Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

U.S. Bancorp (NYSE:USB)

Q3 2008 Earnings Call

October 21, 2008 7:30 am ET

Executives

Judy Murphy - Senior Vice President, Investor Relations

Richard Davis - Chairman, President and Chief Executive Officer

Andrew Cecere - Vice Chairman and Chief Financial Officer

Bill Parker - Chief Credit Officer

Analysts

Matt O’Connor - UBS

Mike Mayo - Deutsche Bank

Ed Najarian - Merrill Lynch

Vivek Juneja - JP Morgan

Nancy Bush - NAB Research

Eric Wasserstrom – Galleon

Chris Mutascio - Stifel Nicolaus

Operator

Welcome to U.S. Bancorp’s Q3 2008 earnings conference call. Following a review of the results by Richard Davis, Chairman, President and Chief Executive Officer and Andy Cecere, U.S. Bancorp’s Vice Chairman and Chief Financial Officer, there will be a formal question-and-answer session. (Operator Instructions) I will now turn the conference call over to Judy Murphy, Director of Investor Relations for U.S. Bancorp.

Judy Murphy

Thank you and good morning to everyone who has joined us on the call today. Richard Davis, Andy Cecere and Bill Parker are here with me to review U.S. Bancorp’s Q3 2008 results and to answer your questions. If you have not received a copy of our earnings release and supplemental schedules, they are available on our website at usbank.com.

I would like to remind you that any forward-looking statements made during today’s call are subject to risk and uncertainty. Factors that could materially change our current forward-looking assumptions are detailed in our press release and in our Form 10-K report on file with the SEC.

I will now turn the call over to Richard.

Richard Davis

Good morning and thank you for joining us. Andy and I would like to start the call today with a short review of our third quarter results. After we’ve completed our brief formal remarks, we’ll open up the lines and welcome questions from the audience.

Our company reported net income of $576 million for the third quarter of 2008. Reported earnings per diluted common share of $0.32 were $0.30 lower than the earnings per diluted common share in the same period of 2007, and $0.21 lower than the prior quarter. Although the company’s core businesses continue to grow, the decline in reported earnings from a year ago and the prior quarter was the result of securities losses -- a consequence of the current market condition -- and an increase in credit costs.

In our view, the quarterly results reflected the underlying strength of our banking franchise and our business model, particularly our diversification and prudent approach to risk management. But the results also demonstrated the fact that we are not immune to the challenges of the current environment. Significant items impacting the company’s third quarter earnings included $450 million of securities and market valuation losses and a $250 million incremental provision expense. These items combined reduced earnings per diluted common share by approximately $0.28.

Understandably, our performance metrics were impacted, as return on average assets in the current quarter fell to 0.94% from 1.95% in the third quarter of 2007 and return on average common equity dropped to 10.8% from 21.7% in the third quarter of last year. Without these securities and market valuation losses and the reserve build, return on average assets and return on average common equity would have been approximately 1.74% and 20.3% respectively.

Let’s review some of the highlights. Total average loans grew by 12.9% year over year, led by solid growth in all major categories. Note that a small portion of the increase was due to a balance sheet reclassification and the purchase of student loans, in addition to the acquisition of Mellon 1st Business Bank.

Extracting these items, average loan growth year over year would still have been a strong 10.2%. On a linked quarter basis, total average loans increased by $3.5 billion or 2.1% on an unannualized basis. Excluding the acquisition of Mellon 1st Business Bank, average loans grew 1.7% unannualized quarter over quarter.

Average total deposits increased by 12.1% over the same quarter of last year, although the linked quarter average total deposits were lower by 1.7%. Total deposits at September 30th were $4.4 billion, or 3.2% higher than at June 30th as growth accelerated during the last weeks of the quarter, particularly in consumer bank.

Similar to our growth in average loans, Mellon 1st Business Bank had an impact. Excluding this acquisition, average deposits were higher by 10.4% year over year and lower by 2.6% on a linked-quarter basis.

