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USBancorp(USB)EarningsReport:Q32014ConferenceCallTranscriptThefollowingUSBancorpconferencecalltookplaceonOctober22,2014,09:00AMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
SeanO’Connor;U.S.Bancorp;SVP,Director-IRRichardDavis;U.S.Bancorp;Chairman,CEOAndyCecere;U.S.Bancorp;ViceChairman,CFOBillParker;U.S.Bancorp;ViceChairman,ChiefRiskOfficer
OtherPart icipants
JessicaRibner;FBRCapitalMarkets;AnalystJohnMcDonald;SanfordC.Bernstein;AnalystDavidGeorge;Baird;AnalystErikaNajarian;BankofAmerica;AnalystBetsyGraseck;MorganStanley;AnalystKenUsdin;Jefferies;AnalystBillCarcache;Nomura;AnalystJonArfstrom;RBCCapitalMarkets;AnalystMattBurnell;WellsFargoSecurities;AnalystChrisMutascio;KBW;AnalystMikeMayo;CLSA;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator:
WelcometoU.S.Bancorp'sthird-quarter2014earningsconferencecall.FollowingareviewoftheresultsbyRichardDavis,Chairman,PresidentandChiefExecutiveOfficer,andAndyCecere,U.S.Bancorp'sViceChairmanandChiefFinancialOfficer,therewillbeaformalquestion-and-answersession.(OperatorInstructions).
ThiscallwillberecordedandavailableforreplaybeginningtodayatapproximatelynoonEDTthroughWednesday,October29at12o'clockmidnightEDT.IwillnowturntheconferencecallovertoSeanO'Connor,DirectorofInvestorRelationsforU.S.Bancorp.
SeanO’Connor(SVP,Director-IR):
Thankyou,Tiffany,andgoodmorningtoeveryonewhohasjoinedourcall.RichardDavis,AndyCecereandBillParkerareherewithmetodaytoreviewU.S.Bancorp'sthird-quarter2014resultsandtoansweryourquestions.
RichardandAndywillbereferencingaslidepresentationduringtheirpreparedremarks.AcopyoftheslidepresentationaswellasourearningsreleaseandsupplementalanalystschedulesareavailableonourwebsiteatUSBank.com.
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Iwouldliketoremindyouthatanyforward-lookingstatementsmadeduringtoday'scallaresubjecttoriskanduncertainty.Factorsthatcouldmateriallychangeourcurrentforward-lookingassumptionsaredescribedonpage2oftoday'spresentation,inourpressreleaseandinourForm10-KandsubsequentreportsonfilewiththeSEC.IwillnowturnthecallovertoRichard.
RichardDavis (Chairman,CEO):
Thanks,Sean,andgoodmorning,everyone,thanksforjoiningourcall.IwillbeginwithareviewofU.S.Bank'sresultswithasummaryofthequarter'shighlightsonpage3ofthepresentation.
U.S.Bankreportednetincomeof$1.5billionforthethirdquarterof2014or$0.78perdilutedcommonshare.Totalaverageloansgrew6.3%yearoveryearand1.4%linkedquarter.ExcludingtheimpactfromtheCharterOneacquisitionwecompletedinlateJune,totalaverageloansgrew5.9%yearoveryearand1.1%onalinkedquarterbasis.
Inaddition,weexperiencedstronggrowthinaveragedepositsandcreditqualityremainsstrong.Totalnetcharge-offsdecreasedby3.7%onalinkedquarterbasis.Nonperformingassets,excludingcoveredassets,declinedonbothalinkedquarterandayear-over-yearbasis.
Wegeneratedsignificantcapitalthisquarter.OurcommonequityTier1capitalratio,estimatedfortheBaselIIIstandardizedapproachasisfullyimplemented,was9%atSeptember30.Werepurchased16millionsharesofcommonstockduringthethirdquarter,which,alongwithourdividend,resultedina78%returnofearningstoourshareholdersinthethirdquarter.
Slide4providesyouwithafivequarterhistoryofourperformancemetricsandtheycontinuetobeamongthebestintheindustry.Returnonaverageassetsinthethirdquarterwas1.51%andreturnonaveragecommonequitywas14.5%.
Movingovertothegraphontherightyoucanseethatthisquarter'snetinterestmarginwas3.16%,in-linewithourguidance.Ourefficiencyratioforthethirdquarterwas52.4%.Weexpectthisratiowillremaininthelow50sgoingforwardaswecontinuetomanageexpensesinrelationtorevenuetrendswhilecontinuingtoinvestinandgrowourbusinesses.
Turningtoslide5.TheCompanyreportedtotalnetrevenueinthethirdquarterof$5billion,a2%increasefromtheprioryear.TheincreasewasduetohighernetinterestincomeaswellashigherrevenueinmostfeebusinessespartiallyoffsetbyareductioninMortgageBankingrevenue.
Averageloananddepositgrowthissummarizedonslide6.Averagetotalloansoutstandingincreasedbyalmost$15billionor6.3%yearoveryearand1.4%linkedquarter.AdjustingfortheCharterOneacquisitiontotalaverageloansgrew5.9%yearoveryearand1.1%linkedquarter.Overallexcludingcoveredloans,whichisarun-offportfolio,averagetotalloansgrewby7.7%yearoveryearand1.7%linkedquarter.
Againthisquartertheincreaseinaverageloansoutstandingwasledbystronggrowthinaveragetotalcommercialloanswhichgrewby13.6%yearoveryearand3.1%overthepriorquarter.Totalaveragecommercialrealestatealsoincreasedoverthepriorquarterswithaverageloansgrowingby6.1%yearoveryearand0.8%linkedquarter.
Residentialrealestateloansgrew5.8%yearoveryearand0.3%overthepriorquarter.Averagecreditcardloansincreased4.9%yearoveryearandwereup2.1%onalinkedquarterbasis.Totalotherretailloansgrew3.6%yearoveryearand1.6%overthepriorquartermainlydrivenbysteadygrowthinautoloans.
Totalaveragerevolvingcommercialandcommercialrealestatecommitmentscontinuetogrowatafastpace,increasingyearoveryearby12.9%and3.2%onalinkedquarterbasis.Lineutilizationwasrelativelyflatagaininthethirdquarter.
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Totalaveragedepositsincreasedalmost$19billion,or7.4%overthesamequarteroflastyear,and3.3%overthepreviousquarter.ExcludingtheCharterOneacquisitionthegrowthrateremainedstrongat5.5%onayear-over-yearbasisand1.7%onalinkedquarterbasis.Growthinlowcostsavingsdepositswasparticularlystrongonbothayear-over-yearandlinkedquarterbasis.
Turningtoslide7andcreditquality.Totalnetcharge-offsdeclined3.7%onalinkedquarterbasisandrosemodestlyonayear-over-yearbasisduetoanunusuallyhighrecoveryinthirdquarter2013.Theratioofnetcharge-offstoaverageloansoutstandingwas0.55%inthethirdquarter.
Nonperformingassetsexcludingcoveredassetsdecreasedby6.2%fromthethirdquarterof2013andwereessentiallyflatonalinkedquarterbasis.
Duringthethirdquarterwereleased$25millionofreserves,equaltothereservereleaseinthepriorquarterand$5millionlessthaninthethirdquarterof2013.Giventhemixandqualityofourportfoliowecurrentlyexpectnetcharge-offstoremainrelativelystableinthefourthquarterof2014.
Andywillnowgiveyouafewmoredetailsaboutourthirdquarterresults.
AndyCecere (ViceChairman,CFO):
Thanks,Richard.Slide8givesyouaviewofourthird-quarter2014resultsversuscomparabletimeperiods.OurdilutedEPSof$0.78was2.6%higherthanthethirdquarterof2013andequaltothepriorquarter.
ThekeydriversoftheCompany'sthird-quarterearningsaresummarizedonslide9.The$3millionor0.2%increaseinnetincomeyearoveryearwasprincipallyduetoanincreaseintotalnetrevenuedrivenbyincreasesinbothnetinterestincomeandfeebasedrevenue.TheCompanyalsoachievedpositiveoperatingleverageonayear-over-yearbasis.
