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Executives

Judy Murphy - Director, IR

Richard Davis - Chairman, CEO, President, Chairman of Executive Committee, Member of Risk Management Committee, Chairman of U.S. Bank, CEO of U.S. Bank and President of U.S. Bank

Andy Cecere - Vice Chairman and CFO

Bill Parker - CCO

Analysts

Erika Najarian - Bank of America

Betsy Graseck - Morgan Stanley

Moshe Orenbach - Credit Suisse

Matt O’Conner - Georgia Bank

Paul Miller - FBR

Ken Usdin - Jefferies

Eric Wasserstrom - SunTrust Robinson Humphrey

Keith Murray - ISI

Chris Mutascio - KBW

Steve Scinicariello - UBS

Mike Mayo - CLSA

Matt Burnell - Wells Fargo Securities

Marty Mosby - Guggenheim Partners

Nancy Bush - NAB Research, LLC

Brian Foran - Autonomous Research USA

John McDonald - Sanford Bernstein

Kevin Barker - Compass Point

U.S. Bancorp (USB) Q4 2013 Earnings Call January 22, 2014 9:00 AM ET

Operator

Welcome to U.S. Bancorp's Fourth Quarter 2013 Earnings Conference Call. Following a review of the results by Richard Davis, Chairman, President and Chief Executive Officer; and Andy Cecere, U.S. Bancorp's Vice Chairman and Chief Financial Officer, there will be a formal question-and-answer session. [Operator Instructions] This call will be recorded and available for replay beginning today at approximately noon EST through Wednesday, January 29, at 12:00 o’clock midnight EST. I will now turn the conference call over to Judy Murphy, Director of Investor Relations for U.S. Bancorp.

Judy Murphy

Thank you, Tiffany, and good morning to everyone who has joined our call. Richard Davis, Andy Cecere and Bill Parker are here with me today to review US Bancorp's fourth quarter and full year 2013 results and to answer your questions. Richard and Andy will be referencing a slide presentation during our prepared remarks. A copy of this slide presentation as well as our earnings release and supplemental analyst schedules are available on our website at usbank.com. I would like to remind you that any forward-looking statements made during today's call are subject to risk and uncertainty. Factors that could materially change our current forward-looking assumptions are described on Page 2 of today's presentation, in our press release and in our Form 10-K and subsequent reports on file with the SEC.

I will now turn the call over to Richard.

Richard Davis

Thank you, Judy, and good morning, everyone. Thanks for joining our call. I'll begin with a few highlights from U.S. Bank's 2013 full year results on Page 3 of the presentation. U.S. Bancorp [reported] recorded net income of $5.8 billion for the full year of 2013 or $3 per diluted common share. We achieved industry leading profitability with a return on average asset of 1.65% and return on average common equity of 15.8% and efficiency ratio of 52.4%.

Total average loans grew by 5.6% and average deposits grew a strong 6.3% year-over-year. Credit quality continued to improve at a 30.1% decline in net charge-offs and a 13.2% decrease in nonperforming assets excluding covered assets. Our capital position end of the year stronger with a Tier 1 common equity ratio of 9.4%, in total, we returned $4 billion or 71% of our 2013 earnings to our shareholders in the form of dividends and buybacks.

Turning to Slide 4 and our quarterly highlights, U.S. Bancorp reported net income of $1.5 billion for the fourth quarter of 2013 or $0.76% per diluted common share. Total average loans grew by year-over-year by 5.7% and as expected 1.5% or 6% annualized, on a linked-quarter basis. We experienced strong loan growth in total average -- strong growth in total average deposits of 5.4% over the prior year and 1.8%, or 7.2% annualized on a linked-quarter basis.

Credit quality remained strong. Total net charge-offs decreased by 4.9% from the prior quarter, while total nonperforming assets declined, linked quarter by 7.9%. We continued to generate significant capital this quarter. Our common equity Tier 1 ratio estimated using the final Basel III capital regulations was 8.8% at December 31 and we returned 65% of our earnings to shareholders during the fourth quarter through dividends and the repurchase of 13 million shares of common stock.

Slide 5 provides you with a 5-quarter history of our performance metrics, and they continue to be ranked among the best in the industry. Return on average assets in the fourth quarter was 1.62%, and return on average common equity was 15.4%.

Moving over to the graph on the right, you can see that this quarter's net interest margin was 3.40% as anticipated a few basis points lower than the third quarter. Our efficiency ratio for the fourth quarter was 54.9%, higher than previous quarter due to the seasonally higher expenses and the impact of accounting presentation changes related to investments and tax advantage projects. These changes did not impact net income attributable to U.S. Bank and Andy will discuss them in more detail in a few minutes.

As we have stated in the past, our goal is to maintain an efficiency ratio in the low 50s by continuing to manage expenses in relation to revenue trends, while continue to invest in and grow our businesses. And we do expect the efficiency ratio to return to the low 50s in 2014.

Turning to Slide 6. The company reported total net revenue in the fourth quarter of $4.9 billion, a 4.4% decrease from the prior year and essentially equal to the third quarter. The decline in revenue year-over-year was largely driven by lower mortgage banking revenue as well as a decrease in net interest income. Linked quarter, a decrease in noninterest income driven again by lower mortgage banking revenue was offset by seasonally higher revenues in other business lines and an increase in net interest income.

Average loan and deposit growth is summarized on Slide 7. Average total loans outstanding increased by over $12 billion or 5.7% year-over-year and 1.5% on a linked quarter basis. Overall, excluding covered loans, a run-off portfolio, average total loans grew by 7.3% year-over-year and 1.9% linked quarter.

Once again, the increase in average loans outstanding was supported by strong growth in average total commercial loans, which grew by 7.8% year-over-year and 1.3% over the prior quarter. Total average commercial real estate also increased over the prior quarters, with an average loans growing by 6.7% year-over-year and 2.1% linked quarter.

Residential real estate loans continue to show strong growth, 17.6% year-over-year and 3.2% over the prior quarter. Within the retail loan category average credit card loans and auto loans and leases were both high year-over-year and linked quarter while average home equity lines and loans continue to decline. The rate of decline in this category however has slowed considerably over the past few quarters.

We continue to originate and renew new loans and lines for our customers, new originations excluding mortgage production plus new and renewed commitments totaled approximately $50 billion in the fourth quarter up 4% linked quarter. Total average revolving commercial and commercial real-estate commitments continue to grow at a faster rate than loans increasing year-over-year by 10.1% and 2.7% on a linked quarter basis. Line utilization edged down slightly again this quarter to approximately 23%.

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

Turning to slide eight, in credit quality. Total net charge-offs in the fourth quarter decreased by $16 million or 4.9% from the third quarter of 2013 while non-performing assets excluding covered assets decreased by $67 million or 3.6%. The ratio of net charge-offs to average loans outstanding in the fourth quarter declined to 0.53% from 0.57% in the third quarter. During the fourth quarter we released $35 million of reserves, $5 million more than in the previous quarter and $10 million more in the fourth quarter of 2012.

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

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

Andy Cecere

Thanks Richard. Slide 9 gives you a view of our fourth quarter 2013 results versus comparable time periods. Our diluted EPS was $0.76, was 5.6% higher than the fourth quarter of 2012 and equal to the prior quarter.

The key drivers of the Company’s fourth quarter earnings are summarized on slide 10. $36 million or 2.5% increase in net income year-over-year was primarily the result of lower producing for credit losses and well managed expense partially offset by lower net revenue.

