U.S. Bancorp (USB) Q4 2011 Earnings Report, Transcript and Summary

Richard K. Davis - Chairman, Chief Executive Officer, President, Chairman of Executive Committee and Member of Risk Management Committee P. W. Parker - Chief Credit Officer and Executive Vice President Judith T. Murphy - Senior Vice President, Director of Investor Relations and Analyst Andrew Cecere - Vice Chairman and Chief Financial Officer

Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division Nancy A. Bush - NAB Research, LLC, Research Division Chris Spahr - Credit Agricole Securities (USA) Inc., Research Division John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division Christopher M. Mutascio - Stifel, Nicolaus & Co., Inc., Research Division Leanne Erika Penala - BofA Merrill Lynch, Research Division Ian Foley - Jefferies & Company, Inc., Research Division Matthew D. O'Connor - Deutsche Bank AG, Research Division Moshe Orenbuch - Crédit Suisse AG, Research Division Marty Mosby - Guggenheim Securities, LLC, Research Division Paul J. Miller - FBR Capital Markets & Co., Research Division John Dunn Betsy Graseck - Morgan Stanley, Research Division Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division Brian Foran - Nomura Securities Co. Ltd., Research Division

Welcome to U.S. Bancorp's Fourth Quarter 2011 Earnings Conference Call. Following the review of the results by Richard Davis, Chairman, President and Chief Executive Officer; and Andy Cecere, U.S. Bancorp's Vice Chairman and Chief Financial Officer, there will be a formal question-and-answer session. [Operator Instructions] This call will be recorded and available for replay beginning today at approximately noon, Eastern Time, through Wednesday, January 25 at 12:00 midnight, Eastern Time. I will now turn the conference call over to Judy Murphy, Director of Investor Relations for U.S. Bancorp.

Thank you, Brooke, and good morning to everyone who has joined our call. Richard Davis, Andy Cecere and Bill Parker are here with me today to review U.S. Bancorp's fourth quarter and full year 2011 results and to answer your questions. Richard and Andy will be referencing a slide presentation during their prepared remarks. A copy of the slide presentation as well as our earnings release and supplemental analysts' schedules are available on our website at usbank.com. I would like to remind you that any forward-looking statements made during today's call are subject to risk and uncertainty. Factors that could materially change our current forward-looking assumptions are described on Page 2 of today's presentation in our press release and in our Form 10-K and subsequent reports on file with the SEC. I will now turn the call over to Richard.

Thank you, Judy, and good morning, everyone. Our company achieved record net income for 2011, driven by record net revenue in the fourth quarter and for the full year. And we accomplished this during a very challenging and uncertain economic and regulatory environment. We're very proud to share our results with you today, and I'll begin with the highlights on Page 3 of the presentation. U.S. Bank recorded record net income, driven by record total net revenue of $5.1 billion this quarter, which was 8.1% higher than the same quarter of 2010. Excluding the gain noted on the slide, the increase was 4.7%. Total net revenue was a record, even after excluding the $263 million gain, and was driven by growth in both net interest income and in fee revenue. Total average loans and deposits grew year-over-year and we realized strong linked quarter total loan growth. Credit quality continued to improve, as net charge-offs declined by 7%, and nonperforming assets, excluding covered assets, decreased by 15.2% from the prior quarter. We continue to generate significant capital each quarter through earnings. Our Tier 1 common equity ratio was 8.6% at December 31 or 8.2% using anticipated Basel III guidelines, while the Tier 1 capital ratio ended the quarter at 10.8%. We repurchased 6 million shares of common stock this quarter. As a result, we returned 29% of fourth quarter earnings to our shareholders in the form of dividends and buybacks. Detailed on Slide 4 are our full year 2011 highlights. As you can see, we achieved record net income in 2011 of $4.9 billion and EPS of $2.46. Earnings were supported by record total net revenue of $19.1 billion, a 5.3% increase over 2010. You'll also note that our strong capital generation allowed us to further build our capital position throughout the year. We repurchased 22 million shares of common stock in 2011. For the year, in total, we returned 31% of our earnings to shareholders in the form of dividends and buybacks. The 5-quarter trends of our industry-leading performance metrics are shown on the left-hand of Slide 5. Return on average assets in the fourth quarter was 1.62%, and return on average common equity was 16.8%. Excluding the impact of this quarter's 2 significant items, return on average assets and return on average common equity were 1.51% and 15.6% respectively. For the full year 2011, we achieved a return on average assets of 1.53% and a return on average common equity at 15.8%. Our net interest margin and efficiency ratio are shown in the slide on the right-hand of 5. As expected, this quarter's net interest margin of 3.60% was lower than the same quarter of last year and the prior quarter. And Andy will discuss the factors that led to this change in just a few minutes. Our full year 2011 net interest margin was 3.65% versus 3.88% in 2010. Our efficiency ratio for the fourth quarter was 52.7% and our full year 2011 efficiency ratio was 51.8%, consistent with our expectation that this ratio will remain in the low 50s. Turning to Slide 5 (sic) [Slide 6]. Our capital position remained strong and continues to grow. At December 31, our Tier 1 common ratio under anticipated Basel III guidelines was 8.2%. At 8.2%, we are well above the 7% Basel III minimum required, we believe have adequate cushion to cover our SIFI buffer, which is an estimate at this time, plus a cushion to cover fluctuations in the balance sheet. Last week, we submitted our 2012 comprehensive capital plan to the Federal Reserve. We expect to pass the test, and importantly, receive permission to raise our 2012 dividend and continue our share repurchase program. Raising the dividend remains a top priority for this management team and for our Board of Directors. As we've indicated in the past, our long-term goal is to return between 60% to 80% of our earnings to shareholders through dividends and buybacks. Now moving on to Slide 7. Average total loans outstanding increased by $11.5 billion or 5.9% year-over-year and 5.5% adjusted for acquisitions. Linked quarter, average total loans grew by 2.4%, a slight acceleration from the 1.7% linked quarter growth in the third quarter. Significantly, new loan originations, excluding mortgage production plus new and renewed commitments, totaled over $49 billion this quarter. This represented a 13% year-over-year increase in new and renewed lending activity and a 7% increase over the prior quarter. Additionally, total revolving corporate and commercial commitments outstanding increased by 21.1% year-over-year and 7.2% linked quarter, continuing the trend we have seen over the past number of quarters and providing us with added confidence that loans will continue to grow as we move into 2012. Total average deposits increased by $33 billion or 17.3% over the same quarter of last year, while total average deposits grew by $7.9 billion on a linked quarter basis or 3.7%. The strong growth in Corporate Trust, Consumer Banking and Wholesale Banking, particularly in noninterest-bearing deposits over both time periods. Our customers continue to hold historically high levels of cash, viewing our bank as a trusted partner in managing their financial needs. Turning to Slide 8. The company reported record total net revenue in the fourth quarter of $5.1 billion, an increase of 8.1% over the prior year's quarter and 6.4% over the previous quarter. The growth in revenue can be attributed to both our balance sheet and fee-based business lines as each has benefited from investments in growth initiatives over the past years. In fact, some of the negative impact realized in the fourth quarter from reductions in the debit interchange revenue, the result of the Durbin Amendment, was offset by growth in the balance sheet and other fee income lines, again demonstrating the advantage of our diversed business mix. Turning to Slide 9 in Credit Quality. Fourth quarter total net charge-offs declined by 7% from the third quarter of 2011, while nonperforming assets, excluding covered assets, decreased by 15.2%. This marks the seventh consecutive quarter of improvement in both measures. The ratio of net charge-offs to average loans outstanding was 1.19%, improving from the 1.31% recorded in third quarter. Turning to Slide 10. As the graph on the left illustrates, early- and late-stage delinquencies, excluding covered assets, are relatively stable this quarter with a slight seasonal uptick in the early-stage delinquencies. On the right-hand side of Slide 10, you can see that the trend in criticized assets continues to show improvement. Both of these statistics provide us with confidence that net charge-offs and nonperforming assets will trend lower in the first quarter of 2012, although net charge-offs will show a more modest reduction than in recent quarters as the consumer categories continue to improve, but at a slower pace as they move closer to stabilization at these lower loss rates. Given the fourth quarter's credit results and the expected improvement going forward, we released $125 million of reserves in the fourth quarter compared with $150 million in the third quarter and $25 million in the fourth quarter of 2010. I will now turn the call over to Andy.

