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U.S. Bancorp (NYSE:USB)

Q2 2007 Earnings Call

Jul 17, 2007, 2:00 PM ET

Executives

Judith T. Murphy - Sr. VP and Director of IR

Richard K. Davis - President and CEO

Andrew Cecere - Vice Chairman and CFO

Analysts

Michael Mayo - Deutsche Bank Securities Inc.

Matthew O'Connor - UBS

Gary Townsend - Friedman, Billings, Ramsey & Co

John McDonald - Banc of America Securities

M. Ramirez - Keefe, Bruyette & Wood

Todd Hagerman - Credit Suisse

David Hilder - Bear Stearns

Betsy Graseck - Morgan Stanley

Vivek Juneja - J. P. Morgan

Presentation

Operator

Welcome to the U.S. Bancorp's Second Quarter 2007 Earnings Conference Call. Following the review of the results by Richard Davis, President and Chief Executive Officer, and Andy Cecere, U.S. Bancorp's Vice Chairman and Chief Finance 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 4:00 PM Eastern, through Tuesday July 24th, at 12 midnight Eastern Time.

I will now turn the conference call over to Judy Murphy, Senior Vice President. Go ahead please.

Judith T. Murphy - Senior Vice President and Director of Investor Relations

Thank you Andrea. Thank you for joining us today. This is Judy Murphy, Director of Investor Relations at U.S. Bancorp. Richard Davis and Andy Cecere are here with me today to review U.S. Bancorp's second quarter 2007 results. If you have not received a copy of our earnings release and supplemental analyst schedules, they are available on our website at www.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 report on file with the SEC.

I will now turn the call over to Richard.

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Richard K. Davis - President and Chief Executive Officer

Thank you Judy and thank you for joining us this afternoon. I'd like begin the call today by taking a few minutes to review the highlights of our second quarter results. I will then turn call over to Andy Cecere, who will provide you with additional detail about our earnings. After completing our formal remarks, we'll open the line to questions from the audience.

This morning, our company reported net income of $1.156 billion for the second quarter of 2007. Earnings per diluted common share for the second quarter of $0.65 or $0.01 or 1.5% lower than the earnings per share in the same period of 2006, and $0.02 or 3.2% higher than the first quarter of 2007.

As many of you know, growth in the second quarter for our company is seasonally higher. This year was no exception. Our strong loan growth and fee income led to a 2.3% increase in net income on a linked quarter basis. As Andy and I discuss the current quarter's results with you today, we would like you to keep in mind that consistent with last quarter, there were no unusual items, positive or negative, affecting our reported earnings. That being said, let me review some of the highlights for our second quarter.

First we achieved the return on average assets of 2.09% and a return on average common equity of 23% in the second quarter. These profitability measurements continue to be among the best in our industry. Our second quarter net interest margin of 3.44% was 24 basis points lower than the net interest margin we reported in the second quarter of last year, and 7 basis points lower than the previous quarter.

You may recall that we had assumed the net interest margin would continue to decline another 5 to 10 basis points from the first quarter margin of 3.51%. We continue to believe for a number of reasons that given the current rate environment, yield curve and our balance sheet mix, our real estimate of 5 to 10 basis points drop in the margin from the first quarter level, still holds. Andy will give you a little more insight into the reasons why we are comfortable with this position, in just a few moments.

On a year-over-year basis, the net interest margin declined by 24 basis points. I mentioned this variance as well, because tighter credits spreads still had an impact on our margins. During the past month, credit spreads once again appear to have stabilized for both commercial and retail loans, and as you know our company's strategy has been to focus on high quality credits, which by the very nature carries a lower margins and continue to be the most aggressive competition for these types of loans.

Once again our fee-based businesses exhibited excellent momentum. Payments and trust-related revenue were particularly strong this quarter. Year-over-year, our payments related fees grew by over 11%, while trust and investment management fees increased by 8.9% over the same period of last year. Our tangible efficiency ratio for the second quarter of 2007 was 44.1%, making us one of the most efficient financial institutions in the industry.

That being said, our non-interest expense in the current quarter was 7.2% higher than the second quarter of last year, and 6.1% higher than the previous quarter. A portion of these increases and expenses is related to planned investments in our fee-based businesses and banking franchise, such as personnel and marketing, business development and associated costs with our PowerBank initiative, the financial institution services initiative, and the expansion of our FAF Advisors' third party distribution, just to name a few of those initiatives.

In addition, the other portion of the increase in spending is related to the state business events, such as expense associated with signing of a new merchant contract, and accelerated OREO [Other Real Estate Owned] disposition activities. Andy will give you more detail on the expense variances in a moment. However, note that our disciplined approach to expense control has not changed, and will continue to be a focus and a hallmark for this company. It is, in fact our efficiency that allows us to invest, while still maintaining our industry-leading profitability metrics.

At this point, we are comfortable in saying that we expect positive operating leverage as we move forward to the remaining quarters of 2007. One of the balance sheet highlights for the quarter was solid year-over-year growth in average total retail loans at 7.8%, while growth in total commercial loans was 4.7%. Going forward we expect that our company's growth in commercial and commercial real estate loans will be slightly lower than the industry average, as we continue to concentrate on originating principally high quality credit. In fact, commercial real estate loans, which we haven't grown as fast as the industry, are down versus prior quarters, as refinancing have exceeded the growth in new business.

Further, the growth itself has been affected by the slowdown in residential home building and the company's decision to reduce condominium construction financing in selected markets. Going forward, we will, however, continue to selectively originate high quality commercial real estate credit with our long-term highly valued customers.

Moving on to credit, once again our credit quality metrics were strong. Net charge-offs were 53 basis points of average loans for second quarter 2007, slightly higher than the 50 basis points in the first quarter of this year, and higher than the 36 basis points in the second quarter of last year. These ratios equated to an increase of $66 million in net charge-offs year-over-year and $14 million on a linked quarter basis. The increase over the prior quarter and the second quarter of 2006, was expected and primarily the result of an increase in the retail net charge-offs. The most significant increase was in the credit card loans net charge-offs as growth in outstandings, which grew by almost 24% year-over-year and over 5% from the first and second quarter, and a return to more normalized credit card charge-offs both led to this increase.

Specifically, the credit card net charge-off ratio was 3.56% this quarter, double over the historical ratios for this loan category. Going forward, we would expect that both commercial and retail net charge-offs will increase modestly, as we move to this credit cycle. However, given our risk/reward profile, we expect our credit quality to remain favorable when compared to our peers.

