U.S. Bancorp (USB) Q4 2014 Earnings Report, Transcript and Summary

Welcome to U.S. Bancorp's Fourth Quarter 2014 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 Operating 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, January 28 at midnight Eastern Time. I will now turn the conference call over to Sean O'Connor, Director of Investor Relations for U.S. Bancorp.

Thank you, Paula, and good morning to everyone who has joined our call. Richard Davis, Andy Cecere, Bill Parker and Kathy Rogers are here with me today to review U.S. Bancorp's fourth quarter and full year 2014 results and answer your questions. Richard and Andy will be referencing a slide presentation during their prepared remarks. A copy of the slide presentation, as well as our earnings release and supplemental analyst schedules are available on our Web-site at usbank.com. I would like to remind you that any forward-looking statements made during today's call are subject to risk and uncertainty. Factors that could materially change our current forward-looking assumptions are described on Page 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.

Thank you, Sean. Good morning everybody and thank you for joining our call. I'll begin with a few highlights from U.S. Bank's 2014 full year results on Page 3 of the presentation. U.S. Bank reported record net income of $5.9 billion for the full year of 2014 or $3.08 per diluted common share. We achieved industry leading profitability with the return on average assets of 1.54%, a return on average common equity of 14.7% and an efficiency ratio of 53.2%. Total average loans grew by 6.3% and average deposits grew a strong 6.5% year-over-year. Credit quality continued to improve with an 8.9% decline in net charge offs and 11.2% decrease in non-performing assets. Our capital position ended the year stronger with a common equity Tier 1 capital ratio estimated for the Basel III standardized approach as fully implemented of 9%. In total, we returned $4 billion or 72% of our 2014 earnings to the shareholders in the form of dividends and buybacks. Turning to Slide 4 and our quarterly highlights, U.S. Bank reported net income of $1.5 billion for the fourth quarter of 2014 or $0.79 per diluted common share. Total average loans grew by 5.9% year-over-year and 1% linked-quarter. In addition, we continued to experience strong loan growth, strong growth in average deposits. Credit quality remained strong. Total net charge-offs decreased by 8.3% from the prior quarter while total non-performing assets declined 6% on a linked-quarter basis. We continued to generate significant capital this quarter. Our common equity Tier 1 capital ratio estimated for the Basel III standardized approach as fully implemented was 9% at December 31. We repurchased 11 million shares of common stock during the fourth quarter which along with our dividend resulted in a 66% return of earnings to our shareholders in the fourth quarter. Slide 5 provides you with a five-quarter history of our performance metrics, and they continue to be among the best in the industry. Return on average assets in the fourth quarter was 1.5% and return on average common equity was 14.4%. Moving over to the graph on the right, you can see that this quarter's net interest margin was 3.14%, and Andy will discuss the margin in more detail in just a few minutes. Our efficiency ratio for the fourth quarter was 54.3%, lower than the prior year. Excluding the impact of notable items in the fourth quarter, our efficiency ratio was 53.8%. We expect this ratio will remain in the low 50s going forward as we continue to manage expenses in relation to revenue trends while continuing to invest in and grow our businesses. Turning to Slide 6, the Company reported total net revenue in the fourth quarter of $5.2 billion, a 5.7% increase from the prior year. Excluding the impact of this quarter's gain related to an equity investment in Nuveen, total net revenue increased 3.2% from the prior year. The increase was due to higher net interest income as well as higher revenue in most fee businesses. Average loan and deposit growth is summarized on Slide 7. Average total loans outstanding increased by almost $14 billion or 5.9% year-over-year and 1% linked quarter. Adjusting for the Charter One acquisition, total average loans grew 5.5% year-over-year. Overall and excluding covered loans, which is a run-up portfolio, average total loans grew by 7.1% year-over-year and 1.2% linked-quarter. Again this quarter the increase in average loans outstanding was led by strong growth in average total commercial loans, which grew by 15.5% year-over-year and 2.9% over the prior quarter. Total average commercial real estate loans also grew increasing 4.2% year-over-year and 0.3% linked-quarter. Residential real estate loans grew 2.2% year-over-year and were relatively flat on a linked-quarter basis. Average credit card loans increased 3.6% year-over-year and were up 1.3% on a linked-quarter basis. Total other retail loans grew by 3.6% year-over-year and 0.8% over the prior quarter, mainly driven by steady growth in auto loans. We continue to originate and renew loans and lines for our customers. New originations excluding mortgage production plus new and renewed commitments totaled approximately $53 billion in the fourth quarter. Total average revolving commercial and commercial real estate commitments continued to grow at a fast pace, increasing year-over-year by 13.3% and 3% on a linked-quarter basis. Line utilization was relatively flat in the fourth quarter. Total average deposits increased almost $19 billion or 7.2% over the same quarter of last year and 1.6% over the previous quarter. Excluding the Charter One acquisition, the growth rate remained strong at 5.5% on a year-over-year basis. Growth in low-cost interest checking, money market and savings deposits was particularly strong on a year-over-year basis. Turning to Slide 8 and credit quality, total net charge-offs declined 8.3% on a linked-quarter basis and 1.3% on a year-over-year basis. The ratio of net charge-offs to average loans outstanding was 0.50% in the fourth quarter. Nonperforming assets decreased by 6% on a linked-quarter basis and 11.2% from the fourth quarter of 2013. The loss sharing agreement for the commercial and commercial real estate loans acquired from the FDIC, which comprised the majority of the nonperforming covered assets, expired at the end of the fourth quarter of 2014. During the fourth quarter, we released $20 million of reserves, $5 million less than the third quarter of 2014 and $15 million less than the fourth quarter of last year. Given the mix and quality of our portfolio, we currently expect the net charge-offs and total nonperforming assets to remain relatively stable in the first quarter of 2015. Andy will now give you a few more details about our fourth quarter results.