As the strong growth in average loans and average deposits demonstrates, we continue to find our company is benefiting from the uncertainty in the financial markets. Customers seek stability as well as a financial services provider that is willing to provide the products and services that they need. Our bank has been and is a beneficiary of the flight to quality aspect of this challenging economic environment.

We have a strong capital structure and are in the position to provide our customers with high quality banking products and services. We can and we will continue to compete for the best customers nationwide.

Our net interest income in the third quarter increased by 16.7% year over year and 3.1% unannualized linked quarter. This increase was the result of an improvement in the net interest margin which came in at 3.65%, 4 basis points higher than the previous quarter and 21 basis points higher than the same quarter of last year in addition to the quarter’s strong growth in average earning assets.

The majority of our fee-based businesses recorded excellent growth year over year. The most notable increases included: commercial products revenue which grew by 23.4%; treasury management fees, which increased by 8.5%; and payment-related fees, which rose by 8.1%. On a linked-quarter basis however, growth in the fee-based categories was somewhat muted, reflecting the changing market conditions and seasonality.

Commercial products revenue was one exception with a growth of 12.8% over the prior quarter, demonstrating that the wholesale group’s revenue initiatives continue to gain momentum.

Payments-related fees were essentially flat quarter-over-quarter, as both a decline in same-store sales volume and a change in mix from higher to lower spread customer sectors limited the growth in fees between the second and third quarters. Seasonality and market conditions contributed to the decline in trust and investment management fees and treasury management revenue, while mortgage banking revenue was impacted by lower production as higher mortgage rates slowed application volume.

Finally within the non-interest income, the other income line posted the largest decline both year over year and linked quarter. The variances in this category were partially due to the market valuation losses, but the majority of the decline was due to the end-of-term losses and impairment on auto lease residuals.

Total non-interest expense in the quarter was $47 million higher than the third quarter of last year, but $12 million lower than the previous quarter. A large portion of the expense was year over year and can be attributed to continued investment in both our fee-based businesses and banking franchise.

Our efficiency ratio as reported for the third quarter of 2008 was 48.1% and we continue to be one of the most efficient financial institutions in the industry. We have always operated with a disciplined approach to expense control and our ability to maintain our efficiency is particularly important in this environment.

Moving on to credit. As expected, credit costs trended higher again this quarter. Net charge-offs of $498 million were 25.8% higher than the second quarter of 2008 and in line with projections we made in early September. The increase in net charge-offs reflected continued stress in the residential home and mortgage-related industries, declining home prices and the impact of the worsening economy on our commercial and retail customers.

The most apparent stress was seen in California residential homebuilding which was the primary driver of the increase in net charge-offs in the commercial construction and development category. The net charge-off ratio on the first residential real estate loans increased this quarter to 1.21% of average loans outstanding, while the net charge-off ratio on home equity and second mortgages fell slightly to 1.07%.

The majority of the increase in net charge-offs on first mortgages can be attributed to loans originated through our consumer finance division, as our branch-originated portfolios continue to perform very well.

Within the retail loan portfolio, the largest increase was in the other retail loan category, about half of which was related to auto loans while credit card loans net charge-offs accounted for most of the remaining linked-quarter increase in consumer net charge-offs. The net charge-off rate on credit cards rose just slightly to 4.85% in the quarter, well below the industry average and indicative of the quality of this prime-based portfolio.

Also, as expected, non-performing assets climbed to a higher level this quarter. At September 30, the total non-performing assets were $1.492 billion, or 31.5% higher than at June 30; again, within the range projected in early December. The majority of the increase was related to residential construction, residential mortgages and related industries. However, the economic slowdown and the rising commodity prices also had an impact on some of our commercial and retail customers. The ratio of non-performing assets to loans plus other real estate owned was 88 basis points at September 30, well below the ratios posted by our peer banks to-date.

Restructured loans that continue to accrue interest rose by 14.7% this quarter as the company continued to work with customers who are current or will become current on their payments to renegotiate loan terms enabling them to keep their homes and retain the value of the relationship for our shareholders.