Non-interest income declined year-over-year by $50 million or 1.8%, the result of 2.3% increase in average earning assets which was more than offset by 15 basis point decrease in net interest margin. The $7.3 billion growth in average earning assets year-over-year included increases in average total loans and investment securities. Offsetting the portion of the growth in these categories was a $5.8 billion reduction in average loans held for sale reflecting lower mortgage origination activity versus the same quarter of last year and a $3.8 billion reduction in average other earning assets, primarily due to the reconsolidation of a number of community development entities in the third quarter of 2013.

The net interest margin of 3.40% was 15 basis points slower than the fourth quarter of 2012, primarily due to lower rates on investment securities as well as growth in the portfolio and lower rates on loans partially offset by lower rates on deposits and a reduction in higher cost long-term debt. Non-interest income declined by $173 million or 7.4% year-over-year, primarily due to mortgage banking revenue, which reflected lower origination and sales revenue.

Lower corporate payments revenue, products revenue the result of lower government related transactions also contributed to the decline. Government spending was down about 18% year-over-year. Growth in several free categories help to offset these unfavorable variances, including growth in retail payments, merchant processing, trust and investment management fees, deposit service charges, commercial products revenue and investment product fees.

Non-interest expense declined modestly year-over-year by $4 million or 0.1%, the modest decrease was primarily the result of lower professional services expenses due to a reduction in mortgage servicing review related cost and the positive impact from an $80 million mortgage foreclosure related regulatory settlement accrual in the fourth quarter of 2012.

These favorable variances were offset by higher benefits expense primarily pension related and higher tax advantage project cost, including the accounting presentation changes in the current quarter. In the fourth quarter we changed the presentation of some tax credit related items in our income statement. These changes were not significant and had no impact on EPS. The impact of the changes is shown on the chart on this slide.

These changes in addition to our favorable conclusion on some state tax matters reduced the effective tax rate to 23.8% on a tax equivalent basis in the fourth quarter. This new presentation will continue in future periods. However in the first quarter of 2014 we also expect to adopt new accounting guidance recently issued by FASB, which will move non-interest expense on certain tax credit investments to tax expense. Including all of these changes, we expect our tax rate in 2014 to be about 29% on a tax equivalent basis.

Net income was lower on a linked quarter basis by $12 million or 0.8% primarily as a result of seasonally higher expense partially offset by lower provision for credit losses. On a linked quarter basis, net interest income was higher as the $4.5 billion increase in average earning assets was only partially offset by a modest decline in the net interest margin. The increase in average earning assets was the result of growth in loans and securities partially offset by a reduction in average loans held for sale. The net interest margin of 3.40% was 3 basis points lower than the third quarter, primarily due to the growth in lower tax investments, lower rate investment securities as well as strong deposit growth, which resulted in higher cash balances at the [bank].

On a linked quarter basis, non-interest income was lower by $21 million or 1%. Again, this unfavorable variance primarily reflected the decline in mortgage banking revenue as well as seasonally lower corporate [payments] revenue. Partially offsetting the decline in these revenue categories was an increase in retail payments, trust and investment management fees, commercial product revenue and other income.

On a linked quarter basis, noninterest expense was up $117 million or 4.6%, driven by higher costs related to tax-advantaged projects including the accounting presentation changes, seasonally higher professional services expense and the timing of marketing and business development projects. Given normal first quarter seasonality and FASB's new accounting guidance related to tax credit investments, we expect first quarter 2014 expense to be similar to the third quarter of 2013.

Turning to slide 11. Our capital position is strong and continues to grow. Based on our assessment of the final rules for the Basel III standardized approach, we estimate that our common equity tier 1 ratio at December 31st was 8.8%, up from 8.6% at September 30th. At 8.8%, we are well above the 7% Basel III minimum requirement and above our targeted ratio of 8%.

In the fourth quarter, we returned 30% of our earnings to shareholders in the form of dividends and 35% through the repurchase of 30 million shares of stock for a total return of 65%. Our tangible book value per share rose to $14.41 at December 31st, representing an 11.9% increase over the same quarter of last year and a 4.3% increase over the prior quarter. In early January, we completed and submitted our 2014 capital plan to the Federal Reserve. We are now waiting for regulatory approval to raise our dividend and continue our stock buyback program in 2014.

Finally, slide 12, provides updated detail on the company’s mortgage repurchase related expense and reserve for expected losses on the repurchases and make whole payments. The record warranties repurchase reserve was $83 million at December 31st compared with a $176 million at September 30th. The decline in the reserve reflected the December agreement with Freddie Mac that resolved substantially all repurchase obligations related to reps and warranties made on loans sold to Freddie Mac between 2000 and 2008. The $53 million settlement was reflected in net realized losses for the quarter.

Now I’ll turn the call back to Richard.

Richard Davis

Thanks Andy. I’m very proud of our 2013 results. We achieved record earnings while we manage through a challenging economic environment and a significant pullback in mortgage banking activities as well as in an environment of regulatory and legislative change and uncertainty.

We continue to invest in our businesses throughout 2013, both organically and through acquisitions. For example, we added a small Municipal Bond Trustee business in March, strengthening our position as the number one provider to municipal trustee and agency services in United States. And in November, we announced the acquisition of Quintillion Limited an Ireland-based full service hedge-fund administrator, further expanding our alternative investment servicing network in Europe.

And we began the New Year with an announcement of the purchase of the Chicago branch franchise owned by RBS Citizens Financial Group. This investment while nearly double our market share in this great market within our footprint strengthening our position and adding product, services and convenience for new and existing customers as well as value for our shareholders. These acquisitions, combined with our ongoing investments in innovative product enhancements, services and people has enabled us to continue to grow our balance sheet and our fee-based businesses and gain market share.

U.S. Bank’s performance metrics continue to be best in class. We are focused on the future, building our company to perform as we have in the past, producing consistent, predictable, repeatable results for the benefit of our customers, our employees, our communities and our shareholders.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Erika Najarian of Bank of America.

Erika Najarian - Bank of America

Yes, good morning.

Richard Davis

Hi, Erika.

Erika Najarian - Bank of America

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

Richard Davis

Erika, I believe that’s true, and I’ll tell you what. I think it maybe a tale of two halfs of the year. I think 2014 starts well looking a lot like 2013 where people continue to husband cash and kind of a hold-off until they see some of the earlier spring sentiment that comes about and whether or not consumers are going to spend and therefore corporations are going to invest. I will tell you as you know the first trigger in that transaction of people spending is the deposit actually going down and our deposits grow and I’m glad they are for the extent that we’re getting more customers. But to the extent that they use their deposits first, they’ll then use our line of credit second and they will extend more credits later in that cycle. And we’re not seeing as much of that yet as we like to at the early stages. The sentiment however is completely different. The sentiment is stronger than it’s been in all these last January’s people are much more willing to talk about future investments. I think consumers are starting to think about doing things to add to their house or spend more money for improvements and may be some discretionary items they hadn’t before. And so my intuition tells me we're on the verge and advent of an increasing sentiment for consumer spending, but I think we'll see it second half of the year and I think this spring will really tell the tale.

In our companies, in order to offset the expected and predicted reduction in mortgage refinances, we're continuing to spend energy on becoming a market share leader on purchases. And we've also as you know introduced that we're doubling our indirect lending and leasing program over the next few years and even already we're seeing a significant increase in the auto loan volume that we would have otherwise at even over a year ago, up over 30% from fourth quarter of ’12. So, I believe that our ability to offset the mortgage and predicted mortgage change, keep market share positions there and add other consumer products like small business, credit card and indirect.