Netinterestincomewasup1.3%yearoveryearasanincreaseinaverageearningassetswaspartiallyoffsetbyalowernetinterestmarginincludinglowerloanfees.The$31.4billionincreaseinaverageearningassetsyearoveryearincludedgrowthinaveragetotalloansaswellasplannedincreasesinthesecuritiesportfolio.
Offsettingaportionofthegrowthinthesecategorieswasa$1.4billionreductioninaverageloansheldforsale,reflectinglowermortgageoriginationactivityversusthesamequarteroflastyear.
Thenetinterestmarginof3.16%was27basispointslowerthanthethirdquarterof2013primarilyduetogrowthintheinvestmentportfolioatloweraveragerates,lowerloanfeesandlowerratesinnewloanspartiallyoffsetlowerfundingcosts.LowerloanfeeswereduetothepreviouslycommunicatedwinddownofCheckingAccountAdvanced,ourshort-termsmalldollardepositadvanceproduct.
Noninterestincomeincreased$65millionor3%yearoveryearduetohigherrevenueinmostfeebusinessespartiallyoffsetbylowerMortgageBankingrevenue.Wesawgrowthinretailandcorporatepayments,merchantprocessing,trustandinvestmentmanagementfees,depositservicechargesandtreasurymanagementfees,commercialproductsrevenueandinvestmentproductfees.
Noninterestincomeincreasedyear-over-yearby$49millionor1.9%primarilyduetoanincreaseincompensationexpense,reflectingtheimpactofmeritincreases,acquisitionsandhigherstaffingforriskandcomplianceactivities.
Netincomewasloweronalinkedquarterbasisby$24millionor1.6%mainlyduetotheincreasednoninterestexpense,partiallyoffsetbyadecreaseintheprovisionforcreditlosses.Thesecondquarterof2014includedtwopreviouslydisclosednotableitemsimpactingnon--othernoninterestincomeandothernoninterestexpensethattogetherhadnoimpacttodilutedearningspercommonshare.
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Onalinkedquarterbasisnetinterestincomeincreased0.1%duetoanincreaseinaverageearningassets,mostlyoffsetbyourlowernetinterestmarginincludinglowerloanfees.Netinterestmarginof3.16%was,asexpected,11basispointslowerthanthesecondquarter,principallyduetogrowthinlowerrateinvestmentsecuritiesandlowerloanfeesduetothecheckingaccountadvancedproductwinddown.
Onalinkedquarterbasisnoninterestincomewaslowerby$202millionor8.3%,primarilyduetothesecondquarterVisastocksale,lowerMortgageBankingrevenueandlowercommercialproductsrevenuepartiallyoffsetbyhigherdepositservicecharges,corporatepaymentsproductsrevenueandtrustandinvestmentmanagementrevenue.
Onalinkedquarterbasisnoninterestexpensedecreasedby$139millionor5%duetothesecondquarterFHADOJsettlementinotherexpense,partiallyoffsetbyCharterOnemergerintegrationcostandhighermortgageservicingrelatedcosts.
Turningtoslide10,ourcapitalpositionisstrong.BeginningJanuary1,2014theregulatorycapitalrequirementseffectivefortheCompanyfollowBaselIII,subjecttocertaintransitionprovisionsfromBaselIoverthenextfouryearstofullimplementationbyJanuary1of2018.
Inaddition,beginningwiththesecondquarterof2014theadvancedapproachesportionofBaselIIIbecameeffectivefortheCompany.AcommonequityTier1capitalratioestimatedusingtheBaselIIIstandardizedapproachasiffullyimplementedatSeptember30was9%.At9%wearewellabovethe7%BaselIIIminimumrequirement.
Ourtangiblebookvaluepershareroseto$15.66atSeptember30,representinga13.3%increaseoverthesamequarteroflastyearanda2.6%increaseoverthepriorquarter.IwillnowturnthecallbacktoRichard.
RichardDavis (Chairman,CEO):
Thanks,Andy.ToconcludeourformalremarksIwillturnyourattentiontoslide11.Weremainfocusedonextendingouradvantagewhichisourthemefor2014.
Ourconsistentlysolidfinancialperformanceisaresultofouradheringcloselytothecorefundamentalsofcontrollingexpenses,ofmanagingcapitalprudently,ofselectivelyinvestingininitiativesthatgeneratesteadylong-termgrowthandexpandingexistingcustomerrelationships.Thatwasreallythecaseinthethirdquarterasourdisciplinedapproachproducedpositiveoperatingleverage.
Asweheadintothefinalquarteroftheyearweremaindiligentlyfocusedonexecutingourplan,evenwiththeongoingeconomicheadwindswithanemphasisonprovidingourcustomerswiththetrustedproductsandservicestohelpthembuildmoresecurefinancialfuturesbackedbythefinancialstrengthofU.S.Bank.
Thatconcludesourformalremarks.Andy,BillandIwouldnowbehappytoansweranyquestionsfromtheaudience.
QUESTIONS&ANSWERS
Operator:
(OperatorInstructions).PaulMiller,FBRCapitalMarkets.
JessicaRibner(Analyst-FBRCapitalMarkets):
Hi,guys,thisisJessicaRibneronforPaulMiller.Howareyou?
RichardDavis (Chairman,CEO):
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Hi,Jessica,goodmorning.
JessicaRibner(Analyst-FBRCapitalMarkets):
Goodmorning.Wejusthadonequestion.JusttakingintoaccounttherecentchangesannouncedbytheFHFAintermsofthe3%downpaymentandsomerepsandwarrantsclarity,doesthatchangethewaythatyouthinkaboutoriginatingdownthecreditspectruminthemortgagespace?Orhowdoyouguysviewthat?
RichardDavis (Chairman,CEO):
Itreallydoesn't.ThisisRichard.Itisagoodsoundbite,butIthinkthetestcomesinwhetherornotthereisaprivatemarketforinvestorstopickuptheseloanswithlowerornodownpayment.AndIamnotsuretherewillbe.
SowearegoingtocontinuetostickwiththeFHFAFreddieandFanniedealsthatweoriginatethatweselloff.Wewillcontinuetooriginateloansthatweholdonthebalancesheetforourmorewell-heeledcustomers.AndwewillcontinuetowatchtheprogressinthisspacebecausewelikeverymuchtofeelmorecomfortablemakingloanswithIwouldsayeitheralowerFICOwithlessdownpayment.
Butunlessweareconvincedthattherulesaregoingtobepermanentandthereisnotgoingtobealookbackorareachbackinfuturetimesorthattherewon'tbeamarketforthis,wearesimplygoingtostayonthesidelinesintheconcernsofbothcompliancerisksandotheruncertainties.Andwewilljustcontinuetodowhatwearedoingnow,whichisIthinkissufficientforthenearterm.
JessicaRibner(Analyst-FBRCapitalMarkets):
Whatdoyou--justasafollow-uptothat,whatdoyouthinkwould--whatdothinkthattheywouldhavetosayorcomeoutwithtomakeyoumorecomfortableinthatspace?Becauseyouweretalkingaboutareachbackorsomethinglikethat.
RichardDavis (Chairman,CEO):
Right,right.Thatisagreatquestion,Jessica,andIamnotsureIhavetheanswerbecauseIwouldhavetoseeitorbelieveitandthentestit.Andsoitisgoingtotakeawhileformetohaveabeliefthatthislitigationriskisn'tasgreatascompliancerisk,whichusedtobebothlessimportantthancreditrisk.
Sowhenyouthinkaboutalltheriskswehave,creditriskwecanmanage,wehavedonethatthroughthewholecycleandwediditwellbefore.Intermsoflitigationrisk,thatiskindofthenewuncertainty.AndwiththestatuteIthinkoftimecominguponus,theremaybeasofteningofsomeofthoselookback/reachbacks.
