U.S. Bancorp. (USB) — Q2 2017 Earnings Call Transcript

Thank you, Melissa, and good morning to everyone who has joined our call. Andy Cecere, Terry Dolan, and Bill Parker are here with me today to review U.S. Bancorp's second quarter results and to answer your questions. Andy and Terry 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 website at usbank.com. I would like to remind you that any forward-looking statements made during today's call are subject to risks and uncertainties. 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 Andy.

Thanks, Jen. Good morning, everyone, and thank you for joining our call. I am going to start off by discussing a few highlights from our second quarter earnings results. Terry will then go into some details and also provide you with forward-looking guidance, and after that, we'll take your questions. I'll start with Slide 3 of the presentation. In the second quarter, we reported net income of $1.5 billion or $0.85 per diluted share. You will see on the slide that our balance sheet is strong and growing, sequential loan growth came in at the high end of our guidance range at 0.9%. As expected, C&I loan growth picked up after a sluggish start to the year and gained momentum towards the end of the second quarter. Based on current trends, we expect that by the third quarter total loan growth will be back to the 1% to 1.5% range we think is more normalized. Credit quality remains excellent and we feel good about the risk profile of the loan portfolio. The net charge-off ratio was stable in the second quarter and our non-performing asset ratio improved on both, the linked quarter and year-over-year basis. Shifting to capital management; our book value per share ended the quarter at $25.55, which was up 4.8% from a year ago. Our common equity Tier 1 ratio estimated for the Basel III fully implemented standardized approach was 9.3% at 6.30, the level which is sufficient to support growth effectively managed through periods of economic stress and returned capital to our shareholders. In June, the Federal Reserve Bank notified us that they did not object to our capital plans submitted during the CCAR process. We subsequently announced the dividend increase of 7.1% and a new share repurchase program for the year. Now let me touch on our key performance ratios. We turn to Slide 4, our return on average assets for the second quarter was 1.35%, our return on common equity was 13.4%, and our efficiency ratio was 55.2%. We're proud of our industry-leading profitability metrics that we're always striving to improve. Although consistently best-in-class, our efficiency ratio has been at the higher end of its historical range in the past few quarters, primarily reflecting increased personnel and technology costs related to the regulatory compliance programs. However, we are nearing the end of the build-out of these programs and believe the growth rates of these costs will begin to moderate. We expect compliance costs to grow at a pace more in line with the company's core expense base in late 2017 and into 2018. When we look out through the remainder of the year, we expect to deliver positive operating leverage in both the third and fourth quarters of 2017 on a year-over-year basis. We further expect that the year-over-year non-interest expense growth will be in line with our long-term target range of 3% to 5%. We believe that our strong balance sheet, diversified revenue mix, and our focus on expense management, combined with participation in some significant expense headwinds, provides momentum for the second half of this year and into 2018. Let me stop there and turn it over to Terry.

