U.S. Bancorp Presents at Citigroup US Financial Services Conference, Mar-05-2013 11:20 AM

Seeking Alpha

U.S. Bancorp (USB)

March 05, 2013 11:20 am ET

Executives

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

Analysts

Keith Horowitz - Citigroup Inc, Research Division

Presentation

Richard K. Davis

Good morning, everybody and thank you for your attention this morning. I'm very pleased to be here. We haven't had a public disclosure in 90 days so here's the chance for us to bring you up to speed into our quarter. So something interesting might happen. And I can promise, but you'll never know. So let me start with that very slide, that something might happen but you'll never know. Let's move on to Slide 5.

I want to cover these things today: the overview of the company, our capital and management expectations as they are on the eve of the CCAR business line update, Q1 performance expectations and the summary. I want to do this in 20 minutes, so there's plenty of time for questions. So more than happy to put an end -- to answer those. I want to start, though, with kind of a reminder on Slide 6 of -- the company will be 150 years old this year. It's not the oldest thing in the company, but its the second oldest charter because actually, banking charters didn't start until 1863. The company's actually a little older than that. Why I bring that to your attention is, this company has kind of morphed itself over 150 years to be the company that we are. And my comments to today will suggest that we want to organically and maybe with small acquisitions grow it over the course of the next decade, but we're not looking for a game-changing moment in time, where this company changes who it is in its 160th year. We'll never miss the opportunities to consider, but we're not out looking for a chance to make the company different than it is or to make it intensely bigger than it is. We like the model we have, it's working well. I'm learning more and more in my 7th year as CEO that, really, what matter is culture, and culture is probably the thing that doesn't get spoken to enough because its hard to define. But the more you have your arms around the culture and the one that's satisfying to both the constituents of the clients, the employees and the shareholders, then you got something to work with and protect. And so one of the goals in making sure you don't overreach just to lose the ability to protect that culture. So for us, that's a big kind of stinging point. And otherwise, you can see our position, you will know our position if you follow the company. But it's a good place to be, and I consider it like the fact that we'll continue to expand in the payment and in the trough businesses, which I'll speak to in just a minute.

Now as we get into the company itself, you can see the business of the U.S. Bank is fairly simple and we're going to keep it that way, but we want to grow every part of it. We are a company that's got kind of a 50-50 goal here showing on the scales of justice of fees versus spread income. And while you can see that fees are under a pressure, they're kind of fighting their way to stay in that range. It's my hope that over the course of an improving economy, which could be in the next few years, fees will grow faster than the balance sheet with notable growth. And so I think, one of the most important messages for you is, I want you to respect the company's performance during difficult times. But I really want you to know we're working on making the company great in great times. And those are things you may not even see today, but the investments we're making, decisions we're taking and protections that we're employing to make sure that this company is great when things get better, and they will. We just don't know quite when they will.

And so I'll turn your attention to Slide 8, which will remind you a little bit about our results for last year, up 15% to 16% in both earnings and net income, particularly setting records and things like revenue and not really based on acquisitions to speak of, because we've really haven't had anything large in the terms of acquisitions for almost 2 years. So for us this is the beginning of kind of core organic performance. You'll also see our deposit growth of almost 11% and loan growth of almost 7%. This is a pretty good place to have been in a recession. It's wholly unacceptable on the loan side in an environment where things will eventually get better. Now in terms of performance against peers, both on the left side of the Slide #7 and on the right side, this is just to inform -- to show you that there's 3 key measures we've continued last year, our first time to look back in the full year 2012 of our 10 peers, which I think you know are all the largest banks, commercial banks in the country [indiscernible] because they're more international, vis-à-vis the other 9. And we are -- we're top-of-class in all 3 categories for last year. And then as I kind of stimulate 5 years now under the beginning of the recession, we've continued to do well under those measures as well. So for us, this is a -- this is an investment group. I couldn't say the past performance is an indication of future success. I would lose my license, but I'm saying it to you here. I do believe past performance is an indication of future success. Now as I look at the metrics that get us there, this is revenue growth. And as I explained to our employees, if I like what you've done yesterday, but what have you done for me lately and what are you going to do in the future. And so revenue is really a proxy for the value of a company and its ability to continue to drive a future sense to where we're going to grow the company.