Non-performing assets decreased to $565 million at June 30, from $582 million at March 31, 2007. And we are now just slightly above the $550 million balance, at June 30th of last year. Looking forward into remaining quarters of 2007, we would expect any increases in non-performing assets to be modest.

As many of you know, we've been very prudent in our approach to sub-prime lending. Our exposure to sub-prime residential loans in addition to the related wholesale businesses, is minimal and very manageable, and little has changed from the end of the first quarter of 2007. At the end of the quarter, we had $3.2 billion of residential real estates loans outstanding to customers that could be considered sub-prime, compared to $3.0 billion at March 31. In addition, we had $900 million of home equity and second mortgages to sub-prime borrowers at June 30th, and that balance is unchanged from last quarter.

These two portfolios represent 2.8% of our total loans outstanding as of mid-year. In terms of buybacks, we repurchased approximately 80 million shares of stock in the second quarter of 2007. This, combined with our quarterly dividend, is also going to be 113% return of earnings to our shareholders in the second quarter.

At this point, I'd like to share a few highlights from our business line. Our Payment Services group reported an impressive 16.8% increase in average loan outstandings year-over-year; the result of growth in both our Corporate and Retail Card portfolios. U.S. Bank was one of the four issuers selected to participate in the Federal Government GSA SmartPay 2 card program.

We have been a payment provider to the Federal Government since inception of the Purchasing Card Program in 1986. This win allows us to continue to offer the full array of corporate payment products to current government agency customers, and provides a tremendous opportunity to expand our share of government's business beginning in 2008. The group completed the conversion of the CIBC Canadian purchasing and corporate card portfolio and the first phase of the First Horizon Merchant process and conversions. Other major milestones for this group included the issuance of the 18 millionth consumer gift card, since the program began in 2003 and the launch of the first hospital-on-payment finance solution, whereby we issue cards on behalf of the hospital, self-manage the billing and receivables processing.

Our Wealth Management group successfully completed to list our Corporate Trust conversion during the quarter, and the group gathered an additional $282 million in client assets through our recently launched SMA [Separately Managed Account] product. This represents an increase of more than 60% over the balance at the end of the first quarter, and our pipeline remains strong.

The U.S. Bancorp investments and insurance initiated a new requirement... retirement planning concept in the first quarter. This post retirement planning center, just opened in one of our Minneapolis branches. The center together with USBII's financial planning process is designed to attract baby boomers that need financial help in managing and planning for retirement.

And finally, in Wealth Management, our FAF Advisors continue to grow their third party retail and institutional distribution of our First American Funds. At the end of the second quarter, the third party fund balances were over $5 billion, approximately 20% more than at the end of June last year.

Our Consumer Banking business line successfully completed the integration of the Heritage Bank in Montana, and excluding our new branch acquisitions, the group opened five new in-store branches and added 59,000 net new checking accounts. These new accounts along with those opened in the quarter one of this year, represent an annualized growth rate of 4.6% from the January 1st start point of 6 million checking accounts.

During the quarter, we launched the PowerBank business model in our Portland market, on April 30th. With extended hours in most branches, the program now makes us the most convenient bank in that market. We have seen positive improvement in net new small business, DDA growth, client satisfaction of course, deposit and consumer loan growth versus last year, along with much lower staff turnover. As many of you know, the St. Louis PowerBank initiative was launched on April 1st of last year, and since that time, we've seen improvement in employee morale, turnover and client satisfaction, all leading indicators of success. We expect to rollout Denver market later this year with PowerBank as well as Minneapolis, Milwaukee, Cincinnati and Seattle in 2008.

And finally, U.S. Bank's mortgage benefited from the flight to quality in the mortgage lending business this quarter, with increases of over 17% in both production volume and the servicing portfolio.

Finally, within the Wholesale Banking group, we are transitioning our corporate bank from a large regional corporate banking model, to a national corporate banking model. The steps we've taken are many and include to-date, the hiring of a number of talented individuals with major money center experience. We have new leaders for our national corporate banking group, derivatives, business credits to leverage finance. We've established a 24-hour trading desk in Chicago, and have extended our calling program outside of our traditional banking footprint. Our emphasis within this segment is on non-credit products, those fee-based products that will effectively leverage our balance sheet and support our recent investment in payments and processing.

At this time, I'll turn the call over to Andy to give you more details about our quarter.

Andrew Cecere - Vice Chairman and Chief Financial Officer

Thanks Richard. The company's second quarter net income of $1.156 billion was 3.7% lower than the second quarter of 2006, but 2.3% higher than the first quarter of 2007. As Richard mentioned, historically the second quarter of the year has always been the strongest in terms of linked quarter growth for our company, and this year is no exception, as we experienced strong seasonal growth in payments, trust and investment management, deposit service charges and treasury management fee income.

I'd like to start the review with the year-over-year results. The $45 million or 3.7% reduction in net income from the second quarter of 2006 was primarily due to lower net interest income and increase in provision for credit losses and higher non-interest expense. These unfavorable variances were partially offset by solid growth in non-interest income, and a reduction in the tax rate.

Net interest income was $47 million or 2.8% lower year-over-year. Although average earnings assets increased by $7 billion or 4.0%, net interest income declined, as the 24-basis point drop in the margin more than offset the positive change in earning assets. The margin contraction can be attributed to tighter credit spreads primarily due to the positive loan pricing. And in addition to the tighter spreads on credit, the cost of funding the company has risen over the past year, as rates on interest bearing deposits have gone up, and the mix of liabilities continues to shift towards higher cost deposits and other funding sources. An increase in loan fees partially offset these negative factors.

Total non-interest income was higher in the current quarter than in the same quarter of 2006 by $100 million or 5.7%.Year-over-year organic business growth was 7.8%, but this growth rate was muted by a $35 million gain from the initial public offering of the card association in the second quarter of 2006. Overall, the growth in non-interest income was driven by the very favorable trends in payments, trust and investment management and treasury management fee income. In addition, the other income benefited from incremental bank-owned life insurance.

Non-interest expense in the second quarter of 2007 was $110 million higher than the same quarter in 2006. We'd classify much of the growth in two categories: First, about half of the increase in expense can be best categorized as investments in our business lines and franchise, including increases associated with fees and acquisitions and the related business integration activities, increase in compensation expense, and a portion of the $18 million increase in legal and professional fees which was related to recent revenue initiatives.

Second, the remaining increase in other expense can be best categorized as business event-driven. Specifically included in the change year-over-year in the other expense, was an increase in operating expense-related tax credit investments, additional merchant airline expense due to a new relationship and transaction growth, and other expense include the higher OREO related expense as the company accelerated efforts to dispose the acquired properties.

