U.S. Bancorp (USB)

Q4 2010 Earnings Call

January 19, 2011 8:30 am ET


Richard Davis - Chairman, Chief Executive Officer, President, Chairman of Executive Committee and Member of Risk Management Committee

Andrew Cecere - Vice Chairman and Chief Financial Officer

P. Parker - Chief Credit Officer and Executive Vice President

Judith Murphy - Senior Vice President, Director of Investor Relations and Analyst


Jon Arfstrom - RBC Capital Markets, LLC

Matthew Burnell - Wells Fargo Securities, LLC

David George - Robert W. Baird & Co. Incorporated

John McDonald - Bernstein Research

Christopher Gamaitoni

Paul Miller - FBR Capital Markets & Co.

Betsy Graseck - Morgan Stanley

Brian Foran - Goldman Sachs

Edward Najarian - ISI Group Inc.

Keith Horowitz - Citigroup Inc

Michael Mayo - Credit Agricole Securities (USA) Inc.

Matthew O'Connor - Deutsche Bank AG



Welcome to U.S. Bancorp's Fourth Quarter 2010 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] I will now turn the conference call over to Judy Murphy, Director of Investor Relations for U.S. Bancorp.

Judith Murphy

Thank you, Brooke, and good morning to everyone who has joined our call. Richard Davis, Andy Cecere and Bill Parker are here with me today to review U.S. Bancorp's fourth quarter 2010 results and to answer your questions. Richard and Andy will be referencing a slide presentation during their prepared remarks. A copy of the slide presentation, as well as our earnings release and supplemental analysts' schedules are available on our website at usbank.com.

I would like to remind you that any forward-looking statements made during today's call are subject to risk and uncertainty. Factors that could materially change our current forward-looking assumptions are described on Page 2 of today's presentation, in our press release and in our Form 10-K and subsequent reports on file with the SEC.

I will now turn the call over to Richard.

Richard Davis

Thank you, Judy, and good morning, everyone. Thank you for joining us.

I'd like to begin on Page 3 of the presentation and point out a few of the highlights from our fourth quarter results. U.S. Bancorp reported net income of $974 million for the fourth quarter of 2010 or $0.49 per diluted common share. Earnings were $0.19 higher than the same quarter of last year and $0.04 higher than the third quarter of 2010. Included in this quarter's results were a few significant items that positively impacted earnings per diluted common share by $0.03. We will discuss them more in detail later on the call.

We achieved record total net revenue of $4.7 billion in the fourth quarter. This represented a 7.9% increase over the same quarter of 2009 and a 2.9% increase over the prior quarter.

Total average loans grew year-over-year by 2%, about half of which can be attributed to recent acquisitions. Importantly, for the second quarter in a row, we achieved linked-quarter loan growth as total average loans grew by 1.5% over the third quarter, the majority of which represented organic growth as this growth occurred despite a slight reduction in wholesale line utilization.

We achieved a strong 9.5% growth year-over-year in average low-cost deposits and 6.4% growth unannualized on a linked-quarter basis. The low-cost categories include noninterest-bearing, interest checking, money market and savings accounts, and represent a solid and growing core customer base. As expected, credit quality improved as the net charge-offs and nonperforming assets, excluding covered assets, declined by 5.8% and 6%, respectively, from the third quarter.

Further, this improvement supported a reduction in the allowance for credit losses, as the company recorded a provision for credit losses that was $25 million less than the net charge-offs in the fourth quarter. Our company continues to generate significant capital each quarter, and our capital position remains strong with the Tier 1 common and Tier 1 capital ratios increasing to 7.8% and 10.5%, respectively, at December 31.

Slide 4 displays our consistent performance metrics over the past five quarters. Return on average assets in the fourth quarter was 1.31%, and return on average common equity was 13.7%. The five-quarter trends of our net interest margin and efficiency ratio are shown in the graph on the right-hand side of Slide 4. This quarter's net interest margin of 3.83% was equal to the net interest margin in the fourth quarter of 2009 and, as we predicted, was lower than the previous quarter's net interest margin of 3.91%. Our fourth quarter efficiency ratio was 52.5%, slightly higher than the prior quarter and above the same quarter of last year.

We remain the best among our peers in terms of efficiency, and the increase in this ratio reflects both the ongoing investments and the impact of recent legislative and regulatory actions on revenue and on expense.

Turning to Slide 5. As previously noted, our capital position remained strong and continues to grow. In fact, our Tier 1 common ratio under the Basel III guidelines at December 31 was 7.3%, above the 7% Basel III level required in 2019. We will continue to generate significant capital through earnings each quarter going forward, even if the economy, which is now showing more signs of a recovery, begins to slow.

As I have said before, our company can support a dividend increase for our shareholders while still meeting or exceeding any new capital requirements that may be forthcoming. Increasing the dividend remains the top priority for our management team and the Board of Directors. And, as you know, we are one of 19 large banks that is required to submit a comprehensive capital plan to the Federal Reserve System. We have submitted our plan, and we expect to receive a response in late March.

Moving on to Slide 6. Average total loans outstanding increased by $3.9 billion, or 2% year-over-year. As noted on the slide, excluding acquisitions, total average loans grew by 0.9% year-over-year, as the commitment utilization rate of our commercial and corporate borrowers declined from 30% in the fourth quarter of 2009 to 26% in the fourth quarter of last year. The decline in the utilization rate was significant enough to offset much of the new loan origination business we experienced over the past year.

On a linked-quarter basis, however, total average loans increased by 1.5%, as the demand for new loans from credit-worthy borrowers was more than enough to offset a nominal decrease in the average utilization rate on commercial commitments. In fact, we recorded an increase in average commercial loans outstanding quarter-over-quarter. This is the second quarter in a row that we have shown linked-quarter increases, something we haven't seen since to the fourth quarter of 2008.

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