AndwhereIstarted--thereisaprivatemarketouttherehasgottosaytheywanttobuytheseloanswithouttheguarantees.Andtheygottobewillingtotakethoseloansonwiththoselesserqualitycustomersundertheriskthatperhapstheywon'trepay.Andthatisgoingtobeamarketthatisgoingtobetestedovertimewithanumberofplayersthatwillhaveachancetocomein.Andonceweseethatappetitethatwillprobablybethefirstevidencewewillbelookingfor.
JessicaRibner(Analyst-FBRCapitalMarkets):
Great,thankyousomuch.
Operator:
JohnMcDonald,SanfordBernstein.
JohnMcDonald(Analyst-SanfordC.Bernstein):
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Justwonderingabouttheoutlookforthenetinterestmarginnextquarter.Andy,couldyougiveussomeoftheputsandtakesforthemarginandwhatkindofoutlookyouhavefornetinterestmarginandnetinterestincomegrowth?
AndyCecere (ViceChairman,CFO):
Sure,John.Soifyouthinkaboutthirdquarterversussecond,weweredone11basispointsandthatwasthreethings.Thefirstis5basispointsforCAAandthatisdone,sothatwon'trepeatinthefourthquarter.
Thesecondwasabout3basispointsforthesecuritiesbuildandthatwillcontinueinthefourthquarter.Weendedthisquarteratabout$96.5billion.We'llendthefourthquarterjustover$100billion.Sowewillhaveadditionalmigrationdownbecauseofthat3to4basispoints.
Thethirdfactorwastheloanmix.Mostofourgrowthwasinwholesaleasopposedtoretailandthatwas2to3basispointsofpressure.Thatwillcontinuelikelyinthefourthquarteralso.
Soallin,down5to7forthefourthquarter,butIstillexpectnetinterestincometogrow.Andthenfinally,thatpressureonsecuritiesbuildwilldiminish,willgoawaybeginningin2015.
JohnMcDonald(Analyst-SanfordC.Bernstein):
Okay,youwillbedoneyouthinkbythefirstquarter?
AndyCecere (ViceChairman,CFO):
We'll--ourexpectationisthatwewillendthisyearatorabove100%intheLCRratio.SoournetsecuritiesgrowthwillbemoreconsistentwiththeoverallbalancesheetgrowthasopposedtobuildingadditionaltomeettheLCRratio.
RichardDavis (Chairman,CEO):
So,John,(inaudible--multiplespeakers)compression--allthatremainsfor2015isloanmixandinterestratesingeneral.Butwehavereallygottenridoftheothervariablesthathavebeenmovingallthroughthisyeartakingthenumberdown.
JohnMcDonald(Analyst-SanfordC.Bernstein):
Okay.And,Richard,couldyougiveussomecoloronyourfeelingsaboutloangrowthfromhere,bothjustkindoftheabsolutelevelofgrowthyouarelookingforandthenthemixfactors?
RichardDavis (Chairman,CEO):
Iamfeelingprettygoodactually.Soletme--Ishouldsaythistoallofyou.First,I'mgladtoseethatyouareevenonthecall.Ithoughtbeinglastwemightnothaveanybodycometoourparty.Wealwaysannounceourearnings…
JohnMcDonald(Analyst-SanfordC.Bernstein):
Reportingwith10otherbanksthistime.
RichardDavis (Chairman,CEO):
Well,Iwilltellyouwhat,Imeanwhocaresaboutwhatwehavetosaynow,right?WehavealwaysannouncedearningsontheWednesdayafterourBoardmeeting.AndtheBoardmeetinghasalwaysbeenthethirdTuesday.ForthefirsttimeinmyyearsasCEO--myeightyearsasCEO,the--that(inaudible)thefourthWednesday.Andsothatiswhywearesolateinthecycle,I'mtalkingtoallofyouaweeklater.
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WehaveamendedthatwiththeBoardandwearegoingtogobacktoannouncingonthethirdWednesday.Sothiswillbethelasttimewehavethistrailerkeepingyoufromwritingyourfinalreports.AndsoIjustwanttomakethatclear.
BythesametokenthoughIhavethisgreatvisibilityandclarityIhaveneverhadbeforeonwhattheotherbankshavebeensaying.Andso,I'mgoingtosaywearegenerallypositiveaboutloangrowthandIamsayingthatforthefollowingreasons.
AsAndyindicated,wehadthe1.4%linkedquartergrowth,ifyoutakeouttheCapitalOneacquisitionitis1.1%.Andthatisrightintherangeofwhatwetelegraphed.Andwearegoingtotelegraphthatagainforquarterfour,wethinkweareinthatsameplaceaswearestillmovingintotheearlystagesofthefourthquarter.
Weareseeingyouatacrosstheboard,too,John.SoImeanweareseeing--inWholesaleBankingweareseeingpeoplecontinuetosupportcapitalexpenditures,particularlyinlargeticketleasingandinCorporateBanking.Weareseeingthepipelineacrossallindustriesstrongerastheyearages,whichisprettypositive.
We'realsoseeingtheleverageportionofthemarketremainsprettyfastgrowing,butwedon'tparticipatemuchinthat.Andasyouknow,thereisaregulatoryoversightthatismoreheavyatthispointintimeandsoitdoesn'taffectusnearasmuch.Andthenstrongmarket--bondmarketisstillstrongsothatdoestakesomeoftheloanvolumeaway.Butoverallwedon'tseeanythinglessthanwehaveseeninthelastcoupleofquarters.
Commercialrealestateisstillprettystrong.IfyoulookattheWest,EastCoastandyoutakekindofthis[mile]downtoTexasandyoumovearoundweseeitisprettyactiveacrossmostpropertybuyingareas.Weareseeingsomeinvestorsgettingintothecentralpartofthecountry,Minneapolis,Denver,Phoenix,placeslikethat.
Propertytypesarelookinggood,apartments,retailoffices,lodgingpropertiesandweareseeingpeoplegetlinesofcreditandusingtheirlinesforpropertyacquisitions.
Andthenwehaveseenalsonicestrengthinhomeequity.Forthefirsttimeweareactuallyputtingmoreonthebooksthanarerunningoffnowthatweareatthatpartofthecycle.Autoloanscontinuetobeastrongpointforusandcreditcardsaregrowingnicelyandareexpectedto,asyoumightexpect,inthefourthquarterseasonallygetevenstronger.
SoImean1%to1.5%andprobablyrightaroundthis[window],1.2%thatwehavebeenatisn'trobust,butitisprettysolid.Andwhatweareseeingisniceconsistencyinourpipelineswouldreflectnotonlywhatwearehearinganecdotallybuttherealfactsthatwehavegotsomeloangrowthstillwellintoourfuture.
Havinglowinterestratesisn'tincreasedforincome,butitisprettygoodforlendingandpeoplecontinuetoseethatbenefitandwehavethatcostoffundingadvantagewehavetoldyouaboutallowustolendtothehighestqualitycustomersatapreferredpriceandwe'regoingtokeepdoingit.
JohnMcDonald(Analyst-SanfordC.Bernstein):
Okay.Andalittlebitmore--thanksforthecolor.It'salittlebitmoreledbythecommercialwhichistheloanmiximpactontheNIM?
RichardDavis (Chairman,CEO):
Yes,Ithinkitisverymuchthesame,whatyouhaveseeninthelastfewquarterswillbeverymuchthesamedominatedbyC&I.Butstartingtoseeconsumersstartingtovieforitspositionnow.QuarterfourwillbestrongconsumerwithcreditcardbutwillstillbeheavilymixedtowardsC&Iwhichwillstillputsome
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pressureonNIM.Butaswetalked,itstartstowanelaterintotheprocess.
JohnMcDonald(Analyst-SanfordC.Bernstein):
Okay.Andonequickieonthenoninterestincome.Thecreditanddebitcardrevenueswerealittlelighterthanexpected.Youmentionedrewardscostinthewriteup.Isthatkindofthenewcostofbusinessinarewardcentricworldhereorisitanykindofone-timecatchupinthere?
AndyCecere (ViceChairman,CFO):
ThisisAndy,John.Sotwothings.Oneisjustanumberofprocessingdaysthisquarterof2014versusthethirdquarterof2013causedacoupleofpercentagepointsdecline,itwas90daysversus94.Sothatisjustanuancewiththenumberofbusinessdays.