Finally, income taxes in the current quarter were lower than the second quarter of 2006, partially due to the decline of the company's tax rate. The result of an increase in tax credit investments, higher balances of tax-exempt municipal securities and additional bank-owned life insurance.

Moving on to the discussion on linked quarter variances: Net income in the second quarter of 2007 was $26 million or 2.3% higher than the first quarter of 2007. A seasonally strong 9.4% increase in fee income and a slightly lower tax rate, were partially offset by 1 % decline in net interest income, as well as increases in non-interest expense and the provision for credit losses.

Net interest income declined by $60 million on a linked quarter basis. Although average earning assets rose by $1.2 billion quarter-over-quarter, the favorable impact on this group... growth on net interest income was more than offset by a 7-basis point decrease in net interest margin. The decline in the margin can be attributed to tighter credit spreads, the continued migration of lower cost deposits into higher price deposits, and funding charges accompanied with the reduction in net refunds, including the impact from the mid first quarter incremental investment in bank-owned life insurance.

During our last earnings call, we estimated that the net interest margin would fall between 5 to 10 basis points from the 351 level we reported in the first quarter. As Richard indicated, we are still comfortable with that assumption for several reasons: First, in the later part of the second quarter, credit spreads stabilized. Second the impact of bank-owned life insurance is now fully incorporated in the run rate. And finally, the change in deposit mix from the lower cost accounts to higher price release has moderated in the last few months.

As I previously mentioned, non-interest income was seasonally strong on a linked quarter basis, due to 11% increase in payments revenue, a 6%increase in trust and investment management fees, a 12% increase in the deposit service charges and a 13.5% increase in treasury management fees. These are all non-annualized increases. While trust in investment management and treasury management fees benefited from second quarter tax season activity, while payments and deposits service charges were higher due to seasonally strong transaction volumes. The other income category was higher than the previous quarter having benefited from the purchase of incremental bank-owned life insurance in that quarter.

In addition commercial product revenue and investment product fees and commissions also posted good linked quarter growth. Offsetting a portion of the solid growth in non-interest income on a linked quarter basis, was $95 million or 6.1% increase in non-interest expense. Again, a portion of the increase could be defined as investment spending while the other increases are best described as business event-driven. Contributing to the unfavorable variance, were personnel-related expenses which increased by $40 million, principally due to an increase in compensation associated with the annual merit increase season, commissions and the impact of first quarter stock option grants. Slightly offsetting these increases, was the seasonally favorable variance and benefits, unfavorable variances in legal and professional, marketing and business development, and a number of other expense line items, reflecting the timing of business initiatives and the advertising programs.

Finally, the other expense category was higher by $43 million. The unfavorable variance primarily reflected the merchant airline expense associated with the new relationship, other loan expense related to accelerate... accelerated efforts to dispose of OREO property, and additional operating expense related to tax credit investments and integration expense associated with our recent acquisitions including Heritage Banks, the corporate trust business of LaSalle and several merchant processing acquisitions.

At this point, I would note that operating leverage was negative on a linked quarter basis as well. And as Richard previously mentioned, we would expect to see operating leverage turn positive over the next quarters. As the expense grows modestly from the current levels, net interest income stabilizes and fee income continues to grow. Finally, the current quarter's results benefit from a slightly lower tax rate. Going forward, we expect a tax rate on a TEB [taxable-equivalent basis] basis will be comparable for the current quarter, at approximately 30.9%.

Turning to the balance sheet; average earning assets rose by $7.4 billion or 4% over the second quarter of 2006. It was primarily the result of a 4.5% increase in total loans. The increase in average loans was driven by a 7.8% increase in retail loans led by credit card, a 4.7% increase in commercial loans, and a 4.6% increase in residential mortgages.

Commercial real estate loans declined year-over-year reflecting customary financings, the current slowdown in residential home building including certain markets for condominium development and the company's overall risk appetite. On a linked quarter basis, average earning assets grew by $1.2 billion, driven by an increase in total loans of slightly less than 1% and an increase in loans held for sale of 12.8%.

Again average earnings credit cards loans grew faster than the other home categories on a linked quarter basis, as our own branch originated, co-branded and financial institution partner portfolios continued to expand. Total average deposits in the second quarter of 2007 were $2.3 billion or 1.9% more than the second quarter of 2006. The decrease in total average deposits was principally due to the company's wholesale funding decisions, where by tight deposits greater than $100,000 were replaced with other short-term borrowings.

Increases in average interest checking and time certificates year-over-year were essentially offset by decreases in the average non-interest bearing deposits. A direct result of reductions of business demand deposits as customers reduced excess liquidity, money market savings, and savings accounts.

Deposit balances in lower rate money market and regular savings accounts continue to migrate to higher rate time certificates or deposits in the consumer business lines. Total average deposits in the second quarter were $1.8 billion or 1.5% lower than the prior quarter. Similar to the year-over-year variance, the change was primarily driven by the $1.7 billion increase in time deposits greater than $100,000, as management chose to replace these deposits with other short-terms funding. Increases in average non-interest bearing deposits and interest checking account balances were offset by reductions in money markets savings deposits.

Finally, as Richard mentioned earlier, we returned a 113% of earnings to shareholders in the form of dividends and buybacks in the second quarter of 2007. We remained well capitalized in our target with tier 1 in total capital ratios of 8.5% and 13% respectively, at June 30th.

I'd like to now turn the call back to Richard for his closing remarks.

Richard K. Davis - President and Chief Executive Officer

Thanks, Andy. I'm sure many of you in the audience today have had the chance to read our other press release this morning, announcing that Mike Doyle has resigned from his position as Chief Credit Officer for our company. I'd like to take this opportunity to thank Mike for his many years of service to U.S. Bank. As Chief Credit Officer, a position he has held since 2002, Mike was the driving force behind the establishment, in implementation of our current credit policies, procedures, and our credit culture. He's leaving the company in excellent condition from a credit perspective, and we wish him well.

I'd be happy to answer your questions about this change in personnel, but I want to be very clear: Mike's departure in no way indicates concerns about our credit quality, nor does it indicate a change in our credit philosophy. We will continue to manage credit prudently with the goal of balancing risks and rewards.

In conclusion, as a company, we are focused on the future and continue to look for growth opportunities, both organically and through acquisitions similar to those in our recent past, which includes small banks and payment and processing businesses.

