will rise over time.

And in that sense, are you thinking about sort of not completely hedging the servicing portfolio so that if rates do rise we could get some net gains in terms of the valuation of the servicing portfolio net of the hedge?

Or do you just want to keep it as well hedged as possible and not really think about that as a source of potential revenue?

A lot of things in the response of that question.

First of all, we're not necessarily operating with a view that rates have to go up, but we at least want to make sure that we're properly protected in case they do.

As far as the hedge is concerned, the actual hedge result of the quarter was really close to zero, as I mentioned in my remarks, because the reported numbers included the additional cost for a servicing of foreclosure expense that went through the MSR in the quarter.

So you take that away and we were really at zero.

And the third point I'd make in terms of the size of the hedge and the composition of the hedge, obviously that's changing all the time and is a function of yield curves and rate levels and spreads between mortgage assets and treasuries and LIBOR and so on.

So there's really no singular answer to that question.

But yes, following your thought, to the extent that we felt that higher interest rates were more likely than lower interest rates, we might actually reduce the size of the hedge and therefore benefit by a greater up valuation of the asset relative to cost of the hedge should rates go up.

And again, I'm not saying that's where we are, but theoretically that could happen in that circumstance.

And another piece that gets involved in that analysis, Ed, is what's the carry on the hedge?

So if you're doing really well on the carry you might want to be more matched versus -- so this is something that we go through every Monday morning, it gets lots of management attention around here and -- but Howard is right.

If we're convinced that there's a high probability that rates are going to go up, in the past we've employed a strategy of maybe less hedged in that -- that's always on the table.

Okay.

And not to sort of belabor the point, but I guess it seems very likely that origination revenue will decline from third- and fourth-quarter levels.

So I guess more to the point, should we think about probably mortgage banking revenue going down or do you think there's an offset available in the servicing portfolio revenue if origination volume does drop?

You are touching on the point as to why we think of the mortgage business as being a balanced business between servicing and origination.

So that when we do our simulations and everything in terms of what impact interest rates may have on the business holistically, we look at both sides of the business and take into account effects of both sides of the business and the way we manage it.

Okay, all right.

Thanks very much.

Fred Cannon, KBW.

Thanks and good morning.

Just kind of as a follow-up, the FHA -- FHFA proposed earlier this week to cut the servicing fee for the GSEs.

And I was curious as to your thoughts in terms of the impact of that on Wells Fargo and how what you guys think of that proposal.

Fred, conditions over the past few years have caused many (inaudible) and policy positions to rethink servicing contracts and what's going on there.

And any changes likely -- if there are changes they'd be prospective in nature.

And it's probably more than a year or so away whatever will be decided, so it's probably too early to give you any view on impact.

But let me just say this -- it's probably -- it could be neutral to us because we're both in the origination business and the servicing business.

So if you allocate less of the -- of what the customer pays, allocate less of that to a capitalized servicing asset you'd probably get more than on your gain on sale.

And there are pluses and minuses in having a smaller servicing asset.

You can hedge less -- so I'm not -- so I think what I'm suggesting is it's still in the very early stages, it's still being discussed, it's probably going to be prospective if anything on new volume and I'm not sure that this is more about geography and less about economics.

I think essentially -- essentially what this really means is that -- if it happens, as John says -- less of that gain on sale when you sell a mortgage is attributable to the servicing asset and more of the gain on sale just comes through as an origination gain in cash.

One interesting potential benefit, if you will, if this happens, again as John mentioned, is that simply the amount of capitalized servicing on the balance sheet will be less over time and that has some positive implications, if you will, under Basel III which caps the amount of capitalized servicing that can be counted as Tier 1 common.

So there are some interesting benefits from that if it happens without really changing the economics of the business.

Great.

I just kind of viewed it as probably a positive for you in that gain on sale as determined in the marketplace wouldn't change much, more gain on sale would be cash and your servicing asset would be smaller freeing up some capital while the actual reported income probably wouldn't change much.

Is that kind of a fair characterization of thinking about it?

Obviously as was stated, it would play itself out over an extended period of time.

I think that's a short and sweet or way of thinking about it, yes.

Okay, great.

One other quick question, Howard.

In terms of interpreting the Fed's policy in terms of dividends, obviously you all are going through a stress test and have to get that all buttoned up.

Secondly, they did discuss Basel III kind of reaching that 7% level.

Should we interpret the Fed's statement as saying before you increase dividends you have to be at that 7% Basel III level or simply just have to have a plan kind of to get there in the near term?

I think the best way I could answer that is to say that Basel III is still evolving.

I don't know whether there will be a soft or a hard or any kind of requirement for 7% under Basel III.

But as you know, if there is one we're already there.

So in our case it doesn't really matter.

Okay, great.

All right, thanks very much.

Thank you, Brad.

Ron Mandle, GIC.

Hi, thanks.

In regard to capital, the 6.9% Basel III, last quarter the Basel III ratio went up more than the Basel I ratio and you referred to deferred tax assets in using the PCI and so on.

So, assuming this is just the flatness this quarter versus last quarter, as you say, it was just definitional.

Does that mean that as and if Basel I ratio continues to go up in the next few quarters that the Basel III ratio should again go up faster than the Basel I ratio -- for the reasons you mentioned in the third quarter?

