US Bancorp (USB) Earnings Report: Q3 2014 Conference …s.t.st/media/xtranscript/2014/Q4/12924387.pdf · Jessica Ribner; FBR Capital Markets; Analyst ... David George; Baird; Analyst

CompanyName:U.S.BancorpCompanyTicker:USBSector:Financial

Industry:BankingEventDescription:Q32014 EarningsCall

©2014TheStreet,Inc.AllRightsReserved Page1of 21

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.




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.




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.




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.


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?





Hi,Jessica,goodmorning.


Goodmorning.Wejusthadonequestion.JusttakingintoaccounttherecentchangesannouncedbytheFHFAintermsofthe3%downpaymentandsomerepsandwarrantsclarity,doesthatchangethewaythatyouthinkaboutoriginatingdownthecreditspectruminthemortgagespace?Orhowdoyouguysviewthat?


Itreallydoesn't.ThisisRichard.Itisagoodsoundbite,butIthinkthetestcomesinwhetherornotthereisaprivatemarketforinvestorstopickuptheseloanswithlowerornodownpayment.AndIamnotsuretherewillbe.

SowearegoingtocontinuetostickwiththeFHFAFreddieandFanniedealsthatweoriginatethatweselloff.Wewillcontinuetooriginateloansthatweholdonthebalancesheetforourmorewell-heeledcustomers.AndwewillcontinuetowatchtheprogressinthisspacebecausewelikeverymuchtofeelmorecomfortablemakingloanswithIwouldsayeitheralowerFICOwithlessdownpayment.

Butunlessweareconvincedthattherulesaregoingtobepermanentandthereisnotgoingtobealookbackorareachbackinfuturetimesorthattherewon'tbeamarketforthis,wearesimplygoingtostayonthesidelinesintheconcernsofbothcompliancerisksandotheruncertainties.Andwewilljustcontinuetodowhatwearedoingnow,whichisIthinkissufficientforthenearterm.


Whatdoyou--justasafollow-uptothat,whatdoyouthinkwould--whatdothinkthattheywouldhavetosayorcomeoutwithtomakeyoumorecomfortableinthatspace?Becauseyouweretalkingaboutareachbackorsomethinglikethat.


Right,right.Thatisagreatquestion,Jessica,andIamnotsureIhavetheanswerbecauseIwouldhavetoseeitorbelieveitandthentestit.Andsoitisgoingtotakeawhileformetohaveabeliefthatthislitigationriskisn'tasgreatascompliancerisk,whichusedtobebothlessimportantthancreditrisk.

Sowhenyouthinkaboutalltheriskswehave,creditriskwecanmanage,wehavedonethatthroughthewholecycleandwediditwellbefore.Intermsoflitigationrisk,thatiskindofthenewuncertainty.AndwiththestatuteIthinkoftimecominguponus,theremaybeasofteningofsomeofthoselookback/reachbacks.

AndwhereIstarted--thereisaprivatemarketouttherehasgottosaytheywanttobuytheseloanswithouttheguarantees.Andtheygottobewillingtotakethoseloansonwiththoselesserqualitycustomersundertheriskthatperhapstheywon'trepay.Andthatisgoingtobeamarketthatisgoingtobetestedovertimewithanumberofplayersthatwillhaveachancetocomein.Andonceweseethatappetitethatwillprobablybethefirstevidencewewillbelookingfor.


Great,thankyousomuch.

Operator:

JohnMcDonald,SanfordBernstein.

JohnMcDonald(Analyst-SanfordC.Bernstein):




Justwonderingabouttheoutlookforthenetinterestmarginnextquarter.Andy,couldyougiveussomeoftheputsandtakesforthemarginandwhatkindofoutlookyouhavefornetinterestmarginandnetinterestincomegrowth?


Sure,John.Soifyouthinkaboutthirdquarterversussecond,weweredone11basispointsandthatwasthreethings.Thefirstis5basispointsforCAAandthatisdone,sothatwon'trepeatinthefourthquarter.

Thesecondwasabout3basispointsforthesecuritiesbuildandthatwillcontinueinthefourthquarter.Weendedthisquarteratabout$96.5billion.We'llendthefourthquarterjustover$100billion.Sowewillhaveadditionalmigrationdownbecauseofthat3to4basispoints.

Thethirdfactorwastheloanmix.Mostofourgrowthwasinwholesaleasopposedtoretailandthatwas2to3basispointsofpressure.Thatwillcontinuelikelyinthefourthquarteralso.