Thanks, Richard. Slide 11 gives you a view of our fourth quarter and full year 2011 results versus comparable time periods. Diluted EPS of $0.69 was 40.8% higher than the fourth quarter of 2010 and 7.8% higher than the prior quarter, while full year 2011 EPS was 42.2% higher than 2010. Slide 12 lists the key drivers of the company's fourth quarter earnings. The 38.6% increase in net income year-over-year was a result of an 8.1% increase in net revenue and a decrease in the provision for credit losses, partially offset by an 8.5% increase in noninterest expense. Net income was 6% higher on a linked quarter basis. This positive variance was the result of a 6.4% increase in net revenue and a favorable variance in the provision for loan losses, both of which more than offset the 8.9% increase in expense. Slide 13 details the notable items that impacted earnings in the fourth quarter of 2011 and other periods. In the current quarter, total noninterest income included a $263 million litigation settlement gain related to the termination of a merchant processing referral agreement. We also booked $130 million expense accrual related to mortgage servicing and foreclosure-related matters. On a net basis, these 2 items increased EPS by $0.05. The fourth quarter of 2010 included a $103 million gain from the sale of our long-term Asset Management business. This prior year's gain increased EPS by $0.02. Moving to Slide 14. Net interest income increased year-over-year by $174 million or 7%. The increase was largely driven by the $35.3 billion or 13.6% increase in average earning assets, as well as the benefit from strong growth in low-cost deposits. The growth in average earning assets was driven by planned increases in the securities portfolio, growth in average total loans and a higher cash position at the Federal Reserve. The net interest margin of 3.60% was 23 basis points lower than the same quarter of last year due to the expected increase in low-yielding investment securities, in addition to the higher cash balances at the Fed. On a linked quarter basis, net interest income was higher by $49 million, as the $8.8 billion increase in average earning assets was partially offset by the 5 basis point decline in the net interest margin. The net interest margin was lower than the prior quarter due to the expected growth in lower-yielding investment securities as the company continued to add liquidity on balance sheet. The investment securities portfolio at December 31 totaled $70.8 billion. Assuming stable cash balances and the current Basel III liquidity requirements, we expect the investment securities portfolio to increase consistent with our overall balance sheet. Slide 15 provides you with more detail behind the change in average total loans outstanding. Average total loans grew by 5.9% year-over-year. Excluding covered loans, which are slowly running off, average total loans increased by 8.5% year-over-year. As indicated on the chart, the increase in average total loans was principally due to solid growth in commercial loans and residential mortgages. Commercial loans grew by a very strong 15.8%. This was the fourth consecutive quarter of year-over-year growth in average commercial loans and the growth rate has improved each and every quarter. On a linked quarter basis, the 2.4% increase in average loans outstanding was also primarily driven by an increase in commercial loans, which grew by 5.6%, and residential real estate loans, which grew by 6.6%, primarily due to refinanced activity. Slide 16 provides more detail on the growth in total deposits over the past 5 quarters. Average total deposits grew by 17.3% year-over-year. Excluding acquisitions, the growth rate was 11.7%. On a linked quarter basis, average deposits increased by 3.7% or approximately 14.8% annualized. Importantly, average low-cost deposits accounted for the majority of the increase on a year-over-year and linked quarter basis. Slide 17 offers more details about the changes in noninterest income on a year-over-year and linked quarter basis. The 9.4% increase in noninterest income in the fourth quarter over the same quarter of last year was driven by the fourth quarter 2011 merchant settlement gain, partially offset by the prior year's gain from our sale of our long-term Asset Management business, as well as growth in deposit service charges, merchant processing fees, commercial product revenue and mortgage banking revenue. These positive variances were partially offset by lower debit card fees due to legislative-related changes to debit card interchange. The impact to this quarter's revenue was $77 million. In addition, noninterest income was affected by lower trust and investment management fees, principally the result of the sale of our Asset Management business late in 2010. On a linked quarter basis, noninterest income was higher by $260 million or 12%. This favorable variance was primarily the result of the merchant settlement gain and higher mortgage banking and merchant processing revenue, partially offset by the reduction in debit card interchange and seasonally lower corporate payments revenue and deposit service charges. Slide 18 highlights noninterest expense, which was higher year-over-year by $211 million or 8.5%. The majority of this increase could be attributed to the $130 million expense accrual for mortgage servicing matters. Higher compensation and benefits expense and an increase in professional services, primarily due to the foreclosure review project, which is expected to be in the run rate for a few more quarters. On a linked quarter basis, noninterest expense was higher by $220 million or 8.9% due to the mortgage servicing accrual, compensation, professional services and marketing and business development expense. The tax rate on a taxable equivalent basis was 30.5% in the fourth quarter of 2011, essentially equal to the third quarter of 2011 but higher than the 27.8% in the fourth quarter of 2010. Slide 19 provides updated detail on the company's mortgage repurchase-related expense and the reserve for expected losses on repurchases and make-whole payments. Our outstanding repurchases and make-whole request balances at December 31 was $105 million compared with $115 million at September 30. We expect mortgage repurchase requests to remain fairly stable over the next few quarters. I'll now turn the call back over to Richard.

