U.S. Bancorp (NYSE:USB)
2013 Investor Day Conference
September 12, 2013 8:30 am ET
Judith T. Murphy - Senior Vice President, Director of Investor Relations and Analyst
Richard K. Davis - Chairman, Chief Executive Officer, President, Chairman of Executive Committee, Member of Risk Management Committee, Chairman of U.S. Bank, Chief Executive Officer of U.S. Bank and President of U.S. Bank
Andrew Cecere - Vice Chairman and Chief Financial Officer
P. W. Parker - Chief Credit Officer and Executive Vice President
Howell D. McCullough - Chief Strategy Officer and Executive Vice President
Kent V. Stone - Vice Chairman of Consumer Banking Sales & Support
John R. Elmore - Vice Chairman of Community Banking & Branch Delivery and Vice Chairman of Community Banking & Branch Delivery for U.S. Bank
Joseph C. Hoesley - Vice Chairman of Commercial Real Estate
Richard B. Payne - Vice Chairman of Wholesale Banking
Terrance R. Dolan - Vice Chairman of Wealth Management & Securities Services
Pamela A. Joseph - Vice Chairman of U S Bancorp Payment Services
Nancy A. Bush - NAB Research, LLC, Research Division
Richard Ramsden - Goldman Sachs Group Inc., Research Division
Betsy Graseck - Morgan Stanley, Research Division
Judith T. Murphy
Good morning. [indiscernible], so we want to start. Welcome to U.S. Bancorp's 2013 Investor Day. I'm really happy to see all of you here. Also I would like to welcome those that are on the webcast who couldn't be here today in New York City. So we have
Judith T. Murphy
All right. I hope that this one works. So today, we have a full agenda. We're going to start with a strategic overview from Richard Davis. Andy Cecere will come up and talk about our financial management, and Bill Parker will finish that section with credit risk management. We're going to have about 0.5 hour break. We'll come back. Mac McCullough will talk about our enterprise revenue focus. And our 2 more traditional business lines, we'll talk. We'll talk about Consumer and Small Business with Kent Stone and John Elmore; and then Wholesale and Commercial Real Estate, we'll take their time, Dick Payne and Joe Hoesley. Then we'll have about 45 minutes for lunch. There's a buffet outside. We'll come back in here and eat. And we'll start again at quarter to 1 with Wealth Management, Terry Dolan; and then finish up with Pam Joseph, talking about Payment. And then we're going to have one Q&A session starting at 2:00 and going for about 0.5 hour. Hopefully, we'll get everyone out by about 2:30.
So if you do need anything during the day, please feel free to ask me or the people at the reception desk. Shelley Schoelps [ph] is there, and I think most of you have either talked to her or emailed with her over the past couple of weeks.
So as you know, I -- it is customary for me to talk about forward-looking statements. There will be forward-looking statements today, and so they do carry risk and uncertainty. Please read this slide carefully and also look at any of our filings with the SEC.
So Richard Davis will be coming up to the stage in a moment. He will be your host and emcee for the remainder of the day. And as he comes up to begin the program, I'm going to run just a slight -- a small video to talk about the beginnings of U.S. Bancorp.
Richard K. Davis
Good morning, everybody, and welcome to our Investor Day. As you know, we do this only every 3 years, so we find this to be a very special opportunity to talk to you, those of you here in the room and those of you on the webcast, to tell our story.
We thought it would best to begin with that video because much of today we will talk about statistics and products and services. What we do as the bankers is serve other people. It's a business of people for people, led by very good people. And that story, how that video was fixed in -- giving you just a small insight into what we do everyday when we wake up and come to work to change people's lives, and particularly at the quality of this company and the size of our company, to be relevant in the landscape of the American economy and in the future of the American banking industry. So today this story will be told about this company 150 years old.
I'll take you back to 2010 when we met in this room just almost 3 years ago to the day. We'll talk about how we performed against those key metrics and those key measures. And then we'll talk about 2016 and how we think we'll get from there today to that point into the future.
If I were an investment sales rep, I would be disallowed from saying the following: that past performance is an indicator of future success. But I am not, so I can say it. Past performance is an indicator of future success. We're very, very proud of what we've accomplished in this company. We've changed it to meet the changing expectations and demands of U.S. investors and of the country and the economy that we work in and within. And yet as the world continues to change, I want to leave you with a sense of confidence that this management team, this Board of Directors and this entire company can adjust whatever future comes our way and, in fact, lead to that future.
I often tell the employees that my best day would be a chance for us to go duke it out with our competitors head to head, literally, head to head. It would be great to go on some big, huge deal somewhere and go up against some of the best banks we deal with and put our very best person against their very best and see just who really is better at what they do.
Absent that ability to do so, we intended to have opportunities like this to perform every day, every quarter and every once a while stop and tell you where we're headed, and that's just what we've done. So today is a chance for us to tell that story.
The one elephant I'll bring you to the room as it relates to some of the things you might think about our company is, you've done quite well as a company, I believe, given we've gone from an expense mantra to a revenue-focused company. I think you would credit us with taking advantage of opportunities as they've come along. I think you will see and be convinced that we're a revenue company now with a disciplined expense baseline.
