U.S. Bancorp Earnings Call NUGGETS: Margin Stability Walk-Through, Credit Trends
Margin Stability Walk-Through
Erika Penala – Bank of America Merrill Lynch: My first question is for Andy, could you walk us through in terms of the components of margin stability for the back half of the year, and I guess, my more detailed question underneath that is could you give us a sense of how much debt is maturing in the second half and at what rate, and what replacement rate you’re assuming, as well as I noticed on an end of period basis the cash balances were actually up, what size bond portfolio you’re assuming for the rest of the year?
A Closer Look: U.S. Bancorp Earnings Cheat Sheet>>
Andrew Cecere – VC and CFO: Okay, Erika, so the key moving parts are the negative is the investment securities reinvestment risk, and the offset to that is the debt repricing which will be at a lower cost replaced by either additional debt issuance and/or deposits. The differential of those two things is essentially causing us to be – to have an expectation of neutrality in net interest margin for the rest of the year. In terms of the cash balance, Erika, any day there is fluctuations in that cash balances, and I like to look at it more at the average for the quarter, which was down from about $4 billion in the first quarter to about $1.5 billion in the second quarter and again, the level of loan growth and deposit growth is fairly stable as you saw in the second quarter. So, I would expect a little movement around that but not substantial.
Erika Penala – Bank of America Merrill Lynch: You don’t happen to have the dollar number of the debt maturing and rate at which maturing for the second half of the year, do you?
Andrew Cecere – VC and CFO: I do have that. In the third quarter we had about $6 billion maturing and I would say that the debt that’s coming off versus what’s coming on is favorable right around 100 basis points.
Erika Penala – Bank of America Merrill Lynch: My last question before I step away from the queue relates to CCAR. I guess, perhaps it’s too early to tell, but now that the (NPR) proposal is out, do you anticipate that the CCAR is going to take into account Basel III ratios rather than Basel I when thinking about approving capital return for the banks next year?
Andrew Cecere – VC and CFO: As you know, Erika, the last CCAR actually took into consideration both Basel I and Basel III. It was Basel III under the stressed environment – Basel I under the stressed environment and Basel III under sort of the glide path and I would expect a similar set of constraints in the new one next year.
Jon Arfstrom – RBC Capital Markets: Question for maybe Richard or Bill on Slide 7, the credit trends. Richard, you talked about this concept of the industry over-earning in the past. Just curious if you’d be willing to take a stab at going below 1%, how long does this phenomenon last and how low can charge-offs potentially go for the Company, just kind of big picture would be helpful.
Richard K. Davis – Chairman, President and CEO: Thanks Jon. I’ll start and Bill can clean up. The (0.98) is that’s where I thought we’d be right about now because in the last few years we and others have not been taking much risk on lending, which is probably at the end of the day what we are supposed to do, but have to be very careful. I think that we’ll stay below 100 basis points for a few quarters, just because the math of it says that we don’t have any loans that will be coming to some point of stress I don’t believe in the next couple of quarters based on our prudent underwriting of the last year. So, I will say remember that we have fairly important credit card book that does affect our overall ratios and that’s probably the one that’s coming now to its most nearest bottom where it will start move up probably sooner than the rest of the portfolios. Also, the rest of it, I think, we are going to stay under one for a while. My hope is that based on appropriate accounting trends that we can continue to have a certain level of unallocated reserves remaining so that we don’t find ourselves releasing reserves to a point of unsustainable performance only to have to build them back as things start to move up. I’d also close by saying I don’t think that 0.98% falls to anything like 0.5% to 0.6%. I think it floats around the high-8s and high midpoint 9s, but it probably eventually gets above 1 and I actually would be looking forward to that because that means we have optimal and (viewing) a right risk/reward balance and making sure that we are taking the right risk and rewards for our customers. But I would say it’s another few quarters and not very aggressive and it’s improvement from here. Bill do you want to add?
P.W. Parker – EVP and CCO: I would just say, John, that how long it stays below 1% and how low it goes is in a large a function of strong the economy is. if it stays at this very moderate growth level that’s positive but we wouldn’t necessarily see that loss rate go way down, given the continued high unemployment rate, but if we do enter into a very robust economic growth, and see unemployment count go way down, see loan growth go way up, then clearly we could get a much lower rate, but a large part of it remains the function of the economy.
Jon Arfstrom – RBC Capital Markets: Just a follow-up up on that, obviously the pipelines are strong, but are you sensing any incremental borrower caution or any potential changes in activity between now and the end of the year?
Richard K. Davis – Chairman, President and CEO: Yeah, a little bit. This is Richard. I like to characterize things in quarter, so I think quarter four was a pretty strong ending, as it related to our customers sense of things. Quarter one remained strong for a quarter at the beginning of the year, and then quarter two, I’d say the last month of quarter two started to taper off a bit in terms of appetite for risk, no surprise, but as you think about it, we’re getting close to a number of moments. We’re coming close to the election, we’re coming closer to the fiscal cliff decision. We’re certainly not getting better news from Europe as it relates to the confidence of our customers, and then the economy isn’t strengthening, it’s not falling apart either, it’s just not getting better. So, I would say that we saw slight tempering in the end of quarter two, and I think, we’ll continue to see that between now and the solution that is in the offing for any of those outcomes, particularly the election and the fiscal cliff, which at least have deadlines on them as we all know. For us, as it relates to loan growth, we’re 1.5% linked quarter in quarter one, 1.9% for quarter two. Our current forecast shows us pretty steady to that level where we’ve been right now, so I don’t think we’re going to see a ramp up. We’re certainly not seeing things go backwards, but our customers behavior both on their continued decision to take on commitments that they’re not using and their caution in not extending themselves in places that they’re not comfortable continues to remain, and that story is kind of just more of the same with a slightly negative bias to their confidence.