美國合眾銀行 (USB) 2013 Q2 法說會逐字稿

Welcome to U.S. Bancorp's second-quarter 2013 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.

(Operator Instructions) This call will be recorded and available for replay beginning today at approximately noon Eastern Daylight Time through Wednesday, July 24, at 12 o'clock midnight Eastern Daylight Time.

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

Thank you, Lori, 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 second-quarter 2013 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 schedule, are available on our website 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 two 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.

Thank you, Judy, and good morning, everyone.

Thank you for joining us today to review U.S. Bank's second-quarter results.

I will begin with a few of our quarterly highlights on page three of the presentation.

U.S. Bancorp reported record net income of $1.5 billion for the second quarter of 2013, or $0.76 per diluted common share.

Total average loans grew year-over-year by 5.2% and 1.2%, or 5% annualized, on a linked-quarter basis.

We experienced strong loan growth -- strong growth in total average deposits of 7% over the prior year and 1%, or 4% annualized, linked quarter.

Credit quality remains strong.

Total net charge-offs decreased by 9.5% from the prior quarter while nonperforming assets declined linked quarter by 5.4%.

We generated significant capital this quarter.

Our estimated Tier 1 common ratio under Basel III rules issued in early July was 8.6% at June 30, while our Basel I Tier 1 common equity ratio was 9.2% and our Tier 1 capital ratio was 11.1%.

We purchased 18 million shares of common stock during the second quarter.

These buybacks, along with our dividend, which was increased by 18% in June, resulted in a 73% return of earnings to our shareholders in the second quarter.

On slide four you can see that our performance metrics continue to be among the best in the industry.

Return on average assets in the second quarter was 1.7% and return on average common equity was 16.1%.

Our net interest margin and efficiency ratio are shown in the graph on the right-hand side of slide four.

This quarter's net interest margin of 3.43% was, as expected, 5 basis points lower than the prior quarter's rate of 3.48%.

Andy will discuss the margin in more detail in just a few minutes.

Our efficiency ratio for the second quarter was 51.7%.

We anticipate that this ratio will remain in the low 50%s going forward as we continue to manage expenses in relation to revenue trends while continuing to invest in and grow our business.

Turning to slide five, the Company reported total net revenue in the second quarter of $4.9 billion, a 2.4% decrease from prior year but a 1.5% increase over the first quarter.

The decline in revenue year-over-year was largely driven by lower mortgage banking revenue and net interest income, while the favorable linked-quarter variance reflected strong seasonal fee revenue trends led by payments partially offset by a decrease in net interest income.

Average loan and deposit growth is summarized on slide six.

Average total loans outstanding increased by over $11 billion, or 5.2%, year-over-year and 1.2% linked quarter, accelerating from the 1% linked quarter we experienced in the first quarter.

Overall, and excluding covered loans, which is a run-off portfolio, average total loans grew by 7.2% year-over-year and 1.6% linked quarter.

Once again, the increase in average loans outstanding was led by strong growth in average commercial loans which grew by 11.2% year-over-year and 2.2% over the prior quarter.

Total average Commercial Real Estate also increased over the prior quarters with average construction loans growing by 9.9% year-over-year and 12.9% linked quarter.

Residential real estate loans also continued to show strong growth -- 19.7% over the same quarter of last year and 3.9% over the prior quarter.

Within the retail loan categories average credit card loans outstanding fell slightly as consumers paid down their balances and average home equity lines and loans continued to decline as paydowns more than offset new loan originations.

Auto loans and leases, however, posted very good growth year-over-year and linked quarter.

We continue to originate and renew new loans and lines for our customers.

New originations, excluding mortgage, plus new and renewed commitments totaled approximately $48 billion in the second quarter compared with $46 billion in the second quarter of last year and $36 billion last quarter.

Total average revolving corporate and commercial commitments increased year-over-year by 10.2% and 2.2% on a linked-quarter basis, while utilization remained flat at approximately 25%, close to where it has been for the past six quarters.

Given early industry indicators, our linked-quarter average loan growth of 1.2% signifies that we are continuing to gain market share.

Additionally, our current expectation is that linked-quarter average loan growth will accelerate again in the third quarter to the higher end of our previously stated range of 1% to 1.5%.

