U.S. Bancorp (USB)

Q3 2011 Earnings Call

October 19, 2011 9:00 am ET


Richard K. Davis - Chairman, Chief Executive Officer, President, Chairman of Executive Committee and Member of Risk Management Committee

P. W. Parker - Chief Credit Officer and Executive Vice President

Judith T. Murphy - Senior Vice President, Director of Investor Relations and Analyst

Andrew Cecere - Vice Chairman and Chief Financial Officer


Matthew O'Connor - Deutsche Bank AG, Research Division

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division

Nancy A. Bush - NAB Research, LLC, Research Division

John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division

Leanne Erika Penala - BofA Merrill Lynch, Research Division

Moshe Orenbuch - Crédit Suisse AG, Research Division

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

Marty Mosby - Guggenheim Securities, LLC, Research Division

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Paul J. Miller - FBR Capital Markets & Co., Research Division

Betsy Graseck - Morgan Stanley, Research Division

Unknown Analyst -

Brian Foran - Nomura Securities Co. Ltd., Research Division

Ed Najarian - ISI Group Inc., Research Division



Welcome to U.S. Bancorp's Third Quarter 2011 Earnings Conference Call. Following a review of the results by Richard Davis, Chairman, President and Chief Executive Officer; is Andy Cecere, U.S. Bancorp's Vice Chairman and Chief Financial Officer. There will be a formal question-and-answer session. [Operator Instructions] This call will be recorded and available for replay beginning today at approximately noon Eastern Time, through Wednesday, October 26, 12:00 midnight Eastern Time. I will now turn the conference call over to Judy Murphy, Director of Investor Relations for U.S. Bancorp.

Judith T. Murphy

Thank you, Tiffany, and good morning to everyone who has joined our call. Richard Davis, Andy Cecere and Bill Parker are here with me today to review U.S. Bancorp's third quarter 2011 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 analysts' schedules, are available on our website at usbank.com.

I would like to remind you that there are forward-looking statements made today during the call and they are subject to risk and uncertainty. Factors that could materially change our current forward-looking assumptions are described on Page 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 K. Davis

Thank you, Judy. And good morning, everyone, and thank you for joining our call. I'd like to begin by saying that I'm very proud of our third quarter results. The company achieved both record earnings and record total net revenue this quarter, along with positive operating leverage year-over-year and linked quarter. And we accomplished these results while facing the headwinds of a very challenging and uncertain economic environment. I'd like to point out a few of the highlights from our third quarter earnings, which are detailed on Page 3 of the presentations.

U.S. Bank reported record net income of $1,273,000,000 for the third quarter of 2011; $0.64 per diluted common share. Earnings per share were $0.19 higher than the third quarter of 2010 and $0.04 higher than the prior quarter. We achieved record total net revenue of $4.8 billion this quarter, which was 4.5% higher than the same quarter of 2010 and 2.2% higher than the second quarter of 2011. Revenue was driven by growth in both net interest income and fee income.

Total average loans grew year-over-year by 5% or 4.5% excluding acquisitions. And we realized linked quarter total loan growth of 1.7%. Once again, we benefited from strong growth in average low-cost deposits with balances increasing by 23.2% over the third quarter of 2010 and 4.7% over the second quarter of 2011.

Credit quality continued to improve as we posted a decline in net charge-offs of 10.4% and reduction in non-performing assets excluding covered assets of 6.9% on a linked-quarter basis. Our capital position remained strong as we continue to generate significant capital each quarter through earnings. Our Tier 1 common equity ratio was 8.5% at September 30 or 8.2% using anticipated Basel III guidelines, while the Tier 1 capital ratio ended the quarter at 10.8%. Finally, we repurchased 13 million shares of common stock during the third quarter. As a result, we returned 45% of our earnings to shareholders this quarter in the form of dividends and buybacks.

The 5-quarter trend of our industry-leading performance metrics are shown on the left-hand of Slide 4. Return on average assets in the third quarter was 1.57%. And return on average common equity was 16.1%, significantly better than the 1.26% and 12.8% respectively that we reported last year. Our net interest margin and efficiency ratio are shown on the graph on the right side of Slide 4.

As expected, this quarter's net interest margin of 3.65% was lower than the same quarter of last year and the prior quarter. And Andy will discuss the factors that led to this change in a few minutes.

As I mentioned at the start, we achieved positive operating leverage on both a year-over-year and linked quarter basis leading to an improvement in our third quarter efficiency ratio. Our 51.5% efficiency ratio for the third quarter is consistent with our expectation that this ratio will remain in the low 50s going forward.

Turning to Slide 5, as I previously noted, our capital position remains strong and continues to grow. Our Tier 1 common ratio under Basel III guidelines at September 30 was 8.2%, well above the 7% Basel III level required in 2019. We have not yet received final regulatory guidance as to the amount of capital we will be required to hold as a systemically important financial institution or SIFI buffer. Given our current capital levels, however, we are confident that we will be able to meet those guidelines through internal capital generation once they are established. In the meantime, we will continue to return capital to our shareholders in the form of dividends and buybacks, eventually reaching our goal of returning 60% to 80% of our earnings.

Average total loans outstanding increased by $9.7 billion or 5% year-over-year and 4.5% adjusted for acquisitions. Significantly, new loan originations excluding mortgage production, plus new and renewed commitments, totaled over $46 billion this quarter compared with approximately $37 billion in the third quarter of last year, representing a 25% increase in renewal and new activity.

Specifically, total corporate and commercial commitments outstanding increased by 16.8% year-over-year and 5.8% linked quarter, indicating we continue to gain customers and market share, and we are well positioned to meet the demand for loans once our customers are more confident in investing in their businesses as the economy recovers.

Although you may think of our middle market and large customers when discussing new commitments, numbers also include our Small Business lending. We just announced this week, that U.S. Bank has set a new company record for SBA loan approvals with a total of $630 million for the SBA fiscal year ending September 30. This represents a 123% year-over-year increase in loan approvals for our company. And SBA loans are just one piece of the Small Business lending that we do. In fact, our branches grew non-SBA Small Business average loans outstanding by over 12% year-over-year.

Total average deposits increased by $32.7 billion or 17.9% over the same quarter of last year. Total average deposits grew by $6 billion on a linked-quarter basis or 2. 9%. With strong growth in Corporate Trust, Consumer Banking and Wholesale Banking over both time periods, the customers continue to hold historically high levels of cash, viewing our bank as a trusted safe place to turn.

Additionally, we've recently published FDIC market share data. It indicates that our company grew deposits significantly more in the U.S. markets as a whole. U.S. Bank grew deposits 15.8% between June 30, 2010 and June 30, 2011 compared with the 6.8% growth rate for the total U.S. market, confirming that we have definitely increased our overall deposit market share.

Turning to Slide 7, the company reported record total net revenue in the third quarter of $4.8 billion, an increase of 4.5% over the prior year's quarter and 2.2% over the previous quarter. The growth in revenue can be attributed to both our balance sheet and Fee business lines, all of which have benefited from investments and many growth initiatives made throughout the downturn of the past 3 years, partially tempered, of course, by the impact of recent legislative and regulatory actions.

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