Thanks, Richard. Slide 9 gives you a view of our fourth quarter 2014 results versus comparable time periods. Our diluted EPS of $0.79 was 3.9% higher than the fourth quarter of 2013 and 1.3% higher than the prior quarter. The key drivers of the Company's fourth quarter earnings are summarized on Slide 10. Fourth quarter results reflected notable items that in combined increased diluted earnings per common share by $0.01. The notable items included $124 million gain related to an equity investment in Nuveen Investments and $88 million of additional expense comprised of $35 million of charitable contributions and $53 million related to recent developments in certain legal matters. The $32 million or 2.2% increase in net income year-over-year was principally due to an increase in total net revenue, driven by increases in net interest income, fee-based revenue and the impact of notable items. The Company also achieved positive operating leverage on a year-over-year basis. Net interest income was up 2.4% year-over-year, as an increase in average earning assets was partially offset by lower net interest margin including lower loan fees. The $35 billion increase in average earning assets year-over-year included growth in average total loans as well as planned increases in the securities portfolio. The net interest margin of 3.14% was 26 basis points lower than the fourth quarter of 2013, primarily due to growth in the investment portfolio at lower average rates, lower loan fees and lower rates of new loans, partially offset by lower funding costs. Lower loan fees were due to the previously communicated wind-down of Checking Account Advance, our short-term, small-dollar deposit advanced product. Noninterest income increased $214 million or 9.9% year-over-year due to higher revenue in most fee businesses and higher other income including the impact of the Nuveen gain. We saw growth in retail and corporate payments, merchant processing, trust and investment management fees, deposit service charges, treasury management fees and investment product fees. Noninterest expense increased year-over-year by $122 million or 4.5%, primarily due to the accruals for legal matters, charitable contributions and an increase in compensation expense reflecting the impact of merit increases, acquisitions and higher staffing for risk and compliance activities. Net income was higher on a linked-quarter basis by $17 million or 1.2%, mainly due to the higher net interest income, the impact of the notable items and a decrease in the provision for credit losses. On a linked-quarter basis, net interest income increased 1.9%, mainly due to an increase in average earning assets, partially offset by lower loan and investment security rates. The net interest margin of 3.14% was 2 basis points lower than the third quarter, principally due to the growth in lower rate investment securities, partially offset by unusually high interest recoveries. These unusually high interest recoveries added approximately 2 basis points to the fourth quarter net interest margin. On a linked-quarter basis, noninterest income was higher by $128 million or 5.7%. This favorable variance was primarily due to higher other income including the impact of the Nuveen gain, partially offset by lower mortgage banking revenue and seasonally lower corporate payments revenue. On a linked-quarter basis, noninterest expense increased by $119 million or 7.3% due to seasonally higher cost related to investments and tax advantage projects, higher professional services and the notable items including the charitable contributions and legal accruals. Turning to Slide 11, our capital position is strong. Our common equity Tier 1 capital ratio estimated using the Basel III standardized approach as if fully implemented at December 31 was 9.0%. At 9.0%, we are well above the 7% Basel III minimum requirement. Our tangible book value per share rose to $15.96 at December 31, representing a 10.8% increase over the same quarter of last year and a 1.9% increase over the prior quarter. Our return on tangible common equity was 20% for the fourth quarter. Also, we are complying with fully implemented U.S. liquidity coverage ratio based on our interpretation of the final rolls. I'll now turn the call back to Richard.

Thank you, Andy. I'm very proud of our 2014 results. We reported record net income, maintained our industry-leading performance measures and returned 72% of our earnings to shareholders. These results are directly tied to the hard work and dedication of our employees. In fact last week I had the privilege of leading our 9th Annual All Employee Meeting. There was a pleasure to once again make this annual connection with our employees and to thank them for their contributions and for our success. I'd also like to take this opportunity to congratulate Andy and Kathy. Yesterday we announced that Andy has been promoted to the Vice Chairman and Chief Operating Officer where he will be responsible for our core lines of business. Andy has demonstrated tremendous leadership as CFO and we are confident in his ability to manage our businesses effectively and execute our customer-focused growth strategy. Kathy Rogers, currently EVP responsible for Business Line Planning & Reporting including the stress test process, will replace Andy as Vice Chairman and CFO. Kathy has been with U.S. Bank for 28 years and has served in a variety of leadership roles within the finance organization. Many of you have already met Kathy and I know she looks forward to meeting the rest of you very soon. So as we head into 2015, we remain focused on extending our exceptional track record or financial performance for the benefit of our customers, our employees, our communities and our shareholders. That concludes our formal remarks. Andy, Bill, Kathy and I would now be happy to answer questions from the audience.