Andthesecondthingwastherewards,whichisalittlebitelevated,butIwouldexpectittobeatthislevelorslightlydownwardinthefuturequarters.Butifyouthinkaboutitcardsonacorebasisextheprocessingdayswasupcloserto5%to6%.
JohnMcDonald(Analyst-SanfordC.Bernstein):
Okay.Thanks,guys.
Operator:
DavidGeorge,Baird.
DavidGeorge (Analyst-Baird):
Richard,wantedtodovetailtoJohn'squestion.It'smorebigpicture,butaverypopularmacrotopicandthatisrates.Wantedtoget,notsomuchyourviewsonrates,butmorefromtheperspectiveofhowyouarethinkingaboutrunningtheCompany,allocatingcapital,makingincrementalinvestment,etc.
DoyouruntheCompanyanydifferentlyifratesstayherelongerthanpeoplethink?Andanykindofindustryimplicationsthatyouthinkcouldemanatefromthattotheextentthatmacrobackdroppersists?Thanks.
RichardDavis (Chairman,CEO):
Yes,David,itisagreatquestionandwearestillevaluatingourfinalviewonwhattherateswillbe.Becausejustacoupleofweeksagomightwellhavebeenadifferentscenario,right,basedonwhattheprevailingviewwasthatrateswouldstartmovingupinthemiddleoftheyearandnowpeoplearethinkinglaternextyear.
Hereishowwehavebeenrunningitthisyear.SoitwasFebruary15,Iremembertheexactdate,exactlythecenterofquarterone.Andremember,itwasaverytoughwinterquarterforeverybusiness.Andwedecidedtoadjustourplanallof45daysintotheyearandweplacedaholdonFTEintheCompany.
AndI'mgoingtorepeatthis,Itoldyouaboutthislasttimetoobecauseit'sresponsivetoyourquestion.ButplacingaholdonFTEwedidn'tputinahiringfreeze.Soifyouhave881peopleinyourdivisionyoucanhave881people.
AndinfactIamgoingtoencourageyounowmorethanevertomakesurethatthey'rethe881bestpeopleyoucouldpossiblyhavebecausethereislimitonthequalityofthepeopleintheorganization.Butyoucan'tgoto895andyoucan'tgetto906untilweseearevenueenvironmentthatisalittlebitstronger.
Andso,butforcomplianceandcompliance-relatedactivitieswherewedidn'tputanykindofaholdbasedonwhatwethinkisappropriateregulatorfocus,we'vebeendoingthatwithquitegoodsuccess.YoumightimagineoneofmychallengestohavetheemployeesofthisCompanyfeelproudthatbecausetheyare
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workingharderiswhywearedoingwellasopposedtomakethemwonderwhywearedoingsowell,whyamIworkingsohard.Andweweretryingtogetthatconversationorganizeproperly.
ButIwouldn'thesitatetoasktheemployeestocontinuetodothat(technicaldifficulty)intonextyearifthatiswhattheenvironmentisgoingtostate.Becausewereallydowanttogiveyouguyspositiveoperatingleveragetoourshareholdersonanannualbasis,Ihavealwayssaidnotinanyonegivenquarter.
Andthewaytodothatisdecidewhatyourrevenueguardrailswillbeandthentostaywithinthosebasedonyourexpenses.Andwiththecostofhealthcareandthecostofmeritincreaseswhatisleftistomakesureyouhavegotenoughtonotoverspendbeforeyouhavetherevenue.
Sowewilldomoreofwhatwedidthisyearthelongerratesstayloworflatnextyear.Bythesametoken,theminutewebelievetheyareontheirwayupwewillstarttoreleasesomeofthoselevelsoflimitsandstartmovingforwardmorequickly.
LetmealsoclarifybeforeIhearitmyownway,thatwearenotslowingdownonourinvestmentsorourcapitalexpendituresorsomeofthelonger-termnecessarythingsyouneedtodotobereadyforourfuture.Soweareputtingallofthatintothelong-termviewofwhatismostimportantandprioritizingsowearestillspendingmoney.
Andasyouknow,ourexpensesarestillgrowing,justatalevellessthanourrevenueandthatishowwewillcontinuetodoit.ButIwillagreethattheminuteratesstartmovingupandweseeevidenceitgetsaloteasiertorunacompanythislongintoarecessionandadownturn.
DavidGeorge (Analyst-Baird):
Okay,thatishelpful.Thanks.
Operator:
ErikaNajarian,BankofAmerica.
ErikaNajarian(Analyst-BankofAmerica):
Myfirstquestionis,Richard,youhavealwaystakenadvantageofincreasingyourmarketsharewhenyourpeersarechallenged.AndbasedonGovernorTarullo'sspeech,itsoundslikesomeofyourlargerpeersmayhavetocontendwithhigheroffersoncommonequityTier1.
IguessIamwonderingifthatdoestranspireandyouhavesomeofyourlargerpeersoperatingat11.5%,12%,12.5%,doesthat--dothinkthatpresentsafurtheropportunityforU.S.BankbeingthatyouwouldbeunderthatG-SIBrequirement?
RichardDavis (Chairman,CEO):
Iwilltellyou,Erika,Ithinkitisjustacontinuationofthebenefitswehaveexperienced.Becausefirstofall,youknowthatevenifthatoccursitdoesn'thavetobeovernight.Andnotunlikeus,butmostbanks,aswecontinuetogethealthier,arecreatingcapital.
SoIdon'tthinkthatisarealburdenfortheminthegettingthereandIdon'tthinkitisanydifferentthanithasbeenforthelastcoupleofyearsaswehavebeenaSIFIandtheyhavebeenG-SIFI.ButIdothinkattheendofthedayourabilitytobemoreprofitableandbemoreattractivetoshareholdersandhaveasimpler,easierCompanytounderstandandinvestin,Ithinkthatcontinuestobecomemoreandmoreobvious.
Andthatiswhywethinkweareinaparticularlygoodpositionwhereweareasthefirstnon-G-SIB.AndIthinkthereareadvantages,manyofwhicharecontinuingandsomewhichmightgetalittlestronger.ButI
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don'tthinkthatveryeventchangedanynear-termoutcomeanditjustcontinuestoremindushowfortunateweare.
ErikaNajarian(Analyst-BankofAmerica):
Gotit.Andjustafollow-upquestiontothat.Aswethinkaboutlong-termcapitalreturnprospectsfortheCompany,whichratioshouldwethinkofasyourbindingconstraint,thestandardizedCEToneoradvanced?
AndyCecere (ViceChairman,CFO):
Standardized,Erika.Soouradvancedratiois200plusbasispointsaboveouradvanced,soourstandardizedwillbeourbindingconstraintandourtargetis8%.
ErikaNajarian(Analyst-BankofAmerica):
Gotit.Thankyouverymuch.
Operator:
BetsyGraseck,MorganStanley.
BetsyGraseck(Analyst-MorganStanley):
Soacouplequestions.Oneafollowontothatonthefundingside.Isthereanopportunityherewiththerateenvironmenttomaybereset,reducesomeofthelonger-termfundingcoststhatyouhavegot?
AndyCecere (ViceChairman,CFO):
Yes,Betsy.SowhenIgaveyoumyexpectationforratesintothefourthquarterandstabilityintonextyearitreflectsthefactthatwehavesomelong-termdebtcomingdueandthatwewillberefundingorrepricingitatalowerrate.
BetsyGraseck(Analyst-MorganStanley):
Andyoucouldeventakeadvantagetodomorethanjustwhatiscomingdueorno?
AndyCecere (ViceChairman,CFO):
No,Ithinkourfocuswillbeonwhatismaturing,whichisplannedoverthenext12months.
BetsyGraseck(Analyst-MorganStanley):
Okay.Andthenseparatelyinthepaymentspace,obviouslyyouhavegotagreatpositionwitheffectivelyaclosedlooporprettyclosetoaclosedloop.Couldyougiveusanupdateonhowyouarethinkingaboutyourowndigitalwalletaswellasbroadeningoutuseoftokenizationforsecurity-relatedpurposesbeyondjustpayments?