Total average deposits increased by $16.1 billion, or 7%, over the same quarter of last year and by $2.4 billion on a linked-quarter basis with growth in low-cost money market and savings deposits particularly strong on both a year-over-year and linked-quarter basis.

Turning to slide seven and credit quality.

Total net charge-offs in the second quarter decreased by $41 million, or 9.5%, from the first quarter of 2013, while nonperforming assets, excluding covered assets, decreased by $108 million, or 5.3%.

The ratio of net charge-offs to average loans outstanding in the second quarter declined to 0.70% from 0.79% in the first quarter.

During the second quarter we released $30 million of reserves equal to the first quarter and $20 million less than the second quarter of 2012.

Given the mix and quality of our portfolio, we expect net charge-offs and nonperforming assets to remain relatively stable in the third quarter.

Andy will now give you a few more details about our second-quarter results.

Thanks, Richard.

Slide eight gives you a view of our second-quarter 2013 results versus comparable time periods.

Our diluted EPS of $0.76 was 7% higher than the second quarter of 2012 and 4.1% higher than the prior quarter.

The key drivers of the Company's second-quarter earnings are summarized on slide nine.

The $69 million, or 4.9%, increase in net income year-over-year was the result of a decrease in expense and lower provision for credit losses partially offset by a decline in net revenue.

Net interest income declined year-over-year by $41 million, or 1.5%.

The result of a 2.7% increase in average earning assets offset by a 15 basis point decline in net interest margin.

The $8.2 billion growth in average earning assets year-over-year included increases in average total loans and the securities portfolio.

Offsetting a portion of the growth in those categories was a $3.1 billion reduction in the average other earning assets, primarily due to the deconsolidation of a number of community development entities and a $1.1 billion reduction in average loans held for sale, reflecting lower mortgage origination activity this quarter versus the same quarter of last year.

The net interest margin of 3.43% was 15 basis points lower than the second quarter 2012, primarily due to lower yielding investment securities and lower loan rates partially offset by lower rates of deposits and wholesale funding, including long-term debt.

Noninterest income declined by 3.4% year-over-year, primarily due to mortgage banking revenue, reflecting lower origination in sales revenue partially offset by higher servicing revenue and a favorable change in the addition to the mortgage rep and warranty repurchase reserve.

Also, contributing to the decline in noninterest income year-over-year were reductions in corporate payments.

The result of our government and transportation-related transactions and other income, which reflected fewer equity investment gains in the prior year and lower retail products revenue, primarily due to end-of-term lease valuations.

Offsetting these declines were year-over-year increases in trust and investment management fees, retail payments, merchant processing revenue, deposit service charges, and investment product fees.

Noninterest expense was lower year-over-year by $44 million, or 1.7%.

The majority of this favorable variance is attributable to a favorable variance for professional services expense, primarily due to the reduction in third-party foreclosure settlement-related costs, as well as an accrual for a Visa-related settlement charge taken in the second quarter of last year and lower intangible expense.

These favorable variances were partially offset by higher compensation and benefits expense and increases in marketing and technology expense.

Net income was higher on a linked-quarter basis by $56 million, or 3.9%, as a result of a 1.5% increase in revenue and lower provision for credit losses partially offset by a 3.5% increase in expense.

On a linked-quarter basis net interest income was lower as average earning assets declined by $2.1 billion and net interest margin declined by 5 basis points.

The decrease in average earning assets was the result of the reduction in other earning assets and loans held for sale, while the expected 5 basis point decline in net interest margin was primarily due to lower loans on rates and securities.

Given the current interest rate environment, we expect net interest margin to be relatively stable in the third quarter, which, combined with our expectation for a linked-quarter loan growth, should lead to a modest increase in net interest income in the third quarter.

On a linked-quarter basis noninterest income was higher by $111 million, or 5.1%.

This favorable variance reflected seasonally higher payments and growth in all fee categories with the exception of mortgage banking revenue.

In June, we had expected mortgage banking revenue to be higher in the second quarter than the first quarter, primarily due to very strong application volumes earlier in the quarter.

However, since the time we made that statement to the end of the quarter rates moved up by about 60 basis points and refinance activity slowed significantly.

As a result mortgage banking revenue actually came in slightly lower this quarter than last.