[Operator Instructions] Your first question comes from Jon Arfstrom of RBC Capital Markets.

Just on the topic of the promotion, I think we're all big Andy supporters, we appreciate the new role for him, but can you maybe share what drove the change and is there anything you are trying to signal or anything that changes with the way the Company is going to be run, and anything change in your role, Richard?

My role doesn't change but it is a chance for Andy to demonstrate the same acumen he's had in the financial role by running the revenue business lines, and as we move through this transition I think as the economy starts to get better, I'm quite excited to have him keenly focused on what leverage we can create as the economy picks up. I'll continue to be running the whole Company but focus especially on the support teams and the compliance and the operating integrity that's gotten this Company to this point so far. And it is fairly transparent, it's a chance to give Andy an opportunity to prove that he can run virtually all parts of the Company in the eventual opportunity for him to run it someday.

Good, thank you. And then just a question on 2015 in terms of some of your targets, historically you've had this 4% to 6% loan growth target and I think it kind of changes from quarter to quarter your level of optimism, but are you feeling optimistic and do you feel is that the right range, 4% to 6%, and what does it take to get to the higher end of that?

Yes, Jon, actually I'm optimistic. So we've been sitting in that 1% to 1.5% linked-quarter for a while and this quarter you see we were at the lower end of that, but for the year you look back and we are just short of 6% year-over-year loan growth, and we're just projecting a higher number for 2015, slightly higher, in the high 6, low 7. So if we are accurate, and we usually are, then we see that as a small but steady continued improvement in loan growth. Let me take you back to 10 years ago, for those who remember though, we are not going to be dissuaded by people who want to compare us to those who are growing loans faster in a given quarter because we never have been impacted by that, but I could remember 10 years ago being questioned on a call like this for why our loan growth isn't as fast as someone else's, and we're just not managing to that point. We're managing to high-quality loan portfolio. I think our quality of charge-offs and nonperforming assets will prove that. And so, tempting as it might be to tell you guys we're going to move to 1.5% to 2% linked quarter or 8% to 10% year-over-year, the economy doesn't warrant that yet and we're going to continue to take market share on the pricing benefits and the quality benefits we've been using for the last five to seven years, and as the economy slowly improves so will our loan growth but not remarkably, and therefore in a few years you'll be satisfied that we have remarkably high credit quality and a continued stability on what we promised through the entire cycle. So, I think we're optimistic for all the right reasons but at a small incremental level from perhaps 1% higher year-over-year than we did in '13.

Okay. Great, thank you.

Your next question comes from Betsy Graseck of Morgan Stanley.

When we met back in November, we talked a little bit about outlook for investing in the business and some of the things you were asking the business unit heads to do, and I guess I'm just wondering if the game plan to grow the business with kind of current headcount is still in place, basically wondering if you're thinking about expanding at this stage to capture more market share or to do the same, to grow the market share with the same…?

Got it. I'll repeat it in a different way. What we said was 2014 was the year that we'll continue to keep an eye on any discretionary expenses that would otherwise not be as important given the fact that expenses were going to be challenged and the fact that the economy was slow. 2015, I think like a lot of our peers, we've adopted the Fed's interest-rate scenario which starts to move up in the middle of the year. If that happens, that's awesome. But if it doesn't, we're not entirely related. It's not going to make or break this Company on whether interest rates move up. We're going to control a lot of other things. So the first half of '15, given Fed's interest-rate scenario, it will a lot like all of '14 where we'll continue to invest where we have to, we'll watch the discretionary investments and keep them perhaps, defer them a bit until we can see a stronger economy, we'll add the compliance, operating risk areas, audit areas where we think we continue to need to make sure we're at the right level of support, and then when interest rates hit, we're ready to pop and move on to some of these more discretionary investments. What's really good about it though is we'll continue to grow market share, we'll continue to do well even though there's really no underlying reason for it but the fact that the employees are just better. They work harder, they find more opportunities in each relationship, our employee engagement is at record levels which I think informs employees that are engaged are intensely [indiscernible] where they can do more with whatever assets they are given and they'll continue to do it if they believe the Company's future is strong and that they are part of it. So I'm quite comfortable that in the next six months we can keep doing what we've been doing. If rates move up then we are all glad and we're going to move right on to start adding back, but if they don't this Company still controls a lot of levers and we're not completely relying on whether rates move up and we'll just manage it one month at a time like we do every year and look forward to talking to you when things are better.

Okay, so if rates don't go up, there is still the hold the line to the line on headcount expenses?

Yes, except for the areas where it's either necessary or the opportunity is too great to pass. There are plenty of things where you can get an ROI in the same calendar year with an investment. I'm taking all those I can. But some of those ROIs are three-year paybacks, four-year paybacks, they're great ideas but they're not necessarily the best investment at a time when you're trying to be prudent against an otherwise difficult backdrop. So we'll hold those off for a while longer. We have so far and it hasn't hurt us permanently and I don't think it will for another six months, even 12 if we had to.

Okay, so you can flex if the rate environment changes from the said outlook is the takeaway?

You got it.

And then just the follow-up is on the auto leasing business, we had some information over the last couple of weeks that [indiscernible] was going in house. I'm wondering how that impacts you.