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

Erika Najarian - Bank of America

Got it. And as a follow-up question for Andy, could you give us a sense of where you stand in terms of complying with the LCR proposals as they are currently written and how we should think about potential balance and margin impacts further balance of the year?

Andy Cecere

Yes, thanks, Erika. There are still some questions with regard to the final roles and the interpretation but I'll tell you that we increased the securities portfolio to 80 billion in the fourth quarter and we are expecting to increase it to 85 billion by the end of the first quarter. That will impact margin a few basis points similar what you saw this quarter and that again is our current expectation. We're still working both sides of the balance sheet; the right and left hand side and working through the questions, but right now 85 billion under quarter one.

Operator

Your next question comes from the line of Betsy Graseck of Morgan Stanley.

Betsy Graseck - Morgan Stanley

Okay, great. So, I just wanted to run through the discussion that you had, it was pretty quick on the accounting changes, may be you could help us understand why you chose to take the accounting changes at this quarter and then you have a follow up in first quarter.

Andy Cecere

So, Betsy this is Andy. So starting in the fourth quarter we moved the amortization of some guaranteed tax credits, from tax expense to non-interest expense. And then we also moved some third party share of losses, we moved the entire third party share of losses on syndicated cash credits to non-interest expense where the related losses are reported. And then finally in the first quarter of 2014 we're going to move some low income housing cost from expense to tax. So the net of all that is what we talked about on page 10, the impacts you see there which lower our tax rate and increase our expense but you'll see a little bit of a reversal in the first quarter. So, when all said and done, our TEB rate for next year will be about 29% and our expense in the first quarter we expect to be closer to what it was in the third quarter of this year.

Betsy Graseck - Morgan Stanley

Okay, all right. So, this is really [fortune], is really a transitory towards a new normal which is similar to your old normal.

Andy Cecere

Correct, that’s correct Betsy.

Betsy Graseck - Morgan Stanley

Okay. And then secondly I had a question on the [Amex] partnership that you announced recently. I did want to just understand how you are planning on leveraging that and can you list the [Amex] partnership, get to that closed loop for the carts that you would be working with them on to a greater degree than you even have?

Richard Davis

Yes, this is Richard. It’s a marketing and sponsorship partnership for our customers on the high wealth category who have many times said that they have both cards in their wallet. They've got the U.S. Bank Flex card but they also have the [Amex] card. We also wanted to recognized this, I am not trying to get into their close loop, so it's not a transaction activity, it’s not a system activity for U.S. Bank, it’s more of a brand. So, you will still have the U.S. Bank branded [Amex] card for our top customers. It will have the ability to have the very high end treatment that an [Amex] customer receives but also be able to do brand U.S. Bank and receive some of the products and services they receive now as our top customers. So, it’s a little bit more than branding but it’s a lot less than anything more sophisticated than you might think as it relates to trying to work with close loop or trying to change tracks if you will.

We'll still a VISA MasterCard originating company but for this very small core customers. We actually think sometimes if you can’t beat them, join them and Amex has a particularly exceptional product, it’s the very highest end for services even in and above the credit card needs of customer. So, I think it was the right thing to do. It’s not going to move the needle a lot but we're satisfied with the early stage announcement and I think our customers are happy with this as well.

Betsy Graseck - Morgan Stanley

Okay. And then just while we are on card I know that on your website, you are very vocal about the fact that you're tracking fraud and everything else but you’ve also been very vocal as a firm with regard to your taking fraud prevention forward, so I don’t know if you could comment at all on what you're thinking, in a post target world around moving towards tokenization or EMV.

Richard Davis

Yes, I am a big supporter of progress in all those protective areas, also as being mature to the clearing house we're working on tokenization and cloud use for some of those protections and encryption. I guess what I would say to you is it’s disappointing that with the retailer fraud that's occurred, it certainly is a burden on the banks because we have most of our customers as well that are affected if they use, in this case, some of those merchants that were affected.

And so we are moving to reproduce all new cards for those customers. We are doing it through methodical process were those who had fraud or we know they had fraud, or where they had fraud, they’re getting card reissues immediately, both credit and debit to the extent that we eventually track every customer who we think could have been affected by that time in period. We are reissuing all of those cards. We are not announcing it as a broad event, we’re just indicating to our customers that as it goes we want to make sure they are protected and that their information is not in the open, say a year from now, when people aren't paying attention.

More germane to the issue Betsy, is one of my concerns is chip at EMV is not necessarily the end point, it's just another step in the journey. And as you get to mobile banking, and you look at cloud, and the other encryptions, it will be interesting to see whether or not we have to stop now and go back to chip EMV or if we really want to leap frog that and get to the more, I think provocative outcome which is going to be the necessary standard, not many years from now. And whether the marketplace reacts and how they react to the breaches that have occurred at some of the more recent merchants is going to be yet to be seen.

So banks will be at the ready, you know as the bank merchant partnership; merchants would have to change their terminals and their willingness to spend the money to have chip receiving cards. We have to reissue cards on chip. Every one of our customers who travels overseas has been getting a chip card for years, because it's necessary over in Europe and some places in Canada. But I think that story we told in the next couple of months. Ask me again in April and we'll just see how it's settled but I think there is one [small dot] that says let's spend all of our energy on the more sophisticated endpoint of mobile banking and cloud encryption.

Others might say we haven’t got the time to waste, let's jump to the chip step and we will end up getting to the other point a later. We'll be open to either one, because we're acquirer or an issuer or deep in the conversation. There is other alternative even that I haven’t mentioned. But we'll do this right, whatever the marketplace wants and as banks have proven with merchants together we'll get the right answer because we all want customers supposedly.

Betsy Graseck - Morgan Stanley

Okay. In terms of timeframe and spend from your perspective, is it something that is obviously ongoing. People had said that maybe the chip tokenization would be a three to five year timeframe. Do you feel like that might be a little bit sooner and would we see any of this in the expense line or is it too small?

Richard Davis

Yes chip has a deadline of 2015, so it would be in the next couple of years. It's more expensive to issue a chip card for sure than a magnetic stripe, but it's not going to break anybody's back. And the receipt is probably more of an issue on the merchant side where it will have to reprogram all of their terminals, now I'm talking small businesses as well as the large merchants, where they would have to change our terminals. And some merchants buy those terminals, so that's a fixed cost you have to change. Many others would lease those terminals which might be a bit easier for that transition. Those are the kind of fundamentals that will come through the economic review of this. But you and I both know there will be a political and maybe a regulatory view of this that might change those outcomes and either force one solution or another based on the concerns from politicians and the protection of citizens or regulators' concerns for our consumer protection.

I think there is a lot of studying to be done because of the simple answer doesn’t just go from one to the other because that’s only one step in a longer journey. But I do think in the next 90 days we'll have a better sense as it's settled and people decide where the risk is.

I'll close with this though, to the extent that other information is not card related, gets taken or the fraudulent operator have new information access to things that are more than card related, we should all be quite concerned, because at the end of the day the banks will bear the burden in most cases. 14 months from now, one of my customers has been a victim of some fraud that's [going to involve] data that was taken from a card situation. And all of a sudden my fraud levels are higher in the second quarter 2015.