Soallin,down5to7forthefourthquarter,butIstillexpectnetinterestincometogrow.Andthenfinally,thatpressureonsecuritiesbuildwilldiminish,willgoawaybeginningin2015.


Okay,youwillbedoneyouthinkbythefirstquarter?


We'll--ourexpectationisthatwewillendthisyearatorabove100%intheLCRratio.SoournetsecuritiesgrowthwillbemoreconsistentwiththeoverallbalancesheetgrowthasopposedtobuildingadditionaltomeettheLCRratio.


So,John,(inaudible--multiplespeakers)compression--allthatremainsfor2015isloanmixandinterestratesingeneral.Butwehavereallygottenridoftheothervariablesthathavebeenmovingallthroughthisyeartakingthenumberdown.


Okay.And,Richard,couldyougiveussomecoloronyourfeelingsaboutloangrowthfromhere,bothjustkindoftheabsolutelevelofgrowthyouarelookingforandthenthemixfactors?


Iamfeelingprettygoodactually.Soletme--Ishouldsaythistoallofyou.First,I'mgladtoseethatyouareevenonthecall.Ithoughtbeinglastwemightnothaveanybodycometoourparty.Wealwaysannounceourearnings…


Reportingwith10otherbanksthistime.


Well,Iwilltellyouwhat,Imeanwhocaresaboutwhatwehavetosaynow,right?WehavealwaysannouncedearningsontheWednesdayafterourBoardmeeting.AndtheBoardmeetinghasalwaysbeenthethirdTuesday.ForthefirsttimeinmyyearsasCEO--myeightyearsasCEO,the--that(inaudible)thefourthWednesday.Andsothatiswhywearesolateinthecycle,I'mtalkingtoallofyouaweeklater.




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.


Okay.Andalittlebitmore--thanksforthecolor.It'salittlebitmoreledbythecommercialwhichistheloanmiximpactontheNIM?


Yes,Ithinkitisverymuchthesame,whatyouhaveseeninthelastfewquarterswillbeverymuchthesamedominatedbyC&I.Butstartingtoseeconsumersstartingtovieforitspositionnow.QuarterfourwillbestrongconsumerwithcreditcardbutwillstillbeheavilymixedtowardsC&Iwhichwillstillputsome



©2014TheStreet,Inc.AllRightsReserved Page8 of 21

pressureonNIM.Butaswetalked,itstartstowanelaterintotheprocess.


Okay.Andonequickieonthenoninterestincome.Thecreditanddebitcardrevenueswerealittlelighterthanexpected.Youmentionedrewardscostinthewriteup.Isthatkindofthenewcostofbusinessinarewardcentricworldhereorisitanykindofone-timecatchupinthere?


ThisisAndy,John.Sotwothings.Oneisjustanumberofprocessingdaysthisquarterof2014versusthethirdquarterof2013causedacoupleofpercentagepointsdecline,itwas90daysversus94.Sothatisjustanuancewiththenumberofbusinessdays.

Andthesecondthingwastherewards,whichisalittlebitelevated,butIwouldexpectittobeatthislevelorslightlydownwardinthefuturequarters.Butifyouthinkaboutitcardsonacorebasisextheprocessingdayswasupcloserto5%to6%.


Okay.Thanks,guys.

Operator:

DavidGeorge,Baird.

DavidGeorge (Analyst-Baird):

Richard,wantedtodovetailtoJohn'squestion.It'smorebigpicture,butaverypopularmacrotopicandthatisrates.Wantedtoget,notsomuchyourviewsonrates,butmorefromtheperspectiveofhowyouarethinkingaboutrunningtheCompany,allocatingcapital,makingincrementalinvestment,etc.

DoyouruntheCompanyanydifferentlyifratesstayherelongerthanpeoplethink?Andanykindofindustryimplicationsthatyouthinkcouldemanatefromthattotheextentthatmacrobackdroppersists?Thanks.


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




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?


Iwilltellyou,Erika,Ithinkitisjustacontinuationofthebenefitswehaveexperienced.Becausefirstofall,youknowthatevenifthatoccursitdoesn'thavetobeovernight.Andnotunlikeus,butmostbanks,aswecontinuetogethealthier,arecreatingcapital.