The $5 million decline in revenue reflected an increase in origination and sales revenue including a favorable change in the reps and warranty reserve offset by a lower gain on hedging activity than the prior quarter.

Although applications were higher in the second quarter than the first quarter, the increase in volume was offset by a reduction in gain-on-sale margin.

We calculate gain on sale margin based on applications expected to close.

On a linked-quarter basis noninterest expense was higher by $87 million, or 3.5%, mainly due to other expense which included higher insurance and regulatory expense relative to the first quarter.

In addition, marketing and business development expense and professional service expenses were higher in the current quarter versus the prior quarter due to the timing of business line projects and initiatives.

Turning to slide 10, our capital position remained strong and continues to grow.

Based on our assessment of the final rules for the Basel III standardized approach released earlier this month, we estimate that our Basel III Tier 1 common equity ratio at June 30 was 8.6% compared with 8.3% calculated under the previously proposed rules.

At 8.6% we are well above the 7% Basel III minimum requirement and above our targeted ratio of 8%.

Turning to slide 11, in June the Board of Directors declared an 18% increase in our common stock dividend.

As a result, in the second quarter we returned 73% of our earnings to shareholders.

Dividends accounted for 30% of the return to shareholders and the 18 million shares of stock we repurchased in the second quarter accounted for the remaining 43%.

Of note, our tangible book value per share rose to $13.48 in the second quarter, which represented an 11% increase over the same quarter last year and a 1.6% increase over the prior quarter.

Finally, slide 12 provides updated detail on the Company's mortgage, repurchase-related expense, and the reserve for expected losses on repurchases and make-whole payments.

The rep and warranties repurchase reserve was reduced this quarter by $43 million and the outstanding repurchase and make-whole request balance at June 30 was $64 million compared with $66 million at March 31.

I will now turn the call back to Richard.

Thanks, Andy.

Last Friday, Andy and I had the honor of commemorating the 150th anniversary of the signing of our National Bank charter by ringing the closing bell at the New York Stock Exchange.

We were joined on the stage by 10 U.S. Bank employees who proudly represented and celebrated the rich heritage that they and their coworkers, along with many who came before them, have helped to create and build over the past 150 years.

Importantly, as we took that moment to observe and reflect on our past, we also celebrate the present and the strong foundation upon which we are building our company's future.

U.S. Bancorp posted record earnings for the second quarter while once again achieving industry-leading profitability metrics.

We continue to build our future as we have in the past, by investing in our well-diversified mix of businesses, by maintaining prudent risk management, by focusing on operating integrity and compliance, by sustaining strong capital and liquidity, and by providing superior returns for our shareholders.

As always, we remain focused on producing consistent, predictable, and repeatable results for the benefit of our customers, our employees, our communities, and our shareholders.

That concludes our formal remarks.

Andy, Bill, and I would now be happy to answer questions from our audience.

(Operator Instructions) Paul Miller, FBR.

This is Jessica Ribner for Paul.

Just a question, I guess, on your mortgage banking expectations going forward.

Are you looking for higher purchase volumes or do you see the same level of refis?

We are part of the way through the third quarter; what is your outlook?

Jessica, let me tell you first from the perspective of what occurred in the second quarter.

From a production standpoint, repurchase activity went from about 71% of the book in the first quarter to about 59% in the second quarter, and applications were also down about 10 points in terms of refinancing.

I would expect that trend to continue.

I do expect -- again, it is early in the quarter, but given the current range there I expect mortgage revenue will be down a bit given the rates are today.

And we will continue to update throughout the quarter.

Okay, great.

I appreciate it.

Jack Micenko, SIG.

Thanks for taking the question.

Looking at sort of the slowdown in average deposit growth, I am wondering on your perspective -- and maybe this is a broader question around the whole loan demand question.

But do you think that the banks, generally, are exhausting really what is out there from a deposit take?

Or are we starting to maybe see maybe a little bit of cash being deployed on the deposit side into investment and business activities that could maybe possibly lead to an expansion of loan growth in the back half of the year?

Just curious as your observations there.

Yes, Jack, it is Richard.

I think it is what you are predicting and it is what we have been saying for a long time.

The first good movement we will see on bank balance sheets is customers using their own deposits, and I am happy to report our deposits, while they were up, the number of customers with deposits was up as well.