I probably will never be able to trace it to any one circumstance that will just be a higher environmental risk, if you like having more breakage off the shelves. So we all have to be much smarter and we are spending a lot of time outside of the card area, watching for fraud behaviors and watching and monitoring activities to protect customers.

What that means that is more customers are going to be have to be tolerant when a really good bank has the protection and first and foremost that says I just discovered fraud or potential fraud. I disrupted your environment for a minute because I want to either change your account number or stop the transaction because I feel like you’re going to be a victim if we don’t stop it now. I think the recent episode over the last couple of months might help consumers realize that their precaution really is worth a bit of disruption if it protects them in the long term. So there is some good learning that will come out of this and I think banks and merchants should work together. And you have in the past probably more in the future to protect customers and they can feel we all have their best interest. It could be a while.

Operator

Your next question comes from the line of Moshe Orenbach of Credit Suisse.

Moshe Orenbach - Credit Suisse

Thanks. The question that I had is, you talked about -- you’ve been able to improve the capital position of the company based upon the earnings, even though you returned 65% of capital during the full year 2013. How should we think about that, I meant is that -- should that number be higher as we go forward, I mean given that you’ve been able to actually do both?

Richard Davis

We've said for as long as I actually can remember that we would return 30% to 40% of our earnings in the form of dividends and 30% to 40% in the form of buybacks. 2013, the full year was 71% the quarter was 65%, and so we’re in that low level range. I will also say to you as a leading follow up question is, as it relates to one of those two measures is currently limited by the federal reserve CCAR process at 30% and at this point we’re going to continue to abide by those general rules and follow the guidance that we’ve been given to stay at that perimeter, it’ll be a time I hope that the fed will say certain banks have earned their permission to go back to along the dividends to be what they think is reasonable and supportable. In that case we probably would float above that 30% level but we’re not eager to do it at this stage and we have plenty of room and opportunity on the buyback side and still stay within that range at 60-80%.

We like the 20% left for ourselves because we do be expect to be an acquirer, we expect to take opportunities when something comes along, particularly in trust or payment and I’ll say there’s a great deal of innovation and R&D that we’re spending money on that, much of which will eventually come to bear fruit, some of it will prove that we’ll learn what doesn’t work, but you actually in this environment now, banks that used to be innovators and in this environment you want us to be, you want us to be the leaders of fast followers and work with a lot of other companies and expertise that we might not necessarily have ever had in our legacy. So 60 to 80 is right in the sweet spot, where its 71, and I think right now where we are is a good indicator of where we'll be for 2014.

Andy Cecere

And Moshe, I would add as we were at 86 in the third quarter, dropping at 88, a good part of that increase was a reduction in the pension debit which as a reduction to capital, the pension debit went down because rates went up. So that's a onetime phenomenon and I would expect this in 2014 sort to be in that 8.5 range for most of the year.

Moshe Orenbach - Credit Suisse

Got you, just kind of as a follow up on the idea, Richard, you touched on the idea of acquisitions and you’ve actually announced a branch acquisition recently, what’s the environment like for those types of acquisitions?

Andy Cecere

You know they’re still one up, one up mostly I mean, we are always interested in deepening our debt where we have a branch network, so we like branches as you know and we are going to be probably a net grower, small but net grower in the next year. It might not be in exactly the same place, we might be in partnerships with universities or grocery stores or things, but we like adding branches and the opportunity to double down like in Chicago is worthwhile. If any of our 25 states currently had an opportunity like that we would be interested. I want you to know, I’m not interested in jumping states or getting a handful of branches in a state where you really have not critical mass or even in an NSA where you can’t build enough distinctions to call out market leadership.

I also don’t see us doing a full bank transaction unless the transaction is still attractive because of the risks I’ve talked about before that align with picking up the problems and the legacy issues that you may not ever be able to know at due diligence and you simply can’t price for. So I think deals like branch related end market transactions and the two deals we highlighted in our earnings call here today, fund services or even European businesses for payments or trust are things you can expect to see more of and we do have a number of toes in the water in those opportunities that none will move the needle but over time, they add up.

Operator

Your next question comes from the line of Matt O’Conner at the Georgia Bank.

Matt O’Conner - Georgia Bank

As you look at the payments business and the fee is worth about 3% year over year, obviously the government fees was a drag, but looking towards 2014 it should be much less of a drag from here. How should we think about the revenue growth in that combined segment, and I am thinking just the payment fees overall much as the government fees.

Andy Cecere

Right, good question, now so first this quarter you know we -- a lot of the merchant activities were in the same store sales and same store sales were up about 3% domestically and about 4% globally. So Europe actually outdid the US in that regard. We were way down this year by the government side of the equation as we said in the CARR, government spend was down about 17%, 18% year over year. I think that will begin to stabilize next year and I think you should expect the total payments category to get closer to what is our normal long term growth there but not quite to that level till same store sales has to increase a point or two. So the anchor that we saw this year on a corporate payment I think will begin to diminish as we get into ’14.

Richard Davis

Matt it's Richard, just as a reminder you know, the total payment space for us is about a quarter of our revenue, corporate payments is about 20% of that quarter and government is about 20% of that space. So it’s not a big driver but we like it, we’re going to stay with it. I don’t believe that we have the same kind of future trajectory, a negative trajectory that we’ve seen in the last two years of both the sequester and the ending of the work, so for us, we'll be glad we stayed with it, we had it carried across the trends and at the same time mortgages, fees were falling but I think that they both have some stability going into 2014 and I think we’ll be glad we stuck with it, but it’s not as big as it looks, it's more of a headline but if we’re staying with it, because I think it starts to turn the corner in ’14.

Matt O’Conner - Georgia Bank

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

Andy Cecere

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

Matt O’Conner - Georgia Bank

Okay.

Richard Davis

But there’ll be a little branch consolidation, but for that it’s really an opportunity to be more present in a really big city and what I’m hoping for is that the synergies to the 100 branches we have will be as powerful as the ability to insight kind of new growth of the 100 that we're picking up and it will be just be a little more pervasive across Chicago and it’s a great market for us, we've got great leadership there and we've actually kind of been managing over our sleeves a little bit in terms of our exposure, our marketing and our visibility. And I think we now have a chance to catch up to it and if I can grow more there I’ll continue to do so.

Matt O’Conner - Georgia Bank

I guess the infrastructure that you have now in the market and you’ve been doing that it’s all scalable, there is not going to be an expense kind of ramp up as you, okay.

Andy Cecere

No, there will not be.

Richard Davis

Yes, so, I was trying to say we’ve pretty much all the fixed costs were already there, we are just going to add something nice to make it more visible.

Operator

Your next question comes from the line of Paul Miller of FBR.

Paul Miller - FBR

Thank you very much. Going back to your loan portfolio, one of the areas that you’ve really done a great job as your residential mortgages and I believe most of them are jumbos, can you talk a little bit about and I think they are arms, am I correct? How is the jumbo markets because we’re hearing that it’s very overheated definitely coming out of the west coast where a large banks out there competing very aggressively in that market?

Andy Cecere

So, Paul, actually most of our growth is in a product called smart refinance in the high quality branch originated refinance product for our core customers and that is what’s driving and a lot of that is a short, it's not a 30-year product, it’s a shorter product. We are seeing a phenomenon occur just like you’re seeing in the total mortgage business refinancing activity is starting to go down. So that volume will start go down but on the flipside home equity line of credit activity is increasing. So those are the trends I think you’ll start to see into the next few quarters.