RichardDavis (Chairman,CEO):
Well,thosearedifferentquestions.Digitalwallet,Ithinkyouknowwecontinuetoinvestinvirtuallyeveryschemewecanfindandeachpartnerthatwehave,manyofwhichwedon'tannounce.Itisnotourplantoannouncethings[' tilcontract].
ButIwilljustremindyouthatwearebothaleaderinmobilebankingbutevenmoresomobilepayments.Because,asyousaidit,wehaveaclosedloopcapability,wehavegotallsidesoftheequationandweareleveragingthat.
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Imightalsosaythatitwouldn'tyousurpriseyou,butwedoalotwithcustomers.Wehavecertaincustomergroupsthatweputtogetherthathelpusthinkthroughthenextbestideasandwegaugethetenorandinterestofsomecustomers,bothsmallandlarge,intowhatkindofthingstheymightwant.
Aclosedloop,asyouknow,hastobealargeenoughcriticalmassthatthereisenoughinterestinallpartiestoseethebenefitsofstayingoutsideofthe--we'llcallitthenormalfreeway.Andwestillhaven'tfoundthatcombinationyetandIdon'tknowthatwewill.Butwearegoingtokeeplookingforitanddoourverybesttousethedigitalenvironmentthatisadvantagetouswithafiringbusinesstocheckitout.
Asitrelatestotokenization,weareattheveryfrontofthatbecausenotonlyareweinvolvedinit,butparticularlythroughtheclearinghouseweareworkingonatokenizationprojectforallofthe24largestvolumebanksinthecountry.
Clearinghouse,asyouknow,isthehalfowneroftheACHsystem,theotherhalfbeingtheFederalReserve.Andsoweareworkingwiththemontokenization.Andansweringaquestionyoudidn'task--tokenizationreallywillsolveanumberoftheseissueswhichintheinterimlookliketheyarebeingsolvedbythe[chip]cardortheEMVsolution.
Thosearereallyjustadifferentalternativetoamagneticstripe.Andattheendofthedayit'stokenizationthat'sgoingtogiveusalltheprotectionsweareseeking.YouthinkoftheApplePay,thatistokenizationplusbiometricswhichallowsforadifferentkindofprotection.Therewilltheallkindsofcombinations.
Solook,banksaregoingtoseekwhateverwecantohavelowerfraudlossesbecause,asyouknow,mostofthesehackingcircumstances,whetherweissuethecardsnoworlater,ifthereisanylossesthebankstakethoselossesandtheyaresubstantialamountsofmoneythathavebeeninourrunratesforyears.
Andtotheextentthatwecanfindawaytomakethecustomersafer,notmakethemfeelburdenedbyhavingtobecomesafer,itreducesourfraudontheothersideanditcreatesasaferenvironment.Tokenizationisgoingtoprovideagreatsolvetothatandthencybersecurityalsogetsanadvantageastohigherlevelsofauthentication.
SoIwilljustsayinanswertoyourquestionweareattheleadingedgeofallthosetopicseitherbecauseofourpositionintheAssociationorbecauseofourcapabilityofbeingafullonpaymentsprovider.AndwearetestingallkindsofdifferentscenariosandyetIhavenothinggrandenoughtoannouncetoyouherebecausewehaven'tfoundtheHolyGrailgetonclosedloopandwearecontinuingtowatchforit.
BetsyGraseck(Analyst-MorganStanley):
Okay,butalsoontokenizationjusttobeclear,youcouldseetheopportunitytousethattechnologynotonlyinpaymentsbutalsoinyourowninternalpeer-to-peerorcustomeraccesstofundsandfundstransfer?
RichardDavis (Chairman,CEO):
Yes.Anditisprobablynottokenizationasmuchastherecouldbeanumberofversionsofclosedloopmoreprotectedinterchangesbetweenlet'ssaylargebanksthatcoulddothingsmuchmorequickly.Thatisadifferentansweraswe'retalkingaboutafasterpaymentsnetwork,movingawayfromthe24-hourcycle.AndweareannouncingIthinkverysoonthatweareallgoingtobeworkingonfasterpaymentcycles.
Theprecursortothatthoughcouldbebanktobankorlargeentitiestolargeentitiesdoingintradaytransfersonatrustedbasis,likeyouwouldwithafriend,andacceleratingwhatwouldotherwisebethenaturalandfinalevolutionoftheentirepaymentsystemfroma24-hourcycletoareal-time.
Thatisprobablyacoupleyearsaway,butfollowingthepathofsomeotherplacesaroundtheglobeandfollowingthefavorofcustomersweareallworkingonthat.AndIthinkthatissomethingthatyouwillbe
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reading--hearingalotmoreaboutinthenextcouplequarters.
BetsyGraseck(Analyst-MorganStanley):
Yes,thatmakesalotofsenseespeciallygiventheFedwhitepaperthatasksfor10yearswhichseemswaytoolong.
RichardDavis (Chairman,CEO):
Yougotit.
BetsyGraseck(Analyst-MorganStanley):
Sothenlastquestion,justslightlyseparatetopic,buttheprogressonthenearprimepushinauto.Couldyoujustgiveusanupdateonhowyouarethinkingaboutthatandhowthatisimpactingpretaxmargin?
RichardDavis (Chairman,CEO):
I'mgoingtohaveBillanswerthatquestion.
BillParker(ViceChairman,ChiefRiskOfficer):
Ithasbeensuccessful.Ithasenabledustoprovideabroaderspectrumofyesanswersinthedealershipoffice.Andwe'veexpandedourpresenceintheusedcarmarketaswell.Anditispositiveontheoverallnetinterestmarginonourindirectdealerbook.Soitisdoingwellanditisperformingasweexpected.
RichardDavis (Chairman,CEO):
Andbroadercontext,ifwerecall,insteadofjustbeingaprimelendertoanautodealer,nowthatwearedoingusedautoandsomenearprimeandtheprimewegetahighershotatgettingtheirforeplanningandgettingtherestoftheirbusinessbecausenowweareinallthecategoriestheywant,notjustselectivelypickingprime.Sothereisanotheradvantage.
AndIalsoshouldsaywehavebeenaleasingbankfor61years,whichisbackwhenleasingstarted.SowehavegotalongtenortherethatIthink--andalesscompetitiveenvironmentforautoleasingandwearegoingtocontinuetoexpandthat.Andasratesgoup,trustme,thatisoneofthefirstthingsyouwillseeispeopleflippingfromloanstoleasesforpayment.
BetsyGraseck(Analyst-MorganStanley):
Yes,exactly.Allright,thanksalot.
Operator:
KenUsdin,Jefferies.
KenUsdin(Analyst-Jefferies):
Justaquestionontheexpenses.Andy,Iheardyourcommentsaboutkindofintheotherthereshouldbekindofaplusorminus,someoffsetting.Soisthisthekindoftherightbaseforexpensesgoingforward?AndtoRichard'scommentaboutstayinginthelow50%sefficiencyratio,whatdoesthatimplyfortheabilitytodeliveroperatingleverage?Isitreallyjustaboutgettingratesupatsomepointfromhere?
AndyCecere (ViceChairman,CFO):
Right,Ken.Sointhethirdquarterwehadacoupleofitemsthatarenotgoingtorepeat.Wehadaboutjustunder$20millionofconversion-relatedexpensesprincipallyrelatedtoourRBSacquisition--orCharterOne
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acquisitioninChicago.Thosewillnotrepeatintothefourthquarter.
ThethirdquarteralsocontinuestobuildourtaxamortizationforourCDCCompany.Andthatwillcontinuetoincreaseinthefourthquarter.Thatisjustseasonal,andinthefourthquartertypicallyitisabout$75millionor$80millionhigherthanthethirdquarter.
Soyouwillseethatandthat,again,comesdowninthefirstquarter.AllinthoughIdoexpectpositiveoperatingleverageinthefourthquarterandIdoexpectourefficiencyratiotocontinuetobeinthelow50%s.