So for us, revenue matters a great deal. You can see it here on Slide 10. On the left is an annual review, and on the right is a 5-quarter comparative. I guess what I'd like to offer up here is that I said on December 4, in my last public declaration and then again on January 16 at our earnings call, that 2013 will be a really challenging year. Those are the words that I used, and I'm starting to say I was right. And so I'm telling you it's going to be a challenging year. And the way we're going to manage through that is what I said to you before and I'm sticking to it, and that is, yes, I'll give you something interesting and you're all writing. What I said to you before, it gets us right there because I kind of didn't get it clear last night. Our revenue will grow this year. We'll continue to have a record-revenue year the way we planned it. But it won't grow as much as its grown in some of these prior periods, not the way I see it. And if it does, fantastic.

Accordingly, we're going to continue to keep our expenses in check, and they will grow, too, but grow by luck. So we'll give you the positive operating leverage that we always deliver to you, which is one of the reasons you like this company. So revenue will be less than probably these 5 years as you see up here. I hope it isn't, but in 2 months into the year, I'm telling you I'm not seeing an amazing sign yet in this economy, so we want to be protective of that. In net then expenses, we'll continue to grow but at a slower pace. So I'm not putting in a reduction-in-force, we're not laying off people across the board, we're just being very, very careful and we're very watchful about the vagaries of an economy. Well I don't want to train a lot of new people in the company and find out in August I made a mistake, I need to let others go. It's not a good way to run the business, and it's not the way we've ever done it.

Now in terms of loans and deposits at the balance sheet, likewise, you can see that continues to grow nicely. I do expect both of these to grow throughout the year. I will tell you that I gave you my last terms of the forecast that loans would grow into 4% to 6% annualized rate. That's about 1% to 1.5% a quarter. I know you can do the math. We're looking at the low end of that now. We're looking right now in this quarter right at the bottom of that 1% to 1.5% because we're just not seeing the kind of robustness that we might have hoped to have as the year -- as the quarter starts to age. So 4% to 6% will still be our monitor, I hope as the year ages, we can get well into that range. But for quarter 1, we'll be at that bottom end because I just think it's important that we don't stretch. And in this company we'll not stretch on structure, and we will not do loans and lose money for a loan and find a way to make it upright. That is not the way we're going to do it.

So you'll see that in terms of credit quality, I think we could probably should just stop having credit quality slides all together because there's nothing to talk about. And there won't be for 5 years. That's the good and the bad news. So be watchful. When someone's growing really fast, you won't notice that slide until 5 years from now that they're making these decisions that might be risky. On the other hand, you're probably not interested in hearing from those that -- who won't put that at risk and aren't growing as much. But it's your decision to make as to whether or not that's a prudent approach.

I won't give you some forward-looking views. So you can see our net charge-offs were at 85 basis points on the left side of Slide 12 at the end of the year. That continues to fall, and it will fall even more into this year, probably into the high 70s. That's not good news because I want this to be at about 1% over the life and the course of time. So I think it's not a matter of being ineffective in managing our assets or managing our loan book, but it's a matter of the time and course when things happen. So in making loans today, I should hope that over the course of time as rates move up and as the world gets better, they'll actually have some stress, and then that will show them we made the right decision. But for now, I'm telling you that's going to come down a little bit further. There won't be a lot of reserve relief because we didn't have a lot in the first place. We don't make our numbers on reserve reliefs, but there will be some left to go this year as that number continues to come down. And I might add, since the comps store of [ph] of the currency has a significant concern about over releasing and banks making a mistake in that regard, I'm pretty sure that we're not one of those banks he's worried about. And if he's listening, don't worry. We're good.

On the right side, nonperforming assets. This is also a kind of a proxy. You can see we fell below 1 basis -- 100 basis points as well, and this number also will flow down into the 80 kind of basis points before it starts to move back up. That's again good news, so we don't have a problem with loan quality. But trust me, I don't want to make it up real fast by growing and stretching for loans and giving you a new number that eventually will become a problem many years from now. So these are not a concern for you, all. They're also not a real contributor to earnings, which I think is a good thing because those are not sustainable and reputable ways to run the company.