Bill Parker

Yes and we are active in the jumbo space, we have done all long and it’s pretty much started it towards our private client type customer and many of those are arms.

Paul Miller - FBR

So is that mainly coming out of your private client product mix what I guess.

Bill Parker

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

Paul Miller - FBR

And then on your securities portfolio, you talk about that you want to grow that to about $85 billion, what type duration with a new product, with the new stuff coming on are you shooting for?

Andy Cecere

While we’re keeping at pretty short about half floaters half fixed and you can think in the term of three and three half years.

Operator

Your next question comes from the line of Ken Usdin of Jefferies.

Ken Usdin - Jefferies

The question just big picture as far as revenue growth and operating leverage, slide 6 of the deck shows that the year-over-year revenue growth has still been easily negative largely because the mortgage comps and the payments, but as we look ahead and Richard to your point about getting the efficiency ratio back down towards the low 50s, can you help us understand the dynamic? Do you think, how close are we to the point of getting that year-over-year comp and revenues back deposit and then how also do you think expenses can kind of trend along with that?

Richard Davis

So you know we do kind of manage the company, the governor is revenue, and when we put our profit plan together late last year, we worked from the bottoms up and we figured out what the revenue growth would be and as I’ve told you before, the plan would be the expenses will be less than that. So I can tell you that our intent is to have positive operating leverage, I won’t take one quarter time because we’re fairly heavy second and third quarter positive and then without government in the fourth quarter we have that's fall off in quarter one and tougher quarter just because of New Year expenses. But we are looking for positive operating leverage first and foremost Ken, in 2014.

Now, the other thing I said the quote for that though is since we’re not expecting revenue growth to be overlay robust, we expect to be at least as good if not more what you’ve seen in the last year or two. We’re going to watch our expenses and we have a good run rate of expenses to start with. We've been part of some regulatory consent order to mortgage which was a fairly expensive task that we’ve now used some of those monies and reallocated to other compliance activities.

We are not seeing an undue increase in expenses in order to run the company run safely, but at the same token, but for merit increases and necessary capital expenditures finishing what we’ve started. This will be a year that we've left some of our investments follow through just on fruition and we won’t start a lot of new things, that’s U.S. Bank's way of logging expenses. They don’t cut expenses because we'd never get over our sleeves. We don’t go out and create an environment where we have consultants come in and give us a program and start reducing people, our working force.

We typically just watch every single 30-day and make sure we don’t do something that the revenue won’t allow us to. So you have to trust us. We’re going to continue to deliver positive operating leverage because it's how we grow the company, it's how you end up making the success that you can count on predictable. But as each month goes, we’ll adjust as we always do but I think we’re expecting revenue to be strong enough to allow for some expense growth. So we’re going to watch our nickels and dimes until this environment is surely on its feet and there is a recovery well. And we don’t see that quite yet so we’re just going to watch everything we do.

I really appreciated the questions early on regarding the non-bottom line impact of the accounting changes we talked about with our -- some of our tax credits because we want you all to know that’s not material, it’s not all impactful to bottom line and it’s more of a landscape they should record it for. We are committed to staying low in 50s and efficiency because we’re going to let revenue growth faster than expenses, so nothing has changed, I guess I am trying to say. But for this little bit of blip, we’re going to continue to deliver for you all but, I'll say as over a year probably not this one, when revenue is going to really take off, for a lot of reasons, and while the expenses were a little higher than they might this year but they are still well below that and the way to you all’s heart is to keep efficiency positive and make sure operating leverage is the way you drive the bottom line and I am feeling pretty good about it.

Ken Usdin - Jefferies

Okay, great. And just a question within the expenses, and one little one on the tax thing, you mentioned, Andy, the benefit in the pension side on the capital side. Are you going to see a pension benefit and is that built into your expectation for the first quarter expenses for this year?

Andy Cecere

Yes and yes.

Ken Usdin - Jefferies

All right, can you help us understand the magnitude of that?

Andy Cecere

So, the increase that we saw from ’12 to ’13 is going to almost go back to the level it was in ’12 in terms of the pension expense. It went up 140 million or so and it will go down about that same range.

Ken Usdin - Jefferies

Okay. And then just on the last thing on the taxing. So the minority interest piece, I don’t think you talked about that. That kind of had been running at a minus 40. So does that now also continue at the same plus 15 range given those changes?

Andy Cecere

Yes, there will be no further change in the minority interest piece.

Ken Usdin - Jefferies

So it is kind of safe from here. Okay, great. And credit -- your comment about first quarter charge-offs being up and reserve releases a little bigger this quarter. Can you just talk to us about how do you continue to expect any more reserve leads to go ahead?

Andy Cecere

Yes, we do -- we had strong improvement in credit in the fourth quarter, and anticipate we’ll have continued improvement in credit in the first quarter. Losses will be up a little bit really not because of the charge-off side but really because of the wholesale recovery side. We’ve had some significant wholesale recoveries in the last few quarters, and it’s unlikely that those will continue.

Operator

Your next question comes from the line of Eric Wasserstrom of SunTrust Robinson & Humphrey.

Eric Wasserstrom - SunTrust Robinson Humphrey

Just a couple of questions please. The first is your GAAP assets look like they went up a little less than 1% but your Basel III risk-weighted assets went up a little over 1.5. Can you just explain what accounted for the difference?

Andy Cecere

Commitments, off balance-sheet commitments.

Eric Wasserstrom - SunTrust Robinson Humphrey

Got it. Primarily lending commitments I assuming?

Andy Cecere

Correct. And as we talked about the fact that our commitment levels are growing more rapidly than our outstandings, which is a good thing in the long-term, and on a 10% annualized basis and that’s a principle driver.

Eric Wasserstrom - SunTrust Robinson Humphrey

Great, thank you. And then you and several other institutions have announced the discontinuation of deposit advanced products. What -- how should we think about the influence of that on either the fee or NII line items?

Richard Davis

This is Richard, I will go first. I will let Andy talk about the financial impact. It’s not significant, first of all, but I am disappointed that the product has gone because it was probably the most popular customer product I think I ever had as a banker. In that it was very transparent, was very clear but it simply just didn’t meet the [cadence] of the regulatory view of total API on a certain calculation and the general sense that people otherwise are being harmed. So of course we moved along and followed the guidance and we’re now ending the product even at this month and we’ll wind it down in the next couple.

What's I am more interested in is trying to find a replacement of such products so that we can find something for those consumers that will otherwise stay in the protected banking industry where there is over sight in protections which I support greatly. And we’re working now with the regulators primarily the OCC to see if we can develop some kind of a replacement product. It’s too new to have that so we haven’t got that built into our plan. So as we really expect there will be a second half loss and most of the impact falls to spread income, but I’ll leave Andy to give a little more dimension.

Andy Cecere

Right, so as Richard said, we would expect very little impact in the first half of the year given that our -- are going to continue with our current customers until mid-year. In the second half of the year the product earns approximately $50 million a quarter because through a lot of these are net interest income. And that would be the impact if the product in of itself on the way but as Richard mentioned we’re working on alternatives and we’ll keep you updated on the impacts as we work through those alternatives.

Eric Wasserstrom - SunTrust Robinson Humphrey

Thanks, and just following on, and this is my last question. Given the influence of this change, as well as the liquidity guidance that you provided earlier in the call, how should we now be thinking about the net interest margin over the next several quarters?