But as the world got tougher in the last few years, instead of walking away from it, we walked right into it. And you allowed us, you permitted us to take our time to catch up on our investments, to change our culture toward a revenue-facing, lean-in [ph] and a chance to prove ourselves in a challenged environment.
The question now is, how good will you guys be when the world gets better again? And the answer is, I suggest we'll be even better in that environment than we had been in the past. If you follow Olympic marathon runners, some of the best runners have one of their secret weapons is their coaching staff. And their coaching staff are other runners. And if you were to be a marathon long-distance runner, you want to run as fast as you possibly could. You cannot train against your old time and you cannot train against the magical competitors somewhere around the world you can't meet. But what you can do is have 5 or 6 other runners who will run a paced lap or lead for you and run the entire race with you but 6 of them freshly as opposed to one of you for 26 miles.
And at this company, we welcome the new world of competition. You may say, "How will you do now that some of these other banks are getting their legs back, now that they're beginning back into the forward view of things and not on their heels trying to fix things?" We welcome them because that's the pace by which we will measure ourselves. The numbers I'll show you today put us at the top of class in banking. We intend to stay there but intend to extend it from that point. And I want you to be excited and believable that this company can do that as we have in the past and even more robustly in the future. Bring on the competition. It helps us know that we are doing the right things and that the world deserves a country with even better banks.
Today we'll talk about the strategy, we'll talk about revenue, and we'll talk about lines of business. But perhaps, most importantly, I want to remind you of the story of this company as we begin this morning. It's a national company with highlights both directions. We're a 25-state, consumer, small business, franchised, pretty much Midwest all the way to the West Coast, as evidenced here in the green on the map on the left. You will find our brand in almost 3,100 branch locations and over 5,000 ATMs and then limitless other places where community activity and U.S. banks support come together.
But no less as a national, full-on national company as it relates to the services of corporate real estate, corporate banking, commercial banking and trust private wealth management. And then start to consider us more robustly than in the past as an international growth opportunity for payments and for corporate trust activities, as evidenced here on the map in blue.
The size of the company is perfect. I would ask any of you, all of you who follow banks stocks to consider a very better position than the one that we have. At $353 billion and 17 million, 18 million customers in some of most steady and exciting markets in the United States, with a 150-year-old heritage and 66,000 people, nothing is impossible for us today or in the future. And to juxtapose it against some of our most common peers, you can see that we're the fifth largest bank, commercial bank, in deposits and assets and as well market value. But we know well, thanks in great part to some of your support, we are well more valued than we are large. And that's a great evidence here as you look at the market value as it's compared to the company's size. And we intend to not only protect that position, continue to convince you of that position that it is earned, but extend that position.
On the next slide ,#9 for those of you listening in, the revenue mix of the company is very simple, and yet it's unique in what is inside of this pie. What we don't have on this pie is, we're not an investment bank, so that's not part of it. We're not an insurance company, and that's not part of it. And you can see that in the green Consumer and Small Business Banking and the light blue Wholesale Banking and Commercial Real Estate, we are significantly directed toward those 2 businesses in terms of size. And that is where most of our peers will be common to us.
But then it gets more interesting. Our Wealth Management, having along with it Securities Servicing, particularly Corporate Trust, is a unique opportunity for this company and a unique contributor to our bottom line. And add that to our Payment Services, which is significantly more than just credit card issuing, and you start to get into the magic of this combination of diversified earnings.
I thought I would stay just a minute to talk about risk profile. You may not think of it this way, but I ask you to consider that one of the other advantages of U.S. Bank besides those that you've heard and you will hear today is our risk position. You know us to be a conservative in the way we run the company. You know that we're conservative in the way we manage our traditional credit, our book of business. You know that in the stress test, we've continued to perform at the highest of any other banks. So even an third-party would tell you that we are conservative and prudent.
And therefore, it should and it does translate to risk management. And this is an example of 4 other large banks that we compete with as it relates to, in the last 3 years, the combined costs of some form of either litigation or some form of fines or settlement that have come to all of us, and these numbers will continue to be large, as you know and are reading about more and more.
But I want to suggest once again that past performance is an indication, I believe, of future activity. We do not have the same complicated and risk-based businesses. We don't have a history of taking risks in areas where we regrettably wish we hadn't. We will make mistakes and we won't do everything perfectly. But I do believe that another core advantage to our company that has yet to be seen in the near future is our risk profile and the ability for us to continue to operate a very safe, sound and customer-friendly company.
Now I'm going to take you back a few years and I'm going to take you all the way back to 2001. And this is when the company that you know today, the new U.S. Bank, really became who we are with the merger of Firstar and U.S. Bank in February 2001. You knew us to be a very strong, defensive company. At the very bottom of this Slide #11, you will see we were expense-driven and you would give nobody more credibility than this one for not spending too much money. And you can see, as listed in the dark blue, the things that we thought made us a strong and defensive company.
And then in 2007, when we had this very same meeting 6 years ago, we introduced you the idea that we would protect that strong defense and move toward flight to quality. Who knew that between 2007 and 2010 that the world would find its most amazing setback in this recession? Who knew, even us, that our strong and prudent philosophies would guide us to become a favored outcome? And so we accepted that, and we became a company where flight to quality was present. To be more physical about it, if you think about the headwinds that occurred starting in 2008, if you and I were runners, like in my earlier example, and someone said the wind is very strong coming on our face, we would turn and run the other way and let the wind be at our back. But if you intended not to run but in this case you're a pilot and you intended to fly, you would actually put your nose straight in toward the wind and accept a higher opportunity to lift faster.