Our long-term goals did not change. Our constituents are counting on us to meet the challenges presented by this environment, but not to take risks that might place us in harms way in the future. We've not been immune to the challenges but our year-to-date results, which can rightly be defined as pure core earnings, support my belief that this company is well positioned to produce a consistent, predictable and repeatable earning stream going forward, for the benefit of our customers, communities, employees and shareholders.

At this time, Andy and I would now be happy to answer any questions from our audience, leaving a plenty of time for Q&A. So operator, if you would join us again please.

Question And Answer

Operator

Thank you. [Operators Instructions]. We will go ahead and take our first question from the line of Mike Mayo of Deutsche Bank. Go ahead please.

Michael Mayo - Deutsche Bank Securities Inc.

Good Afternoon.

Richard K. Davis - President and Chief Executive Officer

Hi Mike.

Andrew Cecere - Vice Chairman and Chief Financial Officer

Hi Mike.

Michael Mayo - Deutsche Bank Securities Inc.

Richard, could you elaborate more on the change in the Wholesale Banking. You mentioned going from a regional to a national model, and that you have made hires and expanding in all these business lines. What was the catalyst for this change?

Richard K. Davis - President and Chief Executive Officer

Thanks Mike. I am glad to do that. As you know, being the sixth largest commercial bank by asset size, it should at least in many cases put us in the camp up, more deals while we're either leading national company syndications or being part of these syndicated credits. If you look at the goal sheets which come out once a week, you will notice that most the time we are absent in those transactions. That's partly because, we have a heritage to become a major regional bank in the wholesale side, but really not enjoy the national corporate view that we've expanded now in our payment businesses, and then our trust businesses. So this is kind of the wholesale lending side catching up with the rest of the company and taking advantage of our size and our scale and many of the customers we currently enjoy.

As you probably know, there is a quite of strong quid pro quo coming forward in these days, that in order to gain the non-lending business from corporations across the country, you need to have a meaningful attachment to their credit line or their credit needs, and we need to step that up. So in accordance with that, we have opened our first out-of-footprint office in New York City. We've hired no less than almost ten key people to lead our national corporate activities, our derivatives business, our business credit activities, healthcare, leverage finance, food and ag, assets [ph] expansion, anything else I can't remember on the top of my head. In other words, we're moving to a national footprint and we have many of the customers already; 5% of the Fortune 500 customers we have some relationship with. But in order to really leverage this payment and processing capability, we need to step-up and take more position with a very high AAA rated customers across the country and this is intended to do that.

Michael Mayo - Deutsche Bank Securities Inc.

So better share wallet of your corporate customer. So I guess that means... would you ever consider spinning off the processing business, or is it the opposite?

Richard K. Davis - President and Chief Executive Officer

It's just the opposite, although it's a good transition Mike. Not at all like a Metavante or based on the activities since we last talked on this call with FTC. We all... feel all the more emboldened to keep these businesses aligned. It's the growth part of our company. It's the non-balance sheet aspect that makes it much more attractive in returning capital. Its all the things that you know it to be, and in accordance with that, I've said this last time, we are a core bank that's going to expand in the payment and processing businesses, which have I think a nice attribute to add to the bank. We are not a payment and processing company that is going to have a bank hinged on to it. So it's quite... as you said emboldened to us to keep the company together and move forward with this nicely diversified and attractive revenue mix.

Michael Mayo - Deutsche Bank Securities Inc.

And one last follow-up. I mean, how about more capital markets than I mean... in a way may be I wish you had paperback, or --

Richard K. Davis - President and Chief Executive Officer

Good question. Not really, we... by the way we are fairly relative, we are in the same building. When we didn't have the capital market capability, those of us from first start, we also had a certain level of envy wishing that we did, and once we enjoyed finally having that, we realized it might have been overrated in terms of our customers. They either wanted to have access to what would be the perfect partner, and/or they would ask us to find that partner for them. But in no cases did we feel that we benefited while we had, or lost necessarily when we didn't, the direct relationship with an investment bank. So having been there and done that, we really feel quite good about our position, and while it might be attractive in quarters like the most recent ones, and probably this one where those money market revenues will look very attractive, we'd like the simpler, more direct company that you all have come to track, and that we are enjoying our leading.

Michael Mayo - Deutsche Bank Securities Inc.

Thank you.

Richard K. Davis - President and Chief Executive Officer

Thanks, Mike.

Operator

Thank you. Our next question comes from the line of Matthew O'Connor of UBS. Go ahead, please.

Matthew O'Connor - UBS

Can you just clarify the expense guidance a bit? I think you have said a modest increase in 3Q and 4Q, off the 2Q base?

Richard K. Davis - President and Chief Executive Officer

Yes, we did. Let me take a moment on that whole topic. I don't like negative operating leverage, but I am not apologizing for it to the extent that, for us to make some investments in our core organic businesses, we simply needed to do that. And in accordance to that this is the quarter where that cost reflects itself. We are trying to dissuade anyone from thinking that, I or Andy have lost control, or that we were going to go crazy on expenses, or give up what has become one of the hallmarks of this company. So, what we want you to know, is that the next two quarters we see positive operating leverage, and a very flattish expense base from the base that we have created here in second quarter.

So that is more a telegraphing and the point is that we will continue to make investments, but we have made probably a one-step launch forward in this quarter to create this negative environment for one quarter in order to create a new baseline to operate the company at. We still see our efficiency to be well, better than anyone anywhere near our peer group, and it will continue to be one of the areas you will cite us for being the most efficient and the most profitable. So, really trying to temper what'd otherwise be perhaps a runaway reaction from one quarter's activity, all of which was intended and delivered.

Matthew O'Connor - UBS

Okay. And then somewhat related question; as you through the markets and implement power banking, can you give us a sense of how much upfront expenses there are either in dollars or percentages and then... obviously there is a lag before you get the revenue boost, and that's still to come and give us a sense of how meaningful that might be over the next couple of years?

Richard K. Davis - President and Chief Executive Officer

Sure, Andy wants to that.

Andrew Cecere - Vice Chairman and Chief Financial Officer

Sure. Matt, thank you. We've modeled each of our locations, geographies that we are going to implement power banking and the incremental investment on fund does vary by market, depending upon the number of branches, the sort of level of staffing in those branches today. But they range anywhere from $5 million to $15 million per market overall. So it's not usually material. The payback does occur within the first couple of years. The payback is a function of both, increased loan volume in small business activity and deposit growth. And as Richard mentioned, our St. Louis leading indicators giving customer retention, employee retention, customer satisfaction scores are all positive leading indicators that we are seeing, and that's why we are very comfortable and continuing to roll this out.