So it is the customers who already have deposits that are using some of those to, we think, employ them in some form of growth.

After that we would hope to see our lines of credit, especially on the wholesale side, move from a utilization of 25% to anything.

26% would be great.

We used to be in the mid to high 30% utilization, so there is a significant amount of pent-up opportunity.

And customers are paying for those lines to have them available and to keep them current.

Then, finally, there may be new lines and loans that will occur, particularly on the large end, when some transactions start to belie underlying growth.

But I will say we do read it like you do.

I think it is a positive that it is not growing any more than that as long as the number of customers are growing.

And to follow our prior comments, I do think we are starting to see some of these green shoots that we mentioned 90 days ago as being real and sustainable and more green shoots.

It is not a rush to a huge recovery, but it is absolutely and positively no longer a concern of going backwards.

We are just seeing customers being thoughtful, careful, but one at a time they are starting to get more comfortable about their future and they are starting to invest starting with their deposits.

Sometimes getting lines of credit with the intent to use, and in many cases, starting to make decisions that have long-term outcomes for the long view of the economy.

Great, thanks.

Then just the ratio of NCOs on the card book looked like it walked up a little bit, and I know in the appendix you talked about lower recoveries.

Obviously dollar amount down and the trend is good.

But can you talk about what that means on the recovery side, and what you meant by lower recoveries and how you are thinking about that going forward?

Yes, this is Bill.

Part of that is really a timing thing as we brought more of the collection activities in-house on the recovery side.

Not all of the recovery collection activities, but some of them.

So as we do that that delays the recognition of the recovery, so I don't expect it to have a material long-term impact.

It is really more of a timing issue.

All right, great.

Thank you.

Ken Usdin, Jefferies.

Good morning.

Just wanted -- on the fee side I just wanted to ask you about just the payments businesses and specifically in the corporates payments business still having a bit of a tough revenue trajectory.

So I was wondering if you could specifically talk about that one, but also talk about just your outlook for the three payments businesses as we look ahead.

The whole payments business is -- 59% is our issuing business and the 29% falls in -- 39% falls in the Elavon of our merchant acquiring and 10% falls in the corporate payments side in terms of revenue.

And to start with your question, the corporate payments is about a third of that is government.

And that continues to be down 20% year-over-year, particularly based on government spending, probably some of the trickle effect of the sequester, and certainly just the budget increase -- decreases that have been evident on the federal side.

But the rest of it continues to actually start showing some supporting.

The P-Card growth is up 13% over last year.

We are starting to see a flattening and a stabilization of T&E for the first time year-to-date.

So on the corporate side, while it is 10% of a total, the government piece, which is a third of that, is still under is some form of stress, but the rest is starting to show some positive trajectories.

As it relates to the Elavon, which is our merchant acquiring, which also has a nice diversification of geographies -- you know it is a global business -- we are continuing to see growth in same-store sales that would reflect what you have seen in the statistics that both the federal government and some of the European government has said.

So there is a nice second-quarter lift there.

We have pretty stable margins in terms of how we get paid and we are actually quite encouraged by what we see on the Elavon side, both domestically and globally.

Then, finally, on the bigger part of it, the 59%, which is led by our issuing side, we are also seeing nice support there.

As you know, the average net receivables or the outstandings were slightly down year-over-year, and that is particularly because people are just starting to have a higher payment activity.

And the payment rates were probably 1.5% higher than they were last quarter or last year, so people are starting to pay them off.

But they are using the card and so credit has been almost 3% year-over-year, following another 3% in quarter one's growth, so we are seeing active accounts growing nicely.

They are using their card more often.

They have been right now paying them back more prudently, and at the end of the day that will slow and they will start to let that outstanding rollover.

And that will be another benefit.

But credit card sales for us are 9% year-over-year, absent the portfolio that we sold.

I couldn't be more optimistic about the payments business.

As you see a nice trend in quarter two, we should continue to see that growth.

Okay, great.

Then the second question, just an expense question, an operating leverage question.

At least on an as-reported basis we are looking at a little bit of a year-over-year decline in revenues, but a little bit of a year-over-year step up in costs.

You did call out the regulatory cost this quarter, so I just wanted to try to understand the balance between revenues, expenses, and how do you help us understand that regulatory cost; if it is now run-rated or was that kind of a one-time catch up?