Not much. I mean the headlines are sometimes just that. For us the leasing business is part of our very big indirect auto lending and this is leasing, and for us it's probably 10%, maybe 15% of our leasing business, which is a small fraction of our total lending business. So it's not material in every sense of the word literally and figuratively and we do leasing with virtually every other party as well. So this wasn't a core fundamental pillar of our success in auto leasing. So we're not worried that we can't replace it pretty shortly.

Your next question comes from John McDonald of Bernstein.

Richard, I was wondering your kind of high-level thoughts on how you are viewing the revenue to expense relationship unfolding in 2015 given what you laid out for Betsy in terms of your rate outlook, how do you see revenues and expenses kind of in your base case this year and what are the key wildcards?

So, John, if you look back on 2014, we grew revenue just a little bit over 1%. This is kind of normalizing for all the noise we had, and expenses were up just a little more than 1%, slightly negative operating leverage. So shame on us, we're disappointed, but it's the way it rolled out. If interest rates move up in the middle of the year consistent with the Fed's recommendation, we will see revenue in the 3% to 4% kind of range and expenses more in the 2% to 3% kind of range. If they don't, then we're going to have to struggle to get really close to positive operating leverage just like we did for '14, and to dwell on Betsy's question, we know exactly how to do that without killing the future, but it will be a lot less enjoyable. We'll have to continue to get it through until we see interest rates giving us the benefit of higher revenue. I just want to say, we are positive, we're extra positive of interest rates growing but based on our trust and payments business particularly, more than most banks, when interest rates move up, for us it's because the proxy of the economy getting better that then triggers all kinds of benefits on our income statement, a lot more than just the spread in the margin. So we kind of see the way we're positioned, we're kind of attuned for interest rates increasing because it's the fundamental reason that the increase is going to benefit some of our fee businesses. But we're going to be positive, we're shooting for positive operating leverage at higher levels of both operating revenue and operating expenses, but to follow Betsy's question and time together, if something less positive occurs we're able to adjust to it and we've got a team that knows how to manage that, they've proven it and we're not going to disappoint you guys.

Great. And just a nuance on the rates up scenario and your base case, if the Fed does act in the second half of the year, but we still see long rates low because of global issues, how does that impact the outlook for revenue growth and is that an incremental challenge, and Andy, how do you manage through the balance sheet with long rate so low and does that create pressure on your base case scenario if the 10-year stays low like this?

The short answer, John, is no. The long rate is less impactful to us. We're most impactful at the very short end and if you think about the middle then two to three years is where we have a lot of impact. We don't have a lot of assets in our book that are at the 10 year and beyond mark, so that's less impactful. Again the short end is the most impactful to us, both in net interest income as well as fee income because of the way we're using our money funds.

Okay. And then just a quick follow up, Andy, what's your outlook for the net interest margin in the first quarter?

Sure, John. So if you think about this quarter, third quarter we were 3.16%, this quarter we were 3.14% and frankly it was a little bit better than we expected and what we told you it was going to be. And the reason for that, part of the reason for that is we have usually high interest recoveries this quarter, and I talked about that in my prepared remarks, and that helped margin by about 2 basis points. I would expect that to dissipate going into the first quarter. So you think about our core being at 3.12%, I would expect us to be down a few basis points in the first quarter from that 3.12% for the same reasons we've talked about, which is the loan mix, principally wholesale versus retail, and then the last tail of our securities build. So we sort of had first average part of it in the fourth quarter, we'll pick up the rest of it in the first quarter. And we are done. We ended the quarter at $100 billion, we're over the 100% LCR ratio. So we're done with it but we'll still have a little bit of a lingering impact, so down a few from 3.12% in the first quarter.

Okay, something like 3% to 5% or 2% to 4%, just something in that range?

Yes.

Okay, great. Thank you.

Your next question comes from Bill Carache of Nomura Securities.

So given your loan growth expectations and the NIM commentary that you just provided, can you talk about your ability to grow NII under the different rate environments that you've been discussing?

We will grow NII on a year-over-year basis, both the combination of what Richard talked about and what I talked about on rates. So our expectation is net interest income will grow. Now in the first quarter, if you think about it on a linked quarter basis, the first quarter has two fewer days and that costs us just under $40 million. So absent that, we'll be slightly, relatively stable but the first quarter is a little down because of days.

Okay, thank you. I had another question on your payments business. On the issuing side, you guys reported a solid acceleration in payment volume growth this quarter. Can you give us a sense of the interplay between pressure on purchase volume growth from lower gas prices on one hand and increased spending power that the consumer enjoys on the other, does the acceleration that you saw this quarter suggest that the latter dominates the former or is it too early to tell and the acceleration is a function of something else, maybe some color around that?

I think the answer is, yes, lots of questions, but latter does it from the former. So here's the deal. We've got this really great opportunity with our corporate payments, not just our retail issuing, to see that and government, we can see pretty much where everything is moving around and we can see directly and very quickly the movement in the, let's say first on the corporate side where corporate T&E is still outpacing, and we're still growing that even with the softness of the fuel prices, so we're still seeing T&E grow which is a pretty good sign that businesses are transferring some of that into other expenses. Consumers are the same. So anything related to energy or gas prices has been coming down but the ticket prices and the number of visits people have made to restaurants, hotels and some of those discretionary things that they would spend money on had absolutely gone up. So, Bill, we've seen at least in 90 days almost a perfect correlation from people still spending the money they're saving on gas through their debit, credit or prepaid cards but they are spending on things that I'm sure that a lot of retailers and the restaurateurs are happy about. So we see that evidence both at the consumer and at the corporate level.