SoIdon'tthinkthatisarealburdenfortheminthegettingthereandIdon'tthinkitisanydifferentthanithasbeenforthelastcoupleofyearsaswehavebeenaSIFIandtheyhavebeenG-SIFI.ButIdothinkattheendofthedayourabilitytobemoreprofitableandbemoreattractivetoshareholdersandhaveasimpler,easierCompanytounderstandandinvestin,Ithinkthatcontinuestobecomemoreandmoreobvious.

Andthatiswhywethinkweareinaparticularlygoodpositionwhereweareasthefirstnon-G-SIB.AndIthinkthereareadvantages,manyofwhicharecontinuingandsomewhichmightgetalittlestronger.ButI




don'tthinkthatveryeventchangedanynear-termoutcomeanditjustcontinuestoremindushowfortunateweare.


Gotit.Andjustafollow-upquestiontothat.Aswethinkaboutlong-termcapitalreturnprospectsfortheCompany,whichratioshouldwethinkofasyourbindingconstraint,thestandardizedCEToneoradvanced?


Standardized,Erika.Soouradvancedratiois200plusbasispointsaboveouradvanced,soourstandardizedwillbeourbindingconstraintandourtargetis8%.


Gotit.Thankyouverymuch.

Operator:

BetsyGraseck,MorganStanley.

BetsyGraseck(Analyst-MorganStanley):

Soacouplequestions.Oneafollowontothatonthefundingside.Isthereanopportunityherewiththerateenvironmenttomaybereset,reducesomeofthelonger-termfundingcoststhatyouhavegot?


Yes,Betsy.SowhenIgaveyoumyexpectationforratesintothefourthquarterandstabilityintonextyearitreflectsthefactthatwehavesomelong-termdebtcomingdueandthatwewillberefundingorrepricingitatalowerrate.


Andyoucouldeventakeadvantagetodomorethanjustwhatiscomingdueorno?


No,Ithinkourfocuswillbeonwhatismaturing,whichisplannedoverthenext12months.


Okay.Andthenseparatelyinthepaymentspace,obviouslyyouhavegotagreatpositionwitheffectivelyaclosedlooporprettyclosetoaclosedloop.Couldyougiveusanupdateonhowyouarethinkingaboutyourowndigitalwalletaswellasbroadeningoutuseoftokenizationforsecurity-relatedpurposesbeyondjustpayments?


Well,thosearedifferentquestions.Digitalwallet,Ithinkyouknowwecontinuetoinvestinvirtuallyeveryschemewecanfindandeachpartnerthatwehave,manyofwhichwedon'tannounce.Itisnotourplantoannouncethings[' tilcontract].

ButIwilljustremindyouthatwearebothaleaderinmobilebankingbutevenmoresomobilepayments.Because,asyousaidit,wehaveaclosedloopcapability,wehavegotallsidesoftheequationandweareleveragingthat.




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.


Okay,butalsoontokenizationjusttobeclear,youcouldseetheopportunitytousethattechnologynotonlyinpaymentsbutalsoinyourowninternalpeer-to-peerorcustomeraccesstofundsandfundstransfer?


Yes.Anditisprobablynottokenizationasmuchastherecouldbeanumberofversionsofclosedloopmoreprotectedinterchangesbetweenlet'ssaylargebanksthatcoulddothingsmuchmorequickly.Thatisadifferentansweraswe'retalkingaboutafasterpaymentsnetwork,movingawayfromthe24-hourcycle.AndweareannouncingIthinkverysoonthatweareallgoingtobeworkingonfasterpaymentcycles.

Theprecursortothatthoughcouldbebanktobankorlargeentitiestolargeentitiesdoingintradaytransfersonatrustedbasis,likeyouwouldwithafriend,andacceleratingwhatwouldotherwisebethenaturalandfinalevolutionoftheentirepaymentsystemfroma24-hourcycletoareal-time.

Thatisprobablyacoupleyearsaway,butfollowingthepathofsomeotherplacesaroundtheglobeandfollowingthefavorofcustomersweareallworkingonthat.AndIthinkthatissomethingthatyouwillbe




reading--hearingalotmoreaboutinthenextcouplequarters.


Yes,thatmakesalotofsenseespeciallygiventheFedwhitepaperthatasksfor10yearswhichseemswaytoolong.


Yougotit.


Sothenlastquestion,justslightlyseparatetopic,buttheprogressonthenearprimepushinauto.Couldyoujustgiveusanupdateonhowyouarethinkingaboutthatandhowthatisimpactingpretaxmargin?