Great question and I own that.

Good question, because I tell you we shoot for positive operating leverage every year.

I think we are still very much in the game to be able to create positive operating leverage, even in the next couple of quarters, but it will be more challenging.

And here is my real clear direction for you.

As much as mortgages will probably be down -- mortgage revenue -- in the next couple of quarters, just based on the elements, you know we are a heavy purchase shop so our decrease might not be as significant as some of the reported.

But I'm not going to take an expense reduction into important investments in the next quarter or two just to accommodate lower mortgage revenue until which time the middle of the curve starts to bend up.

And if it does and the market starts to get stronger then I think we will be fine.

So I'm not going to do any near-term adjustments just to appeal to a slightly negative operating leverage if that is what it has to be, but we are going to continue to watch our expenses.

The cost of compliance, as you recall, about a year ago for particularly the [consent order] was almost $50 million a quarter, and that is trimmed down now to a substantially less, call it, $5 million to $10 million a quarter as we wind down some of those mortgage-related activities.

But I will tell you that we have continued to add compliance personnel and compliance protocols across the Company to accommodate this higher requirement that we achieve near perfection on all of our operating activities.

And so not all of that $50 million is going to be given back.

Most of it, however, though, Ken, is burned into the current run rate and you will see it stabilize.

I am just a little concerned that mortgage might drop off more than I can accommodate in expense reduction dollar-for-dollar, and we are not going to overachieve on that because I don't want to suffocate the future.

Understood.

Fair point, Richard.

Thank you.

Steve Scinicariello, UBS.

Morning, everyone.

Just a couple of quick ones for you.

Just curious to hear your take, given the new final capital rules that we got out there, and really my question to you is a little bit more big picture.

Do you feel that you guys kind of have a real competitive advantage versus some of your larger kind of brethren, given what we have seen out of those rules?

Well, the new rule effectively increased our capital ratio about 30%.

Our binding constraints Tier 1 common under the standard -- 30 basis points, Tier 1 common under the Basel III standard.

So last quarter we were at 8.2%.

Using the same calculation we would have been at 8.3% this quarter and the new calculation allowed us to get to 8.6%.

8.6% is above where we think we need to be.

Our internal guideline is about 8% and that is based on an assumed SIFI buffer of 50 basis points and an additional internal buffer of 50 basis points.

So I think from a capital standpoint we are in very good shape.

We are not in a situation where we are trying to build capital to a level, nor are we in a situation that we are over-capitalized and have no use for the capital.

So when we are in a situation like we are today where we are returning about 70% and reinvesting 30%, it allows us to reinvest at a level to accommodate the loan growth and earning asset growth that you are seeing.

So we are in a really good spot.

It allows us to make the investments we need to make, at the same time allow for the growth that we are seeing right now.

To just put an exclamation point, Steve, we really like our position.

We like our size.

We like our simplicity.

We like our diversification.

As it relates to capital leverage and liquidity, we think we are substantially where we need to be but for any fine-tuning that needs to occur.

And I think all the rules that come out continue to remind us that being not a [G-SIF] is a positive outcome, but being big enough to matter and being able to manage a very significant portfolio of a simple balance sheet allows us to be in a pretty good shape.

And we like the future we have.

No, it definitely looks like you are in a real sweet spot going forward.

Then the second question I had for you was just kind of in the same vein of kind of those investments for the future.

You kind of touched on it a little bit talking about some of the expense initiatives going forward.

Just kind of curious if there was any maybe that you wanted to flag for us just so we are aware some of the things that you have got going on, some of the things you are investing in, and maybe some of the timing of those things; how they might affect the expense line going forward.

Good question, Steve.

A couple of things.

One is we are going to continue to build our wealth management businesses.

As you know, we started this trip three years ago.

It was the one piece of the puzzle I didn't think U.S. Bank had sufficiently demonstrated leadership.

Not only in our wealth management but in our ultrahigh net worth brand called Ascent.

We continue to open those offices.

We are continuing to provide technology to our teams to create a unique experience, and you will see our continued expense initiatives in wealth management.

Secondarily, you will know that we have just recently bought a company called FSV earlier this year in Florida, which is a prepaid card provider and processor.