Thanks, Andy. To conclude our formal remarks, I'll turn your attention to Slide 20. In summary, it was a very good quarter and it was a very good year. We grew loans, commitments and deposits. We achieved record total net revenue in the quarter and for the year, with growth coming from both our balance sheet and from our fee-based businesses. Our credit quality continued to improve. Our capital and liquidity positions remained strong. We earned record net income for the year and we achieved industry-leading performance metrics for the quarter and for the year, all of this despite the ongoing challenges of an uncertain economic environment, increasing regulatory oversight and cost, improving but still elevated credit costs and increased competition. We end the year where we began: in an industry-leading position of strength. We're positioned to win and, in fact, we're stronger than we were a year ago and we're very well positioned for 2012 and beyond, all for the benefit of our customers, our employees, our communities and our shareholders. That concludes our formal remarks. Andy, Bill and I would be happy to answer any questions from our audience.

[Operator Instructions] Your first question comes from Moshe Orenbuch with Credit Suisse. Moshe Orenbuch - Crédit Suisse AG, Research Division: Richard, congratulations. You've kind of met the capital target that you've been striving towards and probably exceeded it. The comments, I mean, in your prepared remarks, I guess, you kind of just reiterated what you had said before. Any kind of additional discussion about the nature of how that process will work and what the time frame to get to your long-term capital return targets would be and how your discussions with the regulators have evolved on that?

Sure. Thanks, Moshe, for that comment and for the question. As you know, the CCAR input was put in earlier in this month and we're waiting for our final results no later than March 15. At that point, and rather like last year, which was the first official stress test routine, we want to make sure that we pass. And it does seem like it's a binary process. So we were thoughtful about putting in both our dividend and our share repurchase request. And I would tell you that while they're on the aggressive side and hopefully will be approved, they're not yet where we want to be at the end of this trip. And accordingly, whether this becomes a semiannual activity or an annual activity, we're comfortable that we'll continue to prove to the regulators that, first of all, our plan and our forecast are sound based on a very steady history. We also think that our prudent capital management should benefit their willingness to allow us to move forward. And I don't think it's more than another year or 2 to get to where we want to that 60% to 80%, but it won't happen in one fell swoop because we simply can't move as quickly as we'd like to, given some of the constraints placed on the test. But we are comfortable that we'll be able to demonstrate the strength of the company through this next pass and hopefully by March 15. Moshe Orenbuch - Crédit Suisse AG, Research Division: Great. And just as a follow up. In terms of the loan growth that you've seen, which has been consistent and improving, are there areas of market share gains that you're seeing and things that might -- that we could look at in 2012 for that to continue?

Yes, Moshe. In our company, and you hear this everywhere, a lot of the companies are strong and they're getting stronger, particularly corporate America, even in the community and middle market. In saying so, you'll hear that a lot of the growth is coming from companies doing refinancings. And while that typically would sound like code word for just rotating your own book, in a position that we're in, where we are continuing to gain market share, we're invited to those refinances, many of which we weren't in the first place. So a lot of our growth is coming from honest-to-God market share improvement by getting bites into other companies that we weren't part of before. I said last quarter and we're seeing a continued -- not huge, but a continued benefit from the European banks moving away from their positions in the syndicates. We're either being invited for the first time in a position that they use to hold or more often being invited to step up in a position that we already had, given that there are less banks in some of these deals. And in more cases than used to be because of our capital markets capabilities, we're invited now to lead some of these deals and get more business than we had before. So for us, it is market share gain. It's across-the-board. It's mostly customers that are strong refinancing and we're getting a bigger part of that. It's nothing more magical than that. And I wouldn't call out any specific industry or geography that would really harken a unique perspective at this point in time. It's kind of across-the-board, slow, steady and as you'd expect in a recovery that's going to take years.

Your next question comes from Erika Penala with Bank of America.

My first question is on capital. Like Moshe mentioned, it's clear that you hit your targets early. And I guess, I'm wondering how you view yourselves relative to some of your peers once the U.S. interprets some of the Basel III regulations because we see press reports that are putting some of your closer peers at 8% Basel III on a Tier 1 common basis. But that peer would be almost 4x your size. Richard, I know you've been cognizant of growing too fast. Is that going to be an advantage once we have the final interpretations and that because of your size, you could hold the lower buffer to your closest pure bank peer?

Well, I think so. 5 is a beautiful number. And we're a distant 5 from the 4. And more importantly, Erika, as you know, we weren't deemed a G-SIFI. And I don't think we were even close necessarily based on either our size and certainly not on our complexity. So my hope is that we can continue to grow like we have, stay under that G-SIFI designation. And as you know, the next peer above us, at least at the G-SIFI rules set, was a minimum of 100 basis points additional to the 7. We actually were given 0 guidance on that. So in our case, we've taken a prudent step of creating our own guesstimate on what our buffer might be when this is all said and done. We've also added, as I indicated in my notes, another buffer based on the balance sheet vagaries and how things move around. And I think we've been extremely conservative, and hopefully as clarity comes along, we'll find that we actually have more put a way that we need to, knowing that we're already well above what we think is a conservative view. So at the end of the day, it's probably an advantage. On the other hand, the scale advantage goes to the really big players who have balance sheets that they can leverage for different purposes. So it seems to be an offsetting benefit for those of us who don't have to hold as much and can be a little more nimble as we move forward through this recovery.