As a result of the upward trends in both net charge-offs and non-performing assets in addition to the ongoing concerns about the economy, the company increased its allowance for loan losses in the third quarter by recording an incremental provision for credit losses of $250 million. With this addition to the allowance for credit losses, the company’s reserves were adequate at September 30th with the ratio of allowance to period end loans at 1.71% compared with 1.60% at June 30th, and the ratio of allowance to non-performing loans of 222%. We expect both net charge-offs and non-performing loans to trend higher in the fourth quarter, although we believe the growth rate will moderate slightly from what we’ve experienced between the second and third quarters of this year.

Going forward we will also continue to assess the adequacy of our reserve for loan losses and provide room for credit losses to reflect portfolio and economic conditions. We entered this credit cycle with a strong balance sheet and we will continue to protect that position going forward.

Finally and importantly, our capital position remains strong. Our tier 1 and total capital ratios were 8.5% and 12.3% respectively at September 30th, both at or above target levels. I will now turn the call over to Andy who will make a few more comments about the quarter.

Andrew Cecere

Thanks, Richard. I would like to begin with a quick summary of the significant items that have impacted the comparison of our third quarter results to prior periods. At an investor conference in September, we disclosed a number of significant items that were expected to impact our company’s third quarter results, and the impact was as predicted.

Included in our September presentation were the following:

1. We expected an impairment charge on our SIV exposure of $150 million to $250 million. The actual impairment was $250 million.

2. We expected an impairment charge on our exposure to GSE preferred perpetual stock of $97 million. The actual impairment was $97 million.

3. We expected an additional reserve build similar to those made in prior quarters of 2008. The actual reserve build was $250 million which resulted in a total provision to net charge-off ratio of 150%, essentially the same percentage as the prior two quarters reserve build.

These items totaling $562 million were consistent with the numbers we disclosed in September and reduced earnings per diluted common share by approximately $0.22. Subsequent to that presentation, market conditions and specific events led to several additional valuation losses in the third quarter.

They included:

1. $42 million of securities losses representing impairment on non-agency mortgage-backed securities held in the available-for-sale portfolio.

2. Security losses on: the preferred stock of Washington Mutual, $25 million; Lehman Brothers, $20 million; and other smaller failed institutions, $12 million.

3. Finally, we recorded market valuation losses on the other income line that were triggered by the Lehman Brothers bankruptcy filing and other market-related events. These two items reduced other income by $39 million.

These post-conference events led to charges of $138 million and together reduced earnings per diluted common share by approximately $0.06. In summary, all of the significant items detailed here reduced earnings per common diluted share by approximately $0.28 in the third quarter of 2008.

For comparison purposes, during the second quarter of 2008 the company recorded $63 million of securities losses, primarily as a result of impairment charges on its structured investment securities. In addition, second quarter results included an incremental provision expense of $200 million. Together these significant items reduced second quarter earnings per diluted common share by approximately $0.11. Finally as you may recall, the third quarter of 2007 included one significant item which was a $115 million charge related to the Visa litigation settlement.

Now, just few comments about our operating earnings. Net interest income in the third quarter was higher on a year over year and linked-quarter basis due to both strong earning asset growth and an expanding net interest margin. The improvement in margin on both a year over year and linked-quarter basis was the result of growth in higher spread assets and the benefit of being liability sensitive in a declining rate environment. We were also able to maintain very favorable short-term funding rates as market volatility continued throughout the quarter.

Going forward, assuming the current rate environment and yield curve, we expect to maintain a fairly stable net interest margin. This assumption is based on expectations of steady to slightly improving credit spreads, continued growth of higher spread products and a normalization of funding and liquidity in the overnight markets.

As Richard mentioned, the growth in non-interest income was affected in the third quarter by losses on auto lease residuals. Specifically, $85 million of the decrease in other income year over year and $47 million of the decrease linked quarter was related to auto lease residuals. We continue to carefully manage the residual risk on this portfolio.

