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U.S. Bancorp (NYSE:USB)

Q1 2009 Earnings Call Transcript

April 21, 2009 8:00 am ET

Executives

Judy Murphy – Director, IR

Richard Davis – Chairman, President & CEO

Andy Cecere – Vice Chairman & CFO

Bill Parker – EVP & Chief Credit Officer

Analysts

Chris Mutascio – Stifel Nicolaus

Edward Najarian – ISI Group

John McDonald – Sanford Bernstein

Nancy Bush – NAB Research

David Rochester – FBR Capital Markets

Richard Ramsden – Goldman Sachs

Operator

Welcome to US Bancorp’s first quarter 2009 earnings conference call. Following a review of the results by Richard Davis, Chairman, President and Chief Executive Officer and Andy Cecere, US 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 11:00 AM eastern time through Tuesday, April 28 at 12 midnight eastern time. I will now turn the conference call over to Judy Murphy, Director of Investor Relations for US Bancorp.

Judy Murphy

Thank you, Rachel, and good morning to everyone on the call today. Richard Davis, Andy Cecere, and Bill Parker are here with me to review US Bancorp’s first quarter 2009 results, and to answer your questions. If you have not received a copy of our earnings release and supplemental analyst’s schedule, they are available on our Web site 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 detailed 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.

Richard Davis

Thank you, Judy. And good morning, everyone. Thank you for joining us. Andy and I would like to start the call today with a short review of our first quarter results. As we’ve completed our brief formal remarks, we’ll open the line to questions from our audience.

US Bancorp reported net income of $529 million for the first quarter of 2009. Diluted earnings per common share were $0.24. I’m very proud of our first quarter results, as they reflect the company’s ability to produce strong core operating earnings in a very stressed economic environment. Equally significant is that we achieved record total net revenue this quarter, and it was driven by core growth in both net interest income and fee revenue.

Although core operating earnings were strong, significantly higher credit costs, including the cost to building the reserve for expected credit losses and reflect existing economic conditions, resulted in earnings that were lower than the first quarter of 2008. The current quarter’s earnings compared favorably however, to the prior quarter’s earnings due to a combination of higher fee income and lower expense.

Significant items impacting the company’s first quarter earnings included $198 million of net security losses, a $92 million gain on a corporate real estate transaction, and $530 million of provision expense in excess of net charge-offs. In total, significant items reduced diluted earnings per common share in the first quarter by approximately $0.28.

Our performance metrics were impacted by these significant items with return on average offset in the current quarter of 0.81% and return on average common equity of 9.0%. Excluding the significant revenue items and incremental provision expense, return on average out-debt and return on average common equity would have been approximately 1.56% and 19.7%, respectively. As I’ve stated, our company continue to do well this quarter on an operating basis. And I’d like to review a few of those highlights with you now.

We recorded strong growth in total average loans year-over-year. Total average loans outstanding increased by $30.5 billion or 19.6%, with solid growth in all major categories. Excluding the impact of recent acquisition, total average loans on a core basis grew by over 11% year-over-year.

On a linked quarter basis, total average loans increased by $8.5 billion or 4.8% and excluding acquisitions, by almost $2 billion or 4.4% on an annualized basis. This linked quarter annualized growth was somewhat muted by a decline in overdraft balances outstanding and seasonally lowered non-interest bearing corporate card balances. Excluding these two non-interest bearing loan categories, total average loans on a core basis increased by 6.4% annualized late quarter.

This growth in average loans outstanding illustrates that our company is continuing to provide credit to our customers. But average loan outstandings are just part of the story. As not all new loan originations and commitments to lend are fully reflected in these numbers. In fact, during the first quarter of 2009, US Bancorp originated almost $14 billion of residential mortgages. We originated over $4 billion of consumer loans including installment loans, student loans, lines of credit and home equity lines and loans. We originated new prime based credit card accounts with lines totaling $2.4 billion and we issued over $8 billion of new commitment and renewed over $14 billion of commitments to small businesses, commercial, and commercial real estate customers.

The statistics clearly demonstrate that US Bancorp continuous to be responsive to, and supportive of the borrowing needs of both our new and current worthy customers and the government’s efforts to maintain the flow of credit in these stressful economic times.

Another highlight of the first quarter results was our outstanding growth in average deposits. Total average deposits increased by $29.7 billion or 22.7% over the same quarter of last year. And over $16 million or 11.1% unannualized on a linked quarter basis. Without acquisitions, this year-over-year growth rate was 12.3% while linked quarter growth was 6.8% an annualized.

