U.S. Bancorp (USB)

Q2 2010 Earnings Call Transcript

July 21, 2010 8:30 am ET


Judith Murphy – IR

Richard Davis – Chairman, President and CEO

Andy Cecere – Vice Chairman and CFO

Bill Parker – EVP and Chief Credit Officer


Ed Najarian – ISI Group

Jon Arfstrom – RBC Capital Markets

Ken Usdin – Bank of America

John McDonald – Sanford Bernstein

Nancy Bush – NAB Research LLC

Betsy Graseck – Morgan Stanley

Chris Kotowski – Oppenheimer

Paul Miller – FBR Capital Markets

Matthew O’Connor – Deutsche Bank

Heather Wolf – UBS

David George – Baird

Mike Mayo – CLSA

Matt Burnell – Wells Fargo Securities

David Konrad – KBW



Welcome to U.S. Bancorp’s second quarter 2010 earnings conference call. Following a review of the results by Richard Davis, Chairman, President and Chief Executive Officer; and Andy Cecere U.S. Bancorp’s Vice Chairman and Chief Financial Officer, there will be a formal question-and-answer session. This call will be recorded and available for replay beginning today at approximately noon Eastern Time through Wednesday July 28 at 12 O’ clock midnight Eastern Time.

I’ll now turn the conference call over to Judy Murphy, Director of Investor Relations for U.S. Bancorp.

Judith Murphy

Thank you, Laurie, and good morning to everyone who has joined our call today. Richard Davis, Andy Cecere, and Bill Parker are with me today to review U.S. Bancorp’s second quarter 2010 results and to answer your questions.

Richard and Andy will be referencing a slide presentation during their prepared remarks. A copy of the slide presentation as well as our earnings release and supplemental analyst schedules are available on our Web site at usbank.com.

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

Richard Davis

Thank you, Judy. Good morning, everyone, and thank you for joining us. I’d like to begin on page number 3 of the presentation and review few of the highlights of our quarterly results.

U.S. Bancorp reported net income of $766 million for the second quarter of 2010 or $0.45 per diluted common share. Earnings were $0.33 higher than the same quarter of last year and $0.11 higher than the first quarter of 2010.

Earnings per share included a $0.05 benefit related to a non-recurring exchange of perpetual preferred stock for outstanding income trust securities, which was recorded during the quarter as a direct increase to net income applicable to common shareholders.

We achieved record total net revenue of $4.5 billion in the second quarter. This represented an 8.7% increase over the same quarter of 2009 and was driven by favorable changes in both net interest income and fee revenue.

We continue to post strong year-over-year average deposit growth of 12.3% or 4.1% excluding acquisitions. Total average loans grew by 4% benefiting from recent acquisitions. Excluding these acquisitions, average loans declined by 2.7% year-over-year.

Credit quality improved in the second quarter as both net charge-offs and nonperforming assets declined from the levels posted in the first quarter. The decline in net charge-offs led to reduction in the provision for loan losses on both the year-over-year and linked quarter basis.

Additionally, although total provision expense is lower, it also included $25 million of provision in excess of net charge-offs to reflect current economic conditions.

We maintained our strong capital position with the Tier 1 capital ratio and the Tier 1 common ratio increasing to 10.1% and 7.4% respectively at June 30.

Slide number 4 grabs our performance metrics over the past five quarters. Return on average assets in the second quarter was 1.09% and return on average common equity was 13.4%, both ratios trending upward over the past five quarters. The five quarter trends of our net interest margin and efficiency ratio are also shown in the graph on the right side of slide number 4.

This quarter’s net interest margin of 3.9% was unchanged from the prior quarter and 30 basis points higher than the same quarter of 2009. Our second quarter efficiency ratio was 52.4%, although best among our peers, this higher ratio compared with prior quarters reflects ongoing investments and the impact of recent legislative and regulatory actions on revenue and expense.

We fully expect to remain best-in-class in terms of efficiency, but anticipate that the new regulatory and legislative actions as well as our continuing investments in our franchise will serve to keep our efficiency in the low 50s versus the high 40s, which we’ve enjoyed for many years.

Turning to slide number 5, our capital position remained strong. As previously noted our Tier 1 capital and Tier 1 common equity ratios rose to 10.1% and 7.4%, respectively, at June 30. Additionally, our tangible common equity to tangible assets rose from 5.1% at June 30, 2009 to 6.0% at June 30, 2010.

Our Company continues to generate significant capital each quarter due to the momentum in our diverse businesses mix, a number which we are less capital intensive than traditional balance sheet businesses, in addition to our superior efficiency and ongoing profitability.

Moving on to slide number 6, average total loans outstanding increased by $7.3 billion year-over-year. As noted on this slide, excluding acquisitions, total average loans declined by 2.7% year-over-year. On a linked-quarter basis, total average loans decreased by 0.9%.

For lack of growth in average total loans outstanding, excluding acquisitions was largely due to the lower usage of revolving lines of credit by our commercial and corporate customers and due to lower demand for new loans from creditworthy borrowers.

Utilization of outstanding commitments by these commercial and corporate borrowers continue to decline from an average of about 28% in the first quarter of 2010, to approximately 27% in the second quarter of this year. Despite the reduction in average loans outstanding, we continue to see the benefits of the flight-to-quality as we add new customers and grow loan commitments.

More importantly, although total average loans declined on a linked-quarter basis, total loans outstanding were higher at June 30 than on March 31, signifying that we are seeing some improvement in loan demand as we continue to originate and renew lines and loans for our qualified customers who want and need credit.

In fact, during the second quarter of 2010, U.S. Bank originated over $10 billion in loans of real estate mortgages, originated over $5 billion of other consumer loans, including installment loans, student loans, lines of credit, and home equity lines and loans.

We originated new prime based credit card accounts with lines totaling $1.7 billion, and we issued $11.4 billion of new commitments and renewed another $17.9 billion of commitments to small businesses, commercial and commercial real estate customers.

Overall, excluding mortgage production, new originations plus new and renewed commitments totaled approximately $36 billion, about $9 billion higher than the previous quarter’s total.

Total average deposits increased by $20.1 billion over the same quarter of last year and $800 million on a linked-quarter basis. Excluding acquisitions, the growth rate was 4.1% on a year-over-year basis.

Turning to slide number 7; the Company reported record total net revenue in the second quarter of $4.5 billion. The growth in revenue was driven by earning asset growth and expanding net interest margin, our fee-based businesses, growth initiatives and acquisitions.

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