Thank you, Andy. If you turn to Slide 5, I'll start with the balancing review and follow up with the discussion of second quarter earnings trends. In the second quarter, average loans increased 0.9% on a linked quarter basis and grew 3.4% from a year ago. Commercial loan growth rebounded from the first quarter, increasing 2% sequentially. Line utilization has not increased materially; however, deal activity has strengthened, and we continue to gain market share. As Andy mentioned, we saw some momentum in large corporate lending in the latter part of the quarter. Additionally, throughout the quarter, we continued to see strong growth in middle-market lending across many geographies. Commercial real estate lending reflects our prudent approach to certain CRE segments such as multi-family and retail given current market conditions. We did have opportunities for growth in construction lending; however, we remain cautious in commercial mortgage markets where the competitive environment has created unfavorable conditions from a risk and return standpoint. In addition, customers continue to refinance commercial mortgages in the capital markets given the rising rate environment and the opportunity to extend maturities. We had particularly strong growth in retail leases, up 11% linked quarter, where we are both a prime lender and a lessor in the auto segment, and our well-established market position, full product offering, and strong dealer relationships provided strong growth in both lending and leasing. We have made significant investments in this business over the past few years, which is coming to fruition in the form of increased market penetration with both dealers and manufacturers. We expect growth will remain healthy for the next few quarters as we continue to penetrate the market. I want to emphasize that leasing growth is not coming at the expense of increased risk. If you look at Slide 6, credit metrics remain very stable in our retail leasing portfolio. We have not changed our underwriting in this business and are not enhancing residual values. I would also highlight that in the second quarter, the weighted average cycle score on originations for auto leases was 782. Turning to Slide 7, total average deposits increased 0.8% compared with the first quarter of 2017 and 7.7% on a year-over-year basis. Following the June interest rate hike, our total interest-bearing deposits are in the mid-20% range. As future rate hikes occur, we would expect the beta will gradually trend towards a 50% level. On Slide 8, you will see that credit quality was relatively stable in the quarter; net charge-offs as a percentage of average loans were 49 basis points in the second quarter, and non-performing assets declined by 9.8% on a linked quarter basis. I will now move on to earnings results. Slide 9 provides highlights of second quarter results versus comparable periods. Second quarter net income of $1.5 billion was up 1.8% compared with the first quarter but was down 1.4% versus the second quarter of 2016. As a reminder, the second quarter of 2016 included two notable items; a $180 million Visa Europe gain in non-interest income and a $150 million non-interest expense related to interest accruals and a charitable contribution. Excluding these items, net income increased slightly year-over-year. I will exclude the impact of these notable items when I discuss revenue and expense comparisons versus the second quarter of 2016. Turning to Slide 10, revenue totaled a record $5.5 billion, up 3.1% on a linked quarter basis and 4.2% higher compared with the same quarter a year ago. Turning to Slide 11, net interest income on a fully taxable equivalent basis was $3 billion in the second quarter, up 2.4% compared with the first quarter and 5.9% higher than the second quarter of 2016. Comparisons in both quarters benefited from earning asset growth and higher interest rates. In the second quarter, the net interest margin increased one basis point to 3.04% in line with our guidance. The increase was primarily driven by rising interest rates, partially offset by the impact of a flatter yield curve and higher cash balances, which increased to meet certain regulatory expectations related to liquidity. We do not expect average cash balances to increase meaningfully from current levels. Slide 12 highlights trends in non-interest income, which increased 3.9% versus the first quarter reflecting seasonally higher revenue, particularly in the payment services business. On a year-over-year basis, non-interest income increased 2% excluding notable items. Credit and debit card revenue increased 7.8% from a year ago on higher sales volumes. Merchant acquiring revenue grew 2.7% on a year-over-year basis adjusted for the impact of currency rate changes. In the second quarter, we exited two merchant acquiring joint ventures which did not have a material impact on the second quarter results but will mute revenue growth comparisons for the next few quarters. Divestitures were, in part, due to changing priorities of the joint venture partners that were impacting future growth and profitability portfolios for us. Mortgage revenue grew about 2.4% on a linked quarter basis but declined 10.9% year-over-year, in line with our expectations. Turning to Slide 13, non-interest expense increased 2.7% compared with the first quarter of 2017, primarily reflecting higher compensation expense and marketing and business development expenses, partially offset by seasonally lower employee benefit expenses. On a year-over-year basis, non-interest expense increased 6.4% excluding notable items, driven by higher compensation and other non-interest expenses. Compensation expense grew mainly due to the impact of hiring to support business growth and compliance programs, as well as seasonal merit increases and higher variable compensation related to production. Other expenses increased primarily due to the impact of the FDIC insurance surcharge which began in the third quarter of 2016. Slide 14 highlights our capital position. At June 30, our common equity Tier 1 capital ratio estimated using the Basel III standardized approach as if fully implemented was 9.3%. This compares to our capital target of 8.5%. I will now provide some forward-looking guidance for the third quarter. Given recent trends, we expect linked quarter total loan growth to be in the 1% to 1.5% range. Average earning asset growth will track with loan growth. We expect the linked quarter net interest margin to increase in a manner similar to the first quarter of 2017, which is within a range of four to five basis points. Let me take a minute to talk about merchant acquiring revenue. Last quarter we indicated that during the third quarter, merchant acquiring revenue was expected to return to a more normal growth trajectory of same-store sales plus 1% to 2% excluding the impact of foreign currency changes. The adverse impact on sales volumes from exiting certain large volume customers is beginning to dissipate with reported sales volumes increasing 3.3% on a linked quarter basis. Given the anticipated revenue impact from exiting the joint ventures, we expect year-over-year merchant acquiring revenue to be essentially flat in the third quarter. Growth will begin to normalize in the fourth quarter and then heading into 2018. As Andy discussed, we expect to deliver positive operating leverage in each of the next two quarters supported by year-over-year expense growth of 3% to 5%, a level we target as more normalized on a long-term basis. Finally, we expect the taxable equivalent tax rate to approximate 29% in the third quarter. Let me hand it back to Andy for closing comments.