This tremendous growth on average deposits as well as loans outstanding is clear evidence that our company is benefiting from the uncertainty in the financial market and the flight to quality by consumers and businesses that are looking for a safe, stable, and sound financial institution. In fact, we are currently the highest rated financial institution in the country with a AA rating from S&P and an AA3 ratings from Moody’s. These ratings have given us a significant advantage as our customers make the decision as to where they will place their business, and where they will place their trusts.

As I’ve previously mentioned, the company reported record total revenue in the first quarter. A major contributor to this success was mortgage banking which also produced record setting revenue with increases year-over-year and linked quarter of a $128 million and $210 million respectively.

The growth in mortgage banking revenue reflected the high origination fees, servicing revenue, and a favorable change in the fair value of mortgage servicing rights, net of economic hedging activity which was essentially neutral for the quarter. Total mortgage production of $13.4 billion was another quarterly record and was significantly higher than both the same quarter of 2008 and the prior quarter. The majority of this production is packaged and sold into the secondary market and we expect to continue to accommodate the increased demand from mortgage products from both new and existing customers.

Finally, I would like to draw your attention to non-interest expense which benefited this quarter from the implementation of the company’s cost containment plan in late January. Year-over-year excluding the impact of acquisitions, total on interest expense was a simply flat. While the $67 million decline in expenses on a linked quarter basis was a result of seasonally lower spending, and the company’s cost saving efforts. Both of which were more than offset by the other expenses related to the two acquisitions made in November of last year.

Our efficiency ratio as reported for the first quarter of 2009 was 45.8%. We continue to be one of the most efficient financial institutions in the industry, and I’m pleased to report that we’ve achieved this positive core operating leverage this quarter on both a year-over-year and linked quarter basis.

In total, the first quarter results underscore the inherent value of our company’s strong balance sheet, and it’s diversified earning stream. As customer actively seek a bank partner that can provide the product and services they need and the safety instability they require, our balance sheet businesses continue to grow and prosper. As consumers in businesses pull back on their spending and the equity market faltered, our fee based businesses remained solid but their growth is tempered. It is however this diversified earning stream that have allowed us to perform despite a stressful economic environment. And it is this diversified mix of businesses that has us very well positioned for the recovery days of the current economic cycle.

Moving on to credit, as I pointed out earlier, an increase in credit cost including the cost of building the reserves for expected credit losses and to reflect the existing economic environment drove the year-over-year reduction in the company’s net income. Net charge-offs of $788 million were 24.7% higher than the fourth quarter of 2008. As expected slightly lower percentage increase than we experienced in previous quarters. The increase in net charge-offs once again reflected the continued stress in residential homes and mortgage related industry and the impact of the worsening economy on both our retail and commercial customers.

The most significant increases in net charge-offs were recorded for lease financing, primarily small business leasing, construction and development loans, and credit cards. Total net charge-offs to average loan outstanding were 1.72% in the first quarter compared with 1.42% in the fourth quarter.

Also and as expected, non-performing assets increased this quarter. The change reflected an increase in non-performing loans in the bank’s core loan portfolio, and the impact of the recent acquisition for Downey Savings and TFF Bank & Trust.

As of March 31st, total non-performing assets were $3,410 million compared with $2,624 million at December 31st. Included in total non-performing assets were $702 million of loans and other real estate covered by a loss share agreement with the FDIC in conjunction with our two California acquisitions. In other words, there is minimal amount of potential loss in these loans given the terms of the agreement of our agreement with the FDIC.

The majority of the increase in non-performing loans within the core bank portfolio was related to residential mortgage and residential construction related industries, as well as other commercial real estate lending. In fact, of the $361 million increase in commercial non-performing loans approximately 43% was real estate related. The ratio of non-performing assets to loans plus other real estate owned, excluding covered assets was 156 basis points at March 31st.

Restructured loans that continue to accrue interest rose by 26% this quarter, as the company continues to work with customers to re-negotiate loan terms, enabling them to keep their homes. These separates are in sync with the government's goal to restore the housing markets, and our desire to retain the value of these relationships for our shareholders.

As expected, given the upward trends in both net charge-offs and non-performing assets, in addition to the continued weakness in the economy, we increased the allowance for our loan loss this quarter by recording an incremental provision for loan losses in excess of five – excess of charge-offs of $530 million .This represents an amount equal to 67% of the current quarter's total net charge-offs.

With this addition, the company's allowance for credit losses to period in loans excluding covered assets was 2.37% compared with 2.09% at December 31st. And a ratio of allowance to non-performing loans excluding covered assets was 169%.

Going forward, we will continue to assess the adequacy of our reserve for loan losses and provide for credit losses at a level that reflects changes in the credit risk of the loan portfolio and the current economic condition. Our company enters this credit cycle with a strong balance sheet and we fully intend to protect that position through this cycle and beyond.