Based on sort of the color that you're getting with the CCAR process this year, it sounds like now is not the year or maybe even next year to sort of take advantage of those differences. Meaning, you're not going to be able to deploy that -- the excess capital positioning doesn't matter near term.

Not altogether. I mean, we're not going to push the limit and we're not going to go above the guidelines they gave us. But they gave guidelines for dividends, they gave no guidelines for share buyback. You put those together and you can get a pretty substantial total shareholder return outcome. And the nice thing about buybacks is, if for some reason an opportunity comes along, you can stop those and redeploy it into the opportunity that's present. So I think we won't get the exact mix we want right away because it will take some time for, I think, the government to feel comfortable for certain companies, particularly on a dividend basis, to go to higher levels. But I think in a total, we'll be pleased to see that if we get our permissions, we'll be moving very closely to our overall goal.

Your next question comes from John McDonald with Sanford Bernstein. John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division: Richard, it seems like you left some buyback authorization on the table this year. I wasn't sure if the $50 million was for this year. But just wondering, do you have flexibility to do buybacks in the first quarter that are preapproved from last year's CCAR? Just wondering how that works.

John, this is Andy. Yes, we do. We carried over our authorization both from the board level into the first quarter, given the timing of the CCAR, and we also have remaining authorization from the Federal Reserve approval that goes into the first quarter. One of the reasons we are a little lower this fourth quarter than last quarter is, as we mentioned some of the vagaries of the balance sheet. The fourth quarter is when we have the pension debit that comes into play. And given the lower discount rate, that increased by about $300 million. So we wanted to be sure that we hit our target capital ratio, so we modified our buybacks to ensure that. And I think you'll see us come back in the market here in the first quarter. John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division: Okay. And then Andy, on expenses. To what extent is the fourth quarter expense number a good run rate for the first quarter? I know there was some seasonal items in the fourth quarter. Just wondering what are some of the puts and takes on expenses as you look ahead.

Right. So John, I would say, first of all, obviously the $130 million mortgage-related servicing matter is a one-time item in nature. Also included in the fourth quarter was just under $40 million related to the consent order. That will likely continue into the first quarter so that is not so much a one-time event but more of a run rate expense. And then the first quarter has a little seasonally higher benefit rate but a little lower on the tax-related matters related to our CDC. So those are the gives and takes. But really, fourth quarter didn't have a lot of unusual items in there. John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division: And is there any color that you can give on the accrual for the mortgage foreclosure stuff this quarter that you gave?

There's not a lot more color than we can give other than what we've talked about, which is it's related to mortgage servicing foreclosure matters and relates to some of the activities that you're reading about. John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division: Okay. Last question for me. It seems like the securities purchase has gotten you where you want to be, liquidity-wise. Did you give a near-term outlook on the NIM? If not, do you have one on net interest margin?

Yes, so you're right. First, regarding securities. We increased our securities portfolio $19 billion from a year ago and we're just over, at an ending balance, just over $70 billion. And as you know, most of that addition was related to building our LCR ratio, which we're going to sort of hold right now until the final rolls come out. So the growth in the securities portfolio will be more consistent with our overall balance sheet growth going forward. Related to margin, the 5 basis point decline from the fourth quarter versus the third was principally due to that securities build. As we look into the first quarter, we're going to have a relatively stable margin, except for our cash position at the Fed, which is a little bit higher. So I would expect margin in the first quarter, given the current cash position, to be down 3 to 5 basis points. But importantly, net interest income will be more stable than that. The margin is impacted by the cash balances but not the net interest income overall. John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division: Okay. And those cash balances are just growing because you deposit growth and not having any other alternatives for it?

Right. We have tremendous deposit growth, as you see in the numbers, which is exceeding loan growth. What I do -- what I will tell you is that we do have debt maturities that occur throughout 2012, but most of those start in the second quarter. So we'll be able to redeploy that in a different way. But in the first quarter, we're likely to have a little higher cash balance at the Fed.

Your next question comes from Jon Arfstrom with RBC Capital Markets.

Just a quick follow-up on the margin. What have you seen in the commercial loan deals? It looks like they're down again this quarter but maybe not quite as much as the previous quarter. Is that primarily the large corporate growth-driven? Or is there something else driving that?

John, this is Andy. The overall margin yield is down more on a year-over-year basis and quarter because of the mix of floating versus fixed rate. What I will tell you, though, is the spread on large corporate loans has stabilized here in the fourth quarter. We did see some declines that occurred in quarters 1 and 2 and a little bit in the first half of 3, but I would term it stabilization in terms of spreads in the fourth quarter.

So it's possible that the decline will start to abate a bit?

That is correct.

Okay. Richard, just a bigger-picture question for you. Where -- acquisitions have been very slow in the industry. Where is that in terms of your interest list? Do you see any hope on an increase in activity and maybe compare and contrast bank versus nonbank in your interest list?

Yes, thanks, John. We'll start with the latter. Nonbank, we are both interested and believe there are opportunities. So that follows the path we've taken for the last 3 or 4 years. Corporate Trust businesses continue to come our way mainly because I think companies without a real scale are saying, "Why are we in this business? And if we aren't fully going to be great at it, the cost of having to invest in this is pretty high." So I think we'll see more of those opportunities, and they're very scalable. They're add-ons to what we have in Corporate Trust. Likewise, payment portfolios, particularly credit card, have come our way, as you know, more recently. There will be more of those opportunities because we have a scalable business and I think we've built a real nice reputation in the businesses as being a great acquirer and a very seamless transition-capable company. So those will continue. As it relates to traditional bank deals, there will be -- opportunities will come along and I've always -- my favorite line is, an opportunity won't be missed as it comes along. But we're not putting it into our strategy as necessary. So if a small FDIC deal came along, the likes of the New Mexico deal a year ago, first of all, because we don't have anything in the queue now that would otherwise disrupt it, we'll be interested. And if we can find a deal that would be small and fits in nicely to our current footprint, we'll probably do it, if it's the right price and makes sense. If it doesn't either make sense or look right, we're not going to do it; if it's out of footprint, we're not touching it. As it relates to the bigger deals, the deals that would be more headline likely, if those opportunities were to come along, I think we either have the capital and I know we have the regulator confidence and I believe the Street would accept a deal if we were to look at something and have a capital raised, but it's not one of our goals. It would just have to be something so undeniably good that you didn't want to pass if you don't want to overlook, but we're not necessarily expecting it. And if it happens, it will be an opportunity we won't miss.