Thanks, Terry. Our financial performance gained momentum in the second quarter, and we expect to continue to improve profitability and returns as we look into the second half of this year and head into 2018. From a macro perspective, corporate balance sheets are strong, consumer confidence is increasing, and the evolving economic and regulatory backdrop has the promise to be conducive to growth. I just spent time in Washington last week and was very encouraged by the open and productive dialogue that has taken place; nonetheless, progress has been slower than anyone had hoped. While we have not yet seen evidence of a resurgence in the CapEx cycle, consumers are spending and businesses are active, and we continue to see strength across our geographic markets and business lines. We have a solid and growing revenue base, and we believe we have reached an inflection point in expense growth. Importantly, the profit improvement that we expect will drive improving returns will not be achieved at the expense of credit quality, nor will it be achieved at the cost of delaying prudent business investment, which will be increasingly focused on technology and innovation. Finally, I want to thank our dedicated employees who work hard every day to be our customers' and communities' trusted financial partner. That concludes our formal remarks. Terry, Bill, and I will now be happy to answer your questions.

Thanks, good morning. I wanted to follow up on the changes in the expense rate; it's encouraging to hear it's expected to improve quickly. Could you explain what factors are contributing to the return to the three to five range in both the third and fourth quarters, and what areas still have some underlying inflation?

Yes, so let me take that question. I think there are three broad things. From a compensation standpoint, we expect that to begin to moderate and continue to moderate into the third, fourth, and into 2018, and that will be driven by the fact that we're getting close to the end of building out those risk and compliance programs, so that is kind of number one. Then costs related to risk and compliance, such as consulting activities that have really been helping us support some of those programs, are moderating and will continue to do so as we go into the next few quarters and also into 2018. So those would be the biggest factors and then a year ago the FDIC implemented a surcharge, and so we're starting to lap that and the year-over-year effect associated with the FDIC insurance will start to moderate.

And I'll keep my follow-up to expenses; can you just help us understand the tax-advantaged investments and what that means for sequential growth as we go third, into fourth as well; it seems like you also had a bunch of that more in the other line this quarter. So can you just help us understand what that means for sequential growth as well? Thanks.

We don't necessarily talk about that specifically, but we do typically see the tax credit amortization expense start to move up in the third and then the fourth quarter. I think last year from third to fourth, as an example, it was up about $40 million to $50 million, kind of a net ballpark. So that should give you some sort of a range with respect to how that's going to change.

Okay, thanks guys, appreciate it.

Good morning. I'd like to discuss the deposit balance sheet for the ended period. Can you provide some insight into what influenced the end-of-period balance, which was higher than the average, as well as the volatility observed? Additionally, how should we anticipate the deposit flows moving forward?