And so figuratively, this company decided during the recession, let's use this flight to quality. Let's take that trust we've engendered with all of you listening in here today, and let's catch up on our expenses, on our investments, on our future. Let's turn the company from expense to revenue-focused. Let's do it all while we protect what got us here. But let's add these other things, as indicated in the dark blue, like focusing on revenue, making national businesses from regional businesses and focusing on brand development and becoming who we are today.
And then 3 years ago, we met here again in this very room and we talked about moving to a market share gain position. Taking advantage of now, the middle of the recession, taking advantage of the long-stayed flight to quality and the belief that we could do more with it, and on top of a strong defense, on top of investing for growth, we introduced to you 3 years ago that we will manage to our scale in every area that we can and get the scale or get out. We'll become a customer-quality company that's not just good enough but great. We'll focus on technology and let it be the enabler to help our employees be stronger. And we'll talk about employees who really, really want to be here, who are proud of what they do and very excited to do it for the rest of their lives.
And so we announced, in this meeting 3 years ago that we are positioned to win. And so that brings us to what we said in 2010. We said that we will focus on these 4 key areas that we would use as an opportunity with an intent to do something with it, not just a good position, but a great place with an intent to do something about it, and in this case, to win.
So on Slide 15, I'll introduce to you under the same simple format of our 4 diversified earnings streams that we have both scale and relevance. I want you to know that we only pick the category that we're measurable, and we didn't pick everything so it would look like it was at scale just to gild the lily here. But on the other hand, as I promise you, we'll either be at scale, be getting to scale or get out, because this is a scale business, and one of the things that accrue to the best companies are those who know how to manage that scale.
And so but for, you can see assets under management and Wealth Management, which is not a ratable activity. Institutional trust, where we think we're not quite at scale and intend to grow to that, every other key area is dominant enough in the country to matter. It's at scale for us to be effective. And I might remind you, none of them are a level where we're precluded from acquiring or building any organic growth mechanisms in order to get bigger because we're not in any of those limits. We're at 10% of the nation's market share.
So you'll hear more about this later this morning from each of the groups, but I wanted to call out that we have met the scale that we said we would. In the last 3 years, that was one of our biggest accomplishments.
I didn't think on the next couple of sides that I want to show you what market share positions have changed. Now here's a warning. Core deposits are 2% of the United State's market share. Going to 2.6% doesn't sound all that impressive, but it's a really big number. And more importantly, it's not 10%, but it's big enough to matter. Even more importantly, in some of our major markets, it's 20%, 25%, 30%. Even in one large national market, it's 38%. And so it's not the national number that matters so much, but it's the number you would all look at. It's how and where we achieve that number, and it's quite impressive as you look at our local MSAs.
One of the reasons we're not big on looking to double the size of the bank or pick up a bank of our size in another part of the country where we're not is because we would much rather double down on where we already are, be more relevant, be more scaled and be more successful than necessarily to be exactly the same market positions we have in 25 other states. It's overrated to think that a customer in Raleigh, North Carolina well along bank with you because you are in Seattle, Washington. That's very rare. What they do care about in Seattle, Washington is that you're everywhere and you're ubiquitous in and around in Seattle, Bellevue and Tacoma, and wherever they go, work or live, you're where they'd you to be. That's what matters.
You'll see in a more sophisticated view in our Corporate Bank, which we introduced here in 2007 and then again in 2010, one of our biggest accomplishments, we're moving up significantly in our Capital Markets and bookrunner positions.
You'll also be impressed, as I move on the slide at the top right corner, that in some of the more -- less traditional areas where a lot of our peers have a cost of entry barrier, where we're going to continue to grow substantially. You can see quite impressive improvement in our credit card, in our fund servicing. Those are 2 areas where you'll continue to see our M&A focus.
And Wealth Management, I said to you in 2010, it's one of the areas we haven't really gotten to yet as it relates to becoming as good at that as we are with everything else. And by the way, I said to you, I said quick, think U.S. Bank, think wealth management. You don't think of them in the same thought because we haven't branded it that way and/or because it isn't something we worked at.
This management team hasn't failed at anything we have tried. We may have failed not to try something. In the last 3 years, this has been another one of our biggest accomplishments, and Terry will walk you through just how far we've come in Wealth Management and how much amazing upside there is for a fairly new market entrant with a fairly unique approach.
And in trust. Now I talk with the employees that trust is a thing that nobody really understands what it is but it sounds cool. Banks started out being bank and trust, savings and trust. It's in our name. You know trust to be the trusted preferred escrow agent to promise that everything gets done that will get done and to act as an intermediary and the advocate for whichever party you represent. It is a great business for us. It's not only big nationally, we are one of the largest global providers of Corporate Trust as well. And as we look into the future, I can assure you we will continue to look at trust as we have followed the payments and move the story across the globe wherever it's welcome and where we think the opportunities are present.