Matthew O'Connor - UBS

Okay, and then just lastly if I may? In April you've talked about targeting higher earnings in '07 versus '06, and if I think about what's coming and better or worse, that the margins were in line with expectations, credits holding in there well, the expenses were the outlier, is it fair to say that you front-ended somewhat of the expense initiatives that you initially kind of earlier this year?

Richard K. Davis - President and Chief Executive Officer

This is Richard. I would say that we are delivering as we've thought we were this year, but because the margin compression continued and we admitted we didn't see that at the beginning of the year, we continued to pursue our expense initiatives even despite the fact that margin came down at this level, because we do see that flattening out now and just hoping the investments made now will be handsomely rewarded in the future year or two. So now, we're kind of stuck to the plans and did make an adjustment, where we might well have been able to believe that it was more prudent to continue to make these investments at the timing, and the real order that we expected them to be made in the first place.

Matthew O'Connor - UBS

Okay. Alright thank you.

Richard K. Davis - President and Chief Executive Officer

Thanks Matt.

Operator

: Thank you. Our next question comes from side of Gary Townsend of Friedman, Billings, Ramsey. Go ahead, please.

Richard K. Davis - President and Chief Executive Officer

Hi, Gary.

Gary Townsend - Friedman, Billings, Ramsey & Co

Good afternoon. How you're you both?

Andrew Cecere - Vice Chairman and Chief Financial Officer

Hi. Good, Gary.

Gary Townsend - Friedman, Billings, Ramsey & Co

You've developed some great non-interest businesses. How do you unlock that value and find it reflected more in the multiple, given the whole company?

Richard K. Davis - President and Chief Executive Officer

Great question. I have long given up on expecting the analyst community to discreetly give us PE value for the payment business of processing vis-à-vis the bank. Because I think, what you're going to do is, give us the value when you see it burdened in the kind of results we'll provide, which should be better than some of our peers who don't have those options. I respond with two specific responses: one is, on the initiatives that you don't see... that we don't talk about too often, we are working toward 2008 to a new plan. It's actually a color to our deepening customer relationships, but it's a very, very complete and complex movement toward having all employees receive direct absolute credit for selling all products in the bank, regardless of which line of business they are in, or whose line of business they are selling their product for. That sounds fairly simple but those of you who know banking really well, appreciate it. That is usually one of the reasons that banks sub-optimize their ability to cross-sell and offer more to their customers, because there's some of the file that was created.

So this year we are changing culturally and it's not just a program, it's a cultural change to move forward on that basis. I might marry that up with the fact that we are changing our incentive plans for 2008, whereby thousands of our top employees for this year and year's before had been paid primarily at a discretionally pool, and the pool is funded at year's end, based on the corporate performance and then it is cascaded throughout the company in the early part of the new year for incentive allocation. In concert with this deepening customer relationship and tracking capability of all products, we are changing to a much more discreet specific incentive program for each person in the company, outside the management committee, who'll remain fully vested in their overall cooperate performance. And these folks will now be much more as a percentage relying on their own business line performance, plus the corporate performance and have a much more discreet way during the year to track to their behaviors, their performance and their rewards.

So number one, I believe we will unlock the value of these other non-lending capabilities by incentivising our employees, and get them excited about getting our customers in more of these businesses. The second piece to that answer would be that we have a capability of that which many companies don't have, which is a payment expertise. And particularly, we are going to begin to develop more of an R&D capability at U.S. Bank, where as a payment leader, we are going to develop the next new products that our customers need. And mainly we are building a small core I'll call lab technicians, partnered with a number of bank employees who will go to our key customers routinely and say, what's the next new thing you need in payments, not in bank language but in your language? You can take it back to your core people, figure out how to build it if you don't have to buy it and be able to deliver that. As we referred before, 4,600 financial institutes in America use U.S. Bank for some form of payments partnership. So when we build that for our customers, we'll build it for ourselves, and we'll build it as a pass-along to other bank partners, which may most of you will not build it themselves, will not have the capability or the space for the interest in doing so. And we can leverage some of those areas we've been talking about here before, which have been more germane to just U.S. Bank and talk more about how they become leveraged across the bank industry. So those two things, I said a lot. But to me they are huge levers and none of which are necessarily going to be discreetly priced, because its payments per se but because of what we do of it.

Gary Townsend - Friedman, Billings, Ramsey & Co

You have to grow the bank faster in order to get a better multiple for the company?

Richard K. Davis - President and Chief Executive Officer

The bank meaning the core banks.

Gary Townsend - Friedman, Billings, Ramsey & Co

Yes.

Richard K. Davis - President and Chief Executive Officer

I think we do and I do because, I believe that if we are really going to be a core bank with these special capabilities to leverage, then the core banks got to be the core. And so I really want to see... one of the things I am looking forwards is a more particular good use of our balance sheet to take on these cooperate and wholesale customer activities, continue to be on the top quality space. But do more audit and become more important of the key customers who are both attractive, are profitable to us and have the interest and ability of taking on these other products that we are going to build. Because the more sophisticated customer are the ones, who will jump on it first. So I do think the core bank needs to grow faster than it has in the past, but that leverage will accrue to the payment businesses as well.

Gary Townsend - Friedman, Billings, Ramsey & Co

Thank you.

Richard K. Davis - President and Chief Executive Officer

Yes. Thanks Gary.

Operator

Thank you. Our next question comes from line of John McDonald from Banc of America Securities. Go ahead please.

Richard K. Davis - President and Chief Executive Officer

Hi John.

John McDonald - Banc of America Securities

Hi Richard. I was wondering if you could just kind of remind us of your M&A interest and where you would like to grow up the franchise and under what parameters?

Richard K. Davis - President and Chief Executive Officer

Great. Thanks for the opportunity to be clear. We are more of the same would be the answer. We would like to continue to fund small banks of size I'll say from $500 million to $2 billion. We would like to particularly find those in the growth markets of western part of our franchise, let's say that we continue to have conversations in those situations. Then we are looking for deals that are not auction, we would like to do private deals like the last two, where we have an exclusive relationship with somebody who wants to be part of our future and appreciates what we will do to protect their franchise. And so, on the small bank area that would continue.