Given the current market for used cars we expect adverse market pressure on auto lease residuals to continue, but they will be manageable for our company. In fact, given the origination dates of the remaining leases, 2008 is expected to be the peak year for residual losses as the number of cars coming off of lease declines in 2009 and beyond.

I will now turn the call back to Richard.

Richard Davis

Thanks, Andy. In conclusion, despite the ongoing challenges and condition of the financial markets, our fundamental business performance remained strong. We’re not immune to the current environment but the advantageous mix of our business lines, the quality of our balance sheet and the strength of our capital have and will allow us to navigate through this economic cycle and emerge with our business model intact and the company well-positioned for the future.

The most important message we want to deliver today is that this management team and all of our 54,000 exceptional employees remain engaged and focused. Focused on capitalizing on this window of opportunity to grow our businesses by keeping our customer relationships and acquiring new customers. Focused on serving our communities through business partnerships and employee volunteerism, and focused on creating value for our shareholders by maintaining our prudent approach to risk while sustaining and enhancing U.S. Bank’s position of strength.

That concludes our formal remarks. Andy, Bill Parker and I would now be happy to answer questions from the audience.

Question-and-Answer Session

Operator

Your first question comes from Matt O’Connor - UBS.

Matt O’Connor - UBS

In the past you said you are not too interested in buying large franchises that are under pressure. I’m wondering how programs being implemented by the government would impact that, specifically the ability to offload some of the assets and obviously the potential for the capital infusion. How does that change your thinking with potentially consolidation that could occur?

Richard Davis

It makes it a little easier to do those things, but first and foremost whether the capital is less expensive or the opportunity of the [inaudible] is present we are going to continue to look at deals on an accretive basis where they make sense and where they would fit into this company’s long-term structure.

It would definitely make it more attractive and so some of our positioning and our targets look more attractive and our valuation is easier now, but to the extent that it has to hit all of the normal bellwether marks and the expectations we have for the near term and long term, it still has to be a good deal.

So it doesn’t really change our philosophy but it does make it easier to find our way to partnerships that might be more accretive sooner.

Matt O’Connor - UBS

Separately, has the pick up in deposit growth continued into October? In which markets in particular are you seeing the largest accelerated growth?

Richard Davis

It has actually accelerated into October. I don’t think there’s been a day in October we haven’t seen a net inflow at an exceptional level. It happens in most of the places where you have seen some of the more headline-stressed companies so it’s intuitive. Where we have branches in and around locations where the banks have been partnered with others, we have found our way through higher deposit growth. So primarily on the west coast and in Ohio and in some of the core markets that some of the smaller community banks might have also some stress. But it’s intuitive, it’s exactly where you think it would be.

October is reflective of more consumer and small business, lots of numbers of accounts moving over. Through September and even last quarter it was primarily large municipal and large corporate accounts moving money in so now we’re seeing the whole effect of the flight to quality.

Operator

Your next question comes from Mike Mayo - Deutsche Bank.

Mike Mayo - Deutsche Bank

Following up on the deal question, why wouldn’t you go out and buy another bank that’s less efficient, especially if you had a government guarantee? Also, are there certain parts of the country that you are interested in, either near or long term?

Richard Davis

Did you say “why wouldn’t we?”

Mike Mayo - Deutsche Bank

Yes, why wouldn’t you? I mean it makes sense what you have done and now the price has come down and maybe even some government assistance. Everyone asks, “what about U.S. Bancorp?” Everyone else has shown some kind of move, whether it is JP Morgan or Bank of America or Wells Fargo.

Richard Davis

I hear you. Now first of all, you know me and I am not motivated by what everybody else is doing. It only works if it works for us. The prices actually don’t come down. I mean the fact of the matter is that there is more money in the market. I suspect that the target prices might actually go up. So for us it’s just going to have to be a deal, like I said, that fits all of our criteria which is immediate accretion and long-term value. I do think that there is more of that out there. I am telegraphing that we are more active and more interested than we might have been before, but it doesn’t change any of the parameters and it doesn’t change our appetite for taking risk. It’s got to be the right deal and it’s got to make sense. So sure, we are looking at it more.