And so customer experience. In the last couple of years since I saw you last, we continue to make great progress in at least in this case, the Gallup branch survey. There are other statistics that and we can provide for you that will show we're making progress. But perhaps, more important is on the right side of Slide #17, and that is, it's not just that they don't hate you. It's that they really, really like you. It means that they come to you with trust and guidance expectations. They expect reliability, whether it's technology or human intervention. It's always done well, it's always done the same way, and it's something you can count on in your life. And so we've introduced a phrase called "client advocacy," which is one of the more significant culture acts we've done since we last saw you. And I'll be asking a few of our folks today to tell you a little more about that in their brief presentations.
Technology, we love it because it makes our employees more capable. It makes our company smarter. We do not like technology because we think it replaces any part of the human side of the banking. It just accentuates it. And I thought you would see on the left side of Slide 18 just a small dimension of some of the capital expenditures we've invested over these last few years, where we have some catch-up to do. Now I'd say we've gone from back to center to now to the front of the pack as it relates to most of these areas, much of which I'm going to have you hear a little bit about from Mac as we talk about some of the initiatives that has allowed technology to move us into the forefront of our peers from at best what used to be at a peer level.
Employee engagement. This slide just shows you, on Slide 19, that we've continued to have remarkably good feedback, that the employees are getting more and more and excited about what they do, who they do it for and what their relevance is in the days and lives of their customers. I'll ask you to take a minute and look at the left side because this is thousands of companies, many of which are financial services as well all industries, across the globe, in fact. And I do think that our performance against employee trends over this recession period have been one of our most remarkable accomplishments.
Perhaps, more importantly, we would never have used to enter into our large cities competition for best place to work. Every major city does that. We didn't invite ourselves into the equation. We didn't know that, that was necessarily going to be positive or negative, but we certainly didn't think we have an edge. In 7 of our largest cities this year, we placed our company into that competition. And in all 7 of them, we were in recognized as one of the top places to work. And in 6 of the 7 cities, we were the largest company with the most employees in that city to be recognized for that purpose.
Why does that matter to you as investors and as those who follow us? Because this is a business of people. That was the video. If the people who do the job of the bank are proud to do it under that banner, proud to be bankers, training is almost secondary to their ability to convey remarkable experiences. And I do believe that if the employees and engaged with the customer experiences will be remarkable and as shareholder value will be equally respected. And so it follows in order to me that we start with leadership.
And on the right side of Slide 19, we spent a fair amount of time in the last 3 or 4 years introducing our distinctive leadership practices. Now this -- your eyes might roll at the back of your head because it sounds like soft stuff. But let me make this very clear to you. If you talk to any of our employees, and you're welcome to at any time, they would tell you, "Oh my god -- or OMG -- this company has such a core philosophy and culture around financial management." And it is so well understood here. Every single director report of mine and all of their direct reports, every single month of every month of the year sit with Andy and I and walk through their financial performance of 30 days past, 3 months forward and full year view, every single month. It is a religion.
You can never not know your number. You can't fake your way through it, and it helps us because it's something is not going to quite right. We can make early adjustments and that's why we don't have any big surprises and that's why we don't bring in companies from outside to tell us how to run our company. It's religious. We have the same discipline on human resource the way we pay people, the way we incentivize people, the way we manage their performance reviews. But do we have a distinct leadership trait? If you let another bank and came to U.S. Bank, we'll just say, "Well, and leadership is very well modeled here, too." It's legitimized, it's specific, and it's clear and It's unique. And could you leave Commercial Real Estate with Joe Hoesley and be transferred over to Pam Joseph in Elavon. And within 2 months, they've got the same company, I can feel it, the leadership traits, the things that are important, they're all measured the same way. And leadership, by the way, is not management. It's much more provocative. And so on the right side of the Slide 19, we've introduced these 4 distinctive leadership practices, these 8 key principles. And while I know, to most of you, that's not altogether that interesting, I promise you that amongst the things you'll hear today, our ability to inculcate that level of religious leadership uniqueness will be as core and centered to the success we will deliver in the next 3 years as other things have been to our recent success in the past many.
And so, as I close, I'll draw your attention to Slide 20. The way we see the world is from your eyes. We really do. I wake up every morning and I worry first about the shareholders. I do believe that if the employees are happy, I worry about them to be satisfied and engaged, to be great customer providers and then I know we'll deliver to you. But first and foremost, you've got to grow. If you guys had any mantra it'd be, "Whatever you've done is great, but what have you done for me lately? And what are you going to do next, is most important."
And so we do believe growth in market share matters, and I think we'll demonstrate that with the level of detail greater than I have in the last few minutes. We do believe that we're an industry-leading, growth and profitability company. You know that. Our returns are at the top-of-class, they have been for a long time, but I submit to you, for different reasons than they were in the old days. None of that matters so much, but whether it's sustainable and something that we can continue, and now, I would never put this 3 years ago, I wouldn't even put this a year ago, with a conservative risk profile. Much as banking used to be credit risk only, it's now so much more than that. The environment that we're under, all of us, has moved to a regulatory risk. Let's take a minute to make sure we all understand that we're not surprised about it, but what we're to do with it matters the most.