Now acquisitions. We do still like to acquire where the opportunity presents itself. So I drop your attention and very hard to note, but the last 3 acquisitions that we've made since I last spoken to you guys publicly was in the top left. We had 2: the Collective Point of Sale Solutions, which was a Canadian merchant processor that we picked up a few weeks ago; and below it, the FSV Payment services -- Payment Systems, which is a wholly-owned provider and processor of prepaid cards. And so we've added those 2 in the last 90 days. And then the bottom right under trust, we've added the AID Fund Administration, which is a head fund administrator, kind of filling in the gap of this spectrum of our fund administration. There will be more that we can find in, in both of those categories as the opportunities present themselves. As well in the consumer wholesale, bank-to-bank acquisitions, if something comes along that makes sense, we will look at everything. I feel like we should get flagpole raising status because we have a number of banks who will ask us what do we work. Because if reasonable, we'll go out and run the flag up the pole and see what the value is. We'll get back to them and tell them what it is. And so and so far, they go, "Wow, that's all?" And we'll say, "Well then why did you ask?' And so we have that plenty of knocks on the door, nobody's coming in. And we're not interested in doing a deal that doesn't make sense. We don't need to do a deal, unless it comes along at the right level. So bank-to-bank acquisitions probably nothing significant, unless something comes along, though I haven't seen in my forecast. And then as it relates to loan books and things, you don't see a second interest in some of these books that come to market, such as some of the European banks that divest assets. But we will always cherry-pick, and so the only ones you've seen is when we really took the loans out of a larger deal, that our customers we already know and positions us with the whole. One of the things about buying a bank or buying a loan portfolio is that due diligence is risky. And if you can't go in and actually do it in the first place, you can never quite get a sense for a portfolio even a bank if you didn't build it yourself. So you have to be very sensitive to that, and we're not eager enough to build the book on somebody else's loans if we can't get in there and understand them very clearly. So you'll see some loans balance up, pick up, but they won't be whole deals. And you'll probably see that loans in some [ph] of those because we're not willing to take the good and bad at the same time.

In terms of the market share, you could read it. We're growing market share. I will, hopefully, 1 day still be around when the market is robust again and things are going well and everyone that talked before will tell you they're all growing market share because things get frustrated. We don't tell you that and yet the market wasn't growing, so how does that work? I do think in the last few years, there has been a chance to notice that the market can either be stagnant, you can have a market share winner, or it can actually grow and you can identify the market share winners I believe for reasons that, I hope we've described before, were gaining that market share. You'll also know we're not in any position of size, where we're at any risk of antitrust or too much market position. And I heard your question just before I was talking about the willingness we think for the regulators to let us buy a meaningfully sized company and its $350 billion. I guess, we think we will be okay. I don't think we've hit any kind of triggers there that would preclude us from looking, asking and hopefully, getting approval. But again, that's not what we're looking for. Just give me one more lever to pull if I need to.

On the capital management, on Slide 16 under the fourth quarter performance, our Tier 1 common Basel ratio was 8.1%. Andy and I have long been declaring our best guest, but at 7% minimum plus a 50 basis point SIFI, which is a guess because we don't have a SIFI calculator plus another 50 basis points just to manage the vagaries of the denominator, we think the 8% is a good place for us to consider well capitalized. We're at 8.1 and obviously, that becomes an important moment for us because we're not trying to husband capital. We're not trying to build it, although we do just for the course of earnings.

Under capital management, looking back now for the first time last year, our annual dividend of $0.78 per share plus our 59 million shares purchased during the calendar year gave us a 62% return to shareholders. As noted on the bottom of Slide 17, our targets start with dividends of 30% to 40%. But as you know, the stress test has a limit of 30% unless you want to push the limit, and we've indicated we're not pushing limits. So 30% to 40%. If we get what we want, then we'll be at the low end of that range. In the meantime, the share repurchase is, in our best estimate, should be 30% to 40% as well, we will continue to ask for permissions in this stress test moving forward, which is the limit. And then at least for us, it's 20% to 40% divide [ph] or do we reinvest. And that's wholly sufficient for our company. And so you can see for last year, dividends were at 27% as the value moves up, share repurchase were 35% right inside the middle slot, and our reinvestment and acquisitions was 38%. So we're not quite where we want to be, but we're certainly not far away either given the circumstances that we all manage.

So CCAR, I'm telling you what you already know. A couple of days from now, we will get the results from the DFA or the Dodd-Frank Act stress test, and after which point in time, we have that 1 extra week. And that's where you guys just go to town I guess and try to figure out what's going on. But it's our intent and if you have questions, I'll let -- I'll have Andy answer some details. But it's our intent to give you as much information as we can without boxing ourselves in, without having the final answer ourselves. But I can assure you that based on the slide before, we went into the stress test with an intention to protect our shareholders, to get in as much as we could safely, and to not expect to have the second bite at the apple because we don't think we should need that, and I do hope that the results themselves, particularly the ones that showed the 4 capital actions we'll design for you what we've been saying, which is the company is a very strong company with an amazingly fortress [ph] good balance sheet that can handle the vagaries of the stress test, both the one we were given and the one that we we're willing to do that U.S. Bank stated on itself.