Mike Mayo - Deutsche Bank

As far as your use of the new Treasury program, whether it’s for capital or disposing some problem assets, any interest?

Richard Davis

You and I could get together and we’d both come up with the same conclusion: it’s too new to rate. We have to decide if we participate in the topics that you and Matt were talking about then yes, we’ll achieve a use of that capital which is quite attractive on those terms and we’ll evaluate what that means for acquisitions.

In terms of selling into the [tarp] or participating in that regard, we don’t have any particular reason to need that. For us that would just be a celebration of getting the markets moving again and opening up the flow of the commercial paper markets and other good things. We celebrate it, but we probably wouldn’t use that part of it.

Mike Mayo - Deutsche Bank

In terms of your outlook for problem assets you said the growth rate should moderate slightly but that’s off a higher base. Should we think about a similar dollar increase linked quarter? If you can give us how you view the ins and outs?

Richard Davis

Good point. October 21st is a little early in the quarter. Unlike last month, we’ve been actually dead on accurate when we make these predictions but I will say that both on a percentage basis we expect it to come down and I would say on a dollar basis perhaps down, but not quite as much because of what you just said, the base.

I would also say that we are seeing a better firming up of net charge-offs as our portfolio ages in this economic environment and a little less certainty in the non-performing loans because you can have one or two or three large deals come out of nowhere virtually, and you can be a bit surprised. So accounting for that surprise and in both cases quarter over quarter they’ll come up at lower levels. I think that will be both in percentages and dollars, but not a lot.

We’re still in the middle of this stress. I think for us we’re coming into this as I said last time, we’re coming in later and lower and I expect we’ll come out of it faster and more assuredly. Our non-performing assets to loans at 88 basis points is probably the point on this whole day that I’m most proud of. To be under 1% on non-performing assets, that just shows you how late we were to this party and how low we’re going to be into this cycle, I believe, because that’s probably the best measure of the core operating prudence of making loans a couple years ago.

Mike Mayo - Deutsche Bank

To what degree is this a rolling recession by asset class? There’s no question you’ve done better but to what degree are we just going to see the problems later in areas less connected to residential real estate?

Richard Davis

I have a sense that the housing-related issues were the first phase and that’s what went from pure mortgage to home equity and into housing developers, and maybe some into commercial real estate. I’m going to put that in one category. Then the economic recession I believe we’re in is just the normal course of moving into the more consumer and small business portfolios.

I see it rolling but the source wasn’t the same thing. It wasn’t just all housing that created the consumer slowdown. It’s the two things together. In terms of rolling, rolling suggests that you eventually get out of one of the problems and move to the next. I think everything is under some level of stress but it can either be housing-related and it’s the later innings or it can be in the early innings of the economic slowdown which is affecting the core portfolio.

But I wouldn’t be one of the CEOs to tell you that I see housing affecting everything or where I see an unexpected outcome that we wouldn’t have all predicted as we learn more each month on how the consumers are behaving.

Operator

Your next question comes from Ed Najarian - Merrill Lynch.

Ed Najarian - Merrill Lynch

Mike asked the bulk of my questions, but I just had one more. Could you provide some context on how the current environment is, or how you expect it to impact some of your fee income items looking forward? Some of the ones that might be more market or economically sensitive? You’ve mentioned trust and investment management fees, things like merchant processing fees, things that look like they are getting a bit negatively impacted either by the market or the current economic environment.

Richard Davis

Those are good questions and I was hoping we could get into that. Andy, why don’t you walk through?

Andrew Cecere

I’d say three areas, Ed. The first is the trust and investment management, as you already mentioned. The way we get paid on that is on market, on level of assets. As the market goes down we do not get paid as much so there is sensitivity there. You saw that, that was flattish. It was down second quarter versus third quarter also because of cyclicality related to tax fees.