Yes, so on a linked quarter basis, if you're going to look at just averages, we saw growth in deposits, both in our consumer business and then also in our corporate trust business. We end up looking at the ending cash balances; keep in mind that one of the things we were doing as we were building cash balances in order to meet some of those liquidity requirements; and in order to do that, one of the things that we did was a little bit of a pricing change related to some deposits in order to bring some dollars in near the end of the quarter, and so that's why you see that. On a go-forward basis when you think about cash balances, we don't expect the average balances to change much from current levels.

That's right, Terry. And I'd add that on any particular day, that cash balance can be up or down. There is a lot of that particularly within the corporate trust business with flows that are there, so one day I think there is a designated trend.

Okay, so the average should remain where it is, so therefore the EOP is probably going to head back towards the level where it was?

Yes, it's an average balances.

Yes, got it, okay. And then on the margin, in terms of your expectation, could you remind me again, you had mentioned four to five basis points?

Yes. Our guidance for the third quarter is that we expect to expand by four to five basis points from here. In the second quarter, we anticipated a lower movement of one basis point, mainly due to building a higher cash balance, which incurred an additional two basis points in costs during that quarter, alongside the impact from the flatter yield curve. However, for the third quarter, we feel quite comfortable with the projected range of four to five basis points.

Okay. And then jumping off from that point into the fourth quarter, how much beyond that would you think barring incremental hikes into '18 can be a good color? Thanks.

When we look into the fourth quarter, at least right now, we would expect that the margin increase may not be at the four to five but it's still going to be kind of in that range of three to four, some and above.

And we try to keep this thing within the 90 days because so much can change with the yield curve in particular, so we'll continue to give guidance as we go over the next 90 days.

Yes, got it. Thanks, Andy. Thanks, Terry.

Hi, good morning. I just had a couple of questions, a little more on the strategic side. I just wanted to get your thoughts on some of the consolidation that's going on with merchant acquiring over in Europe and how that plays into your business over there, any thoughts on incremental investments that you would be looking to make as a result?

We are currently ranked fifth or sixth in both North America and Europe. Our platform, which includes dynamic currency conversion and an international payment system, positions us well in these markets. In the area of merchant acquiring, we will pursue smaller acquisitions rather than major deals. We already have a solid presence in Europe, so we don't need to expand significantly there. However, this remains a focus for us, and we will continue to invest as it grows.

Okay. And then on the corporate trust side, could you give us some more updated comments there?

So corporate trust is having a good year, we continue to lead market share across all three categories, muni, corporate, and structured; we have, again, a good platform and good technology, which I think is key to that business, and we've been very consistent in terms of our commitment to that. So our opportunity is to continue to expand in the U.S., but also we have a foothold in Europe, and our opportunity to expand there I think is comparable to where it was in the U.S. about 20 years ago.

And then just lastly, you talked a bit about deposit betas and how they've been projecting; I just wanted to get a sense from you on how close to run rate you are on the corporate side of your business?

I think when you look at deposit betas overall, they talked a little bit about that. I do think that one of the things you're seeing on the wholesale side is that the deposit prices gain a little bit more competitive; and so we do see that picking up both in the June hike and as rate hikes continued in the future. And you know, I think that is going to continue to move up and as part of what we are seeing when we think about the positive bid overall moving up closer to that 50 basis points, we're going to see more pressure on the wholesale side and on the corporate trust side.

Okay. But it feels like we are two-thirds of the way through or a third of the way through.

With respect to this rate hike?

Yes.

I think we're probably further along on the wholesale side of the equation getting normalized betas. We have more space to go on the retail side which the beta there has been very low, and we'll continue to go up as the next rate increases come forward.

It was interesting to ask the question because we had a rate hike, but you managed to achieve significant growth in non-sparing deposits during the quarter. This led me to think that you might be finished with the corporate deposit beta aspect.

I’m not sure if we’re completely finished. Based on what we observe from a competitive perspective, we’ve reached a point where we don’t feel the need to actively increase deposits, especially given our current cash balances. I agree that there isn’t much upward pressure in this area. Deposit beta, whether for retail or wholesale, is tracking similarly to previous trends, perhaps slightly higher.