And so as I come to a conclusion, I wanted to highlight a couple of our business lines. And you can see again the 4 ways we look at the company, the first tier being Corporate; Wholesale Banking, which includes Commercial Real Estate, its about 20% of the revenue. And why I would just draw your attention on the right side is that we've significantly done in the last 5 years, particularly during the recession to take us from a regional wholesale bank to a national, one with capabilities in the capital markets, municipal bonds and some other areas that make us a whole bank. Now what that means is there isn't another category that we haven't introduced. There is one more thing that we want to start up. This is -- and so we do the business. We want to do -- now we're getting better and better at it. We've attracted amazingly talented people from virtually every good company across the globe during these last few years, and my job now is to protect them, to want to be here and let them build something and move it to a level of significance that they are on their way to doing it.

On the Consumer and Small Business, I guess, I'd highlight for you particularly, we're most proud in both 2 things: our Mortgage Banking performance and the decision we made 4 years ago to triple the size of our mortgage business. And so far, so good. Likewise, it's the Small Business we don't talk enough about because that's one of our strengths -- strongest areas as [indiscernible] study just came out last week and indicated that for the fifth year in a row, we've continued to exceed all performances of other banks and small business. It -- I wish I could get your attention by ringing a bell or something. Small Business is kind of a perfect proxy for the difference between a consumer who has an intent to manage their businesses kind of at a personal level, and the middle market manages at the business level. Small business is a great proxy. If you're growing small businesses, you're probably doing some of the best work you could do as a bank because you're serving customer's personal and business needs and under the patriotic aspect, you're really helping America grow in one small business at a time. So those are areas, particular pride for us as evidenced on Slide 21.

Wealth Management and Securities Services, again, this could be separated. Wealth Management is our movement towards a much more high-quality, high-caliber wealth manager. We've introduced the Ascent brand, as you know, over a year ago, we're now opening offices across the country. Rather likely, the Wholesale Banking still will be a national, wealth manager as opposed to a regional. That's probably halfway through -- it's probably -- it's late sophomore year. There's a lot of opportunity where that came from. I'm not slowing down the investment, if you need to think it'll stop right now and given my earlier discussion. But we finish what we start, we just pace it. The pacing has to be different. But we always finish what we start. This is not quite finished business, and I think you'll be quite impressed when its finished.

And Trust Management, as you can see on the bottom left, our positions are quite important, and they provide us with great deal of opportunity. When the market improves, a great deal of performance there is actually against market performance and so as we'll continue to see more activity, more M&A, more roles for us to be a trusted party and that's great, you'll see those numbers continue to grow.

And then the last business is Payment Services, which is certainly one of our core competencies. You'll appreciate the fact that 2 of our recent acquisitions were either in the acquiring space to take us more globally into Canada or in the prepaid space, which allows us to not only work with a partner who does prepaid cards but actually processes them, creates them and manages them. So we're trying to get more and more independent in the space where we think there's amazing growth.

Nevermind, though, in this particular pie chart, remember, Corporate Payment is a big deal for us. We're one of the country's largest payment providers for corporations, and inside of that is government. And so there's some trough on government payments as you might guess with the sequester and the presequester looming and the defense business. We are the #1 bank to the Department of Defense, so that's certainly a slowdown in the kind of a postwar scenario.

Global Merchant Acquiring is about 1/3 of our business, and as I've told you before, we've moved into Mexico, Canada, Eastern Europe, Western Europe, moving to Eastern Europe and now most likely, more and more growth in South America, which is an opportunity for us which we can speak to further.