Finally and importantly, our capital position remains strong. Our Tier 1 and total capital ratios were 10.9% and 14.4% respectively at March 31st. Both well above our target levels. Additionally, our tangible common equity to tangible asset ratio were 3.7% at March 31st while tangible common equity as a percent of risk-graded assets were 4.0%. Both ratios were higher than on December 31st, having benefited from earnings and the recent dividend reduction.

I will now turn the call over to Andy.

Andy Cecere

Thanks, Richard.

You’ve now heard the key highlights of this quarter's results from Richard. Overall, the results reflected the strength and quality of our core earnings. And I like to spend a few minutes to provide you with more detail. I’ll begin with a quick summary of the significant items that impact the comparison of our first quarter results to prior periods.

First, non-interest income included a $198 million of security losses. Included in this total were $254 million of impairment charges on several securities including a perpetual preferred issue of a major US financial institution, our SID exposure, and a few agency and non-agency mortgage backed securities. These impairment charges were partially offset by gains of securities sold of $56 million. Second, the other income in the first quarter included a $92 million gain on a corporate real estate transaction. And third, we recorded an incremental provision for credit losses in excess of net charge-offs of $530 million in the first quarter.

Significant items in the first quarter were in total $636 million and reduced diluted earnings per common share by approximately $0.28 cents. For comparison purposes during the first quarter of 2008, the company recorded $251 million of security losses, the results of impairment charges on structure investment vehicles, other preferred securities, and non-agency mortgage backed securities.

In addition, non-interest income in the first quarter of 2008 included a $492 million Visa Gain and a $62 million charge related to the adoption of FAS 157, while non-interest expense in the first quarter of 2008 included two special items totaling $47 million. Additionally, results in the first quarter of 2008 included an incremental provision for credit losses of $192 million. The net impact of the first quarter 2008 significant items reduced diluted earnings per share by approximately $0.02 cents. Finally, net interest income in the fourth quarter of 2008 included $253 million of security losses and incremental provision expense of $635 million. Together, these items reduced fourth quarter 2008 diluted earnings per common share by approximately $0.34 cents.

Now, a few comments about operating earnings this quarter. Net interest income in the first quarter was 14.5% higher than the first quarter of 2008, primarily due to a strong 13.7% increase in average earning assets. As projected, the net interest margin for the first quarter was 3.95%, 4 basis points higher than the previous year.

Net interest income was slightly lower in our link quarter basis as a 4.1% increase in average earning assets was offset by an expected decline in the net interest margin. The slight improvement in the margin on a year-over-year basis was principally the result of growth and higher spread assets. On a linked quarter basis, the expected reduction in net interest margin was primarily due to the full quarter intact of the two California acquisitions, the re-pricing of a number of consumer-lending products that lacked the decline in money cost during the fourth quarter, as well as, the normalization of funding and liquidity in the wholesale funding markets.

Going forward, assuming the current rate environment and yield curve, we expected the net interest margin to remain relatively stable. Total non-interest income in the current quarter was lower year-over-year primarily due to the $492 million Visa Gain reported in 2008.

Offsetting the negative impact of that one-time item were favorable variance in mortgage banking revenue, as Richard discuss earlier, as well as Treasury management fees and commercial product revenue, which were higher than the first quarter of 2008 by 10.5% and 15.2% respectively. The growth in both of these two categories reflected the wholesale banking groups ongoing revenue initiatives and the bank's bank-wide BDR or building deeper relationships project. Seasonality, a slowing economy and unfavorable equity market conditions led to a decline in several fee-based categories this quarter. Merchant profit in services revenues lower an a both year-over-year basis ending quarter, while corporate payment products revenue declined from the same period of last year, although remained flat to the prior quarter.

Both of these payments related categories reflect the slow down in consumer and business spending but remained positioned for our recovery. Trust and investment management fees were also lower year-over-year and linked quarter, as adverse equity market conditions reduced the value of assets under management and consequently related management fees. Deposit service charges decreased from both the comparable time periods as changes in consumer spending patterns led to lower fee related activity.

Finally within non-interest income and other income, excluding the impact of significant items was lower year-over-year due to higher end-of-term residual losses in consumer auto leases and lower equity investment income. On a linked quarter basis, the corporate real estate transaction, as expected and as expected lower in the term losses on retail auto leases, accounted for the majority of the variance.

As we indicated in our last call, the end of term losses on auto leases peaked in the third and fourth quarter of 2008 as a number of cars coming off lease began to decline.