Put yourself in a governing position anywhere in the world in 2007 and '08. You can be there in a caja in Madrid, you can be in a province in Canada, you can be in a city in America. Every governor believes that their financial institutions around the globe brought this recession to everyone. And they're not all together wrong, that we have certainly played, as an industry, part of that problem. And so the reaction would be, every governor says, "Under my watch, from 2008 to current day, and beyond, the banks are not going to hurt us again." And so the reaction is, let's take the risk out of banks. Merge that with the knowledge that in the country that we live in, the downturn was also blamed upon the banks and, in part, the discovery toward the regulators, that they didn't oversee the banks well enough. And so in our country, the regulators, you better oversee the banks better as well, because we can't have this happen twice. Those are factual ideals.
What comes out of that is that is everyone's is seeking to take risk out of banking. And what I will remind you all, that you know as well as anybody, is banking actually is only a business of everybody else's business. We don't build it, fix it, make it, move it, acquire it, change it, paint it or name it. Our entire balance sheet virtually is everybody else's balance sheet. Our loans are somebody else's obligations. Our deposits are somebody else's money. We could pay for moving things around and protecting it, but basically, everything we do is somebody else's. But all we do is risk manage. That is our -- that's why we exist, to risk manage. And so with the well intentions of a reaction to a global recession are not surprising, and that everyone's take risk out of banking. But I assure you, we all want risk to remain. We want to be safe and conservative and thoughtful and transparent. And so while everything else in all prior conversations, as you talk about banks, is around who can grow loans fastest and who can have this best margin, and who's got the best business model and who can execute best, and who can stay out of trouble the most. Those are all important. But you should add, now, to your thinking, and who does it with this sense of safety against future risks, that will not only bring concerns to the company's reputation, but to you, as investors, and the financial suppliers that come along the way, they could be significant. I do believe that conservative risk profile is exactly what we need to be at this point in the cycle, while still taking opportunity of every advantage that comes along to a company like ours.
And so we think that creates shareholder value. As I woke up this morning, I thought, there might be some people in the room that want to see a big announcement or some big news, and everyone who knows me knows that's not going to happen. On the other hand, I've had a number of you telegraph and we've read some of the previews. Other say, "Oh, please don't screw up what you got, and don't get greedy and don't go off the beaten path." Well, we're going to do neither of those. We're going to continue to be remarkable. We're going to do lots of things that will get your attention. We're going to stick to what got us here, at the core, but we're going to continue to let the margins drive the outcome of their company. We're going to continue to be a remarkable company because we're starting from a position of strength.
As I look back to the last time we saw you, I swear we didn't pick the time that worked the best, but thank God, it worked this way. I guess, otherwise, you probably want to see in Slide 23, I just want to know, it wasn't there. But since it played perfectly to us, since we saw you 3 years and 2 days ago, I want you to know that, while our company may not be the kind of company that you would day trade, it may not be the one that you would jump into because we have so many things yet to fix, I want to be one that you look back on and then proud that you've held. And when you look forward, I know I'll be proud to hold and realize that, in any given moment in time, we may not have the best year, we may not have the best opportunities based on things that others are working on, but we won't surprise you, but for the upside and the consistency that we'll deliver. And in this case, I think it shows you that, in the last 3 years, even while the bank index has been up 12%, we've continued to do even better than that. And so today's conference will be entitled, Extending The Advantage. And then I'm taking you to Slide 24 now, where I delve back to the original three-part ladder of how we continue to build on our past to create a future that's remarkable. And today, we will now talk about Extending The Advantage.
I want to be very bold here. We're not hiding from it, we have the best position in banking. Your kids would call it the sweet spot. It is the best place. I wouldn't trade places with anybody else. This team wouldn't trade places with anybody else, and I wouldn't trade this team with anybody else. This is as good as you could ever hope to be. It's a slow, very slow recovery, but the recession is behind us. This company has finished its high investment curve. We've repositioned who we are. We've engaged our employees. We've got the scale we need. We are ready to roll and bring on the competition. God knows, bring on a better economy because there's nothing will stop us then. And so we're going to commit to you, with a boldness that we did 3 years ago, when we said we're positioning to win and do something about it. We have an advantage and we plan to extend it, and take it further, in a way that, I hope, we just see as quite sound and quite thoughtful. So this will be the use of our time with you here today.
Before I turn it over to Andy, I want to give you a couple of thoughts. Right after lunch, or right before we do Q&A, Andy's going to go on the stage and give you quick preview to quarter 3, which is really what you're all probably waiting for. If I gave it to you now, you'd all leave and I'd have my feelings hurt. So -- but I'll also tell you, there's nothing but exactly what we said that was going to happen. We've telegraphed it already well. He's going to confirm that everything we said is, at least, if not a little better than we said, unless you're having a very good quarter, so I'll give you that. So there's nothing -- no reason to run to the phones. Likewise, I want to let you know we have -- our Board of Directors is represented here today. We have 4 board members, and in the back of your book, you'll see a tab that shows the board members, and have our Art Collins, Olivia Kirtley, Doreen Woo Ho and Jerry Levin sitting here in the front. They'll be with us today. Their bios are the first among the board members. It's not only grateful for them to be here, but I want you to see that kind of oversight and guidance that we receive from this high-quality board. There's a funny sign that anyone smart enough to be a bank board member is smart enough to know not to be. Because it's a very big job, it's a very complicated position, and banking isn't all that easy.