We continue to extend our position there.

We now have no third-party partners in any part of prepaid because we have cradle-to-grave capability and a significant leadership position.

I want to continue to add to that investment and build a stronger and a unique position of strength for prepaid as it adds to our card provisions.

Then, finally, corporate trust, which you know we recently took across the pond and continue to see opportunities even outside of America to grow our corporate trust business.

We have recently become more of a provider on hedge fund servicing and other areas by some recent acquisitions.

There will be more where that came from.

It could be both in the form of M&A or in the form of organic growth, but I would say those three areas, which are the three areas that continue to make us unique -- payments, corporate trust, and special wealth management growth.

I think those are areas you would want us to invest in.

They have got great trajectory now and I want to continue that momentum so that when the world is better and ready to roll we will already be there.

Excellent, thanks so much.

Erika Penala, Bank of America.

Good morning.

I just had a few follow-up questions and the first is on the dollar-cost trajectory for the remaining of the year.

Should we take out the $66 million in quarter-over-quarter increase in regulatory expense when we are thinking about the run rate for this third quarter, or will some of that stay?

What I would say, Erika, is the first quarter is seasonally low and we had a little bit of a positive insurance recoveries in other expense.

I think the second quarter is more reflective of our run rate of expense with normal increases, so I would use second quarter as more of the basis for our expense.

Got it.

The second follow-up question is you mentioned that mortgage revenues would be down just a bit, but we heard another large bank mention that they think if rates stay -- long rates stay here that the mortgage market is going to be down 30% to 40%.

Is the message from U.S. Bank that you will outperform the market?

And if that 30% to 40% decline is correct, where are you in terms of your outperformance relative to that number just in proportion?

Right.

So first, Erika, as you know, mortgage application or gain-on-sale revenue is one component of mortgage revenue.

There are other puts and takes, including servicing revenue, the net hedge, and so forth, so my expectation is not to have our mortgage revenue decline to the level you just described.

It is going to be less than that, but I do think it will go down.

Application volume is a component of that, but there are a lot of gives and takes.

Again, we will update as we see more throughout the quarter.

But I do expect mortgage revenue to be down a little, bit principally due to the gain on sale, principally due to the applications, but there are some offsets.

And, Erika, it is Richard.

It will be down unless rates were to turn.

This thing turns so fast we would be crazy to try to predict the next 10 weeks when we can't see it that far.

But we also have a -- always had a focus on purchase, so it is coming out our way as it relates to what we have been good at and what we are focusing our market reputation on.

And as you will also remember, we never were as big on a HARP kind of a product, which is probably more likely to be one of the victims of increasing rates.

We didn't rely on that a lot because we didn't have a portfolio that allowed us to have much to refi.

So in some cases we probably should do better than average, but it will definitely be down and we are projecting that the second half of the year to be less than the first half.

Got it.

Just one more follow-up.

Richard, it was loud and clear as you answered Ken's question on taking out expenses near-term to accommodate some of the swings in mortgage revenue.

I guess, no matter what, we should just look to your consolidated guidance of 50% on the efficiency side as we think about the puts and takes of --?

Yes, that is a really good way to think of it because we never set that target.

It is always a result.

But I can tell you that low 50%s and where we have been forever, especially the two years by quarter.

That should not change materially.

We will protect that.

And I can tell you I know we can because mortgage isn't the only thing that is growing around here.

It will just be one of the components we will keep an eye on.

But I'm glad you heard me, because I don't want to be dollar-for-dollar and be shortsighted.

We have been working for five years to grow a substantial amount of momentum and become a revenue company, not an expense company, and I would hate to slow that down at this last stage.

And we are going to be very protective of it.

Got it.

Thank you for taking my questions.

Betsy Graseck, Morgan Stanley.

Good morning.

I just wanted to drill into a couple of business lines.

One is the merchant acquiring business that you have and I know that you have invested globally there.

We had some news the other night from the FT that suggested that the European Commission is proposing some changes on interchange in Europe, which I know many people have been thinking about.

One of the elements they are supposed to be considering supposedly is separating out payments -- issuers from processors.

And I am wondering what that does to your merchant acquiring businesses in Europe.

Is it something that would be an opportunity for you?

It is definitely not a concern based on what we have read, like you have.