Our next question comes from Matt O'Connor with Deutsche Bank.

Andy, just following up on the NIM. As we think out medium and longer-term just keeping the rate environment stable, it seems like you do have some levers on the long-term debt that you mentioned earlier, some starts to run off in 2Q. But also if I look at the short-term borrowings, the rate on that is pretty high. So I'm just wondering how you think the mix is going to evolve over time with all this good deposit growth and maybe some runoff of the wholesale borrowing. So one, how does that progress? And then two, obviously the impact on the NIM, what do you expect that to be?

Right. So Matt, the way I'll answer that is as if I look at the last 12 months, if I take out the securities build and the cash position, our NIM was relatively stable, almost flat. And as we look into the first quarter and we looked at the fourth quarter here, I think that same phenomenon holds true. So the negative next year will be the securities portfolio reinvestment. The positive will be the debt maturities and the coming on at a lower rate, and those 2 things sort of offsets. So as I said in the first quarter, maybe down 3 to 5, principally due to that cash position. And we also talked about the fact that loan spreads overall are stabilizing.

Okay. So after 1Q level, relatively stable, but 2Q and going forward, your best guess at this point?

Yes, I'm going to stick to that sort of 90-day outlook and again, the 90-day is down 3 to 5.

Okay. I guess, is there anything unusual in your short-term borrowings, that $30 billion or so at a rate of 161 basis points?

Yes, there is, Matt. We have our corporate payment systems rebates, which go through that line. And that looks -- it causes the rate to look a little higher than it really is.

Okay. And then just separately, the whole merchant lawsuit against Visa, MasterCard over credit card interchange, any thoughts on that or the time line of the progression there?

No, this is Richard. Not really, I mean, this thing is age-old. I think you know as much as I know about how much was put away years ago for a potential litigation in Class A shares. And at this point, we're not aware of anything more than you are. And at this point, I don't think we make any decisions based on the information that's not current.

I guess, if there was ever a settlement charge, I believe, you're carrying your Class B at cost, so you're probably a little better insulated there versus some banks that have sold their shares.

Yes, that would be accurate.

Okay. And the wildcard is obviously the interchange rate if there is ever...

Yes, that will be a wildcard, capital W, right?

Yes.

Our next question comes from Brian Foran with Nomura.

Just on the merchant processing services fees and the acceleration in growth. And I know some new business initiatives were referenced but also some accrual reversals. Where do you think the kind of core year-over-year growth trend is going forward relative to the 17% we saw this quarter?

So Brian, the same-store sales, which is a principal driver of that, was up about just under 4%, 3.8%. And typically, we grow just above same-store sales because of the fact the we're booking and gaining share and booking new merchants. So I would say, if you think about same-store sales at 4%, perhaps a couple of points above that in terms of normalized growth rate on an ongoing basis.

And then in cards, you're one of the few who's been able to grow balances recently without giving up on yields, and your yields are actually up a little bit. Is there anything obvious you're doing different than peers, types of businesses or the offers you're running or some of the acquisitions you've done recently that's driving those yields to go up?

It's Richard. It's all of those things. First of all, we're not aggressive acquirers. If you go to your mailbox, you won't see us as often. And if you do, you won't see these 18-month 0% interest rate, whatever. And we just -- we don't do that because we want to book sustainable, repeatable kind of clients. So it's number one. Number two, our branches have kicked in big time in the last couple of years and become a much more significant part of originations, where the relationship now is part of that checking account and the credit and debit relationship. And so those are much higher-quality customers and the cost of acquisition is substantially lower. And then lastly, you are right, the acquisitions that we pick up, we only pick them up not for an asset build because we don't need that. It's only because we think it builds on the core capability we have to expand that business line and grow the revenue that we've picked up and extend the relationship, not because we just think it's an asset pickup. So all of those. And I think it goes back to our very conservative approach to underwriting. And while we will miss volumes and give up what others might go for in the near term, one thing you count on is we won't be apologizing for a year or 3 years from now.

Our next question comes from Ken Usdin with Jefferies. Ian Foley - Jefferies & Company, Inc., Research Division: It's actually Ian Foley for Ken. Quick question on the mortgage banking run rate, obviously, high this quarter, given the refi activity. Any thoughts on what industry volumes we set to and where gain-on-sale margins go from here?

We did have a strong quarter. And part of the reason was the increase in production versus the linked quarter and part of it was the increase in gain on sale. As we look into the first quarter, I would say that we sort of see stable levels. About 70% of the activity in the fourth quarter was related to the refinance activity, and that's driven by the low-rate environment. And that continues as far as we can see here in the first few weeks of January.

Things are strong. I mean, I think quarter 4 was our second-largest quarter in history and 50% over quarter 3. Quarter 1 is typically seasonally lower just because of the weather and the history that we've all seen. But we expect that nice trend to continue. That's one of our core strengths and we like exactly the amount that we do at the level we do it, and it's a good companion to the rest of the loan growth that we have. Ian Foley - Jefferies & Company, Inc., Research Division: Got you. And one quick follow-up on -- I wanted to ask on corporate payments. Year-over-year growth turned negative after a couple of good quarters of growth, wanted to know if there's anything you could offer there.

Yes, well, it's slightly and it's partly because of the government business that we have. Our corporate payments are huge for corporate America, but they're also very significant for government businesses. First of all, quarter 4 is the worst quarter of the 4 because quarter 3 is the best. It's the way the annual government calendar works, and so that's usual. Slight year-over-year would be just the fact that there is a trepidation right now by all government agencies to be watchful on what they're spending as you so well know, given what's happened with the potential deficit. So it's not significant. We don't expect it to get worse or better either direction very much, and the rest of this is just seasonal, so I wouldn't read much into it.

Our next question comes from Betsy Graseck with Morgan Stanley.

I just had a couple of follow-up questions on the mortgage servicing matters, the $130 million in the quarter. I know you mentioned that it was going to be continuing for the next couple of quarters. And the question is two-part. One is are you implying that we should be baking in $130 million a quarter for the next 2 or 3 quarters? And then I'm just trying to understand why it's over a couple of quarters as opposed to just being done all at once.