Yes, you can't simply do the transfer -- it's not a fixed spread between the two ratios, Ron.

Some quarters the spread between the two may go up, some may go down.

I gave you some factors before -- you've got the MSR calculation in there, you've got DTA --.

Yes, you referred to (inaudible).

So on and so forth.

So again, it's really just not a fixed spread between the two.

And in this particular quarter, as I say, we had real growth in those assets that impact the Basel III ratio.

But going forward we should expect more of a lock-step than we saw this quarter?

Should we think of it that way?

No, as I said, because of these other definitional factors for the Tier 1 common, I'm not prepared to say that the spread between the two ratios is going to be fixed and therefore it may or may not go up and down.

Generally speaking the two ratios should move in the same direction and simply because the overriding driver of both is internal capital generation, it's earnings.

So, yes, in that sense they both should move in the same direction and roughly by the same amount.

But plus or minus -- the tweaks that come along with Basel III.

Okay.

And then my other question is in regard to [Durbin].

You referred to a $250 million quarterly charge.

One question was whether that's pre-tax or after-tax?

That would be after-tax.

Okay.

But again, I don't want to put too much precision on that, Ron, because again, it's such an approximated figure at this point and so preliminary.

But we put that out there as kind of a place mark.

Right.

No, I just wanted to make sure that it was after-tax.

Yes.

You mentioned a couple of times in discussing it that -- as to if it would be implemented at all.

And I was wondering if you could elaborate on that point.

It's not clear, to me anyway, under what scenarios it might not be implemented at all.

So if you could elaborate I'd appreciate it.

Let me just give you a little larger or a broader response to that.

I don't -- I'm not in favor of government price controls as part of a market-based economy that we have, I just think that's bad as an initial thing as an overall statement.

It wouldn't be free enterprise and government debt.

What product is next, what industry comes next?

I've not seen that work in the past very well.

With respect to the issue specifically, it's in the interest, the long-term interest of merchants and consumers and the Basel service industry that we get this right.

And right now it's on a fast track, we've got to make sure it gets on the right track, where the people who develop these products, the banks and so forth, this is a big fixed cost business.

And I don't know of any industry or business that can continue to grow, innovate, support a product where you don't get paid for it and you get paid on a variable rate basis when you have all this fixed cost.

And there's real value being created here.

Debit cards largely have transplanted cash and check.

This is good for merchants, merchants -- the cost of handling that cash, the checks taking the risk, getting immediate funds with debit is enormously valuable.

And that value creation helps them and we need to get compensated and I don't understand why cost became the issue.

But anyway -- so I think there is good reason and opportunity for us to sit around, get on a table and make sure we come up with the right situation.

In fact, the President even asked a couple days ago that look at these regulations, he didn't say this one but he said regulations in general.

And I think this is a great example of something that we simply have got to get right.

Because at the end of the day if we can't get paid this way we've got to get paid a different way.

And we want to make absolutely sure that we make -- that customers don't get disadvantaged in this process.

John, I understand what you're saying completely, but it seems to me that the Fed is implementing the law as it currently stands.

So unless the law itself changes, I don't see how we go to the environment that you're describing from where we are now.

Well, we will be prepared for whatever outcome, but we're going to make the point as an industry that in this case we need to really understand what we're doing here.

We have time for one more question.

Adam Barkstrom, Sterne, Agee.

Hey gentlemen, good morning.

I wanted to -- not to pound you guys on the dividend question, but just at some point obviously you guys are going to be given the green light to increase dividends.

And I'm just curious from your perspective, do you think that's going to -- let's just say 30% payout is kind of the bogey.

I mean do you -- would you envision kind of jumping up to the 30% or kind of gradually working your way through to that number?

And then I have one follow-up.

Really can't talk about the specific submission to the Fed or let alone what the Fed may or may not approve.

So a lot of this is really going to be up to the Fed.

Yes, I guess just to follow up -- just assuming hypothetically that 30% give or take is kind of the number, would you envision getting to that number very quickly or kind of more in a gradual process.

Well again, as I say, restoring a more normal dividend, buying back shares, calling the TruPS and continuing to generate more capital are all important things to us.

But at this point really the best way I can answer the question is it's up to the regulators at this point.

Got you, okay.

And then, Howard, one last follow-up.

Any further color you could give us kind of on margin from here?

You mentioned in your opening remarks that you guys sold some of your bond portfolio, the lowest yield stuff.

You've certainly benefited from some nice loan growth this quarter.

Should we expect kind of looking out maybe a gradual turn in the margin from here?

The margin really is a result of many things that occur on the balance sheet and in our earnings and what we're trying to do is grow net interest income and revenue and the margin will be what the margin will be.

To the extent we have continued success in growing checking and savings, that will increase the margin.

Frankly if loan demand accelerates that will be great for the top-line, but it may actually reduce the margin if we're not growing deposits at the same fast rate.

So lots of things can happen to the margin here which, as I say, are just the result of many, many other things that we're trying to do.

Okay, gentlemen, thank you.

Thank you.

We're going to wrap right now.

Sorry, we went a little over our time, but we appreciate your interest in the Company and your questions.

Thank you for joining us and we will do this again 90 days from now.

Thank you much.

Ladies and gentlemen, this concludes today's call.

You may now disconnect.