That's really helpful. On the acquiring side, you guys also had nice growth but interestingly that reflected a little bit of deceleration, which is kind of an interesting contrast to the acceleration that we were just talking about on the issuing side. Can you talk about maybe what's driving that?

On the merchant acquiring side, part of that is seasonality. So our fourth quarter is typically lower than our third quarter and that goes to mix of business a little bit. If you think about the issuing side, we have a lot of retail. On the acquiring side, we have less retail, more airlines and the like. And you think about when people buy tickets and so forth, this is less so in the fourth quarter. So it's more seasonal, still we're showing good growth year-over-year, same-store sales is just under 5%.

Your next question comes from Ken Usdin of Jefferies. I'm showing he disconnected. Your next question comes from John Pancari of Evercore ISI.

Another question on the margin. Beyond the first quarter, want to get your thoughts on the margin progression. Is it fair to assume 2 to 3 bps of quarterly compression mainly on competitive pressures on loan yield, just want to get your thoughts there?

So I would describe it as 2 to 3 basis points given flat rates more because of loan mix than competitive pressure, although pressure is a little bit of it, but it's more the mix. Most of our growth is coming on the wholesale side of the equation and the wholesale has about half the yield of retail. So that's what's driving that 2 to 3 basis points more than anything, and again that assumes the rates flat to current levels. Once and if and when rates start to move, we'll start to see a positive rise there.

Okay, alright. And then separately on the expense items, just on comp expense and the increase in fourth quarter, was that all performance related, just want to get an idea of what the driver was?

In the fourth quarter we have normal activities going on in increases related to risk and compliance positions for the most part, [indiscernible] headcount and [indiscernible] increases. We had some increases in compensation expense related to incentives. But if you peel those two things out, it was relatively stable.

And John, it was a full effect of our RPS acquisition in Chicago that had a full quarterly effect in quarter four as well, but there was nothing unusual and it doesn't bode for any significant change in quarter one.

Okay, alright. And then lastly just want to ask on credit. You released additional reserves this quarter and wanted to just get your thoughts on where the reserve to loan ratio could bottom out, I mean you're still at a healthy level here, they're around 167 basis points or so.

Bill?

Yes, it's 177 on allowance to loans, all-in allowance. I mean it's really a function of our mix. That's why ours look a little bit higher than some of our peers, so we have a higher percentage of credit cards. So obviously we're comfortable with where it's at. You see we have very, very modest reserve release. I think when that inflects, really gets to the point of what kind of loan and commitment growth we see during the coming year. There is a little bit more room for opportunity in some of the residential and home-equity products but at this point it's going to be more a function of loan and commitment growth going forward.

I mean the stability, [indiscernible].

Yes, the stability of our credit portfolio right now is the strongest I've ever seen. It's just extremely all the loaners are performing well.

And there surely will be an inflection point for all the banking, right, where eventually you have to reserve for loans that you're making and [the future may go bad but] [ph] we're not looking at that inflection point in the near term for our Company, we're simply not, and we haven't been driving much income off of reserve releases, so we don't have much to gather again from that, but eventually we'll end up reserving for as opposed to releasing but we are not there, now we're not there for a little while.

Okay, thank you.

Your next question comes from Eric Wasserstrom of Guggenheim.

I just wanted to follow-up on some of the commentary on fee income growth. I think for the prior year the security gains were about 4% of the noninterest income. So as we think ahead to next year, is the realization of those gains going to be something that continues as kind of a bridge to a better rate environment or were those really just opportunistic and we should really think about growth off of a baseline number of something like 8.8 billion?

The latter. So I think the notable items, the gains that we talked about, the Visa gain in the second quarter, the gain from Nuveen here in the fourth quarter are one-time items that are not likely to repeat, so [exempt] [ph] from that base that is excluding that think about loan growth in there.

Okay. So I think absent those things, the growth rate was about 1% in terms of fee income and it looks like the consensus for next year has about implied 5% growth off of that core number. Is that an achievable level given kind of some of the acceleration that we've talked about or is that maybe a stretch?

I think a key factor in '14 was the headwind that we faced in the first half of the year related to the mortgage and if you looked at the mortgage numbers they were down 13%, 14% year-over-year which caused a tremendous headwind in quarters one, two and a little bit in three and you're seeing quarter four we're actually flat for the first time in a long time in mortgage. So I think the removal of that headwind will help us get to the numbers that are higher than we achieved this year.

That's a big deal. We should have had the applause because that is a long anticipated moment where we're starting to grow mortgage again on a year-over-year basis. That is a big number, Eric, so if you do the math, you'll see that it's more than enough to accomplish that.

Your next question comes from Richard Bove of Rafferty Capital.