RichardDavis (Chairman,CEO):
Youknowwhatelse,Ken?Wearenotthereyet,butIthinkthe--weareprobablyatthehighestleveloftotalcomplianceandaudit-relatedcostswearegoingtohaveoverthecycle.Idon'tseethemcomingdownrightaway,soI'mnotsayingthat,buttheyaren'tsustainablythishighforthelong-term.
Sotherewillbeonanotheradvantageanditwillhappenprobablysometimenextyearwherejusttherunrateandtheexpensesstarttocomedownabitbasedonsomeofthefocuswehaveallhadincertaincategoriesthatwillsettle.
Andso,itisnotimmediatebutIthinkitwouldbeimpropertobelievethatourcurrentexpensebaserelatedallthatinthisveryquarterortheonesyouhaveseeninthelastcouplearethenormalhighratebecausetheyarenotgoingtobethathigh.
KenUsdin(Analyst-Jefferies):
Understood.Okay,great.Justasecondquestiononjustthemortgagebusiness.Thisquarteryouhadahugejumpinoriginationvolumeanditlooksliketheappsareprettyflat.AnditlooksliketheMSRhedgecamedownasyouhadforecastedforusaquarterago.Socanyoujustwalkusthroughthedriversfromhereontherevenuesideinthemortgagebusiness?
AndyCecere (ViceChairman,CFO):
Soasyoumentioned,inthesecondquarterwehadagainonservicingthatdidnotrepeatinthethirdquarter.Ifyoustripthatoutwewererelativelyflatandactuallyapplicationvolumewasalsorelativelyflat.ThefourthquarteristypicallyseasonallylowerandIwouldexpectthattooccurthisyear.Andthatwillresultinrevenuebeingalittlelower,Iwouldcallsomewherebetween5%and15%principallyduetoseasonality.
KenUsdin(Analyst-Jefferies):
Okay,gotit.Thanks,guys.
Operator:
BillCarcache,Nomura.
BillCarcache (Analyst-Nomura):
Ihadaquestiononyourfundingadvantage.Ithasn'targuablybeenasmuchofanadvantageasitcouldbegiventhestrongdepositgrowththatwehavebeenseeingacrosstheindustry.ButIwonderedifyouthoughtthatmightchange,particularlyifQEisindeedoverafterthismonthanddepositgrowthstartstoslow--notnecessarilyturnnegative,justslow?
SoIguessatwo-partquestion.First,doyouthinkdepositgrowthwillslowwiththeendofQE?Andthensecondly,wouldyourfundingadvantagebecomemorevaluableinthatkindofenvironmentassumingthatloangrowthcontinues?
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AndyCecere (ViceChairman,CFO):
Right.So,Bill,wedoassumethatat--andatQEorwhenratesstarttorisewedoassumeanoutflowofdeposits,thatispartofourratesensitivityanalysis.AndIdothinkthefundingadvantagewillbecomemoreexplicitandclearwhenthatoccurs.
ItistherenowbecausewestillhavesomedebtonthebooksandIthinkthatadvantageshowsitselfbutitwillshowitselfmoreasmoredebtreplacesdepositsasratesmoveup.
Andimportantly,about15%ofourdepositsarecorporatetrustrelated,whicharelesssensitivetoratesmovingupsoitismoreafunctionoftheoperatingmodelofthecorporatetrustbusiness.SothathelpsusretainacorelevelofparticularlyDDAdepositsthatwillbehelpfulasratesmoveup.
BillCarcache (Analyst-Nomura):
Right.ButIwashopingmaybetofollowuponthat,Andy,ifmaybeyoucouldseparateforustheriseinrates,whichtherearesomeconcernsthatthatisbeingpushedfartherout.AndtheendofQE,whichmanybelieveisstillgoingtohappenthismonth.
SoifwehavethatscenariowheremaybewejustsetthehigherratesasideforasecondandjustlookattheimpactofQEcomingtoanend.Wouldthatalonebeenoughtoslowindustrydepositgrowthandbringthefundingadvantagetobemore--playmoreofanimportantrole?
AndyCecere (ViceChairman,CFO):
Ithinkwhatwillslowthedepositgrowthwillbegrowthintheeconomy.AndasbusinessesstarttoinvestmoreingrowthandexpansionandsuchIthinkthefirstplacetheywillgoistheirownfunds,whicharecurrentlyonourbalancesheet.AndIthinkthatwillbetheprincipalchange.
Andthensecondly,asratesstarttomoveuptheopportunitycostofhavingmoneyinDDAgoesupandIthinkyouwillstarttoseeashiftoutofDDA.Butwhentheeconomystartstogrowthefirstplacebeforeweseeloangrowthwewillseedepositdeclines.
BillCarcache (Analyst-Nomura):
Gotit.AndIwantedtoalsofollowuponsomeofyourcommentsaboutauto.RegulatoryinterventionhasbeeninfocusinautofinanceandIwashopingmaybeyoucouldjustshareanythoughtsonthepotentialfortheCFPBtobringnon-bankautofinancecompaniesunderitsoversightandwhatthatcouldmeanforyouandtherestofthebankingindustry.AndIguessparticularlytotheextentthattherearesomenon-banklenderswhoeithergoodpushedoutorseetheircostofcompliancerise?
RichardDavis (Chairman,CEO):
Bill,thisisRichard,IthinkuntilweseeanyevidenceoftheCFPB(inaudible)anyactivitiesofthenonbankswearejustgoingtopresumeitwillstaythewayitis.Asyoucansee,itdidn'tstopusasabankingindustrytostayinthebusiness.Wearedealingwithalittlehigherlevelofriskasitrelatestothefairlendingrulesandthethingsthathavebeenset.
ButIthinkwehaveallgottenbetteratitandknowwhattherisksare.Westillarethebest,Ithink,providersoflendingtotheautobusinessesbecauseofourcostoffundingandbecausewearemoretraditionalbanks.
IhaveheardthesamethingyouhaveheardandIappreciatethefactthattheyaregoingtogetsomeofthenotbanks.AndIdothinkthatiftheywerethatwouldbeanetpositivejustbecausetheoperatingparadigmswouldbethesameforallofus.
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Butitwon'tchangeinthenearterm,itwouldn'tchangeinthenearterm.Itwouldn'tchangeanythingwearedoingatall.AndIdon'tthinkuntilweseeevidenceofitforsomeperiodoftimelikeayearormoreanyofusaregoingtoadjustanyofourthinkingbasedonthat.
Soitwilltakeawhileforthemtodecidewhichpartofthespacetheywanttogetinto,whatitmeanstooverseethem,whatadjustmentstheymaymake.AnditwilltakeIthinksuchasubstantialamountoftimethatIwouldn'texpectanyadjustmentforatleastayearbecauseittakesthatlongforsomethinglikethattocultivate.
BillCarcache (Analyst-Nomura):
Understood,thankyou.
Operator:
JonArfstrom,RBCCapitalMarkets.
JonArfst rom(Analyst-RBCCapitalMarkets):
Justafewfollow-ups.Bill,canyoujusttouchalittlebitonautocharge-offsandwhatisnormalforyourportfolio?Thereisalittlebitofanuptick,I'msureitisexplainable,butjustmaybejustgiveusanideaofwhatisgoingonthere?
BillParker(ViceChairman,ChiefRiskOfficer):
Well,partofthatisrelatedtotheexpansionthatwetalkedaboutearliergoingintothenearprimespace.Sosomeofthatiscomingtoseason.Andthenseasonallythereisusuallyhigherlossesinthewintertimethaninthesummermonths.Sothatisallrelativelynormal.
Andjustmostofourbookisstill--eventhoughwedidexpandthelowend,mostofthebookisstillveryprime,highprimeportfolio.Sotheleveloflossesyouseethisquarter,they'llbeprettystablefromthere.
JonArfst rom(Analyst-RBCCapitalMarkets):
Okay,good.AndyorRichard,justontheriskandcompliancespending.Ithinkthatisgoodnewsthatwearemaybeatthepeak.ButcanyougiveusanideaofthemagnitudemaybeyearoveryearintermsofspendingandFTEsthatyouhavedevotedtoriskandcompliance?