I will now turn the call back to Richard.

Richard Davis

Thanks, Andy.

In summary, I am very proud of the results for this quarter. I am more than confident that – more confident than ever that this company with this diversified mix of businesses, coupled with its long-standing prudent approach to risk, and the remarkable dedication and loyalty and hard work of its employees, will continue to outperform despite the stress of the current environment. We are, in fact, building momentum in our balance sheet businesses while remaining poised to capture the extraordinary opportunities that we’d present for our fee businesses as the market, the economy, and the world recover.

In conclusion, our fundamental businesses remain strong. We are not immune to the challenges facing our industry but we are open for business and continue to prudently lend to credit-worthy customers. We continue to wisely invest and grow our franchise. We continue to support the communities in which we operate. We continue to serve our customers current needs while building deeper relationships for our future. and most importantly, we continue to create value for our shareholders. Value that is derived from our high quality balance sheet, capital strength, and earnings power; factors that have enabled the US Bancorp to successfully navigate the challenges of the present while remaining well positioned to view the opportunities of the future.

That concludes our formal remarks. Andy, Bill, and I would now be happy to answer any questions from the audience. Rachel?

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Chris Mutascio with Stifel Nicolaus.

Chris Mutascio – Stifel Nicolaus

Good morning, Richard and Andy and Judy. How are you?

Judy Murphy

Good morning.

Chris Mutascio – Stifel Nicolaus

Good. Richard or even Andy, can you give a little more color on the mortgage banking side? I’ve had some other banks report some pretty good increases or write ups of the MSR. Didn’t look like that occurred with you guys this quarter. And mortgage production volume was up nicely, but the increase in the production volume was lower than the type of gain we saw if you will, from the origination of sales volume. Sales volume and origination of sales was up about five fold quarter-to-quarter, and mortgage production was up less than half. So, is the driver gain on sale? Has that spread widened to such a degree? And if so, can you comment on the sustainability of those kind of margins you can get on the sale of the loans?

Andy Cecere

Chris, this is Andy. First, regarding your hedge question. Our hedge was essentially neutral for the quarter against the servicing valuation, but that was an improvement versus the fourth quarter. As you know, the fourth quarter rates were highly volatile and we actually recorded a negative in the fourth quarter of about $70 million. So on a quarter linked basis, that did improve the numbers. Year-over-year it was slightly positive. In the first quarter 2008 we were negative about 13. So the neutrality in the first quarter was helpful.

Chris Mutascio – Stifel Nicolaus

Okay.

Andy Cecere

Regarding the production versus servicing numbers, the production number was the principal driver in the first quarter, both on a linked basis and a year-over-year basis, producing $174 million linked in about $130 million quarter-over-quarter. So it is the principal drive. We had a record quarter in terms of, but not only production but also applications. So we would expect that strength that we saw in the first quarter to continue at least until the second quarter.

Chris Mutascio – Stifel Nicolaus

Are you also seeing widening spreads on the gain on sale on those loans?

Andy Cecere

Not yet, but the key driver in the revenue increase is the production levels.

Chris Mutascio – Stifel Nicolaus

Okay. And I may have missed this. If could just follow up on the tax question. I know that your tax rate was a bit low this quarter on taxable equivalent basis. What’s the outlook going forward so I know how to model that?

Andy Cecere

Right, Chris. So we, on a TEB basis, we are at about 21.5% this quarter. Higher than last quarter but lower than the first three quarters of 2008. And it’s really a function of where our income levels fall. We would expect the rest of the year to fall somewhere between 20% and 25% on a TEB basis.

Chris Mutascio – Stifel Nicolaus

Okay. Thank you very much.

Operator

Your next question comes from Ed Najarian with isi Group.

Andy Cecere

Hi, Ed.

Ed Najarian – ISI Group

Good morning, guys. How are you?

Andy Cecere

Go ahead, Ed.

Ed Najarian – ISI Group

Richard, in past calls you’ve been at least willing to give a three-month type of credit outlook. You didn’t do that on this call. I’m wondering if you’re still willing to do that in terms of the pace of increase in charge-offs and NTAs. And then if you could also comment maybe a little more broadly on how you’re thinking about additional reserve build throughout the balances of ’09, that would be helpful. Thanks.

Richard Davis

I would be happy to. Thanks, Ed. I’m happy to report that our last few quarters, including this quarter are very consistent with what we’ve expected along this cycle. And we’re looking the same for the next couple of quarters as we move forward.

In other words, the kind of trajectory you‘ve seen in both the increase in charge-offs and non-performing loans in the future couple of quarters are not expected to be very different in the last few quarters. So we’ve got a nice, steady, unfortunately negative, but steady stream northward of both non-performs and charge-offs moving on the 20% to 30%, 35% range linked quarter as you’ve seen for last four or five quarters.