And then finally, Retail Payment Solutions, that would be classic card issuing. $20 billion portfolio. We have a very important product called FlexPerks, which allows us to have one of the best, I think, market businesses out there. There is continued space in this area, so I'm going to update this eventually and move it into mobile payment because payments become mobile. It's a channel, but it starts to look like products as well as a channel. And you've heard about some of the updates in square [ph], you've heard about the VISA partnership with Chase, there are all kinds of opportunities that will put them themselves. And we have the ability, I might say, with humility, to do anything we want, and we are testing in our laboratories more than you'll ever see, so really nothing unturned and an opportunity to make sure that we embrace whatever new technologies and new partnerships need to be brought forward under the uptick of the payments and mobile. And as we talked earlier, I'd say I would mention a couple of these things, nothing out there we couldn't do including the partnership with Visa. We had the same rights to do the same thing, but there are plenty of other announceable activities. They are probably forthcoming in the payment space, and I'm really, really proud that our company has a position to start a strength to go forward because the cost of entry into payment is 100%. You can't get in at this point if you're not already in. So this can be quite a growth area for U.S. Bank.

And so finally, quarter 1 update. This is the good stuff that you probably came for. First and foremost, the business climate is not very positive for banks. The business climate for our customers is actually what you know because you're customers. The business climate would say the following: That on the corporate side, customers who, 90 days ago, were most concerned about the fiscal cliff, didn't feel real satisfied with that solution. We now are working with the sequester, and now we're working with the national debt. Those are all just big enough things to suggest to a corporation another reason to kind of withhold decisions until they have more clarity, add to the troubling effect of interest rates being low, being sustainably low, being record low and being expected to be low for quite some time. And that gives the same corporations reason to withhold decisions they will eventually make, when there's no reason to rush and tell unless prices come down or until there's a real trigger then for rates to rise. So we're in that environment. And so when I told you that our loan growth will be on the low end of 4% to 6%, or 1% linked quarter, that's where it's going to be. And it's going to be that not because we're not out there growing commitments and growing new customers. It's because they're not using the lines of credit. Our extension of credit used by our wholesale customers is record low at 25%. And it's not all customers are using 25% of their lines, that's 25% of our lines outstanding or being used. And its about 1/2 the customers use about 1/2 of their line. So for us, there's a substantial amount of pent-up opportunity. I'm part of the business council, we are with the President last week, we did a survey, we talked about the world that we're in, I'm sitting with all my peers, CEOs in the companies that are not banks, and they're saying exactly the same thing. We are ready when the evidence is present, that its time to do something. But unless until that moment comes, we're going to hold off and wait. So as a bank, we're a mirror. We reflect back that same sentiment, and we will wait until that time occurs.

As it goes in the consumer side, same-store sales globally up 5% for this quarter, domestically 3.5% to 4%, that's pretty normal. But in terms of the behaviors of our consumers, they are using their credit card now more than their debit card. They are using our money now and not their money. The FICA increase in payroll taxes and just the continued uncertainty has caused them to be much more careful, they're paying down their debt faster in the credit card space. And they're being much more careful about credit extension. If you read in the front page of the Wall Street Journal, they had talked that the young people has a different view of what it means to be someone in debt. And so we will effect that until the world starts to warm-up, and we can handle all that just fine. In the meantime, we'll continue to do what we're doing but we're not going to put out there a forecast to suggest its going to get grow and great.

And I will say that the typical spring thaw is starting to happen. On the mortgage side, we're seeing activity. Last week, we had one of our best days ever, one day last week in other trends by any means. We had a very weak January and February, weaker than we thought it would be. Is it the snow? Is it the storm? Is it just a general lack of motivation into continue to refinancing which is 73 [ph]? Not sure. So until we are sure, we'll act like it's not for real. Or that it is real, we'll manage the fact that we have, and as things warm-up, we'll be ready to celebrate that and reinvest. I will remind you that we are very, very good at expense management. From my lips to your ears, I should help. You will never hear me introduce a campaign or a -- the name of a program or some ridiculous way of managing a business that you should manage everyday. I will tell you, therefore, when we have mortgage business and it goes with the vague reason in the market, you can well count that we will take the costs down, and we'll take the costs up, and I don't have to lay people off because I didn't build it that way. I didn't build a parking lot for just to decide [ph] that nobody's ever going to park in. We're very, very good at this. We know how to have temporary employees and temporary staff, and we can move them around the country so you will see no declaration by this company of reduction in force. We will just do it. And it will be quiet, it will be humane and it will be the right thing to do for both our future and for your investment.

So I will tell you mortgage activity is going to be down probably 15% in terms of revenue for this quarter, from linked quarter. Applications are down 14% to 15% so far in the quarter, and gain on sale is a margin that will slow down. So that brings us to about a 15% reduction in the mortgage income and that for me, that's not a permanent outcome. That to me, managing the business, so that we don't operate as though it won't particularly have the risk of flowing backwards. But if it gets better, we're ready to jump on that, too. And I think I'll know a lot more in probably 30 to 45 days.