AndyCecere (ViceChairman,CFO):
IthinkaboutthethirdquarterversusayearagoIwouldsaywehavesomewherebetween$30millionand$40millionofadditionalexpenseintherunraterelatedtoriskandcompliance.
JonArfst rom(Analyst-RBCCapitalMarkets):
Okay,allright.Butyouarethinkingthatthatisnearthepeakatthispoint?
RichardDavis (Chairman,CEO):
Yes,butIalsosaiditstaysthereforawhile.Inthemidtermitgoesdown,thereisanewpermanentlevel.Youdidn'taskAndyforthreetofiveyearsago,butitwouldbeprobablythreetimeswhatitwasacoupleyearsago.Andsowearegettingtothatplacenowandwewilljustreassignsomeoftheparties.
Becausecompliance,asyouknow,isn'tjusta--itisn'tjustaunitoradivision,itisacrosseverypartofthebusinessline.Soevenmysalesteaminthefrontlinesallneedtohavemoreofacomplianceview,we'llcallitthefirstlinedefense.Soeveryemployeehastobethinkingmoreappropriatelyaboutdoingthingsperfectlythe
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firsttimeand,therefore,thereisanextracostineachincrementalFTE.
Soitisnotjustagroupwebringit,butitisawayofdoingbusiness.Andwehavebeenaddingthattoeverybody'sjoboverthelastcoupleyears.Pluswehavebeenhavingoutsidethirdpartiesandwehaveaddedbulkedupstaffincertainplacestodealwithregulatoryissuestoalignwiththenewhighermarkof[HIFN]standards.Butoncewegetthatsettled,Icanseesomeofthatgoingbackdownabitaswegetmoreefficient.Andasyouknow,weareprettyefficientonceweknowwhattherulesare.
JonArfst rom(Analyst-RBCCapitalMarkets):
Okay.Andthenjustonemoreoncapitalreturn.Richard,youare--sometimesquotesgettakenoutofcontext,butyouareontherecordofsayingthatyouthink2015couldtakeoff.Wonderingifyoufeellikethecapitalreturninthecurrentrangeisappropriatefornextyear.Doyoufeellikeyoucanpotentiallyreturnmore?Doyoufeellikeyouneedtoretainsomemoreforsomemaybegreaterexpectedbalancesheetgrowthin2015?Justwalkusthroughthat.
RichardDavis (Chairman,CEO):
Yes,Jon,thatisahardquestion,right.ButIwilltellyoutotheextentthatwecanoperate,andhavenowforatleastfiveyearsinthisverylowinterestratesloweconomy,Ithinkwehaveprovenourabilitytowithstandamorechallengingenvironment.Butwearelookingforwardtothemomentwhen--Ithinkwhenratesmoveup,itislessaproxyforthefactthatwearepoisedtodobetterwhenratesmoveup.Itmeansthattheeconomyisdoingbetter,andwegetwaymorebenefitoutofthat.
Soforme,itisaproxyofwhentheeconomystartstoturnup.Wecertainlythinkwecanprotectourcapitalpositions,thatisforsure,becauseweknowhowtomanageitinanenvironmentlikethis.Butthesoonerratesmoveupand,again,asaproxyfortheeconomydoingbetter,thesoonerwewillbeabletotelegraphthatwewillbeincreasingourcapitaldistributions.
UntilweseethatI'mgoingtostay(inaudible)andjustindicatethereisapositivebiasassoonasweseetheeconomyimprove.Wearecertainlysafeonwhatwehave,butwearegoingtobecarefulontelegraphingwhenwecanmoveupuntilweseeamoresustainedrevenueenvironmentwhichallowsusthereforetopredictahigherlevelofcapitalreturn.
JonArfst rom(Analyst-RBCCapitalMarkets):
Okay,allright,thankyou.
Operator:
MattBurnell,WellsFargoSecurities.
Matt Burnell(Analyst-WellsFargoSecurities):
Justmaybe,Andy,aquestionforyourelatedtoexpensesnextyear.Questionshavecomeuponacoupleofearliercallsaboutpensionexpense.Ithinkyouguidedthisyearthatpensionexpensewillbedownabout--itwillbedownabitfromtheprioryear.
AndIamjustcurious,Irealizewearenotatyearendwhenyousetthepensionrate--orthediscountrateandthepensionexpense.Buthowareyouthinkingaboutpensionexpensesaffectingyouroverallexpensesin2015?
AndyCecere (ViceChairman,CFO):
Sure,Matt.Soifyouthinkabout2013and2014,becauseoftheincreaseinthediscountrateweactuallyhad
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alowerpensionexpenseofabout$130milliononanannualbasis.IfIweregoingtoresettheratetodayIwouldlosethat$100millionorsobecauseratesarebacktowheretheywereayearago.Butasyousaid,wewon'tknowthatuntiltheendoftheyear.
Matt Burnell(Analyst-WellsFargoSecurities):
Okay.Andjustaquestion,Richard,Ithinkyoumentionedhome-equityloansweregrowing,thatthatisarelativelynewtrend.Couldyougiveusalittlemorecoloronwherethatdemandiscomingfrom?Arethereanygeographiesthataregrowingfasterinthatproductspecificallythanyouhaveseeninthepast?AndI'mjustcuriousaboutanycoloryoucanprovideoncompetitionfromeitherlargerregionalbanksormaybesomeofthesmallerlocalbankswhoarelookingtogetintothatspaceaswell.
RichardDavis (Chairman,CEO):
Yes,so,Matt,let'sgobacktothebeginning.U.S.Bankforourbalancesheetdoesn'thaveanoversizedhome-equityportfolio,neverhave.AndifyoulookbacktojusttheMortgageBanking,oneofthethingswedidn'thavegoingintotherecessionwasanoverlyactivesubprimeornearprimemortgagebusinesseither.
Sowearenotfeedingoffofalotofrunoff,wedon'thavealotofdealsthatarecomingdueattheirfive-orseven-yearmarkthatmight'vebeenoriginatedintheearlierdays.Soweactuallyhaveaprettycoresteadybook.Soforusitisreallysimplyamatterofthepaydownsnowarebeingoutpacedbytheneworiginations.Andagain,youwilllookatthesizeofourportfolio,it'sprettyaverage.Andthatisokaybecausethequalityisveryhigh.
Theapplicationlevelsareparticularlyhighrightnowandweareveryaggressiveinamarketingcampaignwithaninternalratepricingfeatureandthatisacrosstheentire25statesandthat'sservingusquitewell.
IthinkwhenIwastalkingaboutorpricingadvantages,everyoneonthecallrightfullyjumpstoWholesaleBankingandthinksabouttheadvantageswehaveoncostoffundsbasedonourhighestdebtratingsandthattranscendsintobetterratesandcompetitiveissuesonadjustable-rate.ButwecandoittooonthingslikeConsumerProductsaslongaswematchfunditproperly.
Andso,wehaveaverystrongnewaccountpipelinegoingnow.Andtheactivationrateisevenmoreimpressive.SoI' llgiveyouanexample.Oursix-monthactivationrateonayearagowas61%,sowegetalineofcreditonand61%withinsixmonthslaterwasbeingused,thatisnowupto77%.
Andso,thatmeansthatwearefindingbettercustomerswhoreallywantitandneeditandareusingit.Andincreasethatwithafixedratelockoptionwhichisanotherfeaturewehaveincludedinouradvertisingandwearespendingmoneytotalkaboutitinbothsocialmediaandintraditionalmarketing.Letthatbeoneofourleadingproducts.
Ifyoulivedinourmarket,likeJondoes,youwouldseethecommercialsandyouwouldhearthecommercialandyouwouldseesomeofthesocialmedia.Soweareputtingalotofenergybecausewereallywantthatto[term]permanentlyandwethinkthatthatisoneofthebestcorequalitytypesofloansthatyoucanhave.