In the payment businesses and in the processing businesses, we are continuing to find some continued momentum. A number of payment companies come to our... come into our view. We talk with them, we make some evaluations every once a while we find when that works. Last time we talked as a group, one of the questions was, with private equity is there way that we can continue to compete pre-payment businesses when so much private equity is out there paying different price points? And the fact is yes, particularly because, we are interesting to some of the owners who don't want to just hand over their company and their keys to private equity partner, but they really want to have the growing concern in many cases a job. And they want to work in a company that can add capital and do something with it. So we continue find some decent stable of small payment companies that come into our view, and in the processing and trust servicing side, we haven't seen much activity lately but there hasn't been much too to see. But we believe that short... in a short order that medium sized trust company aspect of these medium banks will come into the forefront, we will be one of the candidates that they can look out to take over the business and providing same kind of service we have for the... I mean that precedes them. So more of the same John, nothing transformational, nothing significant to change the order of magnitude that we are trying to build here, which is a slightly enhanced revenue stream that attracts all of you.

John McDonald - Banc of America Securities

Okay thanks. And a quick one for Andy, was there any meaningful sales of MPS this quarter Andy?

Andrew Cecere - Vice Chairman and Chief Financial Officer

Not meaningful, John. We pretty much the same levels that we've experienced the last few quarters and you know below in a few million dollar range, so nothing unusual from prior quarters.

John McDonald - Banc of America Securities

Okay, thanks.

Andrew Cecere - Vice Chairman and Chief Financial Officer

You bet.

Richard K. Davis - President and Chief Executive Officer

Thanks John.

Operator

Thank you. Our next question comes from the line of Immanuel, I am sorry, Manuel Ramirez of KBW. Go ahead please.

Richard K. Davis - President and Chief Executive Officer

Hi Manny.

M. Ramirez - Keefe, Bruyette & Wood

Hi, good afternoon everyone. Two quick questions on your deposit charge growth, just it looks like it's been decelerating a little bit in the last two to three quarters on a year-over-year basis. But based on your comments on account growth, it seems like there haven't been any real change there. So may be a little bit of back run on what's going on deposit charges. And then the merchant processing business, even in accounting for seasonal factors came in better than I expected this quarter. Was there anything unusual in that number or should we expect that continue from obviously the third quarter? Thanks.

Andrew Cecere - Vice Chairman and Chief Financial Officer

Manny, first on the deposit service charges, we did see accelerated growth here in the second quarter versus the first quarter nearly 12% up. As you recall in the first quarter, we mentioned that it started out in the first two months of the first quarter were a bit lower than we had been experiencing. So we did see some acceleration in that growth. Second, on a year-over-year basis, our deposit growth is up about 3%. Now one factor in that may be that we have a new product called the CAA, Checking Account Advance, which the fees from that accrued to loan fees and are reflected in margin as opposed to deposits service charge and that may reflect a little bit of a shift in the way we are recognizing those fees. But as we talked about last call, we would expect on a go forward basis that the deposits service charge level would growth very much in conjunction with our growth in accounts, which as we talked about is in that 5% to 6% range.

With regard to merchant activity, the second quarter is seasonally stronger. There is activity that occurs that is a little bit higher in the first quarter, but that double-digit growth that we've seen is consistent with what we have seen historically and what we would expect in the future.

Richard K. Davis - President and Chief Executive Officer

Let me just add, this is Richard Manny. To the deposit growth, I would like to see more deposit growth; and while we are accurate in depicting the movement of customers' balances to higher interest rate, our products and their usage of those for earnings credit, I do think that relevant to my earlier comments about the quid pro quo that comes off large corporate customers giving you more in our lending business when you have more expression of interest in their lending needs. I believe that deposit improvements will follow in that regard as well. That is one of the reasons we are introducing this wholesale corporate banking initiative which again we'll have legs to it in short order to show you.

On the merchant servicing side, I do think that it... that it would be fair for you to amend your expectations. This is a very attractive business. It grows quite handsomely. We have tens of thousands of customers join every year into the merchant category and because of our service period... I know we all talk about service, but its very bonafide here. We wouldn't add this many net new customers as often as we have in merchant servicing if no, we didn't have the kind of brand and the equity in the marketplace that it does. So we're quite emboldened by that, and with FDC and some of the recent changes and some of those peers we see that as a near-term opportunity because that disruption for them is absolutely opportunity for us to the extent that customers like dealing with a known entity and there is no change on this side of the fence.

M. Ramirez - Keefe, Bruyette & Wood

And just to clarify, the last meaningful acquisition would have closed in the first quarter of 2006, right, on the merchant processing side? That's a pretty good cut at organic growth that we saw this quarter.

Andrew Cecere - Vice Chairman and Chief Financial Officer

That is correct. That would have been First Horizon and you are correct.

M. Ramirez - Keefe, Bruyette & Wood

Perfect.Thank you.

Richard K. Davis - President and Chief Executive Officer

Thanks Manny.

Operator

Thank you. Our next question comes from the line of Todd Hagerman of Credit Suisse. Go ahead, please.

Richard K. Davis - President and Chief Executive Officer

Hi Todd.

Todd Hagerman - Credit Suisse

Good afternoon, everybody. Just a couple of quick questions on the card portfolio, obviously growth continues very strong. I was wondering if you could just remind us in terms of the break down in the portfolio there, in terms of your expectations, in terms of a normalized loss rate for that portfolio and then just update us in terms of kind of mix in terms of the channels and where that's coming from?

Andrew Cecere - Vice Chairman and Chief Financial Officer

Sure Todd, this is Andy. First, from a normalized loss rate, about a year ago our loss rate in the credit card area was about 2.7% charge-offs and as you know this quarter it was 3.56%. As you recall in the fourth quarter of '05 with the change in bankruptcy legislation there was an acceleration of charge-off activity and it slowed greatly in the first few quarters of 2006. We are now getting back to a more normalized rate and given the growth characteristics that we see in this portfolio we're approaching what we would see sort of a normalized level in the mid 3.5% to 4%. So we were lower in the first quarter and second quarter of last year and this quarter I think represents more like what would expect to see in future quarters. Our actual rates will be a little bit higher but because of the growth that we see in the portfolio, the reflected rates would be in the mid 3.5 like you saw in this quarter.

In regarding where it's coming from, it is really across three areas. It is through our partners, it is through our branch activity, and it is through the direct sales activity that we see that growth. So we're seeing growth in all categories and I would also highlight that the growth that we're seeing in credit card is principally if not all prime credit cards we don't have sub prime activity it is really solid credit in terms of the growth that we're seeing.

Richard K. Davis - President and Chief Executive Officer

Yes, in fact this is Richard, I'll add to that. There were some analysts that expected our charge-offs to actually come down if not be flat and I am only disappointed because I thought that was prima-facie that as we're only a credit card prime portfolio and we're growing in the 20% range and honest to God that has a lot to do with our agent bank relationships and our partnerships that's high quality re-growth in a very valuable line of business. And so we are hardly a reflection of bankruptcy, post bankruptcy charge-offs coming to something normal, which by the way 3.5% to 4% itself will reflect the prime quality.