I'mgoingtohaveBillanswerthatquestion.

BillParker(ViceChairman,ChiefRiskOfficer):

Ithasbeensuccessful.Ithasenabledustoprovideabroaderspectrumofyesanswersinthedealershipoffice.Andwe'veexpandedourpresenceintheusedcarmarketaswell.Anditispositiveontheoverallnetinterestmarginonourindirectdealerbook.Soitisdoingwellanditisperformingasweexpected.


Andbroadercontext,ifwerecall,insteadofjustbeingaprimelendertoanautodealer,nowthatwearedoingusedautoandsomenearprimeandtheprimewegetahighershotatgettingtheirforeplanningandgettingtherestoftheirbusinessbecausenowweareinallthecategoriestheywant,notjustselectivelypickingprime.Sothereisanotheradvantage.

AndIalsoshouldsaywehavebeenaleasingbankfor61years,whichisbackwhenleasingstarted.SowehavegotalongtenortherethatIthink--andalesscompetitiveenvironmentforautoleasingandwearegoingtocontinuetoexpandthat.Andasratesgoup,trustme,thatisoneofthefirstthingsyouwillseeispeopleflippingfromloanstoleasesforpayment.


Yes,exactly.Allright,thanksalot.

Operator:

KenUsdin,Jefferies.

KenUsdin(Analyst-Jefferies):

Justaquestionontheexpenses.Andy,Iheardyourcommentsaboutkindofintheotherthereshouldbekindofaplusorminus,someoffsetting.Soisthisthekindoftherightbaseforexpensesgoingforward?AndtoRichard'scommentaboutstayinginthelow50%sefficiencyratio,whatdoesthatimplyfortheabilitytodeliveroperatingleverage?Isitreallyjustaboutgettingratesupatsomepointfromhere?


Right,Ken.Sointhethirdquarterwehadacoupleofitemsthatarenotgoingtorepeat.Wehadaboutjustunder$20millionofconversion-relatedexpensesprincipallyrelatedtoourRBSacquisition--orCharterOne




acquisitioninChicago.Thosewillnotrepeatintothefourthquarter.

ThethirdquarteralsocontinuestobuildourtaxamortizationforourCDCCompany.Andthatwillcontinuetoincreaseinthefourthquarter.Thatisjustseasonal,andinthefourthquartertypicallyitisabout$75millionor$80millionhigherthanthethirdquarter.

Soyouwillseethatandthat,again,comesdowninthefirstquarter.AllinthoughIdoexpectpositiveoperatingleverageinthefourthquarterandIdoexpectourefficiencyratiotocontinuetobeinthelow50%s.


Youknowwhatelse,Ken?Wearenotthereyet,butIthinkthe--weareprobablyatthehighestleveloftotalcomplianceandaudit-relatedcostswearegoingtohaveoverthecycle.Idon'tseethemcomingdownrightaway,soI'mnotsayingthat,buttheyaren'tsustainablythishighforthelong-term.

Sotherewillbeonanotheradvantageanditwillhappenprobablysometimenextyearwherejusttherunrateandtheexpensesstarttocomedownabitbasedonsomeofthefocuswehaveallhadincertaincategoriesthatwillsettle.

Andso,itisnotimmediatebutIthinkitwouldbeimpropertobelievethatourcurrentexpensebaserelatedallthatinthisveryquarterortheonesyouhaveseeninthelastcouplearethenormalhighratebecausetheyarenotgoingtobethathigh.


Understood.Okay,great.Justasecondquestiononjustthemortgagebusiness.Thisquarteryouhadahugejumpinoriginationvolumeanditlooksliketheappsareprettyflat.AnditlooksliketheMSRhedgecamedownasyouhadforecastedforusaquarterago.Socanyoujustwalkusthroughthedriversfromhereontherevenuesideinthemortgagebusiness?


Soasyoumentioned,inthesecondquarterwehadagainonservicingthatdidnotrepeatinthethirdquarter.Ifyoustripthatoutwewererelativelyflatandactuallyapplicationvolumewasalsorelativelyflat.ThefourthquarteristypicallyseasonallylowerandIwouldexpectthattooccurthisyear.Andthatwillresultinrevenuebeingalittlelower,Iwouldcallsomewherebetween5%and15%principallyduetoseasonality.


Okay,gotit.Thanks,guys.

Operator:

BillCarcache,Nomura.