Anditisacrossthewholestate--thewholecountryforusparticularly--mostnotablyinthewesternpartwherethebalancesonmarketsaregrowingfaster,sohomeappreciationisrelatedwhichtotallymakesalotofsense.AndIwouldsayouroutlookforquarterfouristocontinuetoseesomegrowthinboththeoriginationsandthebalancesheet.
Sothatisaprettypositivestoryoffofkindofaslowstartingpoint,butwithsomepermanencearounditnotwhich,upuntilrecently,mighthavebeenjustoneortwomonthsandthenafallbackwards.AndIthinkweareonasustainablegrowthpatterntogrow.
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Matt Burnell(Analyst-WellsFargoSecurities):
Okay,thankyouverymuch.
Operator:
ChrisMutascio,KBW.
ChrisMutascio (Analyst-KBW):
Andy,Iwonderifyoucouldtalkalittlebitaboutthemerchantacquiringbusiness,theunderlyingtrends.WhatI'mtryingtogetat--whenIlookatacquiringrevenuepertransaction,that'sdownabout5%yearoveryearandtheacquiringspreadisalsodownabout6%yearoveryear.And(inaudible)alongertrendofdeterioratingofthosetwometricscanyoukindofgivemesomecolorofwhatisgoingoninthatbusinessfromkindofamarginandspreadperspective?
AndyCecere (ViceChairman,CFO):
Yes.SotheDIAratethisquarterwasabout40basispointsanditisdownalittlebitfromayearago.Tworeasonsitisdown.Numberoneisalittlebitofmarginpressure,asyoutalkedabout.Ithinkthatisbeginningtostabilize.Butwedidseethelast12monthshavesomepressureinpricing.
Thesecondfactoristhemixofbusinessesthatweacquiredfor.Sototheextentthatwherearelargeretailersorairlinesinparticularthereisalittlethinnerspreadthere.ButIwouldsaythedeclinerelatedtomarginpressureisbeginningtostabilize,therestofitwillbedependingonthemixofspendinthenext12months.
ChrisMutascio (Analyst-KBW):
Great.Thankyouforthecolor.
Operator:
MikeMayo,CLSA.
MikeMayo (Analyst-CLSA):
Ihadafewfollow-upquestions.First,whatdoyouestimatetobeyourdepositbeta?
AndyCecere (ViceChairman,CFO):
Mike,thisisAndy.Itrangesfrom5%to90%dependinguponthedepositproduct.Soitisnotjustonenumber,wehaveverydetailedbyproductbyline.
MikeMayo (Analyst-CLSA):
Andonaverage?
AndyCecere (ViceChairman,CFO):
Onaverageitdependsuponthedepositmixwehaveanypointintime.Butifwethinkaboutafewyearsagowhereitwaslet'ssay20%to30%,itisabovethatnowbecauseofthehigherlevelofDDAandotheractivitieswehave.Soitishigherthanitwasinourmodeling.
MikeMayo (Analyst-CLSA):
Okay.Richard,youtalkedaboutthecapitaladvantageandthatgivesyouapricingadvantagewithhigher-qualityborrowers.Andyousaiditisnotreallyanythingnew,itisacontinuation.Butcanyousomehow
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quantifythat?
Imean,youdohaverequiredregulatorycapitalthatissignificantlybelowyourmuchlargerpeers.AndIamjusttryingtofigureouttowhatdegreedoesthatgiveyouapricingadvantage,whichinturnallowsyoutogainmarketshare?
AndyCecere (ViceChairman,CFO):
So,Mike,ifyouthinkaboutit,weareassumingourSIFIbuffersisabout50basispoints.Wedon'tknowthat,thatisourassumption,thatiswhenwegettoour8%.SoifyouareaG-SIBthathasa[250]buffer,solet'scallit200basispointsmoreandyougothroughthemath,youwouldhaveabouta30to35basispointsadvantagetoachievethesamereturnorlessthanthatandgetahigherreturn.Soitisnotinsignificant,itisaprettysignificantadvantage.
RichardDavis (Chairman,CEO):
And,Mike,additionally,whichwe'vetalkedabout.Whenwegointothemarketifwehavetoissueanykindofadebt,wehaveanadvantagetoeveryotherbank.Andwhateverthattimeperiodisandhowevermuchthatraisewas,wehavethatmuchdeltatoofferup.AndasIsaidearlier,itcouldbetowholesale,itcouldevenbetoconsumerbusinessesandthereisanetpositive.
Buthereisthetrick,youonlyuseitonthehighestendqualitycustomersbecauseotherwiseyouarestartingtodipdownintothingswithloanlossesandcompliancecostsandthingsyoumaynotreallyunderstand.
SoforusI'dexpectyoutohearonothercallsthatthepricingcompetitivenessisstillhighandprettypeaked.Youhaven'theardthatherebecauseweeitherarepartoftheproblemorwechoosetouseourfundingadvantagetobemorecompetitiveonpricenotonunderwriting.Andforthemostpartmostofthepricingseemstobeprettystableinthecompetitiveenvironmentasweseeit.Sowearenotfeelingdisadvantagedbyiteither.
MikeMayo (Analyst-CLSA):
Soyougotothetableandyouarecompetingtogetalargehigh-qualitycorporateclientandyousaywewillpricethisloan30basispointsless,giveusyourbusinessor25basispointsless?Isthattheconversation?
AndyCecere (ViceChairman,CFO):
Iwouldsaythatistheconversationmoreforthemiddlemarket.OnalargeclientitismoreofanationalfundingmarketandinthatexampleIthinkwhattheoutcomeiswehaveahigherreturnforthesameprice.
RichardDavis (Chairman,CEO):
That'sright.
MikeMayo (Analyst-CLSA):
Isn'tthatsomewhatsimilarthoughtootherregionalbanksthatalsohaveacapitaladvantageversusthelargestpeers?
AndyCecere (ViceChairman,CFO):
Capitalyes,debtratingno.
RichardDavis (Chairman,CEO):
Itisatwofer.
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MikeMayo (Analyst-CLSA):
Andthenthelastquestion.Richard,tofollowupbefore,yousaid2015cantakeoff,itisrightaroundthecorner.Ithinkthereissomequotesandthatalllooksgreat.Andweareallthinking,okay,ifRichardDavisisrightthiseconomyissettotakeoff.Andthenyoulookatthe10-yearbondwhichissayingtheopposite.Sowhoisright,RichardDavisorthe10-yearbond?
RichardDavis (Chairman,CEO):
Wow.Ihavenevermetthe10-yearbond.Iamgoingtogowithme.ButI' lltellyouwhat,Idothink--andIhavesaidthisbeforetoo--Ithinkthestockmarketisaheadfakeifpeopleareusingthatasameasureofthequalityorthewealthoftheintentionofconsumerstostartspendingandacting.
Infact,insomerespectsthestrongerthestockmarketisbecausethereisnowhereelsetoputit.SoIamnotchangingmyviewthatin2015thingscanturnaroundquicklyandstarttotakeoffbecausewhentheydotakeoffIthinkitisprettylikelytheywillbefast.
Andagain,thepipelinesIamtalkingabout,customerintentionsI'mtalkingabout,(inaudible)waitingforthefinaldecisionwhenratesstarttomovewhichwillcreatethisIthinktsunamieffectofpeopleactingquickly.IamgoingtosticktowhatIsaidbeforeandIthinkitisnextyear.Andwhenitdoesithappensfast.
Idon'thaveanyevidencethatsaysotherwise.AndIamnotrespondingtothevagariesoftwoweeksofeither10-yearinterestratesorstockmarketvariances,Iamjustgoingtostickwithit.
MikeMayo (Analyst-CLSA):
Allright,thankyou.
Operator:
Thatwasourfinalquestion.Presenters,doyouhaveanyclosingremarks?
SeanO’Connor(SVP,Director-IR):
Well,thankyouforlisteningtoourcallandpleasecallmethisafternoonifyouhaveanyfurtherquestions.Thanks.
Operator:
Thankyou.ThisconcludesU.S.Bancorp'sthird-quarter2014earningsconferencecall.Youmaynowdisconnect.
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