The story I've told you and the one you will year today, is guided by, well understood by and measured closely by this proxy of board members for U.S. Bank. And so I thank you, all, for being here and they will be with you all day, so if you want a different view on something, make sure you catch up with them.
I also want you to know that we have 3 of our senior leaders in the room, they're at the back of the room, Mark Runkel, Kathleen and Beth Blaisdell, raise your hand. I just want you to know we're doing this. This story you're about to see was built by the 128 senior leaders of U.S. Bank, my direct reports and their direct reports.2 months ago, we built what you're going to see. This isn't it just a few of us and our view of how to tell the story, it's the senior leaders in the company that helped build this. These 3 senior leaders were picked among that group to come with us today. They are blogging this meeting all day long, including the questions you will ask and the reactions they will have or hear from you during the breaks and during lunch. They're blogging back to the entire senior team as we do this today, so they can tell how the story is being received.
And then lastly, we will do Q&A. If we're a bit ahead of schedule today, our goal is to get ahead and not behind, so we'll get you out of here, well, by if not early than 2:30. And we'll be at your beck and call afterward, if you need us.
So with that, I'm going to bring forward Andy Cecere to walk you through our company's financial performance. And I will say, he's got a very interesting and unique way of characterizing how our company looks by the numbers, and I think you'll find this very interesting. So Andy?
Thank you, Richard, and good morning everyone. I don't always sound like this. All right. I'm going to talk about the company from a financial perspective. And actually, I'm going to talk about the company from an investment perspective, the way you want to think about the company. And if you think about a company, a bank, from an investment perspective, you typically think about 3 attributes. You think about risk, growth and return. And I want to hit where our position is on those 3 attributes in this discussion. I'm going to talk a little bit about capital management and long-term growth. So let's start with risk.
I'd like to suggest that we are a very low-risk company, and our intention is to stay in that low-risk position. And there are a number of factors and reasons that we have this low-risk position. The first is our diversification. We have diversification from a business perspective and from a sources of revenue perspective. Richard already mentioned the 4 very simple business lines that complement each other, the low volatility business lines that we have on the left side of this chart. But as important is the right side of this chart, is our resources of revenue. At any point in time, anywhere between 45% and 55% of our revenue comes from the balance sheet, from net interest income, and 45% to 55% from the B side of the equation. Now why is that important?
Go back in time to 2001 through 2006. If you were a bank that was principally focused on net interest income, and you're only source you revenue was the balance sheet and pricing started to be very competitive and structures started to be very competitive, you were forced, your hand was forced to be with that competition. And ultimately, what happened was there's a lot of negative credit impact from that. Because we have the other half of the income statement coming from the B side, we did not force into that position. Our discipline held. And that diversification is very beneficial for us and we intend to continue to have that diversification as sources of revenue.
And the next slide, you'll see that -- if you look at the B side of the equation, what you'll see is there are 2 slices of that pie that are very different from our peer group. The first is the payment slice, which is very large in comparison to our peer group, over 15%, compared to 3% per our peer group. Why is that important? Well, that is a very annuity-based, very low volatility business, very consistent and predictable in the sources of revenue. What it is small in our bank, what is tiny, is that orange slice, trading investment banking. A more highly volatile business, less predictable, less certain. That is also a key component to sources of fees as we think about our company.
We talk about the balance sheet. When we talk about the balance sheet from the perspective of the securities portfolio, our securities portfolio of $75 billion is very low risk. In fact, 96% of this is government-issued or government-backed. So from a credit risk standpoint, we have built a low-risk balance sheet, we have built a low-risk securities portfolio and our intent is to continue to have it as a low-risk position. I'd also highlight the yield of this securities portfolio is low. Part of the reason it's low is I'm keeping the duration very short, and our intention is to continue to keep that duration short. I talked to you in the past about some of the headwind we've had in net interest income and how that would diminish over time, because of the shortness of this duration, and that's happening. So today, about $1 billion to $1.5 billion is running offers, as the $2 billion to $2.5 billion a month. And today, I'm replacing that at 30-basis-point differential versus 50 or 60 just a few quarters ago. So as we talked about that as accruing and that's one of the reasons we're leading to a more stable net interest margin.
Let me talk about interest rate risk. We have positioned the company to be positive to rising rates. Now I'm sure every other CFO's told you that, too. I'm pretty positive of that, but I'm very comfortable with these models. We back tested the models. We have very conservative assumptions, and you can see we're 1.6% positive, 200 basis points up and a 50-basis point shock is about $130 million in net interest income. We actually ran 28 different net interest income simulation scenarios. In this environment, because straw rates are so low, I can only do 21 of them. And across those 21 scenarios, we're positive in every one of them except 2, and the 2 are twists. Where the short end says flat and the middle or long end goes down, and those are slightly negative. Otherwise, in any interest rate movement, we are positively biased. And the second thing I want to mention is, this does not include the fact that we have a $36 billion money fund that's in waivers to the tune of about $100 million, which is totally focused on the short end of that curve, principally repos. That will be in addition to this positive asset sensitivity I talked about. So we have been retained asset sensitivity, and we will continue to be this way in terms of what we're putting on our balance sheet.