And then finally, net interest margin, which is important to you, we said the last time we were together, we said it in our earnings call in January 16, we thought that there would be a 4% to 6% slide [ph] linked quarter, we're looking at 5% to 7%. So I'm giving you one more [indiscernible] in that range. I'm only giving you range because there's not, that's not like I'm withholding, I just don't know where the month gets, the month goes and it could be a good month.

I'll remind you, we're a very seasonal company with the payments with some of our companies, so the Fee businesses alone might be one of the reasons that we'll have that extra 1 basis point. But I'll also tell you that this is probably the steepest slide you'll see for rest of the year, that 5% to 7%, and then we have a couple of more floors that are left of a document [ph] and we'd flatten out later in the year. So this is not -- there's nothing to see here. This is not a grand announcement.

And so in summary, we are what we say we are. And we deliver what we say we will. And you can see here particularly on the profitability side, we're in the range, but we want to be on the high-end of those ranges as soon as we can. Our capital distribution is days away, and you can evaluate the performance for which we took care of our shareholders and we took care of our own company's growth opportunities. And I'm telling you, as I started, I'll end, we're a simple company. It works for us, we understand how to run this company, and culture does matter and our culture is very, very important to me. And so far, so good. We have people who want to work here, who are proud to do what they do for this company and I'm going to protect that virtually. So with that, I will stop and let you ask your questions.

Question-and-Answer Session

Keith Horowitz - Citigroup Inc, Research Division

Excellent. Okay. So to get you ARS [ph] cards, could you have your first question up? So we all think that U.S. Bancorp is generally viewed as a superior franchise, traded at a premium multiple. The real question is what drives the further earnings on man-to-man or PE expansion from here? So your 5 choices are: One, is it the Payments franchise; two , is it M&A opportunities; three, is this the increase in the capital return; four, is entering into new asset classes; or five, is all for extent [ph]?

[Voting]

Keith Horowitz - Citigroup Inc, Research Division

So #1 response is 43% on the Payment side. And the second response was [indiscernible], 21%. So Richard, any thoughts on these?

Richard K. Davis

Well, on #5, I -- and one thing I'd -- I hope we can protect the PE that you all give us because it's important that don't things that we overlooked how valuable that is. But I would agree with you. I think that our Payments growth is the area that we really can shine. And as I said earlier in my comments, it's not an area that you can jump into now, so there are only a few of us that really have the permission to do something important here. And I called mobile payments out because everything is going to be under term mobile. The payments will be different as we defined it, and we're looking for -- we have an opportunity at the Investor Day later this year, we're going to spend quite a bit of time on mobile payments and bring some color around what's happening and what we think might happen. So I think you guys nailed it. I would agree with that.

Keith Horowitz - Citigroup Inc, Research Division

Can payments accelerate in a low growth, low rate in Canada over the next couple of years?

Richard K. Davis

There's a couple of things. Payments will, this is an immediate cash. That's why this is such a sort of reasonable consideration. If you ever thought of it just like -- otherwise, payments -- other things just to take [indiscernible] some that's already out there. But when you think about this growth Star Bank [ph] combination. The reason I will have life in the near term is because it's just an immediate cash. Over the long-term, it's got to have another solution. So I think, absolutely. But for U.S. Bank particularly, you have so much opportunity outside of the domestic order, and that's why I want to bring your attention. To make this clear, as long as I'm around, we're not taking deposits outside of America and we're not making a loan outside of America, unless it's a corporate card for one of our most important customers. So we aren't going to do that. But we will move people's money in their native currency in a nanosecond, and get paid for doing that and for being a trusted party to move money. So that throughout can happen anywhere in the world, and I'd say I think that's got a great growth for us as well.

Keith Horowitz - Citigroup Inc, Research Division

Okay. Our next question please? So U.S. Bancorp has made a number of acquisitions across all their business lines since 2008 [indiscernible]. Going forward, what do you want to see? Do you want to see them: one, just to do a continued small acquisitions across all their business lines, still on acquisitions; two, you want an acquisition of a big bank; three, a larger acquisition to get bigger in payments or trust; or four, nothing. No, you don't want M&A, you want to focus more on organic growth?

[Voting]

Keith Horowitz - Citigroup Inc, Research Division

Okay. So the #1 response is prety much what you've being is, just to continue small acquisitions across business lines, that was 45% number. The second most frequent response is 29% for a larger acquisition of a payment company or trust. And third, with 23%, why don't you do a large bank. So good. Is that in line with your priorities?