Okay. Alright, thanks so much.

Good morning. My first question is on loan growth. It sounds like the aggregate stuff is pretty much tracking as you would have thought through the course that you're already in, and it will accelerate back in your targeted range in the back half. So that's all good, but it is kind of running a little contrary to the weakness we still see in the HA. Just curious if you can spend another moment or so just talking about exactly where it ends up coming from how much of it is market share versus?

So I'll start and then I'll ask Bill to add on. You know the areas of growth continue to be in middle market, which is doing exceptionally well, that's in excess of 2% on a linked quarter basis, and we continue to see that accelerating or being about that level in future quarters, that's doing well. As Terry and I both mentioned, we saw some growth in the second half of the second quarter in the large corporate wholesale part of the category. And then a lot of leasing, as Terry mentioned, is very high quality but given the great platform relationships we had, that shows some growth. So those are areas that I would say are our principal areas of focus.

Yes, that effectively addresses the consumer. We anticipate strong performance in the latter half of the year, continuing to experience good demand for auto loans and leases, which remains a prime portfolio for us. We have consistently maintained our position in that area. There is also some demand for home equity, which is a challenging market, but we are still seeing robust originations there. As Andy mentioned regarding the commercial side, while we are experiencing some roll-off in our mortgage portfolio or standing loan portfolio due to aggressive terms from life companies in the VS market, we continue to be active as a construction lender and have observed growth in that sector. Our client base includes many reaps, which significantly contributes to the C&I line, and we are witnessing good growth both quarter-over-quarter and year-over-year. Overall, there are numerous areas where we continue to observe strong demand.

Okay, that's perfect. I appreciate the insights. Separately, regarding the idea of positive operating leverage, it seems that both quarters in the second half of the year should be good. I'm curious about your updated thoughts on achieving positive operating leverage for the full year and when you expect to see that. I recall you mentioned hoping to generate positive operating leverage for the entire year of 2017. Based on the updated guidance, it seems it might still be somewhat challenging, but I would like to hear your thoughts.

Scott, we'll get to the third quarter and fourth quarter, and we'll be very close if not on for the full year.

Hi, good morning. Just a follow-up to Scott's question; as we look on longer term in terms of the progression of your efficiency ratio, if we presume this with either forward curve today; could we see U.S. Bancorp exit 2018 with an efficiency ratio in the low 50s?

Yes, it's a short answer to that question. We would expect to have positive operating leverage and closer to our long-term growth projections as we move into '18, and that is what we talked about at Investor Day. And that expense ratio in the 3% to 5% and revenue growth above that. Now that's assuming sort of a normal yield curve, economic growth is abnormally lower, or anything like that but we would expect to continue to have that into '18.

Thank you for the clarity. Regarding the inquiry about deposits, some of your competitors have mentioned that if the Federal Reserve starts to reduce its balance sheet by September, they expect that wholesale deposits will be the most affected by outflows. I'm interested in your perspective on this and whether it could potentially increase beta's further for U.S. Bank.

Yes, so let me take that. The Fed is still kind of in the process of defining what the level of balance sheet reduction and the pace of that over time, and our expectation is that first of all, they're going to be very transparent as they go through that process, and the pace is going to be very gradual, most likely several years. So we do believe that as excess liquidity comes out of the market, we would expect there to be more competition for deposits, and that is going to end up impacting pricing; I do believe that just because of the nature of the deposits on the wholesale side, you're going to see more competitiveness and more of a competitive environment associated with that. Whether I’d be surprised if it's going to significantly impact 2017, and I do believe that just because it's going to be very gradual, it's going to also be very manageable and the market is going to respond accordingly.

Thank you. And just one last follow-up question; I know you always get asked on this call about an update for with the consent order, and I'm wondering if I could ask a more technical question; is the consent order for OCC applicable to the holding company? And I'm just wondering whether or not there is a way to isolate the consent order to sort of unshackle it more strategically?