And finally, liquidity. Our company has always had high liquidity. Liquidity is never something that's concerned me or kept me up at night. We've always been very positively biased here. We have ample access to the capital markets. But when the LCI ratio was introduced about 3 years ago, we intentionally built our securities portfolio, and intentionally built our on balance sheet liquidity to the point that you see here. So 4 years ago, we were $49 million, today, we're over $123 million. We're very strong from a liquidity standpoint. Our loan-to-deposit ratio went from over 110 to 90. We have ample sources of liquidity, on and off balance sheet, lines of credit available, as well as very strong deposit base. So liquidity is not something, from the perspective of risk, that you think about U.S. Bank.
So I've gone through a couple of facts with you that says we're low risk. I have a fortress balance sheet. And again, what CFO hasn't told you that. What CFO hasn't said, who's going to say I'm on the edge of the cliff, as the way I positioned the balance sheet, right? So I thought it'd be helpful to provide, perhaps, a little external validation. The first is are debt rating. You can see on this chart, that across Moody's, S&P, Fitch and DBRS, we're at the very top of our peer group. You can also see that across all 4 of those rating agencies, we have a stable outlook. Our intent is to continue -- I didn't want to go forward, I'm not sure -- I'm sorry, our intent is to continue to be at that position, and the way we manage the balance sheet is a driver of this. Now all those facts I told you, I want to let you know that the rating agencies have full access to all that information. Our outlook book is about this big and I gave you some of the highlights about our interest rate position, our securities portfolio, our position in the balance sheet, they have a whole amount. So this is something that insiders to our company have rated us on. Now why is this important?
There's a couple of reasons. First of all, the flight to quality, we talked about this, and you'll hear a lot more about this later, particularly from the wholesale business behind the corporate trust. You would expect that businesses would want to put their money, their deposits, with companies that have high debt rating, because they want it to be safe. But it's interesting because the lending side of the equation is also highly impacted this. And the reason for that is, if you have a line of credit, a commitment, you want to be certain that it's going to be renewed, you want to be with a company who's going to have staying power, that's going to have low risk, that's going to be able to renew that commitment in times of need, and not retract back as they have to hold their capital, or saving for other things. So this has been a huge advantage our businesses in terms of gaining new business and getting in deals that they have not gotten in before. The other advantage this offers is, is a funding advantage. So if you look at is, we can offer or we can issue over 5-year treasuries at about 60 basis points. Most of our peer group is 100-plus. So if you think about that and our ability to compete in the long pricing market, either at lower spread to get the deal, or at the same spread to get a better return, this is a huge advantage and one that we intend to continue.
Finally, CCAR, the stress test. Now you guys know the numbers. This is an environment or set of economic factors that the Fed created, that said housing was going to go down 23%. The S&P was going to go down 50%. GDP is negative 6%, and unemployment is 12-plus percent. So it's a scenario that we haven't seen for 80 years, and under that scenario, under the Fed's models, they said that we're going to have 6.2% pre-provision net income and one of only 2 banks to earn money. In fact, we're earning 1.1% pretax on assets in that environment, again, from the Fed's models. Our model is very close to their models, but this is their answer. So you can see from the perspective of both the rating agencies and the CCAR results, others would also say that our position is low risk. Now I'm going to also guess that you probably came into this room this morning believing we were low risk, because that has been our reputation, that has been our history, that has been our tendency. So that's the part of the equation I probably have the least amount of difficulty, in terms of convincing you that's our position. But the second part of it is, okay, you are low-risk, U.S. Bank., that's part of the reason, perhaps, we haven't grown as rapidly. But let's talk about that.
Loan growth, over the last 3 years, so this is 2010 through the middle of 2013, second quarter, our loan growth has been 17%. The median for our peer group is 1/4 of that, or 4%. So that flight to quality, that benefit of the ratings, the benefit of the investments we've made, our growth while others were shrinking, comes through on this slide. Now I know at least one person in this room is thinking, well, that's because you had acquisitions, Andy. You grew because you bought. You're absolutely right. If I take all the acquisitions out, the 17% would be 16%. So we still grew 4x our peer group in loans through this period, and you're going to hear a lot more about this from the wholesale folks and the retail folks and across-the-board. But we have grown and our intent is to continue. We are much better positioned. And in fact, that loan growth doesn't even reflect the commitment growth that we've seen, that you'll hear more about.
The same exact facts on the deposit side of the equation. Our deposit growth during that same timeframe, 34%; our peer group, 12%. The deposit growth, excluding acquisitions, is 28%, more than twice the peer group. Again, that flight to quality that I've talked about. So our growth has been very strong on both the left and right side of the balance sheet and is also strong in revenues.
Look at the left side of the chart, $14 billion in revenue in 2008, $20.3 billion, record revenue growth last year. And think about the environment that we're talking about that we've achieved that slide. It's an environment of very low interest rates, very slow growth, and, in fact, during that period of time, over $1 billion was taken out of our revenue stream due to regulation. And in spite of that, we had that slow -- Richard and I often talk about 20 years from now, when someone else are in these jobs and they look at slide, they're not going to appreciate the environment that, that slide was achieved. So our revenue growth has been outstanding.