Richard K. Davis

Yes. I must say run them through the subs [indiscernible] that are one -- so 84% is exactly what I want this company to do is grow organically and grow in smaller, well-placed acquisitions that won't change the composition of the company as you know it.

Keith Horowitz - Citigroup Inc, Research Division

Okay. One to one question. When you talk about 2013 being a challenging year, how is that different than '12? Because really, when I think about 2012, you had a soft economy, you had tons of uncertainty, you had lower rates, so why is 2013 from a -- from your perspective, challenging more so than 2012?

Richard K. Davis

So there's 2 reasons. One is, the duration of rates being low is worth noting. It's a year longer, low interest rate, which just caused people to kind of [indiscernible] in their performance. I mean, companies were, 2 years ago, so proud of themselves because they can handle this recession. Then they got used to the low interest rates, and then they realized they're going to hold off and wait longer, and I think that, that decision to keep rates low is a challenge for us, and I hope to think the decision to tie it in 6.5% unemployment is probably -- is going to be an equally important challenge. So for us the declaration of rates being a little longer than they were than a year ago is I think harmful to at least the banking income statement. And I just think the fact that the recession is older, it doesn't have a real sense for a turning point is number one. The other thing that I would say is, hope springs eternal. But I think [indiscernible] a handful of banks this year, right? Like 3 or something. So now everybody is back out. It's like everybody can come out and play. And there are more people in the marketplace, and they're not acting entirely rational. And so I'm not -- God knows I will not accept that excuse from any of my folks, but I will tell you that it's the reality, so we all have to end up being more competitive. And what that means is in order for us to win the right business, we have to sacrifice margin not structure, and we will do that. I've told you that for years. We'll always sacrifice margin if we have to. Well, the good point, well, we don't make it up in volume. So that's our need [ph] important change over last year, and I think it caused us to have some of the pressures you're seeing with more people in the game and everyone's thinking there's a fighting chance to make it to the other side.

Keith Horowitz - Citigroup Inc, Research Division

[indiscernible]

Unknown Executive

That's one of the factors in the 4 to 6 basis points moving into the 5 to 7, but the other key factor there is the lumping number, which is the seasonally low first quarter and that's probably a couple of basis points. Now as often as you said, Richard, I think it'll start to stabilize later in the year.

Keith Horowitz - Citigroup Inc, Research Division

Any questions in the room? I think on the margin, you said that it's going to come down later in the first quarter, and then you'll see it come down [ph] as they kind of pace so...

Unknown Executive

So -- we had indicated that, Keith, back in the earnings call, 4 to 6 basis points. We now think 5 to 7, but that decline will moderate because the first quarter is always lower because of lumpies. So it can still come down a little bit, but less than 4 to 6 in future quarters. Probably, a couple of basis points.

Keith Horowitz - Citigroup Inc, Research Division

So if you were to hold the rate structure flat today and you just continue to roll the balance sheet, at what point does the margin bottom out for the year exactly.

Unknown Executive

The key headwind we have is the securities repricing. And today, my securities are coming off at about 2 30. What I'm putting on is maybe 60 to 70 basis points below that. But my duration is pretty short. So if you think about it in a year or 2, less than a year now, that differential is going to become less and less to the point where there is no differential. So that is the headwind that will go away, probably towards the end of this year, early next year.

Keith Horowitz - Citigroup Inc, Research Division

And so there's no headwinds in the loans of the [indiscernible]?

Unknown Executive

Loans are mixed. I would say the large corporate loan book is fairly stable. I think we've bottomed out there and we've had stable spreads there for a number of quarters. Consumer has some areas of pressure but generally stable. Auto is a little bit pressured. The area that we're seeing some of the competition being perhaps a little bit more aggressive is in the middle market, where you can have one bank who is very aggressive and make a difference in the market. And that's the area that we're seeing a little bit of a compression.

Unknown Analyst

You mentioned the seasonality of the Payments business, which we're aware of that. But you mentioned something about the sequester impacting a certain subsegment of the government side. It is that just kind of -- give us color there or you...