No, Betsy, I'm sorry. Here's what's happening. The $130 million, it's a one-time event. In addition to the $130 million in our professional services line, we have about $38 million of servicing-related expenses related to the consent order. That $38 million will continue. That's a run rate item. The $130 million, that is a one-time item.

Yes, thanks for the clarification because I would not want that to be mistaken. We're not putting any of the run rate cost into that reserve. We're simply putting a one-time issue out there for potential matters that we're working on right now with the government agencies. And they are not related at all really to each other at that.

Okay. And the $38 million just goes into the expense line...

It's in there now...

And that's there in 4Q right now?

Exactly.

Our next question comes from Paul Miller with FBR Capital Markets. Paul J. Miller - FBR Capital Markets & Co., Research Division: Just follow-up on Betsy. Can you elaborate a little bit more on potential matters? I mean, it seems like this is popping up in a couple of other earnings announcements. And I think it's confusing the Street exactly what this stuff is.

Yes -- no. I mean, only because I don't really have that much to offer you. We have estimable and probable beliefs that there will be some discussions between some regulatory agencies and some government agencies on this matter that you would know about, which started with the AG's a year ago. It is accurate that the banks to be on that. The big 5 have been invited into the conversations, and for that, we believe we have something that we need to reserve for. But to the extent that there has been no settlement, there has not been a final decision, we don't even know exactly who that would end up being for, I feel comfortable that the amount is a good predictor of putting something behind us. But it's not necessarily intended to be the final answer and it's not necessarily intended to be reflective of having completed any final decisions. Paul J. Miller - FBR Capital Markets & Co., Research Division: So not to put words in your mouth, is this related to the AG robo-signing lawsuit that they're trying to expand to the top 14 services?

It's partly that, Paul. It's related to any of the mortgage activities that you've read about in the last year, where it could be AGs, it could be agencies, it could be regulators, any of whom may want to levy any kind of an assessment against the banks that have been part of that consent order or found outside the consumer to have done anything less than perfect in the mortgage servicing area, and we're part of that discussion. It's not a very substantial thing for us, but we thought appropriate to go ahead and call it now, get the majority of it behind us, market and do a reserve, and then we'll provide some details around it as we get them in the coming quarters. Paul J. Miller - FBR Capital Markets & Co., Research Division: Okay. So this is not reps and warrants, this is just related to the servicing side of it?

That's correct. Paul J. Miller - FBR Capital Markets & Co., Research Division: And then can you -- and you talked about you had some nice growth on residential lending and you talked a little bit about that's coming from refi activity as you guys growing market share in the mortgage business. Can you elaborate a little bit more on exactly -- are these all jumbo loans? Are these 30-year fixed rate loans? Are these 5/1 adjustable loans? Can -- what type of parameters are you putting onto the balance sheet for these resi loans?

Yes, this is Bill Parker. There's 2 main pieces, there is -- about 2/3 of it is jumbos, a lot of it coming through our private client group activity. But another part of it is much smaller refinances that we do out of the branches. Those are very low loan-to-value. Those are primarily fixed rate loans, generally 15-, 20-year fixed rate loans. They're shorter amortization loans. Paul J. Miller - FBR Capital Markets & Co., Research Division: And on the jumbo loans, what type of -- are they usually a 30-year? Are they 5/1s? What type of rates are you giving on them?

Well, we stay competitive with the market, so the spreads, the all-in rates are 4% right now. And we do, do ARMs there. We do, do 30-year fixed. So it's... Paul J. Miller - FBR Capital Markets & Co., Research Division: Are they mostly -- are the jumbos mostly ARMs or is a mix?

It's a mix.

Our next question comes from Marty Mosby with Guggenheim.

I had a question about the growth in investment securities. It seems that you're diverting that over to the held-to-maturity instead of putting it in available-for-sale. Is it a product that you're putting over there? Or what's your thought process about putting it in that category?

Marty, this is Andy. Most of our security purchases that we've increase over the last year are related to the liquidity coverage ratio under Basel III because we intend to hold those, have been put in the held-to-maturity category. And part of the reason for that is the volatility around the capital ratio does not include held-to-maturity, so we're trying to manage the volatility. And given the fact that we're going to hold them, we thought that was the prudent place to put them.

So it's like kind of defensive measure for when rates go up, you wouldn't have to take the haircut into your common capital ratios.

Right. Only available-for-sale goes to the Basel III ratio.

Right. And then when you look at loan growth, you're really looking at commercial and industrial line and the residential side, which in my mind, really reflects the consolidation back within the banking sector. In other words, as one part of the economy is working, it's C&I positioned to be able to capture more than your fair share of that. And then on the mortgage side, again you're being able to retain. So those are the 2 places that we're seeing some real traction in the economy and a shift back to banking.

That would be fair. We do see at U.S. Bank, I think we're different in this category, Small Business. We've had amazing growth in the last couple of years, including just this last quarter. Linked quarter growth was 1%, year-over-year, it's 5%. The deposits are almost 3x those statistics. And the reason for that, Marty, is Small Business was an area that we really started to put an energy in a couple of years ago. It takes a while to get both the front and the back office reset. The branches are now much more capable of culling officers and Small Business underwriters. And to the extent that we've been able to accomplish that, we're taking probably as much or more market share in the Small Business than we are on anything else at the bank, including large corporate. It doesn't move the needle very much, but for us, it's a very important undertow for the kind of future growth that we can expect, especially when small business America starts to pick up and the recovery hits. So you can't really see it in the numbers too much. And then we're actually -- we're hanging in there pretty steady on autos and home equity and the other consumer loan categories. You can see we're one of the few that ever has absolute growth in those categories. We don't do it on giving up marginally, we just underwrite the high qualities. And we never underwrote at levels we couldn't continue through the recession because we didn't stretch in the first place. So I think across the board, virtually all of our categories show some form of strength, and on a relative basis, I think top-of-class.

And just lastly, on your payout ratio, you said the long-term 60% to 80% range. You kind of in answering another question said we might not get to that range. Is it not that you wouldn't get to closer to the bottom end of that range at least next year?