And secondly just the absolute growth of the portfolio is expected. At least I expect some prime customers to have some delinquency and some charge-offs. And so, for us, I would say that 53 basis points was actually a point of pride, I was holding for this quarter's result and while some folks expected differently or may see it differently, I hope this call helps you all to kind to go back and look at both our sub-prime, minimal impacts. The fact that our commercial quality credit as represented by MTA does not charge-offs as well and our credit cards will continue to grow at a very prime level. I think you should feel, as I do feel quite good about the quality metrics associated with charge-offs and then in the future we have indicated that they will be modestly growing and really is code word for mostly because the market does balance sheet will grow in the areas that have most likely the charge out level.

Todd Hagerman - Credit Suisse

That's helpful. And just to clarify so, you would evolve they may modestly pick up, you wouldn't expect them to fall outside of this kind of normalize range as you say and then just internally, just in terms of the challenge you are seeing more the growth coming out of the... mostly the Asian end relationships. Did I understand you correctly?

Richard K. Davis - President and Chief Executive Officer

Yes, we are seeing it on both sides; I mean that is more than agent is quite attractive. I will give an example; we have the year-to-date... I think enjoyed 23 portfolios for 23 banks that have sold us their credit card portfolio this year. Those never get right value, they never get put out at the press release, but it shows you the kind of run rate we have in doing business which is very traditional by the way, with banks to give us their card portfolios which are quite in many cases cured. And that's has benefited a lot of our peers don't have because they are just not in that space.

In terms of organic growth, we are not a direct mail shop Todd and so this is really the opportunity that occurred to a company like ours that has a very strong branch-related growth of credit cards and debit cards to 2500 branches. And the fact is there has been a fair amount of disruption in the prime credit cards space and we have been able to move through that taking advantage of opportunities, including co-brand and some affinity opportunities that come to us because some of the larger partners have either lost track with them or just busy doing their own conversions. So we are optimistic for sure, but you know, I don't know how long we can keep 20% growth in prime credit cards but as long as we can its good today and its good for the future.

Todd Hagerman - Credit Suisse

Great, that's helpful. Thank you.

Richard K. Davis - President and Chief Executive Officer

Thanks Todd.

Andrew Cecere - Vice Chairman and Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from David Hilder of Bears Stearns. Go ahead please.

David Hilder - Bear Stearns

Good afternoon. Just a couple of real estate related questions. First, I thought I heard you say that you have either curtailed or discontinued condo lending in certain areas and I wonder where that might be?

Richard K. Davis - President and Chief Executive Officer

Dave, this is Richard. We have... we have and not across the board by any means. We have a lot of good customers who do condos with. But primarily the market that have been in scraps, that we have reduced our exposure unless we know the customers particularly well, would be in the Florida, the Nevada and the Southern California markets to name three. Our exposures in condos are top markets, actually our Washington State, Florida, Colorado, New York and Utah, and except for Florida those other four are actually quite strong and so we continue to do a condo of lending in those markets and enjoy good returns, but Florida, Nevada, Southern California are markets that we've either tapered or by good fortune weren't very deeply in any way and continue to stay away from it.

David Hilder - Bear Stearns

Okay, thank you. That's very helpful. And you referenced a couple of times a program as I heard it to accelerate your sale of OREO and I was just wondering, it looks like your OREO balance has certainly gone up over the past year. Why are you doing that? Are you in fact sort of concerned that there will be more coming or --?

Andrew Cecere - Vice Chairman and Chief Financial Officer

Yes Dave.

Richard K. Davis - President and Chief Executive Officer

Well, are you there, Dave? We lost you.

Andrew Cecere - Vice Chairman and Chief Financial Officer

Yes, David you are back on, thank you.

Richard K. Davis - President and Chief Executive Officer

We didn't want to answer if you weren't there, okay.

Andrew Cecere - Vice Chairman and Chief Financial Officer

Okay, David in fact our ORE levels haven't declined in the last quarter and part of the theory is that we think that the... it's prudent at this time in the cycle to continue to be aggressive on moving those OREO properties off our books. So that you tend is not have a build but to be a very aggressive in terms of selling those properties at prices that we think we are appropriate at this time. So that's what we are doing, we would expect to continue to do that in the third and fourth quarter, again achieving the level of the ORE that we are seeing right now, and as you saw in the second quarter here, that actually came down for the first quarter.

Richard K. Davis - President and Chief Executive Officer

And David, you are right, it is up year-over-year for sure and that's I think reflects in the market. Its generally the philosophy of this company that if you are going to have a stress property better to sell it soon or the later in this environment and we are actually getting quite a decent returns while we do take a hair cut and god knows so many out there is making a market on this of all of us who want to take this off balance sheet, that's included. We feel it's prudent and we think that we can withstand those additional expenses to lighten the load of future ORREOS. But it's not because we are worried about a downstream situation, we really want to keep this steady state so that we don't have anything to speak about in the future.

David Hilder - Bear Stearns

Okay. And the increase in expenses is that simply the cost of the loss on the properties or is it actually adding more people deferred?

Andrew Cecere - Vice Chairman and Chief Financial Officer

It's a little bit of both, but most of it's the flamer of the cost the differential and the property versus the sales price.

Richard K. Davis - President and Chief Executive Officer

You might explain this two parts to the last--?

Andrew Cecere - Vice Chairman and Chief Financial Officer

Yes, as you know as the loan goes from, when the loan goes into fore- closure in the initial charge is to net charge-offs and is put in the books as an ORE asset and then to the extend there is a further decline in value. We saw it for lower that book value that goes to operating margins and that was part of the increase we saw in other expense this quarter.

David Hilder - Bear Stearns

Okay. Thanks very much.

Andrew Cecere - Vice Chairman and Chief Financial Officer

You bet.

Richard K. Davis - President and Chief Executive Officer

Thanks

Operator

Thank you. Our next question comes from the line Betsy Graseck of Morgan Stanley.

Richard K. Davis - President and Chief Executive Officer

Hi Betsy.

Andrew Cecere - Vice Chairman and Chief Financial Officer

Hi Betsy.

Betsy Graseck - Morgan Stanley

Hi. How are you?

Richard K. Davis - President and Chief Executive Officer

Good.

Andrew Cecere - Vice Chairman and Chief Financial Officer

Pretty good.