I got to ask as I think 30,000 feet high for a second, when I look at your bank, I can see absolutely nothing wrong. In my view it's about as perfect as a company can get in this industry. And yet when I take a look at Slide 9, I see that on a year-over-year basis the net interest income to common is up 0.6%, I see that the EPS is up 2.7%, and when I take a look at the price of your stock it's up 2.6% last year in a market that's up 11%, and what I'm wondering is, if a bank which is as close to perfection as this one is, can't get its earnings to move up at a faster rate and can't get its stock price to do anything but move up at a rate one quarter that of the market, what will it take to get this thing moving in a direction where the stock is going to equal or outperform the market?

This is Richard. Thanks for that observation. I think U.S. Bank moves best when everything is moving one way or another. So the bank was 10 years ago a fairly considerate bank with a sense of all defense, right, we were an efficiency company, no one ever thought about us making revenue, which is save the next dollar, we can merge and acquire companies and squeeze more out of that than anyone else, and that was well-regarded and well-recognized. Then the downturn hits, and that was our first chance to prove, like I said earlier in an answer to John's question, that while we may not look like we are growing as much in the go-go times, we also chose not to take risks and those showed up later when the economy turned and we ended up getting stronger. I know you know this, you've written about this, we became a flight to quality, a place of safety and we played on that. So now here we are in kind of a flat, slow, slow recovery that's almost flat, so we can't prove anything remarkable except to just say we're not going to disappoint, we're not going to surprise, we're not going to get complicated, we're just going to get it out and do a little bit better than everyone else on all the basic tenants. The next opportunity for us to perform is when the rates pick up because the markets picked up and to show that the Bank is repositioned now to be as strong as it ever was when it was on defense and be better than anyone else on offense. So I'm going to hold your question in the rears until we get the chance to show you that when the recovery starts and because of our high credit quality, our amazing pricing benefits that we have based on our debt ratings, that we are going to be able to show you we can be even better. And then I think the multiple comes back, we even spread further from where we are because we're always sitting at this high multiple that people need us to be, remarkable every quarter to prove and protect, but we are looking forward greatly at the time when the world gets better and we can show you just how positioned we are for that, and there's a lot we did in that period of time, in the last five to seven years, to position this Company as innovative, payments focused, trust leader and global. So I'll look forward to that and I'll ask you to ask me the question again when things start to turn, but I think it makes sense that we hold our own position of strength, kind of the yellow flag is out on the racetrack but when the green flag comes out we'll take off first.

Again, I have no questions with [indiscernible], I think the way you run the Bank is superb. My issue I guess is, and we heard it again last night in the State of the Union message, will the government prevent the industry from reaching a level where it can show meaningful profit increases or will it come up with a new liquidity capital ratio supplement to leverage ratios, loss absorbing capital ratios and special [indiscernible] for taking high levels of risk? In other words, as you improve your Company, will the government stay one step ahead of you and prevent you from showing the type of improvement that you're getting in the operation of the Company?

I'll tell you I can't answer that because I don't know the answer, but I will say that we're in a closed set of competitors, right, at least as banks go, and we certainly wouldn't trade places with anybody else based on our current position, our size, the fact that we're a domestic city not a global city, the fact that we don't do leverage lending, we don't have high-risk portfolios, and all I'm saying there is, customers, businesses, they're all going to need banks and unless there's a huge alternative I haven't found out there, they're going to need what they need. [It worries me not] [ph] what the government does to impair our profitability, we will be there first amongst few I think at the highest returns and the highest quality to be there to receive those needs from the customers and almost despite – because I mean look, I mean, Dick, we lost $1.5 billion in the last four years over four or five specific government decisions on how to [indiscernible] income and we still had a record year. So we can do this. It's a lot harder, it's a lot less satisfying and it's a lot less predictable, but I think we've figured out how to do this and what we do is control what you can, be very nimble and ready to adjust to the next opportunity, and I for one can't imagine a scenario that would be any more difficult than what we have now, so I'm looking forward to getting a little bit easier with a little more clarity. But I agree, it's complicated and I can't answer directly to your question because it's what I contemplate at 30,000 feet every day.

Your next question is from Ken Usdin of Jefferies.

This is Bryan Batory from Ken's team. Apologies for the mix-up earlier. I was wondering if you could provide a little color just on the starting point for noninterest expenses in the first quarter '15, just particularly thinking about the reset in other expenses, and then also the potential pension expense increase just given where your long-term rates ended 2014?

This is Andy. If you think about the fourth quarter, there are two unusual items in total. The first is the total of the notables which is $88 million. The second is our higher CDC or the tax advantage amortization which happens every fourth quarter. That was about $60 million. So if you take out that $150 million or so, I would expect us to be relatively flat to that in the first quarter. Secondly with regards to pension expense, year-over-year we'll see about $100 million increase in pension, of $25 million a quarter, and that is reflected in the numbers I gave you in the first part.

Okay, great. And then could you provide some color on your outlook for mortgage banking revenues as we head into '15 just given the recent decline in interest rates?

Good question, and it's changing every day as rates move a lot. We had a very good week last week. But right now I will tell you that our expectation is relatively stable total revenue fourth quarter into first quarter. So we have some pluses and minuses and that could change as rates move around in the next few weeks and we'll update you if it does, but right now relatively stable.