So you can do the math. But I've made it clear we've gone close to the level that we've been permitted to on the dividends in the CCAR. And that would be something below 30%. And if I want to get to the 60%, I'd have to do at least 30% or request that of the buybacks, and we are in that range. So to the extent that we get permission for that, then we'll get into the lower end of the range that we've offered. But as I also said to the earlier response that it may not be an exact mix I want, not in one fell swoop. So we'll get there over time, and I think we'll make a good step forward in the next couple months.

Our next question comes from Mike Mayo with Credit Agricole. Chris Spahr - Credit Agricole Securities (USA) Inc., Research Division: This is Chris Spahr on behalf of Mike. I just have a question regarding the Consumer Banking business line and the efficiency ratio, it's in low 60s for a while now. I'm just wondering where you think it can go over time as the mortgage expense reduces. And if so, will you be shifting your kind of your overall efficiency target from the low 50s to the mid 40s or the -- where it's been prior to the crisis?

Chris, it's funny. Don't be disappointed in me, but we don't ever look at the efficiency ratio as a measure for the Consumer Bank. It's just an outcome. You're right in knowing that we put our national consumer lending businesses and our mortgage business in the consumer line. So to the extent that the mortgage cost are higher during this consent order and the cost of compliance, that's definitely a nonsustainable activity. I'll also remind you the branches are the biggest part of that. And right now, a branch doesn't make as much as money as it used to unless it can get back to making a lot of loans at really nice margins. It's a big data deposit collector at amazing levels and that's actually an expense to them the way we collect it. So overall, I'm not surprised it's higher than it's been in the run rate, and we actually are quite a big believer that the branches have a role in the future, it might be a slightly adjusted one. But I wouldn't read too much into that except to say that given the moments in time for the reasons I described, it's probably looking less efficient. But as a collector of deposits and a creator of credit cards and things I mentioned earlier, it's still got a great deal of value here.

Our next question comes from Nancy Bush with NAB Research, LLC.

Richard, could you just talk a little bit about your outlook for the payments businesses as a whole? I mean, given the sort of slowing global environment we've got right now, is that still going to be a growth area for your company? And is that going to be a target for acquisitions?

Good question. Yes and yes. And as it relates to growth, one of the reasons is because we were primarily a merchant acquirer domestically for a few years. Few years ago, we moved into Western Europe in great stead. Now we're moving into Eastern Europe, Central America, Mexico, South America. And those are all actually good moves because those markets, some of them were actually have a higher forecast for growth than the ones that we're in. And we're growing substantially in all of those markets, even the old-fashioned ones. So I like the fact that our growth is greater organically than maybe the market share is growing itself. But we get this chance to, I think, grow on a troubling basis. Acquisitions, absolutely. This payment business that we created for acquisitions, this international payments capability, it's really plug-and-play. So when we entered into Brazil last year, we were literally going in there and in a matter of a couple of weeks, we were able to transact for merchants in Brazil in their native currency and be up and running faster than anybody else who came into that kind of expanding world. On the traditional credit card, both corporate and consumer cards, we still like the business, absent some big surprise where someone could take away the metrics and value of what it is to be a card issuer, it's a great relationship tool for our customers. They like the rewards programs, which I know we have some of the best cards. And we compete very effectively with these monolines and those who are doing this as a majority of their business. So we're going to keep growing it. I think we grew our portfolio more than most. And if I can't do it organically, I'll continue to seek acquisitions in the more traditional credit card. So we like it across the board. I see it as a cylinder that's been operating at 60% during the recession but just ready to be rubbed into things when the world gets better. And we'll take it here and we'll take it overseas.

And also I was going to ask you the question about the sort of changing view of branch banking in the industry right now. And you alluded to it in the prior question, just saying that branches will still have a role, although it may be altered. Can you just talk about that a little bit?

Yes, I'd be happy to. First of all, the transaction activity in the branches more likely, I think, we all agree is going to come down. People have, with mobile banking and just changing behaviors, they don't see the need to come into a branch as often as they used to meet with the teller for a nonconsultative activity just to move money across the counter. So that is what starts to change. But I think we also see an entirely higher value of this guidance-giving consultative role that you have for an investment decision, a trust, a long-term family trust, an opportunity to buy a home. And in this case with interest rates low, you can't see the value of what branches will become when rates start to move up again. And the traditional old-fashioned CD, which just rolls over on its own, starts to become less attractive like it was 5 or 6 years ago because there is a less-insured alternative in a mutual fund or an annuity that really deserves a lot of conversation and some eyeball-to-eyeball opportunity or branches will kick in big time and will have all kinds of opportunities for them to become more effective. So my view of the branch is you shrink the teller line, you increase the privacy areas, you change your hours, you make yourself more available to people when they need to come and talk about something private and personal and you probably have a different staffing composition. But you still have those locations on the corner of Main and Wall, I guess, for people to come in and do what they can't do over the phone, and probably for a long time, won't want to do online.

Our next question comes from Todd Hagerman with Sterne Agee. Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division: Just Andy, a follow-up in terms of the fee outlook in Durbin in particular. You've mentioned that there's a number of kind of strength in terms of the fee businesses that can help offset that. I'm just curious, again kind of follow-up on the previous question on the merchant payments business. There was commentary in the release surrounding some pricing changes, and in part, tied to some of the legislative mitigation efforts. I'm just curious with that. Does that mean you're potentially accelerating kind of that 50% offset target that you'd previously mentioned?

No. So that was considered in the 50%, Todd. So just to be specific, $77 million was the impact to Durbin in quarter 4, full year run rate is just over $300 million. Quarter 4 is the first quarter that reflected it. We do have some mitigation in there, as we talked about before. I would say we talked about 30% to 50% mitigation. And right now, we're on the low end and we expect to continue to have different pricing mechanisms to get us closer to that 50% by the end of 2012. Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division: Okay. Is that something again outside of the payments business but something more along the lines in terms of the traditional consumer pricing, product packaging, that sort of thing?

Right. I would say the principal mitigation is our Checking With Choice product, which is a product that charges for a checking account, but has very clearly articulated methods to not be charged, $6.95 with electronic statements, $8.95 with paper. But there are a number of mechanisms that customers can undertake to not be charged. And it's very clear and it's actually proven to be a quite popular product. Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division: Okay, great. And then just unrelated, just in terms of credit on the restructured credit line. I'm just curious, Bill. When should we expect to start seeing kind of that inflection point on the restructured line? And just obviously been a very successful program for the company, I'm just curious, as we get to the later stages of the cycle, when we might start to see that potentially moderate.