We are happy to report that, if nothing else it’s very predictable. We’re able to really see well ahead into the 90-days on the consumer side where the modeling has become much more precise. It’s much more measurable as regards to delinquencies becoming – what percentage of those become charge-offs; which of those go to bankruptcy. We have a much better view on that. So consumer is much more mature in this cycle in terms of credit quality and understanding the future implications.

I would say commercial and commercial real estate are a little more lumpy in that, as I’ve said in prior quarters, it’s not quite the modeling. It’s more of the deal by deal or the systemic nature of the kind of loans that are going in distress. In our case, because of a significant amount of stress we’ve had in our California housing portfolios last year, we are able to replace some of that. Now that’s matured into something more traditional and old-fashioned C&I and CRE stress that we’re seeing. And both of those will continue to show non-perform first, and then some of those will translate into charge-offs later.

So I’ll remind the audience that the charge-off nature of the non- perform, particularly commercial real estate where they’re primarily collateralized, it’s not necessarily equal to that of an unsecured credit. And so they’re not equal to that of the stressed consumer credit. So our non-performs are up slightly more than our charge-offs. So I wouldn’t actually read that to believe we’re going to have a higher incidence down the line of charge-offs, more consistent with the prior quarters. And you can pretty much just draw a line as we have done.

We don’t see anything tempering yet. We don’t see it coming to an end. But we also don’t see any unexpected outcomes that would cause our trajectories to change in the next two quarters.

Ed Najarian – ISI Group

Okay. So for the next two quarters, we’re going to expect that trajectory line that we’ve been seeing to continue upward at the same pace?

Richard Davis

That’s how we’re finding it. And then that bring us to the second part of your question, which we’ll continue to provide reserves to be adequate for those expectations. And I don’t expect us to stop reserve building until which time we see straight in [ph] the reduction not with the continued trajectory northward. And I think we’re going to find loans to start to moderate in that regard late in the year. But for the next couple of quarters, I would expect us to see some reserve build and that we’ll determine the (inaudible) of that as each quarter comes to a conclusion as we have a better view into the next 90 days and the next 180.

Ed Najarian – ISI Group

Just one last question. Do you think this quarter’s reserve build was abnormally high or next couple of quarters could be similar?

Richard Davis

This quarter was a good example of average for the last years. We’ve been between 55% and 100%. Bill, this is 67%. It probably reflects that we think we’re probably in the middle of this whole cycle. And I think that we’ll find something in that same range between 33% and 100% in the next few quarters. But it could be that wide of a range. And we really don’t make that decision until the very end of the quarter Ed, when we have a real good view of the next 90 days.

Ed Najarian – ISI Group

Okay. Thank you.

Operator

Your next question comes from John McDonald with Sanford Bernstein.

Richard Davis

Hey, John.

John McDonald – Sanford Bernstein

Hi. Good morning. A couple more credit questions. Commercial real estate and net charge-offs in the non-construction book were better than I expected, and wonder if Bill could get some color on that. And then on construction, you‘ve talked in the past about how you’ve gotten ahead of some of the construction credits. Can you enlighten us on where you stand there?

Bill Parker

Sure. First I’ll do the construction loans. What we’ve been talking about last year was our California residential mortgage portfolio. This quarter we saw additional stress, not just in California but also in the Pacific Northwest. Obviously, Las Vegas, Phoenix-type areas. In sum – total of those areas outside of California are not as big as our California exposure but needless to say, the residential construction portfolio remains under stress.

On the commercial mortgage side, again about half of that – more than half of that is actually owner-occupied, so really cutting in to our middle market and small business in community lending area. So that’s a fairly stable bulk even in downturn. And then the other mortgage plans, there’s obviously we do have retail, office, et cetera. But those are fairly broadly diversified portfolios; projects throughout our footprint. They’re all recourse [ph].

John McDonald – Sanford Bernstein

So you expect the trajectory of your overall charge-offs and NTAs to continue on a similar pace? Do you expect some shifting there with the construction slope moderate and then other commercial real estate in C&I pick up a little bit?

Bill Parker

Yes. There’ll probably be some of that. But clearly the stress – the high level of stress will remain in the construction category. And depending upon the length of the downturn, there could be more stress in the mortgage lending area. But so far, that’s been more case by case or the regional basis looking at particular markets, as opposed to broad based.