We are entirely an acquirer, not an issuer and a processor.

So the issuers are where the gun sites are pointed in that topic.

As you said, there is an opportunity for us, particularly given our closed loop capability and our own proprietary product that we believe this could be a net positive for us as a leading acquirer and processor.

So we don't see it as a negative.

We're trying to understand whether it is a positive, but we are not worried about it.

Okay.

Then separately, in auto, could you give us a sense as to what exactly happened in auto and what kind of reinvestment in the business you are doing now?

And then a little bit on opportunity for share gain from here and what would drive that?

Betsy, this is Bill.

We had a strong auto quarter, both loans and leases, and we anticipate that to be a strong third quarter, too.

We obviously can monitor the new car sales so we get a good sense of what our market share is, and in the second quarter we definitely grew market share.

It is a competitive space, but we have made the right investments to be successful there.

We have been in the business a long time and we are very good at it.

Right.

There has been some discussion around how the CFPB has come into the mix here, acquiring the dealer rebates be done potentially a different way.

And I know you have updated the Street on how you're thinking about it, but has your thoughts changed at all since your last update?

No, when that came out we took action immediately and narrowed the amount of dealer reserve discretion.

We had no negative consequences to that.

I think our dealers all understood it.

We have worked with them and we have seen increase in volume since then.

Okay.

So no competitive reaction against what you did?

No --

Couple of banks followed us --

Couple other banks followed, yes.

-- but it didn't hurt our volume and we are actually feeling that we have (inaudible) a little bit of a risk.

The real issue here is, Betsy, as you know, is going to be if the banks as an entity can compete effectively with the captives who are not part of the CFPB's oversight, and that is long time to be determined.

But as it relates to our position against both of those entities, we are growing market share.

We like the business and we are going to continue to find ways to expand, not only in geographies but also in product types that start to emerge as rates start to go up.

Thank you.

Kevin Barker, Compass Point.

Good morning, everyone.

Thanks for taking my questions.

Just would like to discuss some of the increase in commercial real estate loans this quarter compared to what has happened over the last year.

You definitely saw a pickup from the first quarter and we are starting to see just broad growth across from the Fed data.

Is there any particular sectors where you are seeing Commercial Real Estate pickup or any particular regions where you are seeing that?

Yes, I can speak to that.

This is Bill.

We have seen -- for several quarters now we have seen multifamily being kind of the lead property class for demand.

And for us, we have seen good new construction activity in Seattle, both Bay Area and Southern California, and then Houston.

Those have been the primary areas for us.

In other areas we have seen some hotel/motel lodging demand that has picked up a little bit.

That is strong pretty much in all the coastal cities.

So those are the primary areas that we have seen Commercial Real Estate growth.

Then concerning residential real estate, given that the 30-year has moved up so much and you are seeing a decline in application volume for performing 30-year fixed mortgages, are you seeing any application shift towards 5/1 ARMs or 15-year fixed given the movement in rates?

Or is that -- are you also seeing a similar decline as you are for 30-year fixed?

This is Andy.

There is a bit of a shift to more of a shorter duration as you described and a little bit perhaps more on the variable rate.

And I will also tell you that which we are putting on balance sheet, our Smart Refinance product has always been shorter in terms of the term there closer to the 15-year.

So the 30-year is not impacting that as much and the decline is coming on the mortgage production in the 30-year, but there is some shift to shorter terms.

So would you expect (multiple speakers)

I would say, as it turns out, I was surprised but I thought there might be a bit of a tsunami affect or a cash for clunkers effect where we get a pent-up demand and anybody who still haven't refi'd would come into the game now.

And it doesn't seem to have happened.

It seems that people are still moving at kind of a snail's pace.

If they still see a deal that is better than the one they will come in, [but it's not that] kind of one-time surprise that I thought we might have.

Now that relates to mortgage, but until short-term interest rates start to move we won't expect to see a great deal of effect on the commercial wholesale side, although I do still predict there will be a bit of a rush to the gates when that starts to become a real thing.

We haven't seen that trigger yet and I think that will be an upper for wholesale lending at that moment in time which could be a few quarters off.

Okay, I appreciate it.

Thank you.

Dan Werner, Morningstar.

Good morning.