The OCC regulates our national banks, which is where this falls under. Our national bank functions as the holding company, representing over 99% of the total banks, meaning all operations take place within that national bank. Therefore, the OCC's regulations broadly apply.

Erika, we continue to expect to have our people and processes who are in place, their technology will be completed by the end of the third, into the fourth quarter, and then it gets to the sustainability part of the equation and that goes into early '18.

Thank you.

This is actually Ricky from Matt's team. I'm wondering if I could just do a bigger picture question first. I wonder if you can touch on some of the items on the growth front that you mentioned in the past, maybe it's in payments or in wealth penetration; maybe frame out what those could mean to revenue as we think about both the rest of this year and into 2018 and beyond?

So let me just sort of go across the business lines at a high level; our wholesale continues to be an opportunity to expand our dominance in terms of being the bank of choice for large corporate customers. We have a number of capabilities we've built over the years, and we continue to take market share in different categories, particularly in the commercial group, as we move up the league tables. On the wealth management side, I do think the extension of corporate trust, as well as the wealth management piece of the pie, particularly focused on the emerging, that represents a great opportunity. Payments across all three categories, merchant acquiring, card issuing, as well as corporate payment systems; I think we have the technology and leaders to continue to grow that. I think particularly regarding Elvan, I think the opportunity is both here, as well as in Europe. And then finally, retail, we're doing very well in terms of small business, as well as retail core customer growth. And so I think across all of our business lines, as we've said many times before, I think we're in a strong position, and we're not really seeking to have major adjustments and just taking advantage of the opportunities we have in front of us.

Okay, great. And maybe separately, it seems like energy and maybe oil prices are starting to come back in the conversation a bit more; some analysts are calling for sub $40 oil prices by 2018. I'm just wondering if you can remind us again what your exposure in that space is and does it seem like there is any real signs of deterioration in your portfolio? I'm wondering if you could talk again about the quality.

Sure. Our book has been relatively modest in size; we finance the energy sector, but we're below 2% of our commitment level and less than 1% of our loans in that sector. When the original price decline occurred, we did see some impact. This quarter, non-performing assets were down partly due to the resolution of those original non-performing loans, and we've been reducing our reserve levels, but it’s not a significant impact on our overall performance. We believe that with the price approaching $40, we are in a comfortable position, so we anticipate continued improvement in that portfolio.

Okay, thanks.

Hi, couple of questions, and maybe this one goes to Bill. Credit card net charge-offs up 58 basis points year-over-year, turning a little higher than your peers; can you talk a little bit about what's going on there?

Yes, I believe the forward outlook is lower, and it will come back down to below 4%, so it's not a matter of trajectory. We have continued to grow that portfolio through both acquisitions and internal growth in our branches, which has been strong. There is a seasoning impact that you may have noticed across the industry, and we are experiencing that as well. However, our outlook remains very solid, and we are starting to see growth in our underwriting.

It's a strong portfolio overall, with no concerns about sub-prime activity.

Okay, alright. Second topic, mortgage banking, you discussed that on last quarter's call. Terry, Andy, your applications have decreased significantly, and it appears that gain on sale margins have declined; could you provide some insight into what’s happening and what you anticipate moving forward?

Yes, so maybe just to talk about the second quarter first; mortgage applications on a year-over-year basis were down about 16% for us, and that's pretty much in line with what the market was experiencing and that's driven in large part by the drop in refinancing. Second quarter mortgage applications, we did see a nice movement up on a linked quarter basis; we end up looking into the third quarter, we would expect mortgage applications to continue to move higher, that is kind of a seasonal effect, and we also have a nice mix of retail and on the purchase mortgage side, so that seasonal impact will continue to see in the third quarter. Gain on sale margins in the second quarter did come down, and I think you saw that kind of in the industry, our expectation or outlook is that they will be relatively stable going into the third quarter.

Okay, great, thank you.