BillCarcache (Analyst-Nomura):

Ihadaquestiononyourfundingadvantage.Ithasn'targuablybeenasmuchofanadvantageasitcouldbegiventhestrongdepositgrowththatwehavebeenseeingacrosstheindustry.ButIwonderedifyouthoughtthatmightchange,particularlyifQEisindeedoverafterthismonthanddepositgrowthstartstoslow--notnecessarilyturnnegative,justslow?

SoIguessatwo-partquestion.First,doyouthinkdepositgrowthwillslowwiththeendofQE?Andthensecondly,wouldyourfundingadvantagebecomemorevaluableinthatkindofenvironmentassumingthatloangrowthcontinues?





Right.So,Bill,wedoassumethatat--andatQEorwhenratesstarttorisewedoassumeanoutflowofdeposits,thatispartofourratesensitivityanalysis.AndIdothinkthefundingadvantagewillbecomemoreexplicitandclearwhenthatoccurs.

ItistherenowbecausewestillhavesomedebtonthebooksandIthinkthatadvantageshowsitselfbutitwillshowitselfmoreasmoredebtreplacesdepositsasratesmoveup.

Andimportantly,about15%ofourdepositsarecorporatetrustrelated,whicharelesssensitivetoratesmovingupsoitismoreafunctionoftheoperatingmodelofthecorporatetrustbusiness.SothathelpsusretainacorelevelofparticularlyDDAdepositsthatwillbehelpfulasratesmoveup.


Right.ButIwashopingmaybetofollowuponthat,Andy,ifmaybeyoucouldseparateforustheriseinrates,whichtherearesomeconcernsthatthatisbeingpushedfartherout.AndtheendofQE,whichmanybelieveisstillgoingtohappenthismonth.

SoifwehavethatscenariowheremaybewejustsetthehigherratesasideforasecondandjustlookattheimpactofQEcomingtoanend.Wouldthatalonebeenoughtoslowindustrydepositgrowthandbringthefundingadvantagetobemore--playmoreofanimportantrole?


Ithinkwhatwillslowthedepositgrowthwillbegrowthintheeconomy.AndasbusinessesstarttoinvestmoreingrowthandexpansionandsuchIthinkthefirstplacetheywillgoistheirownfunds,whicharecurrentlyonourbalancesheet.AndIthinkthatwillbetheprincipalchange.

Andthensecondly,asratesstarttomoveuptheopportunitycostofhavingmoneyinDDAgoesupandIthinkyouwillstarttoseeashiftoutofDDA.Butwhentheeconomystartstogrowthefirstplacebeforeweseeloangrowthwewillseedepositdeclines.


Gotit.AndIwantedtoalsofollowuponsomeofyourcommentsaboutauto.RegulatoryinterventionhasbeeninfocusinautofinanceandIwashopingmaybeyoucouldjustshareanythoughtsonthepotentialfortheCFPBtobringnon-bankautofinancecompaniesunderitsoversightandwhatthatcouldmeanforyouandtherestofthebankingindustry.AndIguessparticularlytotheextentthattherearesomenon-banklenderswhoeithergoodpushedoutorseetheircostofcompliancerise?


Bill,thisisRichard,IthinkuntilweseeanyevidenceoftheCFPB(inaudible)anyactivitiesofthenonbankswearejustgoingtopresumeitwillstaythewayitis.Asyoucansee,itdidn'tstopusasabankingindustrytostayinthebusiness.Wearedealingwithalittlehigherlevelofriskasitrelatestothefairlendingrulesandthethingsthathavebeenset.

ButIthinkwehaveallgottenbetteratitandknowwhattherisksare.Westillarethebest,Ithink,providersoflendingtotheautobusinessesbecauseofourcostoffundingandbecausewearemoretraditionalbanks.

IhaveheardthesamethingyouhaveheardandIappreciatethefactthattheyaregoingtogetsomeofthenotbanks.AndIdothinkthatiftheywerethatwouldbeanetpositivejustbecausetheoperatingparadigmswouldbethesameforallofus.




Butitwon'tchangeinthenearterm,itwouldn'tchangeinthenearterm.Itwouldn'tchangeanythingwearedoingatall.AndIdon'tthinkuntilweseeevidenceofitforsomeperiodoftimelikeayearormoreanyofusaregoingtoadjustanyofourthinkingbasedonthat.