Betsy Graseck - Morgan Stanley

Good. I just wanted to understand the profits of the investments spending. I know you talked about that in the beginning of the call, but it would be helpful to understand how you are determining what you are going to expensively spend on the kind of return timeframe that you have for getting paid back on those investments and how far through the influence of investment spending you are?

Richard K. Davis - President and Chief Executive Officer

Okay, got it. This is Richard. I think we shared last quarter that every Wednesday in order to minimize platforms, just to create a little more innovation at least in discussion around this company about investment opportunity and every Wednesday morning Andy and I have an M&A discussion with anybody who has either a deal to talk about, which traditionally comes from the outside and/or an organic initiative or as I think one of our peers calls it embedded opportunities. Take a look at where we can do more with what we already have for investment. Each time they knew with us Betsy, we have with us the Chief Technology Officer, the Chief Legal Officer, the Chief Risk Officer and Chief Credit Officer. The reason I say that is because if someone has an idea, we decided has legs but in order to get it evaluated quickly we need to treat it like an outside deal and through a lot of resources into a quick evaluation. That evaluation comes back within a week or two. We evaluate it against a return and an expectationable time and ROI if you will and if they meet those hurdle rates, each of them are bit different, while I will have Andy describe a little further our general benchmarks. Then in fact, it has legs then we make that investment, we burn it into the plan and we put it out there and treat it like an outside deal.

As you all you may know from your experience in banking, an outside deal gets everyone's attention, because it has got the headline and it's got everyone excited about it. We try to create the same level of enthusiasm for opportunities in the company like the PowerBank or the distribution of FAF or the opportunity for cross bank initiatives. So we find that to be a formalized process now which... look, it's cracked, it's done and we're getting a lot more of this. In fact, we're turning down a lot more too which helps me to see where that kind of level of willingness I have and we have to make investments for our near term and long-term. Andy, you might have a little bit of --.

Andrew Cecere - Vice Chairman and Chief Financial Officer

And in fact we are tracking these things. Very specifically, we look at the... both the next year or two in terms of the profitability, the net present value, the internally, the returns and we're looking at all these things and examples of the investments we made, we talked about PowerBank, we look at it market-by-market. We look at the investment required and the returns we expect, which we talked about the people and the offices on the corporate banking side, that's another example. And we have a number of embedded opportunities within our payment script that we continue to invest in again. The returns are typically... the payback is typically within two years, eighteen months across most of these activities, and we try to measure those and we try to track them. We are tracking them very succinctly and very specifically.

Betsy Graseck - Morgan Stanley

And you mentioned that the pace of the idea flow has been ticking up?

Richard K. Davis - President and Chief Executive Officer

It has. It has Betsy and what I mean by that is we'll have somebody come in from, say, equipment/finance and say we wanted to get into this line of equipment. Not only do I know how to do it, I have maybe a team of people that I know that can do it, it will cost us this much to get into the situation, it will take this long to build the balance sheet up to a recovery point of the investment and let's talk about it. And a year ago, those ideas were never been embedded. Now there's a formal opportunity for us to say yes, no, we like it, maybe not now, maybe later, and we do evaluate things on the cost of capital and the ROIs got to be as good or better than any deal we would bring from the outside, and it's got to be accretive to the company in this 18-month range Andy talked about or good ideas may well not happen just because we can afford them.

Betsy Graseck - Morgan Stanley

Okay. And the ROI say everything, or has that... or has the cost of capital been impacted at all by the general rise in rates recently?

Andrew Cecere - Vice Chairman and Chief Financial Officer

Well, as we think about it Betsy, we are looking at our returns. You know the returns in the projects we are looking for are anywhere between 14% to 20%.

Betsy Graseck - Morgan Stanley

Okay, great, thanks.

Richard K. Davis - President and Chief Executive Officer

Thank, Betsy.

Andrew Cecere - Vice Chairman and Chief Financial Officer

Thank you.

Operator

Thank you. Our final question today comes from the line of Vivek Juneja of J. P. Morgan. Go ahead please.

Richard K. Davis - President and Chief Executive Officer

Hi Vivek.

Vivek Juneja - J. P. Morgan

Hi Richard, hi Andy. Just to follow up on the OREO disposition. Was this prime, or sub-prime properties, and what kind of pricing did you get on to the cents on the dollar, and to your comment of what you intend to do more in the third and fourth quarter, is that most the new stuff that flows into OREO or more that's still sitting there and that you intend to?

Andrew Cecere - Vice Chairman and Chief Financial Officer

It was a combination of both prime and sub-prime or non-prime, Vivek, and we would expect it to continue to flow from NPAs to OREO, and then out of REO through the disposition process that we see. I would not expect a significant increase in expense in the current levels, but more of the same as you saw in the second quarter.

Vivek Juneja - J. P. Morgan

All right, great. Thanks.

Richard K. Davis - President and Chief Executive Officer

Thanks Vivek.

Andrew Cecere - Vice Chairman and Chief Financial Officer

Thank you.

Richard K. Davis - President and Chief Executive Officer

Is that our last call, operator?

Operator

Yes it is. I will turn it back over to you.

Richard K. Davis - President and Chief Executive Officer

Okay, this is Richard. As we close, first of all, I'll thank you for your continued interest and support in our company, and let me tell you how excited I am about the future of this company, and yet how much I appreciate the reaction that you need to have to the fact that we are making some investments, and potential investments to move the company forward. I think I would be safe in this audience to say that no company has proven over its legacy that it knows how to do more with the dollar expense than this company by virtue of not only our disciplines, our D&A but our investment capability.

What I am saying to you is, there are some well-thought through longer term opportunities that we need to bring back to the street, bring back to you, enable this company to be as capable on the revenue side as it has been for years on the expense side and with a very careful well-placed increase in investment that is not long life and not significant to harm any of the profitability measures we enjoyed today. I believe that's the right decision to make for this company and while I believe you as an investors and analyst will follow over the course of time to have been the right decision and I thank you for that continued follow up. So Judy, your closing one liner?

Judith T. Murphy - Senior Vice President and Director of Investor Relations

Thank you for listening to our review of second quarter 2007 results. If you have any follow-up questions or need hard copies of our press release and schedules, please feel free to contact me at 612-303-0783. Thanks a lot.

Richard K. Davis - President and Chief Executive Officer

Thanks everybody.

Andrew Cecere - Vice Chairman and Chief Financial Officer

Thank you.

Richard K. Davis - President and Chief Executive Officer

Thanks operator.

Operator

Thank you. This does conclude our conference call for today. We appreciate your participation and you may now disconnect.

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Source: U.S. Bancorp Q2 2007 Earnings Call Transcript
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