Good morning. I wanted to follow up on the expense guidance. Year-over-year, do you think if we look at the 3% to 5% range that we're seeing any change in expenses sequentially? Especially considering Terry mentioned the impact of the amortization of income housing tax credits; should we expect to see most single-digit increases on a sequential basis from the third quarter compared to the second?

Yes. I mean usually there is a little bit of a seasonal effect that comes into play with respect to the third quarter, but I think that's a reasonable assumption when you think about the third quarter.

Okay. And I know you talked about earlier the deposits and the expectation around just the seasonal, there is a seasonal runoff that comes back in the second half of the year; so cash balances on average you think will be unchanged. So with the recent issuances of some longer-term debt, are you planning to add anything else to the investment securities portfolio? Are you planning to keep the securities portfolio relatively flat?

We are increasing the securities portfolio in line with the overall growth of our balance sheet. If you consider the expected average loan growth, our average earning assets will also follow a similar trend. Therefore, we will be adding to the investment portfolio to accommodate this growth, and that's a way to interpret our strategy.

Alright, thanks for your time.

Good morning, everyone. I have a couple of questions. I want to clarify the net interest margin and the net interest income guidance. The guidance for net interest margin is four to five basis points with average loan growth of 1% to 1.5%. This suggests that the net interest income growth could be around 3% to 4%, which is a bit higher than I expected. I just want to confirm that I'm understanding how net interest margin translates into net interest income growth correctly.

Yes, I know that you can do the math based on what we ended up laying out, but I think that's a reasonable assumption.

I understand. Moving on, I have a broader question regarding the merchant acquiring business, which follows up on an earlier discussion. Considering the consolidation occurring in Europe, there are opinions suggesting that you might be operating below scale in the acquiring sector in both the U.S. and Europe. While you've ended some low MDR relationships and dissolved certain joint ventures, could you elaborate on your strategic approach to this business? Specifically, how do you identify and leverage new opportunities? Additionally, how do you aim to position yourself within the entire payment landscape in the merchant acquiring sector, and what strategies will you implement to enhance growth consistently?

So I think first on your scale question, I think we have sufficient scale to be very competitive. I think we've had that for a number of years. We're focused on the few areas, number one is verticals; I think as you think about the merchant processing business, it's migrating from a natural transaction business to an information business, and being very focused on verticals and providing that information is usually important. We have a number of verticals; the travel industry, hotels, small realty retailers that I think we're very good at, healthcare is another one; so our focus is on that information and in terms of innovation and technology, providing beyond the financial transaction, and as well as the expansion of our sales force, both domestically and in Europe. And then finally, the e-commerce side of the equation is another area of focus for us in terms of investment and growth.

Got it. And how do you feel like your e-commerce capabilities are now versus where you want them to be?

I think they are fine; I want them to be better.

Good morning. I just had a quick question on tax rate; you mentioned it was going to 29%, I'm right there on the third quarter, so it's been quite volatile over the last few quarters. Are you still sticking with the 27% to 28%, give or take range for this year and maybe longer term?

I believe that when we consider the tax rate on a tax equivalent basis over the long term, it will gradually increase due to growth and the marginal effect. Therefore, as I look ahead to the next few quarters and into 2018, a rate of 29% seems more reasonable.

Okay. In terms of growth, commercial mortgage and commercial and industrial lending have been the primary drivers over the past few years, but that has slowed recently. Looking ahead to the next one or two years, do you believe that consumer and retail lending will begin to take the lead, or do you expect commercial lending to remain strong in the coming years?

I think wholesale will continue growing as it is, and I think we'll start to see a turnaround in retail; so we've had strong growth, we've seen another portfolio that we talked about, a little bit less in terms of the home equity and traditional retail loan areas, but I think we'll start to accelerate in future periods, and I think that's how we get to the more normalized long-term growth rates.

Okay, thank you.

Hi, I have a follow-up question regarding the CCAR process, specifically about the dividend. I noticed that there was a nice increase in the dividend, but your earnings streams have some of the lowest volatility in the group. It seems there might be potential to enhance the dividend component of the capital return. I'm curious about your thoughts on that.