Soitwilltakeawhileforthemtodecidewhichpartofthespacetheywanttogetinto,whatitmeanstooverseethem,whatadjustmentstheymaymake.AnditwilltakeIthinksuchasubstantialamountoftimethatIwouldn'texpectanyadjustmentforatleastayearbecauseittakesthatlongforsomethinglikethattocultivate.


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.


Okay,good.AndyorRichard,justontheriskandcompliancespending.Ithinkthatisgoodnewsthatwearemaybeatthepeak.ButcanyougiveusanideaofthemagnitudemaybeyearoveryearintermsofspendingandFTEsthatyouhavedevotedtoriskandcompliance?


IthinkaboutthethirdquarterversusayearagoIwouldsaywehavesomewherebetween$30millionand$40millionofadditionalexpenseintherunraterelatedtoriskandcompliance.


Okay,allright.Butyouarethinkingthatthatisnearthepeakatthispoint?


Yes,butIalsosaiditstaysthereforawhile.Inthemidtermitgoesdown,thereisanewpermanentlevel.Youdidn'taskAndyforthreetofiveyearsago,butitwouldbeprobablythreetimeswhatitwasacoupleyearsago.Andsowearegettingtothatplacenowandwewilljustreassignsomeoftheparties.

Becausecompliance,asyouknow,isn'tjusta--itisn'tjustaunitoradivision,itisacrosseverypartofthebusinessline.Soevenmysalesteaminthefrontlinesallneedtohavemoreofacomplianceview,we'llcallitthefirstlinedefense.Soeveryemployeehastobethinkingmoreappropriatelyaboutdoingthingsperfectlythe




firsttimeand,therefore,thereisanextracostineachincrementalFTE.

Soitisnotjustagroupwebringit,butitisawayofdoingbusiness.Andwehavebeenaddingthattoeverybody'sjoboverthelastcoupleyears.Pluswehavebeenhavingoutsidethirdpartiesandwehaveaddedbulkedupstaffincertainplacestodealwithregulatoryissuestoalignwiththenewhighermarkof[HIFN]standards.Butoncewegetthatsettled,Icanseesomeofthatgoingbackdownabitaswegetmoreefficient.Andasyouknow,weareprettyefficientonceweknowwhattherulesare.


Okay.Andthenjustonemoreoncapitalreturn.Richard,youare--sometimesquotesgettakenoutofcontext,butyouareontherecordofsayingthatyouthink2015couldtakeoff.Wonderingifyoufeellikethecapitalreturninthecurrentrangeisappropriatefornextyear.Doyoufeellikeyoucanpotentiallyreturnmore?Doyoufeellikeyouneedtoretainsomemoreforsomemaybegreaterexpectedbalancesheetgrowthin2015?Justwalkusthroughthat.


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.


Okay,allright,thankyou.

Operator:

MattBurnell,WellsFargoSecurities.

Matt Burnell(Analyst-WellsFargoSecurities):

Justmaybe,Andy,aquestionforyourelatedtoexpensesnextyear.Questionshavecomeuponacoupleofearliercallsaboutpensionexpense.Ithinkyouguidedthisyearthatpensionexpensewillbedownabout--itwillbedownabitfromtheprioryear.

AndIamjustcurious,Irealizewearenotatyearendwhenyousetthepensionrate--orthediscountrateandthepensionexpense.Buthowareyouthinkingaboutpensionexpensesaffectingyouroverallexpensesin2015?


Sure,Matt.Soifyouthinkabout2013and2014,becauseoftheincreaseinthediscountrateweactuallyhad




alowerpensionexpenseofabout$130milliononanannualbasis.IfIweregoingtoresettheratetodayIwouldlosethat$100millionorsobecauseratesarebacktowheretheywereayearago.Butasyousaid,wewon'tknowthatuntiltheendoftheyear.


Okay.Andjustaquestion,Richard,Ithinkyoumentionedhome-equityloansweregrowing,thatthatisarelativelynewtrend.Couldyougiveusalittlemorecoloronwherethatdemandiscomingfrom?Arethereanygeographiesthataregrowingfasterinthatproductspecificallythanyouhaveseeninthepast?AndI'mjustcuriousaboutanycoloryoucanprovideoncompetitionfromeitherlargerregionalbanksormaybesomeofthesmallerlocalbankswhoarelookingtogetintothatspaceaswell.


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.



©2014TheStreet,Inc.AllRightsReserved Page18 of 21


Okay,thankyouverymuch.

Operator:

ChrisMutascio,KBW.

