U.S. Bancorp Earnings Call Nuggets: Capital Return, Margin Compression
Erika Penala – Bank of America Merrill Lynch: My question is on capital return, it seems like the banking industry, your bank in particular is coming into the stress test with clearly much stronger capital levels and it feels like the global macro picture is a little bit better than it was at this point last year. Is it fair to assume for investors that strong banks like U.S. Bancorp can then continue to increase their capital return levels next year and if not what are the blind spots that you’re seeing from your side that we’re not seeing as investors in terms of that premise?
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Richard K. Davis – Chairman, President and CEO: I don’t think there are any blind spots, but I think we all see and know the same information at this stage. Without the final rules and without the final scenario it’s still the Fed’s options to decide what stress scenario they want to set us up for and those assumptions are yet to be shared with us, and unless we learn something new at this stage, we’re still operating under the guidelines we’ve been – in the past couple of years of the dividends being limited to 30% of future near-term earnings and the rest being allowed for some form of share buybacks. Until and unless we learn different rules we’re going to operate under that assumption and await the final guidance that will come in the next few weeks.
Erika Penala – Bank of America Merrill Lynch: Just a quick follow-up question, I know a lot of management teams have been talking about the fiscal cliff as it impacts demand. Is there – do you think – this is for Bill – there would be an actual impact on credit quality if the worst case scenario under fiscal cliff plays out on the consumer side? It’s something that discussion I am starting to hear but I guess it’s not something that I have fully thought about yet.
P.W. Parker – EVP and CCO: If the worst case happened on the fiscal cliff, I think it’s fair to say we’d probably re-enter a recession and that would be then you’d see unemployment go up and that would have an impact on consumer portfolio. I’m hopeful that they come to some kind of resolution, I think the fiscal cliff was designed in such a way that it’s so severe, I think it’s unlikely that there won’t be some political solution that cuts the middle ground and mitigate that risk.
Richard K. Davis – Chairman, President and CEO: I also think, when the recession started last time, there was a different quality of customers that have loans from banks and as you think about it five years later, a very high quality of customers now are remaining in the bank portfolios that either haven’t been charged off or back out and have been originated. So, I do think, if there are lagging affect certainly it would be a negative effect, but I don’t it’d be immediate. I think you once again see the nuances of credit quality in each bank’s portfolio as they would be stressed at different speed and different depths based on the recession.
R. Scott Siefers – Sandler O’Neill: Andy probably question for you. I mean, you guys have been able to holding the margin pretty well and appreciate the color on the anticipated few basis points of compression over the next quarter or so. I guess just from the way you look at things, what’s your sense for? How long that margin compression persists? Is there at some point where re-pricing on various pieces of the assets just going to get fully baked in? How are you thinking about that dynamic? Then, I guess, additionally you and others have been growing the resi-mortgage portfolio for the last few quarters. I’m was curious for thoughts on what kind of stuff you’re putting on, if there has been any change – what types of mortgages you’re willing to put on just given all the variables at play?
Andrew Cecere – VC and CFO: So first on the margin, as a reminder this quarter, third quarter, we improved by one basis points, principally due to improvement in our wholesale funding (because some) high debt was rolling off. We talked about that. We said it’d be relatively stable. That offset the headwind of the repricing on the securities portfolio. In the fourth quarter we don’t have as much debt rolling off, but we continue to have the headwind on the securities portfolio and that’s what’s causing the few basis points down. What happened in the last 30 or 60 days is that sort of two-year period or five-year period of the yield curve on what we’re buying has come down 25 to 30 basis points and that’s the headwind we’re seeing. The loan and deposit side are sort of offsetting, so my focus is on that securities portfolio and that two to five-year area is where we’re focused on our duration sort of closer to the lower end of that range. So that’s what we’re focused on for quarter four. I’m not going to project out to next year yet because there are lot of moving parts here and things can change rapidly as we saw the last 30 days. So few basis points in the fourth quarter. Whatever we face in 2013 will be manageable, but that principal headwinds is securities portfolio. In terms of what we’re putting on the balance sheet on our residential mortgage, it’s principally a product we call Smart Refinance which is a branch-based, high quality, typically 15 years and mortgage product that again is originated out of our branches.
A Closer Look: U.S. Bancorp Earnings Cheat Sheet>>