Andy Cecere

Yes, the net interest margin absent the CAA issue that we just talked about and the securities bill is relatively stable. So the principle change will be the securities bill. The securities bill impacts net interest margin the rate has no impact on net interest income at all. It comes down with fairly neutral spreads. So we’ll continue to update you on that. I would expect the build in the first quarter to impact just by about 3 basis points similar to what you saw in the fourth quarter.

Operator

Your next question comes from the line of Keith Murray of ISI.

Keith Murray - ISI

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

Andy Cecere

So it’s across many categories. We had a good quarter in high grade underwriting. We had a good quarter in order of credit activity, FX, just across many categories. I attribute this back to some of the investments we've made over the years in terms of building those capabilities both with people, products and services and technologies. So that is a real positive story for us and I would expect it to continue into 2014.

Richard Davis

Every once in a while you get that moment you can actually prove something and so here we were three or four years ago talking about taking our wholesale bank and moving it from regional to national, creating scale, hiring people in New York and Charlotte. And you'll say, well one year we see the benefits, this is a great example [indiscernible] of where that’s starting to show up and coming in more consistent basis. We’ve always been a bank to a large number of large customers, Fortune 100 customers but we always didn’t have all the products and services. The last few years we’ve got a chance to become more important in the syndicated line of credit, we moved up in their view of being a trusted partner and now we get the fee businesses as well more often than we used to and that’s exactly where this kind of benefit shows up years later.

Keith Murray - ISI

Okay, thanks. And then can you give us some color on the magnitude of any equity gains for this quarter?

Andy Cecere

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

Keith Murray - ISI

Okay, thanks. And then just lastly on the repurchase reserve and repurchase cost going forward. How should we think about this "more normal run rate" for that line item?

Andy Cecere

Yes. So we have the 753 million with Freddie here in the fourth quarter, and we’re down to a level that -- we're probably still a little bit higher than what we would be over the long term but we’re starting to get to a level that I think is more normal in terms of historic level. So we’re not quite there but it’s going to be a material change on a go forward basis.

Operator

Your next question comes from the line of Chris Mutascio of KBW.

Chris Mutascio - KBW

Andy, first I’ve got a quick question for you on expense given the guidance for a first quarter being closer in line with previous third quarter, does that imply that there was a good bit of pull forward of business development and marketing expenses that occur this quarter?

Andy Cecere

No, not necessarily a pull forward, it’s just a seasonal impact that we typically see. So if you look at the expense increase from third quarter to fourth quarter, about half of it was the tax related and then about half of it was things like legal and professional and marketing and expense. And if you look at our history Chris you’ll see that the fourth quarter is seasonally higher in those categories and then seasonally comes down in the first quarter.

Chris Mutascio - KBW

Okay, that’s fair. Bill, my question for you is, could we see, going back to the reserves for a little bit and I think I ask question almost every time I see you, can we see the pace of reserve releases actually pick up from here? It’s been pretty steady around $30 million to $35 million or so. I mean I had a bank yesterday that released more reserves in terms of taking the reserve ratio down in one quarter than you guys have done in four quarters. And BofA now has a lower reserve ratio than you do. So I was kind of wondering given the continuing improvement in credit quality, could the pace of the reserve releases pick up in ’14?

Bill Parker

Yes, I’ll speak for our bank, right. I don’t think so. What we’re down, what we’re left with is really improvement in residential mortgage and home equity. Those are really the only two portfolios where there is still work to be done in terms of the fallout from the recession. So absent that I would say we’re steady as you go for the moment but there is probably not loss of reserve release.

Richard Davis

This is Richard. One thing I hope you guys like about is we’re not that interesting and volatile and it's a great example. We didn’t have anywhere near the same credit issues in the first place. We didn’t have to build the reserves in the first place and we’ve been very steady and methodical and thoughtful all in line with regulator views and accounting views to make sure that we’re not living on and counting on these reserve releases and you shouldn’t either because it’s not sustainable. I think you’ll see a lot more of what we’ve done in the past it's how we get to a point of stability where all of a sudden and we’re all going to start having reserve releases. And in a forward view there should be a day when banks have growing loans, balance sheet is growing and we’re adding to our reserves at a level equal to and higher than the current day because those are for future loan charge-offs. So I think we’re probably closest to most of new basic inflection point but this year we'll have a little bit more but we haven’t relied on it because at this point we’re not counting on it to get through this year or the next one.

Chris Mutascio - KBW

Rich I kind of agree with you, but it just gets a little frustrating when I see bank stocks go up on reserve releases and you guys are more prudent going for the full cycle and you don’t get credit for the quality of earnings but in any event that’s a…

Richard Davis

I hadn’t noticed.

Chris Mutascio - KBW

If I can just follow up one with Bill, so from your comments it seems like the new belief that reserve for loan ratio for your individual bank will be higher than it was previous to the crisis whether it’s from the re-regulatory process or what have you, so whether it was one in a quarter to 150 previous to the cycle we’re going to be somewhat higher than that?

Bill Parker

Right, the first thing is you have to look at the difference and mix so and we do have a fairly large card portfolio relative to the size of our balance sheet relative to our peers. So that’s obviously going to keep parts a little higher. And then again as Richard said we just didn’t go up as much so we’re just not going to go down as much.

Richard Davis

With that Chris over the course of time 1.53 charge-off right, we think over the course of time the long time this bank is a 1% charge-off and with FAS 114 in other areas we want to make sure we stay aligned with that and for investors we think to the extent we can stay within the balance of all the rules and not create these volatilities that were occurred at giving away too much than build it back when we don’t need it. But again the line with rules and regulation, we would love to stay as steady as we can and have the appropriate level. It actually serves another form of capital if you have a good reserve portfolio for loans that could go bad but for reasons we all know, I don’t think any bank is under where there are long term run rate will beneath them we know in the last few years if we didn’t take risks as an industry on loans when we shouldn’t have, but we probably have record low position and we are going to start building that back. So don’t anyone be disappointed when charge-off rates start to move up, provision releases stop and provision build starts, that’s actually a pretty good sign that we're all getting back to doing what we’re supposed to do which is make loans to qualified people and every once in a while one doesn’t get paid back.

Operator

Your next question comes from the line of Steve Scinicariello of UBS.

Steve Scinicariello - UBS

I just want to circle back to the Chicago branch acquisition for a moment. I'm just curious as you kind of look at the long-term potential opportunity there, do you see the greatest potential benefit over the long-term from ramping up loan growth or cross-selling and further penetrating a customer base in that market? Just kind of curious how you look at that long-term potential benefit, where is the biggest source of opportunity for you?

Richard Davis

Steve, good question. If we had had our druthers we started from the bottom we would always be top one, two or three in every market in terms of consumer, small business and wealth management. First of all because you're pervasive enough to matter, you are in someone’s life, at where they are near their work, near their home, in between and now on mobile technology; you are pervasive to them, that’s our goal. I am not kind of get out of markets where I am sixth or seventh, that we are still good for the shareholders but I would love to move up in every market to top three.

Chicago is going to take a while, so we’re are going to move up now at seventh or eighth. In terms of branch distribution we might get in the top five and we can find other deals to couple together maybe more grocery partners and things we could get into the top three or four, that’s really what we are headed towards, then the scale matters. Right, so every time I run an ad in the Chicago Tribune and we do something on mobile technology or Chicago land we do a sponsorship of something and partner with the city or some of the suburbs, then all this go so much further and so much deeper and so much better. Employees are more enthused, we get more of a kind of a reputation build. And it’s one of the greatest cities in the country, so it’s also worth investing there for a long-term because it’s pretty loyal market.