ChrisMutascio (Analyst-KBW):

Andy,Iwonderifyoucouldtalkalittlebitaboutthemerchantacquiringbusiness,theunderlyingtrends.WhatI'mtryingtogetat--whenIlookatacquiringrevenuepertransaction,that'sdownabout5%yearoveryearandtheacquiringspreadisalsodownabout6%yearoveryear.And(inaudible)alongertrendofdeterioratingofthosetwometricscanyoukindofgivemesomecolorofwhatisgoingoninthatbusinessfromkindofamarginandspreadperspective?


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?


Mike,thisisAndy.Itrangesfrom5%to90%dependinguponthedepositproduct.Soitisnotjustonenumber,wehaveverydetailedbyproductbyline.


Andonaverage?


Onaverageitdependsuponthedepositmixwehaveanypointintime.Butifwethinkaboutafewyearsagowhereitwaslet'ssay20%to30%,itisabovethatnowbecauseofthehigherlevelofDDAandotheractivitieswehave.Soitishigherthanitwasinourmodeling.


Okay.Richard,youtalkedaboutthecapitaladvantageandthatgivesyouapricingadvantagewithhigher-qualityborrowers.Andyousaiditisnotreallyanythingnew,itisacontinuation.Butcanyousomehow




quantifythat?

Imean,youdohaverequiredregulatorycapitalthatissignificantlybelowyourmuchlargerpeers.AndIamjusttryingtofigureouttowhatdegreedoesthatgiveyouapricingadvantage,whichinturnallowsyoutogainmarketshare?


So,Mike,ifyouthinkaboutit,weareassumingourSIFIbuffersisabout50basispoints.Wedon'tknowthat,thatisourassumption,thatiswhenwegettoour8%.SoifyouareaG-SIBthathasa[250]buffer,solet'scallit200basispointsmoreandyougothroughthemath,youwouldhaveabouta30to35basispointsadvantagetoachievethesamereturnorlessthanthatandgetahigherreturn.Soitisnotinsignificant,itisaprettysignificantadvantage.


And,Mike,additionally,whichwe'vetalkedabout.Whenwegointothemarketifwehavetoissueanykindofadebt,wehaveanadvantagetoeveryotherbank.Andwhateverthattimeperiodisandhowevermuchthatraisewas,wehavethatmuchdeltatoofferup.AndasIsaidearlier,itcouldbetowholesale,itcouldevenbetoconsumerbusinessesandthereisanetpositive.

Buthereisthetrick,youonlyuseitonthehighestendqualitycustomersbecauseotherwiseyouarestartingtodipdownintothingswithloanlossesandcompliancecostsandthingsyoumaynotreallyunderstand.

SoforusI'dexpectyoutohearonothercallsthatthepricingcompetitivenessisstillhighandprettypeaked.Youhaven'theardthatherebecauseweeitherarepartoftheproblemorwechoosetouseourfundingadvantagetobemorecompetitiveonpricenotonunderwriting.Andforthemostpartmostofthepricingseemstobeprettystableinthecompetitiveenvironmentasweseeit.Sowearenotfeelingdisadvantagedbyiteither.


Soyougotothetableandyouarecompetingtogetalargehigh-qualitycorporateclientandyousaywewillpricethisloan30basispointsless,giveusyourbusinessor25basispointsless?Isthattheconversation?


Iwouldsaythatistheconversationmoreforthemiddlemarket.OnalargeclientitismoreofanationalfundingmarketandinthatexampleIthinkwhattheoutcomeiswehaveahigherreturnforthesameprice.


That'sright.


Isn'tthatsomewhatsimilarthoughtootherregionalbanksthatalsohaveacapitaladvantageversusthelargestpeers?


Capitalyes,debtratingno.


Itisatwofer.





Andthenthelastquestion.Richard,tofollowupbefore,yousaid2015cantakeoff,itisrightaroundthecorner.Ithinkthereissomequotesandthatalllooksgreat.Andweareallthinking,okay,ifRichardDavisisrightthiseconomyissettotakeoff.Andthenyoulookatthe10-yearbondwhichissayingtheopposite.Sowhoisright,RichardDavisorthe10-yearbond?


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.


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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US Bancorp (USB) Earnings Report: Q3 2014 Conference …s.t.st/media/xtranscript/2014/Q4/12924387.pdf · Jessica Ribner; FBR Capital Markets; Analyst ... David George; Baird; Analyst