The second area would be our merchant processing line. What we saw in this third quarter were same-store sales down about 3% versus the normalized level of up 2% or 3%. So while we grew, we grew at a lower level and that may continue in the future.

The third area is one we talked about which is our end of term lease losses. We do expect that the third quarter was the peak for that but we’ll see continued pressure before it turns around in the fourth quarter and into 2009.

Operator

Your next question comes from Vivek Juneja - JP Morgan.

Vivek Juneja - JP Morgan

Your construction NPLs jumped up quite a bit. Can you give any color on where you are seeing that?

Bill Parker

That’s primarily our California homebuilding portfolio.

Vivek Juneja - JP Morgan

What’s the size of that?

Bill Parker

That’s $1.1 billion in residential construction in California. That’s where we saw the bulk of our losses in that same category this quarter. We think that this was an unusual quarter and we did a lot of re-margining on a lot of the assets. We think that should taper off in the future quarters.

Vivek Juneja - JP Morgan

The net charge-offs on that are still to come, though?

Bill Parker

We took a lot this quarter and there will be more, but we think we are ahead of it now.

Vivek Juneja - JP Morgan

Bill, while I have you, the consumer finance mortgages, talk about the net charge-offs on those moving up. There was a faster increase in both 30 to 89 as well as 90-day past due. Can you comment on that?

Bill Parker

Are you talking first mortgages?

Vivek Juneja - JP Morgan

Yes, which is about a $6.9 billion portfolio.

Bill Parker

There is clearly, those were in general higher loan to value mortgages. That’s why they were in the finance company and yes, we do see continued increase in both delinquencies and foreclosures in this portfolio.

Vivek Juneja - JP Morgan

Andy, since you commented on other income more in terms of change linked quarter and year on year, what was the dollar amount of lease losses?

Andrew Cecere

$84 million.

Vivek Juneja - JP Morgan

Richard, from your commentary, it seems like you are going to participate in [tarp]?

Richard Davis

No, I didn’t say that. I am evaluating it, that’s for sure. We don’t need the second piece of it. If you consider two pieces one is having the capital and the other one is using the vehicles to dispose of assets. I don’t expect us to use the latter. The former, we are evaluating both the landscape of opportunity and whether or not the pluses and minuses of accepting the money is right for our shareholders.

Vivek Juneja - JP Morgan

When do you think you will get your decision on that?

Richard Davis

November 14. That’s the deadline, so we’ll use all that time.

Vivek Juneja - JP Morgan

The 30 day deadline.

Richard Davis

Yes.

Operator

(Operator Instructions) Your next question comes from the line of Nancy Bush - NAB Research.

Nancy Bush - NAB Research

You had mentioned in your commentary the impact of economic stress on some other commercial sectors. I’m assuming that you mean other, outside of residential construction, etc. Could you just tell how things are rolling through the other commercial loans?

Andrew Cecere

The rolling through is intuitively what you think; in our middle market book we have lumber yards, forest products, home building suppliers, all of those have been weakened by the downturn in new home construction. There is a little bit in some of the newer retail spaces that were put out where the new rooftops were going up that have seen a little bit of stress as well.

But again, we do all that with our existing relationship client base so we always have significant support behind those. Those are some of the areas where we’ve seen spillover outside of the direct residential mortgage.

Nancy Bush - NAB Research

Is what you’re seeing right now going on in the economy which looks like a deepening recession, has that changed your future lending plans at all, particularly related to retail? Is that a sector that you’re overly concerned about at this point?

Andrew Cecere

The piece that changed was really the decline in home values and we reacted to that several quarters ago. The mere fact that there is an economic slowdown hasn’t really materially changed how we do our underwriting.

Richard Davis

We’re actually very bullish on that topic. We haven’t not loaned to anybody that’s qualified in the last six quarters. I will agree that our qualifications have been adjusted as the world’s gotten tougher, as we’ve learned from some of the areas that were higher risk. But if I had to put it into the scheme of things, we’ve probably tightened our underwriting by 10%.