Your next question comes from Mike Mayo of CLSA.

In terms of your outlook for loan growth, so you're expecting an acceleration you said from 6% closer to 7% range and also your growth in commitments was up 3%, so that's good. On the other hand, you mentioned that the unused lines of your commitments are still bouncing along the bottom I guess unchanged. So once again we're at another quarter where you're expecting better growth yet the 10 year yield is significantly lower. So who's going to win, Richard Davis or the 10 year bond?

[Indiscernible] 10 year yield, Mike, [indiscernible] I've been buying them and everything. I mean actually you're playing into one of our thoughts. I haven't included the improvement in utilization at all in our expectation if loan growth goes up. That is an absolute stable starting point. And the way we look at it, wholesale commitments, a lot of banks look at the total retail, we look at wholesale, and that number is at highest point in the mid-30s and today it's sitting at 24%. It's been stuck there for about 18 months. And so to me that is unbelievable upside. As long as we keep adding commitments more than loans, that means that more people have an open to buy with us and that they have an intent to use it, because they're paying for it and so are we by the way, but if they use it, any part of it, even a slightest movement from 24% to 28% or 30%, that's going to be on top of the kind of loan growth we're anticipating. So we're not counting on that to give you the answer, and I do think that while customers look at the 10-year, as Andy said most of them look more at the two to three and that movement is going to be what's going to trigger the decision on whether they want to grab something before it gets too late and whether they'll be glad they prepared themselves with the line of credit that's got an open to buy. That has a lot to do. I think there will be a tsunami effect when there is a period where people are sure that rates are moving up, I think they'll start grabbing the lines they have, they'll start using what they have and they'll be incentivized, be a catalyst for this economy, but until then we're not counting on that as part of our expectations to provide loan growth, we're just doing with our better debt ratings, our better pricing power and our really remarkable employees who've learnt how to tell our story better.

So just more generally, put your economist hat on, Richard, so the 10-year seeing this much slower growth yet your guidance is for some acceleration in your loan growth. How should we reconcile those two thoughts?

On one hand and on the other hand, [indiscernible] harness. Mike, I don't think those are directly correlated right now, and I say that because the Fed and the Fed equivalent across the globe, they've done some behaviors that are certainly not [indiscernible] and they are not things that we all learned in school. To the extent that they are being motivated by I think non-financial, more political activities and more financial data that might be backwards looking not forward-looking, I'm not going to be able to correlate those two for you, and I don't think our customers are sitting there thinking that way either. So the 10-year stays low, sure mortgage will look great and then we go back to this again, but it doesn't inform our customers that the majority of this Bank until we get to two to three and until that starts to bend up, we're going to stay right where we are and if the 10-year informs us, fine, if it doesn't, it's probably going to be a bit of an inflection on the curve, but I'm not managing to the 10, I'm in management of the two or three, and I'm just not that smart.

And then lastly, you're implying market share gains. You said before that U.S. Bancorp has a 30 to 35 basis point pricing advantage when pricing commercial loans against some of the largest banks. Now that the SISI premium might go even higher for some of the larger banks, could that pricing advantage improve and how are you positioning your Company to potentially benefit?

The answer is, yes, because you know the math, you knew the answer when you asked it, and where we're positioned is we have a philosophy that we will give back some portion of that advantage when we're competing against one of the banks that has a different pricing scheme and we'll only do it with the high quality customer. I suppose, because the philosophy is in place, if that spread were to widen, then we give ourselves more room to be more competitive, but it doesn't interest a new philosophy, it's just more of a larger scale for us to use and to give our lending offer the opportunity to price more effectively. So it's a net positive, I'm not counting on it, but if it happens we'll take it gladly and we'll be even more successful.

How much higher could that go with 30 to 35 basis points today, could it go up another 5, 10, 20, 30?

The capital differential is about equivalent. So if you think about your 35 on the side from the perspective of our debt rating, it's an equivalent level on the side about the capital differential from the highest levels.

Your next question comes from Paul Miller of FBR.

This is Jessica Ribner for Paul. On the mortgage side, what are you guys seeing in terms of the purchase market? As most of your volume coming off the refi side, do you see any recovery there?

The third quarter was 70-30 new, and because the rate is coming down a bit, it's closer to 60-40, 62-38. So it's coming down a little bit more high on the refinancing side and we are also starting the year strong that way because of the low rate environment. So I would expect it to be somewhere between that 60% and 70% new.

Okay, great. And just in general, what's your institutional view on housing and the recovery, do you think that we have room to go or where do you see mortgage banking?

We do, but more than just mortgage, first mortgage, right. So we're already seeing it now on our home equity, we're growing nicely in home equity. Thanks for asking, Richard. Yes, we're actually growing almost three times the market with our home equity right now and we're doing that because we're seeing a lot of people invest in property improvement kind of monies into their homes and not doing debt consolidation, entirely they're doing it for their properties, and these are in some of the states where they are the hardest hit, where the pricings have come, [indiscernible] come back nicely. So mortgage in general has got a really nice I think outlook because people without houses now feel that they are no longer under water and they're willing to invest in them, people without houses that are now above water are willing to use it as collateral for something else, I think small business, and housing prices slowly but surely are recovering. I think there is a social question we ought to ask ourselves is how many 18 year olds who five years ago their mother or father lost their job or their house are going to want a house in the American Dream category three years from now when they're 25. Don't know that answer but I know that the housing stock is not at all overbuilt for the number of people who either need to get back out of their parents' basements or get an upgrade in the house that they live in and we think it's a good business for us, we're staying in it, we want to be in the top five from here to forever and we're investing accordingly to make sure that we're great at originating loans and servicing them as well.