John McDonald – Sanford Bernstein

Okay, Question on the fee based businesses, some of the trends and sensitivities. Richard, you had given some sensitivities both from the payments and wealth management revenues to the economy, consumer spending, and market levels. Based on what you’ve seen so far in the first quarter, do you still feel good about those relationships?

Richard Davis

We do. In fact, I’ll give you a little bit more highlight. In the first quarter, the same store sales for the costumers that our payment businesses are aligned with was down 9.6%. To be more specific, North America, which is about three-quarters of our volume was down 9.7%. And Europe was down 9%. That’s 25% of our volume. That is very aligned with what we would expect at our performance in the payment businesses related to consumer small business behavior is down 2.2%. So that reflects that we're gaining some market share and we're still growing the businesses underneath all of that stress.

And for the second quarter, we forecast that 9% to be very similar for quarter two in our book of business. And if that's the case, we'll probably continue to see a very moderate flatness in the benefits coming from the payment side. But as Andy mentioned in his comments, the pipeline's built. Everything is ready for a higher flow when the economy recovers both here and overseas. We'll see that information translate directly into bottom line and we're really looking forward to that.

On the trust side, a number of our businesses are aligned directly with the valuations in the market. And as the markets are impaired, that continues to take some of the information directly into the bottom line of our business success. But the like [ph] payment is open and ready to roll when the trust business picks up as a relation to the markets improving. We'll get the benefit on that, too.

So for the quarter, I was actually played – a couple of years ago on this call, we we're talking about how our payments and trust businesses, the non-balance sheet businesses were really coming through like gang busters while we dealt with an inverted yield curve and a decreasing margin and spreads on the balance sheet. Now we've got a reverse where the balance sheet businesses are enjoying a yield curve again and amazing growth while the payment businesses and trusts are hanging in there but ready in position for when things turn on. So right now, with two or three cylinders of the four running, I look forward to the day when we have all of them on up and running at the same level.

John McDonald – Sanford Bernstein

Okay, thanks. One quick follow up on credit cards. Can you give some color on your outlook for charge-offs in credit card? Maybe relative to employment? Maybe relative to the industry? Are you seeing a performance differential in your book between your partner cards and your generic bank cards?

Richard Davis

Bill, why don't you do that?

Bill Parker

Yes. First part, the relationship to unemployment, I think it's pretty clear to all of us that card losses do correlate with unemployment. Because of our prime nature of our book we do expect our losses to go up with unemployment but not to the level that I have seen in some of the other bank portfolios. So, it will, it will go up as unemployment rises through the balance of the year.

With regard to bank brand versus partner brand clearly the bank brand shows higher losses than the co-brand type activities but both portfolios are prime based, and basically have been operating in similar fashion.

Richard Davis

Also John, you would notice yet, you'll see it in the 8-K but our total 30 plus delinquencies are up compared to the fourth quarter but there is an improvement in the early stage delinquencies, which caused update certain level of tempered enthusiasm for the fact that the consumer might be starting to get more solid around their ability to manage their debt. And the long term due of that leads to credit card.

But as you see in our portfolio's performed with the best of all the large portfolios. I expect this to not only continue there but slightly separate itself from further because our consumers are performing quite well during this period. And our ability to restructure and work with them on cases where they need help has been quite successful.

John McDonald – Sanford Bernstein

Okay, thanks Richard. Some other banks have talked about that early stage bucket improvement on the 30-day delinquencies and maybe cited seasonality on that. Have you seen any evidence of seasonality there? Or, maybe a little more how to –

Bill Parker

–yes, there is. I mean, it is, there is a seasonal influence there. But last year I think the important distinction is last year we really didn't see any lift from the normal factory fund type payments of the seasonality of this year does appear to be actual lift from the seasonality.

Richard Davis

Like the old fashioned –

Bill Parker

–yes.

John McDonald – Sanford Bernstein

Okay, thanks very much.

Richard Davis

Thanks, John.

Operator

Your next question comes from Nancy Bush with NAB Research.

Bill Parker

Good morning, Nancy.

Nancy Bush – NAB Research

Good morning, guys. Richard, a question for you. There is a great deal of debate, becoming more heated in Washington, about whether the banks are actually lending or not. Can you just give us your take on this and there seems to be a belief that the banks are not lending, and should be. And this said, what more you can do to increase lending in line with your receipt of TARP funds?

Richard Davis

Miss Nancy, I think it's fair to say that it is individual bank related. And I think a lot of banks are lending and some of the, perhaps eight to 20 rules on the larger banks not being as aggressive in the entire period, is what you're seeing.

In our case, of course, we are lending and we've said that from the beginning. I reflect on yesterday's Wall Street Journal story that showed the February results compared to January where we're shown slightly below the median, and in fact we were down February over January, down by 4.4%.