We are making loans to everybody who qualifies and I’ve got to say, even on a large syndicated basis I haven’t come across customers that have been unable to find enough large banks to take care of their needs. So while I know the vocal minority is out there with the stress in the marketplace and people can’t find loans, I think it might be a bit overrated to the extent that there’s a lot of money and a lot of banks like ours to make loans to small businesses and to consumers and to middle market companies that are performing well and they were prepared for this downturn and they’ve managed their businesses or their personal circumstances quite well.

So we’re actually quite steady state and I know that sounds a little contrarian but it’s really quite true.

Nancy Bush - NAB Research

Also on the credit card charge-offs, you’re substantially below the industry average right now, probably by about 100 bips. Can you continue to maintain that differential, do you think?

Richard Davis

Definitely. I mean it’s really a classical brand portfolio. We have a lot of co-brand in there where those customers are more like the old American Express kind of customers. They don’t revolve and they’re high quality. I would expect that spread, I’m even going to put a guess out there that that spread will increase because we’ll see some continued stress. We’re at 485, we’ll probably move into the fives next year but I have heard others say they’ll get into sixes and sevens and we don’t see any trajectory for that at this stage.

Operator

Your next question comes from Eric Wasserstrom - Galleon.

Eric Wasserstrom - Galleon

Just to follow up on Nancy’s first line of questioning, it seems like most of your commercial losses are in areas related to the homebuilding industry. Are you seeing any weakness in C&I performance just based on broader economic metrics?

Bill Parker

Again, most of the weakness or where it’s really showing up is anything that’s feeding into or touching homebuilding or homebuilding construction or people remodeling homes. All those types of suppliers have weakened significantly over the last 12 months. The rest of the economy or the rest of the C&I portfolio is just your basic middle market book and maybe a little bit of additional stress, but nothing material.

Richard Davis

Eric there is nothing remarkable there and if you remember these are probably customers that were originated anywhere from two to four years ago. We were originating at least half if not less than half of the run rate of our peer group and at the time we’re not trying to say we were smarter, we just simply didn’t see a yield curve and we didn’t think we were getting paid for the risk so we simply didn’t do those kind of loans for customers that didn’t have a high repayment likelihood. So, it’s not surprising that we should have a significantly lower effect in the C&I portfolio.

Now, if the recession continues for a very long and painful duration, then they will be affected just like consumers but for now they’re just moving along as we expected them to.

Eric Wasserstrom - Galleon

What is your baseline economic assumption currently?

Andrew Cecere

We still continue to expect a decline in home prices probably in the neighborhood of 5% to 10% from today’s levels and limited growth into 2009 overall. We projected or we plan around a yield curve that’s essentially the same and no significant change to rates.

Eric Wasserstrom - Galleon

How about an unemployment expectation?

Andrew Cecere

Moderately up from today’s levels.

Operator

Your next question comes from Chris Mutascio - Stifel Nicolaus.

Chris Mutascio - Stifel Nicolaus

Most of my questions have been answered. Andy, if you mentioned this in your prepared remarks, I apologize. Can you give me the view on your tax rate going forward on an effected basis?

Andrew Cecere

Tax rate this quarter was lower because of some of the one-time items, Chris. I would expect on a normalized go-forward basis we’d be right around the 30%, 30.5%.

Operator

There are no further questions at this time. I will now turn the call over to Richard Davis for any closing remarks.

Richard Davis

Thank you, Regina. Thanks everybody for joining us this early morning. We knew that there were a lot of other calls so hopefully we accelerated our conversation. We’re available to you for the rest of the day. Judy Murphy is especially standing by to answer any questions you have.

I hope you appreciate that we are well in control of this company’s destiny. We’re very careful and watchful over this environment but we also have in mind the shareholder focus that we’ve always placed first and foremost. You can have our confidence that that’s what we work with everyday. Thanks very much.

Operator

Thank you for your participation in U.S. Bancorp’s third quarter 2008 earnings conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: U.S. Bancorp Q3 2008 Earnings Call Transcript
This Transcript
All Transcripts