Richard K. Davis

Yes. I'll give you color. I'm giving you a little color. So we expected the government side of corporate payments to fall in quarter 1 of [indiscernible]. And you know their peak is quarter 3 because that's their fiscal year, in September 30. We started seeing in quarter 4 -- we're seeing it even more in quarter 1 that perhaps our -- cluster effect, but perhaps for the number of agencies, they don't know what their future will look like, and now there are some of them that do. We're seeing some of the [indiscernible] some of them are coming down. We already suffered the consequence of the Department of Defense, anything war related, which we didn't have a lot of people on the [indiscernible]. Little tanks, maybe. But we saw some of the tangent effects. But now we're seeing just I think the impact of uncertainty in the government space alone and that's something that I suspect will get better as people figure out what their real budgets are.

Keith Horowitz - Citigroup Inc, Research Division

Can you lay down out the capital return early on and so basically, you had to stay below dividend?

Richard K. Davis

Yes.

Keith Horowitz - Citigroup Inc, Research Division

And what that essentially means is that you have to allocate more in that bucket in terms of organic growth or acquisitions, right? By definition, because in your share buybacks, you're in the middle of the range. So I guess my question is, as we go through this year and next year, things are getting tighter and you're getting growth opportunities are lower, M&A. Are you -- do you let capital build? Do you feel forced to kind of redeploy that capital? Or do you think it's going to end up on [indiscernible] for that capital on M&A alone?

Unknown Executive

I think our equation is working very well right now. It worked well in '12, and I think it will work well in '13. If we're returning 62% like we did last year, and where capital ratio basically stayed flat for the year, what that means is the 40% or 38% we returned accommodated the internal growth and our risk-weighted assets, as well as the acquisitions that we're looking at. If we're in that 60% to 70% range, I think that will work again in the same way in '13. So we don't have to moderate anything. We're going to be somewhere in that 60% to 80%, probably in that 60% to 70%, and the rest will accommodate our gross weighted asset wealth, which we moderate as we talked about, as well as some of these small deals that we just talked about.

Keith Horowitz - Citigroup Inc, Research Division

Do you think the capital ratio will kind of drag or move up over time?

Unknown Executive

We're managing 5% to 8%.

Richard K. Davis

I'll mentioned that and I'll also say that the only thing that's probably precluding us from doing everything that we want to do is that we didn't have dividends higher than 30%. And the trade-off would probably be, Keith, it would be coming from buybacks. It wouldn't be coming from organic protection. So we're not far off from where we want to be, but I'm hoping there will be a day when, thanks to the prudent folks, we'll get permission to manage the entire capital production in a way that the regulators approve, but it isn't under some limited factor like we have today.

Keith Horowitz - Citigroup Inc, Research Division

Do you think that 30% changes in the next couple of years?

Richard K. Davis

I'm hoping it should. I think it should. I think it's the one -- because I think if you're a regulator, you can approve buybacks and you can stop them together [indiscernible]. You approve dividends, and nobody wants to be embarrassed and have to go cut the dividend again. Then they are done at that. For everybody -- no one does that twice. So I think the extension of why your dividends get higher than 30% -- how it will come to that had a strong reflection of that company having that much confidence from their regulators that they have got so much absorption that no one is going to be embarrassed. I think we're one of those companies, and I'll be asking in future the opportunities for us to be able to move beyond that. But I'm also not cavalier trying to be the first among the few that are trying to push the limits at this stage. It's still pretty infant for us, but we're still learning a lot about it.

Unknown Analyst

And then on M&A, you talked about being in a challenging year, 2013. Do you think M&A starts to pick up in the bank space that people [indiscernible] realizing you need to scale, you need to sell? Or do you think it didn't go well in sellers?

Richard K. Davis

No, I think it gets a lot now. I think we've hit that moment. Honestly, guys, in '10, '11 and '12, that very period didn't play out. I don't know when it will. I mean, if the Board of Directors of these banks have decided to carry the cross at this point in time, and we all know it does get better, we know as banks make money as rates go up and as rates move and both things are going to happen, they're going to wait. I honestly think that these have been checking with that they are still unbelievably outside of the range of what we think their company is worth. And that's all right. But I mean, that just means that they have a long way to go before they're willing to sell, and I think you're going to see substantial -- roughly, tons of small banks getting together like we do every afternoon. And we don't know who they are because they're small. But I don't think you can see banks that are household names are even known to you guys, very many of them in the gun site in the next year. I think this is a year where they're very, very quiet in the medium to large size.

Keith Horowitz - Citigroup Inc, Research Division

Okay. We're out of time, but thank you very much.

Richard K. Davis

Thanks, everybody.

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