So, for us it’s a step towards getting into top most pervasive companies and the two or three really, really big companies that are legacy and we are legacy in a couple of other big markets and legacy always has to worry that they are going to get old and become part of a kind of an old-fashioned paradigm and we are going to try to protect ourselves when we are really big, and when we are not big we are going to be that really vicious competitor that comes up and tries to reset the paradigm and get people to pay attention to our self. This deal was perfect on all accounts, financially it just accrues because its scale and because it allows us to extend in a market that’s going to grow because Chicago will grow.

Stephen Scinicariello - UBS

Well makes total sense but I know you said you are more than willing to look at more of these types of transactions in other markets. The question I have is do you think you might get the opportunity? Just curious what your thoughts might be on that.

Richard Davis

I know more -- I think we're considered a disciplined buyer and so the deals you will never know are the ones that came and went because we said there is no way we are going to pay that for that. But every once in a while one comes along where the motivations of the seller and our interest is high, the price is good for both parties including all the shareholders and this is one of those that came together. So, we if those circumstances align again, we'll do more of these deals because we think it’s the right way to take advantage, especially in an unfinished kind of unsettled market where until things are normal again, some people have the need to shed assets, others like us will be interested in acquiring assets where it make senses and kind of jumpstart the organic trip that otherwise happens in normal time. So, if we don’t do another deal, the branches will be fine, but if more come along on these terms we'll take them.

Operator

Your next question comes from the line of Mike Mayo of CLSA.

Mike Mayo - CLSA

I was trying to gauge your conviction level that loan growth is coming back. On the one hand, Richard, you're expressing optimism that we've heard from several other bank CEOs on the other hand what I think I heard you guys say is that loan utilization declined down to 23%, that your customers aren't drawing down their deposits, which is a leading indicator, that you don't expect a whole lot of loan growth the next quarter or two and that you yourselves are still watching your nickels and dimes a lot given some uncertainty. So I know you've been more conservative than most over the years and we're all trying to figure out the pace of loan growth. What sort of leading indicator is sentiment or is this just informal? Is this a gut feel? Just any other color on loan growth.

Richard Davis

Yes, so Mike, Erika’s question number one, I think I said it was a tale of two halves and I was confessing that it's solely sentiment from my customers and my bankers that tells me that things are better than they have been. It is not on the balance sheet, it is not evidential at all which is why we do not agree with you that first deposit get used, then lines that are already outstanding get used and then new lines get created and we haven’t seen any of that. So, it is purely sentiment and perhaps it’s a lot of just pent-up long overdue demand to get things move moving.

But sentiment is always the leading indicator, right and so I think as I said before, Spring will tell this story more than most springs and the second half will be what the sentiment yields as will results or it will be nothing more than sentiment and we'll be talking in April and again in July as seen -- well at least we see, at least consistent loan growth of the 6% plus annualized loan growth we've been doing it through the whole recession, the only reason we can’t keep doing it. But at the same time you’ve heard us before we are not going to compete on term, on structure we are going to compete on rate and we can continue to do that and the rates are seeing a little bit at compression. So, we'll be thoughtful about it but, you repeated what I said which is its simply sentiment, I don’t have evidence yet. And when the evidence starts, the best news I'll have for you is the deposits are drawing down, lines are getting used, and people are starting to show an interest and be involved.

I said before too that I do think that perhaps different than almost any other recovery coming from a recession that people will not be -- the consumer that blinks first, it will be the businesses, meaning that the consumer is not going to evidence like it always has a real strong sense that we are now ready, get ready we are going to buy. I think the businesses are going to have to find a way to incentivise that interest, they can incentivise the product at creations or innovation or pricing and start pulling consumers across to start investing. As long as they invest consumers are starting to feel better and the products are more interesting and the pricing is more attractive, I think that’s the magic that will pull this one out, that for the first time I think businesses will drive through this recovery, it really has a lot to do with their behaviours, in and above whatever spend and we are hearing from consumers.

Mike Mayo - CLSA

And one follow up, you talked about the trade-off between price and loan growth and as a low cost producer you can probably afford to charge lower rates on the loans, but you have seen compression across the board on your loans. Are you close to a tipping point where you say, hey, we shouldn’t charge a whole lot less or as long as you’re growing some NII, it’s okay?

Richard Davis

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

Operator

Your next question comes from the line of Matt Burnell of Wells Fargo Securities.

Matt Burnell - Wells Fargo Securities

Good morning, thanks for taking my question. Just, I guess to focus on one area of loan growth specifically it looked like commercial real estate outstandings were rising at a faster pace in the fourth quarter than they have on a year-over-year basis. We've heard from a number of competitors particularly in the southeast that that is a growing area of competition. What’s your sense in your markets as to the demand for commercial real estate opportunities and looking into 2014 and how competitive has the pricing gone?

Richard Davis

I will start with demand. I mean we have seen pretty good demand on the coast and in the southeast as you mentioned, that was our -- the southeast was our fastest growing market in the fourth quarter. And we have heard from our clients that they are seeing more demand for their product whether it’s storage or build to suite, more than just the multifamily that we’ve seen in the past several quarters. So, we are seeing a pickup in demand which is positive and then on the pricing, I think to the extent there has been pricing compression, I think that’s mostly behind us. I think the pricing is fairly stable right now. So, we saw good demand in the fourth quarter and expect to continue next year.

Matt Burnell - Wells Fargo Securities

Then if I can follow up with a question on the capital market side, Richard you’ve been obviously been quite correctly optimistic particularly for your own business over the last couple of years; as we head into a higher rate cycle, there is concerns I think across the broader market that demand for fixed income underwriting may come down a little bit, demand potentially conversely for equity underwriting may increase. How are you looking at that business heading into 2014 in terms of some of the bigger picture trends that are affecting interest rates?

Richard Davis

You know Matt, I think; I still see ’14 looking a lot like ’13. You’ve got leverage lending and middle market activity still pretty high. You’ve got syndicated issuance still getting better over time primarily refinancing and that refinancing as opposed to new transactions creates a bit of a downward pressure on yields. We've got loan growth looking seasonally best in the western markets and particularly seasonally high including some of the retail groups.

As it relates to more traditional lending, that’s where we would see and expect it by the way everything is performing as we thought it was just kind of slow annuity like, as it relates to the more sophisticated transactions what we are seeing in the capital markets are particularly a deal event, action oriented items where someone wants to buy another company or make a particular transaction in the market to create some additional financing and we are there now where we didn’t use to be. And we can handle those activities but kind of following the conversation with Mike, the sentiment isn’t necessarily any stronger than it was to generate a sense that that’s going to be different in ’14 but it's not worse than it was in ’13.

It just seems to be kind of a slow steady part of that recovery and I think the very high end of the market reflects exactly what the low end is which is careful, thoughtful, event driven by taking advantage when the chance comes along. And the whole economy is still uneven, so there are people who have something they want to get rid of and there are others who find value in it and that’s kind of where we are until we see something more predictable. Bill, you want to add to that?

Bill Parker

Well, I think, you know in terms of the capital markets activity, I think ’13 was obviously a very good year for refinancing and higher rates may moderate that a little bit, but there is still a lot of acquisition activity and that will clearly generate bond activity. So, we anticipate that we'll benefit from that.

Operator

Your next question comes from the line of Marty Mosby of Guggenheim.