To be very specific, our new originations and commitments were up 4.4%. Our commercial real estate was up but our commercial and industrial renewals were down for the month. If you look at the whole quarter, which we'll see eventually, that negative 4.4% was actually 3.6% for quarter one improvement over quarter four. So my first issue is, any one period of time picked at the wrong moment for the wrong optic, does not really, what is a suitable way of determining bank lending.

In our case, I went through my – in my early comments, all the net or the gross new loans we've made, but on the net position, this also gives you (inaudible) we're lending more than we did 90 days ago. And if you want to tie that to TARP, I suggest that we're good stories of the investment by the taxpayers. I think we can prove that any give – any time, under any period, to show that we're robustly making loans.

But, I will say that probably the most dangerous aspect of that is the number of credit worthy and interested borrowers that exist in this current downturn. And I think it's fair to say that banks, and even the government would make, take a risk by trying to align success of the economic recovery with the amount of lending that's accomplished. Because there's a number of customers who are neither as qualified as they were a year ago nor are they interested in exceeding additional levels of debt.

So, I think that the banks that are growing in this environment absolutely must be taking market share because I don't think overall there is more lending out of the market place at this stage of the recession. And I think it's fair to say that banks in general, in total, they reflect that and therefore be flat to negative. But individual banks they're actually making where they should be are dismissed as either making it up or not being able to justify their position because there is plenty of lending out there being accomplished.

I said it 90 days ago, and I'll say it again. And I think any of the customers calling you for, maybe one wells, that we have not denied a single credit worthy customer since the beginning of this downturn for any reasons of either capital or (inaudible), we simply have continued to be prudent with our underwriting as we were many years ago and we're making loans to whoever qualified to meet our terms. And in this case you'll see we're surely we continue to increase quarter over quarter. And you'll see that we've been good stewards of that TARP money.

I'll also say, too few of my peers mention it, but I will reflect it as well. There is a slowing down of interest in consumer appetite and commercial appetite in the last couple of weeks, maybe the last half of the quarter one. In February-March, we saw a little bit less appetite. So, I think there is a reason to believe that as the cycle matures, people are becoming a little more careful in what they do to extend their balance sheet. I think they're also being a little more careful to become more productive in the time when they need to cut back on costs and rationalize their businesses.

But for those who are asking for loans, there’s still plenty of money out there and I think the banks are willing to make those loans for all intents and purposes.

Nancy Bush – NAB Research

Well, I’ve got you. Would you care to update your view of TARP?

Richard Davis

Sure. I'm looking forward to learning more about it. As you've all read, and as I know as well, we're expecting a white paper from the government on the, this Friday on the 24th. I'm also led to understand that we'll be getting an individual update sometime and around that time to find out how our performance during the stress test occurred, at which point I'm of the mind I'll learn that I have the chance to rebut any of these findings or confirm those findings. And in early in May, I guess we'll all find out some levels of detail how we performed. I start on the stress test because I do believe that that is the proxy or the gateway to the question on TARP.

I have indicated before and I’ll remind you all that we would like to pay back our TARP obligation only and after we have permission from our regulator and in the good alignment with what the government wants at the right time. But it's my hope that if the stress test results in positive I think that should first right to then say I'd like to repay the TARP if I may, find out what the terms of that include, what the timing would be. That’s for both our shareholders and for the government, for all the optics to go along with it. And then move forward on that basis to move this company back to independent status. That's my goal.

Nancy Bush – NAB Research

Thank you.

Richard Davis

Thanks, Nancy.

Operator

Your next question comes from David Rochester with FBR Capital Markets.

David Rochester – FBR Capital Markets

Hey, good morning. Thanks for taking my questions. Sorry if you mentioned this earlier, could you roughly give us the amounts of the larger real estate company loan that went bad, that boosted C&I, NTAs?

Andy Cecere

We cited $110 million but that, we can't –

Richard Davis

Yes, it was $110 million, David. It was –

David Rochester – FBR Capital Markets

–Okay, I apologize. And instead, what – looking at the rest of the increase there, what specific industries aside from those related to residential construction home building industries would you say made a preponderance of that increase?

Andy Cecere

Yes, a couple of the areas that we've seen strapped outside that is gaming. We do do gaming credits. We've seen strength in that area. Also, newspapers have been an area of high stress. Those are just couple of the two main industries.

David Rochester – FBR Capital Markets

Okay. And finally, can you update us on where you see the unemployment rate peaking in terms of timing and level? I know you have mentioned in the next couple of quarters you are looking at a reserve build, and maybe that will be temporary, but after that can you kind of update us on how bad you think the economy will get? And when we'll start to see, you think, we'll start to see a turn?