That's a reasonable question. We're starting from a relatively low capital ratio, and it's true that we exhibit the lowest volatility and experience the least downturn in stressful conditions. We still generate profits, but we're approaching what we consider our ideal capital structure, which is 8.5% compared to just over 9% today. Additionally, we aim to ensure a successful outcome in the CCAR process. We're also trying to strike a balance between share buybacks and dividends. We have maintained steady growth, and we anticipate continuing that trend. In the future, we may focus more on increasing the dividend rather than on buybacks.

Okay, alright, thank you.

Good morning, thank you. Could you provide us with more insight on the commercial real estate markets? You mentioned there might be some weakness in the multi-family sector. Are there specific geographic areas that you find particularly concerning at this time?

Well, I mean there are certainly some of the cities that have very strong multi-family growth, and if you look at some of the rent forecasts, there are plenty of companies to do this. They will see there are markets, some of the coastal markets of Boston and DC, where the forecasts are for either no or slightly declining rent growth; and that doesn't mean we won't do projects there. We follow our client base, and if they like the project, we like the project, we both will do something, but some of the markets have seen a lot of multi-family development, Minneapolis is another one, where you got to be cautious about it.

Thank you. The second question was about your perspective on the Federal Reserve's plan to begin unwinding their balance sheet, which will be fully operational in 2018. How do you view this and its potential impact on deposits in the banking system and for U.S. Bancorp?

Thank you, Gerard. We discussed this earlier, but when considering the Fed's current actions, they still need to establish a clear reduction strategy for the balance sheet and the pace of that reduction. They have been quite open about the fact that this process will be gradual over several years, which I believe will keep any effects on the banking industry manageable. As the market adapts, we can anticipate increased competition for deposits as excess liquidity is removed. Additionally, I expect that the long end of the yield curve will likely rise somewhat, which means that some of the impacts on deposits will probably be felt more on the wholesale side.

Very good. Lastly, you have industry-leading profitability with your current ROA and ROE levels. When considering how to increase that, will it be more due to improvements in the net interest margin or the efficiency ratio? In the past, your numbers were higher, so is the focus on margin, efficiency ratio, or leverage? What factors are you considering to drive further growth? Can you take it higher than it is today?

Gerard, I think it's both parts of the equation; it's accelerating revenue growth and moderating expense growth; positive operating leverage, which will improve the efficiency ratio and ultimately improve ROA and ROE.

Good morning. Just one question, the bottom of Slide 8 really stands out; that U.S. Bank has built reserves for the last six quarters whereas your peers, even through 2Q for those that have reported, continue to release those reserves. So could you talk about it as something in terms of the mix shift or the loan portfolio that's driving your ability to grow reserves, again when your peers are just not in that same position?

Well, one of the things you're looking at is that a lot of the peers have larger energy exposure, so they added more, and like us, we can see improvement in this quarter. So they may have released more reserves out of their energy book. And we're pretty much steady as she goes from a credit standpoint, so at this point in the cycle, we have a very stable credit environment, and we're still growing loans, so that's what we look at. We will add to reserves to support loan growth if you think about what they are for, and they are for potential future losses out of your loan book. As you grow the loan book, that's what the reserve is for. So if we don't have big upswings, we're needing to add to reserves in a downturn like the energy portfolio. Then we're going to be adding for loan growth.

Sorry about that, it's been a lot lower than everyone else, and so simply stated if we're not adding a lot, we're also tracking a lot.

Great. Then just a follow-up question for me. Andy, this concept of one U.S. Bank, which you've talked about, I believe is in the annual report; as you think about the second half of this year, are there any areas within your core businesses that stand out in terms of benefiting from this strategy as you work together under this one U.S. Bank kind of strategy?

Terry has a long list; there are a number of initiatives across the company from the way we handle our call centers, to the way we do innovation and the way we communicate with our customers, to how we share information among the business lines. So there are a number of initiatives, and I would say it's probably our number one focus of the company right now.