Marty Mosby - Guggenheim Partners

Good morning, as you can imagine most of the questions have been asked, but I have two technical questions I wanted to follow up on. You had mentioned in the tax line that there was a state benefit I think. What was the magnitude of that this quarter?

Andy Cecere

It impacted the rate by about 1%, Marty.

Marty Mosby - Guggenheim Partners

Okay. And then lastly on the mortgage repurchase reserves, there was a change in reserve of about $30 million. Was that geography and that’s a benefit or a reduction of expenses that’s probably in other expenses, is that correct?

Richard Davis

It’s actually an increase in mortgage revenue and it’s a reassessment of reserve levels every quarter and it’s just that what we think is the appropriate level and that’s reflected in mortgage revenue.

Operator

Your next question comes from the line of Nancy Bush of NAB Research, LLC.

Nancy Bush - NAB Research, LLC

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

Richard Davis

Nancy, do you mean for the middle market or in corporate?

Nancy Bush - NAB Research, LLC

Yes.

Richard Davis

Okay. So we have, what we call an adjacent state program. So for instance we have our folks in one market managing Michigan and managing Pennsylvania, we have others managing Indiana and managing Georgia. And that’s worked quite well for us. So what we’ve done is we have a local in footprint management team that has people also in adjacent space where we have enough of a reputation, a halo, we have people know who we are. At the middle market level if you don’t have branches you have to be valuable to these folks in a different way because you have to get them up on more than cash management, treasury management, products and some of the servicing it would be more technical and more mobile.

That’s how we’re having success there. It’s probably 4% to 5% of our total. It’s not a very big number. It’s not intended to be because I do think it gives certain level as you get to the point where you have branches. On the larger end we can do business in all 50 states because the corporate customers, it’s not even in the first three questions of whether or not you have branches nearby, they’re not looking for that from a -- and so we’re a full on national provider in both corporate and commercial real estate.

But as it relates to middle market, it’s probably 4% to 5% impact on our total, and unless and until we were to find a very large branch acquisition in an adjacent space it’s going to stay that way because we are just going to really drill down where people knows us best and have the ability if they want us to use our services on the ground.

Operator

Your next question comes from the line of Brian Foran of Autonomous Research.

Brian Foran - Autonomous Research USA

Hi, good morning, just a couple of quick follow ups, on the commitment growth you saw I know every business is different, every line is different. But is there any kind of historical rule of thumb you would look to for the typical lag between commitments turning into funded balances?

Bill Parker

Yes, this is Bill. I would say we sort of exceeded the historical lag. So normally by this time in an expansionary period you will be seeing these lines being drawn more than they are today. I mean some of our categories are down 10% in terms of normal utilization levels. So I think we’re still all anticipating when this confidence turns into investment.

Richard Davis

Yes, I would agree with that. And I would say that -- surprisingly they’re all down a lot very much the same in terms of traditional history, commercial real estate which is the last in, last out in terms of problems and in terms of growth and that’s probably the same in this cycle. But if you get anything from small business to commercial real estate specialty products through community banking, they’re all down, in fact even more, I mean bill our collective utilization for the wholesale credits for this company was at 38% kind of level and we’re at 23% and that’s on well over $100 billion so that’s in its own right is just a huge place built at the right we’re in places we’ve never been, there’s nowhere to go but up but in the next month if we go down again we’ll say one more time.

But I like the fact that it’s pent up opportunity, it is even better, it’s one step better than in an unknown line or loan at this stage because these are people paying for it, they’re paying us to have first have a line, they want have the access to it, the fact they keep growing lines over 11% last year such that they are planning to do something and that kind of feeds my sentiment issue, my answer with Mike Mayo, which is actually that number get stronger, not weaker. So we’ve got a lot of canaries in the mine, they’re all chirping but nothing is happening yet.

Brian Foran - Autonomous Research USA

That’s very helpful. On the commercial products I guess as a follow up or clarification, when I think I heard you say '14 should look a lot like 13'. We should be working off the 13 full year base, not the run rate from the fourth quarter for that line item, right?

Richard Davis

Correct.

Brian Foran - Autonomous Research USA

And then lastly just as I think about capital and I guess it touches on the question I think Erika asked, RWA growth versus asset growth. I mean when I look at some of the other super-regionals who are in that advanced approach bucket, mega regionals, whatever you want to call them. RWAs have been falling even if assets have been growing for the past two to three quarters. And I wonder is that a pent up opportunity for U.S. Bank or because some of your peers have more punitive noninvestment grade securities and things like that, are they just reversing out of capital penalty you never had to begin with?

Andy Cecere

I can’t tell you what others are doing. I will tell you ours is pretty straight forward. First of all, while we’re in advanced approach purchase bank the ratio we’re giving you is a standardized approach because that is your binary constraint that is the lower ratio. So it’s a pretty simple equation, it’s basically commitments that are causing the off balance sheet growth.

Operator

And your next question comes from the line of John McDonald of Sanford Bernstein.

John McDonald - Sanford Bernstein

Morning guys, two quick follow-ups. Andy on net interest income -- you mentioned the net interest margin outlook for the first quarter. Do you hope to grow the net interest income dollars, just the balance sheet still growing, but you might have some seasonality in terms of the account pressure I guess. What would be outlook for the net interest income dollars?

Andy Cecere

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

John McDonald - Sanford Bernstein

Okay -- otherwise you expect it to be flattish?

Andy Cecere

Pretty close, yes.

John McDonald - Sanford Bernstein

Okay and then on the expenses you gave the outlook for the first quarter, would you expect the expenses to be declining from the first quarter. In other words are there seasonal items that fight the first quarter expenses as well?

Andy Cecere

No, I would say the first quarter is sort of a normal quarter in terms of activity. There are some things that are higher like FICO expense, some things that are lower like legal and professional. But overall it's relatively representative.

John McDonald - Sanford Bernstein

Okay. So to the extent the first quarter efficiency ratio it’s below the -- it’s really the seasonal pressure on some of the fee income lines?

Andy Cecere

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

Richard Davis

There is no holiday, we got the pay downs on the credit cards, so it's always our [weak company] quarter. But that’s when things pick up in quarters two and three.

John McDonald - Sanford Bernstein

Okay, thanks guys.

Operator

Your final question comes from the line of Kevin Barker of Compass Point.

Kevin Barker - Compass Point

Could you talk about the non-QM market? Do you expect to participate in it and if so do you expect it to have an incremental uptick in residential loan growth on your balance sheet?

Andy Cecere

We are going to participate in the non-QM market and much of it is very similar to what we do today. So again we do offer today interest only loans to private client type customers. We do offer lower loan to value loans that might not meet the 43% debt to income in the QM. So, on a go forward basis it doesn’t have a material impact on types of loans that we’re going to be putting on in balance sheet.

Richard Davis

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

Kevin Barker - Compass Point

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

Andy Cecere

No, I mean we recognize the risk and we've mitigated it with either higher down payments in general wealthier customers that type of thing. So we believe that we have the offset built into the underwriting.

Kevin Barker - Compass Point

Thank you.

Judy Murphy

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

Operator

Thank you for participating in today’s fourth quarter 2013 earnings conference call. This call will be available for replay beginning at 12 O'clock PM EST today through 11:59 PM EST on Wednesday, January 29, 2014. The conference ID number for the replay is 137-716-72. Again the conference ID number for the replay is 137-716-72. The number to dial for the replay is 1855-859-2056 or 404-537-3406. Thank you. This concludes today’s conference call. You may now disconnect.

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