Your next question comes from Nancy Bush of NAB Research.

Congratulations, Andy, well deserved. Richard, there was a debate sort of brewing out in the wake of fourth quarter earnings which I think have not been particularly wonderful particularly for the largest banks about whether the industry can continue to cut costs without 'going from cutting fat to cutting muscle', and I'd like to get your view on that, and secondly just from the perspective of your Company, I think you go through this exercise every month of where you are in terms of expenses, how do you make sure that you're not cutting muscle? I'd just like to get what you guys do and what you see for the industry generally.

A great question, as usual. Here are a couple of thoughts. I do think – let's talk about the efficiency ratio, it's what everybody looks at, it's a fraction, right, it's a quotient. So one of the reasons I think we can do well is because our revenue grows. I mean there is a very basic fact, like you all know, that if you grow revenues faster than expenses, your efficiency ratio comes down. That's a fact. Banks are usually two parts revenue to one part expense. So it's important if I were to spend $100 million, my team has got to get $200 million in revenue just to keep it to 50% efficiency ratio. So those are some of the foundational points. So number one, if you grow revenue, you can impact your efficiency ratio and still grow expenses because it's not like it's [Pioneer] [ph] where you can't grow expenses, and we've been able to do that but not at the levels we want. I do think the argument at the largest bank level is partly due to revenue. I think banks could do better with their revenue but to the extent that that gets slightly impaired by certain actions, they've got to watch their expenses. And honestly I don't know why are banks in the 60% efficiency. It doesn't make sense to me because if you watch every dollar, there's plenty of money that is not necessarily shareholder friendly that's been spent and you can put a discipline in place where the employees own it first before you're telling them what to do. So in other words we've never brought in an outside party to look at our Company and tell us how to run it or tell us how to cut expenses, where you impose on employees some oversight if they didn't do themselves, because number one, it's intrusive, number two it's really unnerving because if I have to cut 10 people out of a room of a 100, the rest 90 don't know if they're safe or they're in the next group to fall. So I think that is another reason for us to be thoughtful, is that banks need to watch their expenses very, very carefully, and I'm now going to answer out the other side of my mouth that in the last five years it didn't caused banks to be amazingly disciplined in knowing where their money is being spent. I haven't got an answer for why as I thought there would be a ton of banks in the low 50s with this at this point in time. I actually don't know why there isn't. As it relates to U.S. Bank, we do meet every single month, every capital expenditure at U.S. Bank, get ready for this, over $100,000 has to come through a committee and that's a capital expenditure that includes particularly properties, leases or any kind of technology improvement. That's a very low number. We look at about a dozen items every month and the whole team is the managing committee. And so if somebody in commercial real estate needs a special new program that's going to cost them $100 million, I got to look at the rest of 13 people and say, are you willing to add $200 million in revenue over the next three years to offset this, and guess what, when the vote is taken by the group, sometimes it's no. But we all know that we've got to be able to return our investments in a fairly short time. So in closing, if we could do an ROI in everything in less than one year, it gets approved here every minute. If it takes two years, it gets contemplated given the circumstances. If it's finally more than three years, we're very, very careful and thoughtful about it. So I know that we are not improving every single thing that lead to revenue improving three to four years from now, I know we're not. I also know we're improving everything that has the highest value in the next couple of years and the minute the world gets better, I've got a list from most important to least important that will go right back into the coffers, we will improve them immediately and the shelf is full of the next best ideas so that we don't linger and lose any time to get back to spending money. So I didn't answer your question very well but it's the discipline, knowing what you're doing, put in the hands of the employees where they control their fate, give them a forecast to show them what the decision is going to mean so they can make that decision on their own or collectively as leaders and they'll always make the right one and then they don't feel like they're being told how to run the place and they feel like you respect them for the qualities of their leadership, that we do. So that's my long answer to your question.

So I guess I interpret that as you're saying, yes, there is still lots of fat in the banking industry that can be cut?

Yes, I am saying that. Why didn't I just say that? Why do I talk so much, Nancy, what's wrong with me? Yes, that's what I meant.

Okay. Secondly if I'm reading the news correctly, the Supreme Court just refused to hear a case about swipe fees. Am I reading that correctly?

That's right.

And does that mean that this issue will now go away or do you think that the retailers are going to come back with some other new slant on this?

I think in terms of a lifecycle, it goes away for all of us on this phone. It could go back, come back in a few years and has another 10 to 15 year lifecycle, but in this half-generation, I think by all accounts, exclamation point, this one is dead.

Okay, great. Thank you very much.

This concludes the question-and-answer session of today's call. I would now like to turn the floor back over to management for any closing remarks.

Thank you for listening to our call this morning and please contact me this afternoon if you have any follow-up questions. Thank you.

Thank you. This concludes your conference. You may now disconnect.