You're looking at troubled debt restructuring? Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division: Correct.

Yes. So I mean, because of the accounting changes that took place third quarter and then fourth quarter, it's probably still going to go up for the next several quarters before it truly inflects. So I would actually think of later in 2012. But some of the categories, we're starting to see -- we do fewer modifications now on the residential than we did. And that's just because we're getting further and further into the cycle and our delinquencies keep going down so... Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division: Right. And is there any impact or opportunity as it relates to kind of the new HARP II program that came out? Is that influencing that at all? Or is it again kind of the majority, the proprietary mod programs the bank has implemented?

Well, the HARP will be primarily on our service portfolio, our Freddie-Fannie agency portfolio. So that won't be in our on-balance sheet numbers. So the on-balance sheet is proprietary programs, HAMP programs. That's what we focus on, on-balance sheet.

Our next question comes from Chris Mutascio with Stifel, Nicolaus. Christopher M. Mutascio - Stifel, Nicolaus & Co., Inc., Research Division: Richard, I wonder if you could help me out with a macro question on C&I loan growth. And if you had covered this in your opening remarks, I apologize. But some of my banks are saying, or all my banks are saying somewhat the same thing, that line utilization rates really are not improving. And we're taking -- the growth we're getting is we're taking share from others. If that was true, then it'd be a zero-sum gain when I look at the H.8 data. In other words, the C&I loan growth and the H.8 data wouldn't show the growth we've seen over the last 2 to 3 quarters. So where is this coming from? And more importantly, could some of the growth be attributable to customers taking advantage of accelerated depreciation on CapEx before year end?

Well, the last part is yes, for sure. And we think that, that was present everywhere. I'm going to agree with you emphatically. I mean, for years, I've sat here and before I was the CEO saying, "How can everybody be growing market share if isn't growing that fast?" And the H.8 data sometime surprises me because I think we have probably the best loan growth, and sometimes it sounds like we're right on average. So I think it misses some of the refinances, some of this portfolio sales and the movement in and out of the system. I think it's a gross number. So I don't count on it, by the way. That's too much of a proxy, maybe just a direction on trends. I will tell you this, though, the C&I loan business is strong because customers are now mature in this recession. They know what they're doing. They've reset their balance sheets. They're hoarding cash to be prepared. But those M&A opportunities coming to the bank in the form of a loan or a financing opportunity, if they're going to do some form of growth, they're going to come to the bank only after they've expended their own deposits. So I've said this before, but as long as, Chris, the money in the banks are this high and much of it is coming from corporations and consumers, it's your first proxy that they're not going to use the lines of credit they have. In our case, we all do our own definition, but we measure our wholesale lines of credit, not consumer. And we are as flat as flat could be for the last couple of quarters. We are growing commitments, like 11% to 12%, but the reasons we're hitting a reduced to flat utilization is because the people we're adding aren't even using the line they're getting at the levels that our current book is. So it's a good news when things pop. It's an expected outcome when people are trying to prepare for potentially a future that they didn't want to be surprised again. But it doesn't really put any money in the bank, except for the original origination fee. So I think it's okay for you to hear that utilization is down or flat. It's consistent to say the commitments are up, so people are booking more. Those are actually related, but I do think the H.8 data is a gross number that overestimates some of the activity in the business because I don't think you're seeing that much loan growth all together, not on the net. Christopher M. Mutascio - Stifel, Nicolaus & Co., Inc., Research Division: If people are taking advantage of the accelerated depreciation, would you expect C&I loan growth to slow in the first half of 2012 versus the second half of 2011?

As a matter of fact, I think that will. It won't be just for that, it's seasonal anyway. But we've enjoyed a really robust continued trend. We will continue to grow our loans. It will be something less than this quarter but more like last year in the first quarter because we don't see that same robustness. And I think it has a lot to do with what you just said. But I'm not trying to telegraph we won't have growth, I'm just telling you that the 2.4% total book was probably a high watermark for last year, and we won't see that again until later this year when the year ages and things become a little more normal. And I'm glad for the question because I think it's important people don't think the lack of loan growth getting bigger and bigger is a consideration that the economy isn't strong. I think the fact that there's loan growth at all says that the economy is doing pretty well. So people are going to put it in cash before they take the bank's money, and I think that's important to note.

Our next question comes from John Dunn with Meredith Whitney Group.

Just one more branch question, if you wouldn't mind. Can you give us a sense of what the profitability of a hybrid branch versus a traditional bank branch would be? And then I think you had, in the past, referenced 25 to 50 branch openings per year. Is that still your outlook?

Yes. I'll answer the nonnumeric number. Andy is the smart guy of the 2 of us. We are still going to open 25 to 50 net locations wholly. Almost 1/3 of our locations now are what you call hybrid. They are on corporate sites, they're in grocery stores and they have been extremely useful to us. I think people used to think that we are building branches on the cheap. I'd like to think we're actually seeing the future, realizing that the transaction part of branches don't need to be the old-fashioned brick-and-mortar. And that's going to continue. I will tell you, though that it's the same thing. It's about half the cost to breakeven on a nontraditional branch as is the traditional. It's doesn't grow to be as big over 20 years as a traditional. But at the end of the day, they both need to make loans to make money for the bank. They just need to be originators of mortgages, credit cards and old-fashioned auto loans. And those are all starting to come back, but they're not at the levels they were before the recession. So in a relative basis, they're both under some form of stress. The traditional branches will take longer to recover because it's got a bigger expense base. But I'm glad that we have both mixes because based on my answer to Nancy, we're going to need those traditional locations if they're in the right place and the right community for those more traditional questions. And Andy, on the financial side...

Yes, on the financial side, just building on what you said. When both are mature, the traditional branch because it has more loan activity is the more profitable. But the in-store builds to a breakeven in a more rapid fashion because of the lower investment requirement, at times 0.

At this time, there are no further questions. I will now turn the conference back to Judy Murphy for closing remarks.

Great. Thank you, all, for listening to our review of our fourth quarter results. And as usual, if you have any follow-up questions, please feel free to give us call.

Thanks, everybody.

Thank you.

Thank you.

Thank you. This concludes the conference. You may now disconnect.