Could you give us an update on the bank M&A environment in terms of what you are seeing?

Are you still seeing the big gaps between sellers and buyers at this point, given that we have seen a lot of M&A activity amongst the smaller banks?

We haven't seen any activity.

I mean I could make it up -- I wouldn't -- but I could make it sound interesting.

But we haven't.

We have had no approaches of any significance.

We are not approaching anyone.

Like you, I read about the small banks continuing to cobble together to find some critical mass, which makes total sense to me because the cost of compliance and just regulatory costs are easier by a larger base.

But really none.

I mean it couldn't be more dormant and our interest couldn't be lower either.

So [it equates to] an opportunity because we are not feeling that need right now.

I was just wondering if there was any changes in that.

Thanks.

Jon Arfstrom, RBC Capital Markets.

Thanks.

Good morning, all.

Just a follow-up on that.

How about the payments business and the processing business; are you seeing more opportunities there?

Actually that feels a little more heated because, first of all, we are known to be an acquirer, an active acquirer.

We are known to -- we will talk to anybody.

I have said this before, but a few folks that created a great idea in a garage that has got payment uniqueness attached to it we will talk to them.

Some of the deals we look at are typically privately held businesses that are smaller than you would probably ever read about, but these are groups of people that either don't want to go out and raise the second round or third round of capital and they want to be part of something bigger.

In many cases, we can bring them in to be part of the company as well.

Sometimes they just sell and move on.

But I would say we have a very active list of M&A opportunities.

Fewer as a percentage would come to the end, but it is not for lack of having looked and seeing interest.

And people know us so they are coming at us.

Okay, good.

Then, Andy, maybe a question for you on your margin guidance.

You talked about flattish for Q3.

Is that something that is Q3 specific or is this more of a longer-term trend where maybe we are near the end of the margin pressure for the Company?

Jon, so we talked about the fact that I expected the margin pressure to be worse in the first quarter, five in the second quarter, and start to dissipate as we got into the second half of the year.

So it is not a unique to third quarter event.

It is just a function of our reinvestment rates coming closer to our rates currently on the books and currently rolling off.

So we talked about that happening.

It is happening and we do expect a relative stability.

Okay, good.

Thank you.

Let me add one last -- we didn't get a question on it, so I'm going to create my own.

Richard, what do think about the growth of loan volume?

Oh, that is a good question.

We went from 1% linked quarter in quarter one to actually 1.25% in quarter two.

We have enough of a view to see that that will go up in quarter three.

I don't exactly know how far because things are still 10 weeks to go, but we are seeing -- here is how I would characterize it.

Our flight to quality, which we have talked about for many quarters, many couple of years now, has become the real deal and it has certainly brought us a lot of good market share in the years going into this downturn.

It is now coming into kind of a phase 2 where we were invited into a lot of transactions and a lot of customers at the depths of the recession, when they wanted a strong -- our highest ratings helped.

Now they're rolling these over and we are getting invited back in at higher positions.

We are invited in, in some cases, to lead transactions and, of course, the other business that comes with it is amazing.

So for us to try to articulate why in a basically flat loan growth market we are growing now, while we still think that can continue and, in fact, grow, I do think the secret sauce in U.S. Bank's business line is that we have got this flight to quality that is now turning into a -- we auditioned, we performed well, and now we are getting the lead part.

And that is a really good thing to see at this point and at this stage.

Then as these commitments -- we never talk enough about our commitments that continue to grow faster than our loans outstanding.

As you all as analysts know, the minute and if those actually get used, whoever has the line of credit has established themselves as the first among few to be the one to draw on.

That is going to be the next round of loan growth, notwithstanding new customers.

So we love our positioning there.

We are actually fairly opportunistic and we're going to tell you that in an optimistic way to give you a sense that we see sustainability there.

Thanks, Richard.

Judy, that is it.

I think that is it.

Lori, are there any more questions?

Thank you, that concludes the Q&A portion of today's call.

I will now turn the floor over to Judy Murphy for any additional or closing remarks.

Great.

I want to thank everyone for listening to our call.

As always, if you have questions, please feel free to give Sean O'Connor or myself a call later today.

Thank you.

Thank you for participating in the U.S. Bancorp's second-quarter 2013 earnings conference call.

You may now disconnect.