Richard Davis

Yes. We're looking at the unemployment rate near the end of this year hitting between 9% and 10% on the high end of that range but not hitting 10%. And if you look at the performance guidelines that you'll see later on the stress test, they'll be somewhere in between all those same scenarios.

So I think we've been consistent with what the market is telling us. We haven't built for the Armageddon scenario. We can, but we haven't. And under any circumstances we find ourselves able to be profitable through the cycle and I think what we're looking for, David, is late in the year that starts to peak and then starts to trim back down slowly but surely into 2010. So, we're of the mind that the economy starts to show the possibility of recovery late in the year or early first part year. But we're not building any financial metrics around that to happen until 2010.

David Rochester – FBR Capital Markets

Okay. Great. Thanks, guys.

Richard Davis

Thanks.

Operator

And your final question comes from Richard Ramsden with Goldman Sachs.

Richard Davis

Good morning, Richard.

Richard Ramsden – Goldman Sachs

Yes. Hi. Good morning. Just a couple of questions. The first one is on the restructured loan market. Could you just give us an update on the re-default rates in the restructured loan portfolio? As well us give us a breakdown of how the composition of that portfolio has changed?

Bill Parker

Sure. Obviously, most of it is mortgages, the single biggest category that will continue to grow as we continue to work with our client base in trying to prevent foreclosures. What we've looked at is we measure who that we restructured and we've been doing this back beginning in, actually prior to '07, where we restructured the loan and then they eventually go into foreclosure or we have to take a loss or an event like that.

On that basis we've restructured over 8,000 loans and 12% of those re-entered foreclosure are actually entered foreclosure. And the other –

Richard Ramsden – Goldman Sachs

But then –

Bill Parker

– yes, go ahead.

Richard Ramsden – Goldman Sachs

Yes, sir. On the re-default rates that you've seen, how are those evolving? Because you've been –you've been conducting the program long enough now that you, I assume you've got some good data on how the re-default rates are evolving.

Bill Parker

Right. In the cumulative re-default rates, 12%. But you maybe speaking about the vintage impact of that, because obviously we went through the restructured most recently and not yet have the potential to go into foreclosure. So, if you look at some of the older vintages, it differs by portfolios. We have some restructured types that have maxed out at around that 12% range. Some of the older vintages get up to 20% or 30% range, depending upon the program.

Richard Davis

Hey, Richard, this is Richard. We've – you've all read about and heard from the OCP about their recent findings that re-default rates are higher for loans where the payment went up even if the payment was precluded from going up higher. We've seen that same early incident that those with payments going up perform less positively than those with flat payments or reduced payments. And in the course of that, that's early warning. And we're working now to evaluate our go forward approach to make sure that we take that thing, guide it, and keep payments flat or reduce payments, for those restructured credits so that we don't have a long term re-default problem that may not have shown itself yet.

Richard Ramsden – Goldman Sachs

Okay, that's great. And then the second question I wanted to ask is on deposit pricing trends. It looks as if that's now become a little bit more rational but it would be just helpful to get your perspective on how that's changed, I guess, in the last couple of months?

Andy Cecere

Richard, this is Andy. And your statement is correct. What we've seen is some of the more irrational price – deposit pricers are not in the marketplace any longer. I would say the large banks are pricing in the similar band that is rational and reasonable. There are still a few outliers, principally smaller banks. But I would say that it has rationalized quite a bit in the last quarter.

Richard Ramsden – Goldman Sachs

Okay. That's great. Thanks a lot.

Andy Cecere

You bet.

Richard Davis

Rachel, anybody else?

Operator

That concludes the Q&A session.

Richard Davis

Well, let me just thank you guys for joining our call. And I guess on one hand I'm completely more proud of the fact that I hope you appreciate the simple, transparent nature of our earnings. It's a little old fashioned except for the fact that loan losses and provision continue to be a question mark that, throughout – we have our board meetings then our annual shareholder meeting and we're going to declare once again that, without a lot of noise and fanfare, we're just kind of a basic old fashioned bank going through a cycle, able to earn through it under any circumstances, and pleased to see that underneath all that we're building some very strong momentum for a future that will be quite robust for our shareholders, as the credit world finds itself more settled in the coming quarters and coming years.

So, thank you for that support. If you have any questions we'll be – certainly have the answer later today.

Judy Murphy

Thank you for joining us on the call today. If anyone has any questions please feel free to call me at 6123030783. Thanks.

Operator

Thank you, this does conclude today’s US Bancorp first quarter 2009 earnings conference call. You may now disconnect.

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