So we're low risk. We've been growing pretty well. The only part of the equation that's left, you must accepting lower returns to get that growth. Well, that's not true either, as you know. Here, look at return on assets, return on equity and efficiency ratio, 3 key ratios in banking, 2012 we were #1 across all 3. Year-to-date, 2013, we are #1. And in fact, if I do this same slide, going back to 2008, you'll see that we will continue to be #1 across all those categories. So our returns are extraordinary. So why is that?
Well, one of the key facts is our return on tangible equity. This is a huge advantage for us and for you, as a shareholder. For every dollar that we reinvest in our company, we make about $0.24. For every dollar some of our peers invest in their company, they make 10-plus cents or less than that. Why are we able to do that? Why do we have that tremendous advantage in terms of our tangible return, which drives our tremendous opportunity to return capital to our shareholders? There are a couple of reasons. First of all, and Richard touched on this, we have a number of a higher-return capital efficient businesses. I go back to that fee slide, 45-55. Great examples of our merchant processing or corporate trust business, very scalable business, very capital efficient, huge benefit to that ratio and one that's sustainable. Two other key points are our efficient expense platform and our disciplined capital allocation. Let me touch on both of those.
First of all, efficiency ratio. This is probably the question we get the most, 51.5%. It takes us $0.51 to make $1. Many of our peer group are in the high 60s and trying to get to the low 60s. So how do we do that? And oftentimes, we get, "Well, you must be really cheap," that must be the only answer, right? Well, I tell you, if it were, only paperclips and Post-It notes, then everyone would be there. It isn't that easy. And I would argue, there are 2 things that drive us to this low ratio: one is structural and one is cultural. First, from a structure standpoint. We have a single processing platform. We have on e consumer loan system, one commercial loan system, one credit card system, one trust system. Think of the advantage that offers you. Every night, when you have to run your platform, the overnight desk processing, we do it in one place. Many of our competitors do it in the 10, 15 or 20 places. Think about if you're changing a product or pricing or a characteristic, we do it in one place, think of the efficiencies that drives. Now one of the reasons we're able to do that is, we fully consolidate every single acquisition. 4 weeks ago, we just consolidated our last corporate trust acquisition into our platform. Every bank we buy, every merchant processing platform, every credit card deal and every corporate trust deal, goes on our platform. It's an investment at x0 to get that done, but it pays in the long run. And we have operating scale in all our businesses, which we talked on that -- you're going to hear a lot more about this, but if you think about the corporate trust business and the ability to take someone else's corporate trust business at an efficiency ratio of 60-plus and put it in our platform with an efficiency ratio of 30, that's a huge advantage that offers to our company.
Now the second part of this is the cultural piece of it, which is the business line reviews. Richard touched on this. But if you had a business, if you had a company, if you had a small entity, how would you run that business? You would run it by understanding where you are every month. You get your managers around the table and run through the numbers. You wouldn't hire a consultant to come and tell you how to do it, you try to do it yourself. And I maintain we're just big enough, or perhaps we're just small enough, the Canadians would be able to do that. As Richard mentioned, we get together every month with 64 business lines, understanding the revenue opportunities to make sure the expense is consistent with the revenue, what's going on from a competitive standpoint, how is pricing, what are our opportunities, what's going on in credit. And that is a huge, huge advantage, in terms of being able to look around corners, to react in advance of the occurrence and to adjust your investment, consistent with the opportunity. And we're going to continue to do that. Just to give you a perspective, if our efficiency ratio was at the median from our peer group, our 16% ROE would be 9.9%. So this single component is a very tremendous driver and a significant driver to our high returns. Another part of our culture is our disciplined allocation -- capital allocation process. We do this for internal investments and we do this for acquisitions.
One of the managing committee member's sponsorship. We talked about the returns. We look at it from a shareholder value perspective. We talk about the sensitivities and the risks. Here's what we never do: We don't say, "Here's an acquisition opportunity. What would it cost to win?" What we say is, "What is the right price to pay for it to get the right value out of it?" And we've always done that. Another point is, I talked about 64 business line meetings. We, every quarter, review all these deals after we've done the deals to understand how we're doing against what we said we're going to do to inform us on the next deal, and that's the consistent discipline we've had.
We do the same thing on internal CapEx. We have a CapEx meeting every month. And again, we're just big enough or just small enough so the management committee reviews every investment in this company of size, and we go through the same process and we challenge each other to make sure it makes sense. Now, we've made a lot of very positive investments. Part of the reason we did that in the years 2008 to 2012 was because we probably were little under invested in the early 2000 years. We were probably a little bit behind. And the investments we've made, you see a list of the right, are what allowed us to get into the position, and I would argue now that we're at the forefront from a technology perspective and you'll hear a lot more about that from Matt. But I'll also tell you another thing, so if we go through the math, we spent $450 million a year in the early 2000s, and $650 million '08 to '12. We are past our peak investment curve, and I would expect the next few years will be somewhere between those 2 levels, but we're past the investment. We don't need to catch up anymore. We are there.
So you think about how we built and how we've used that discipline through this process. You can see this chart is the acquisitions that we've made over the last 5 years. A couple of points I'd make: we've made them in all businesses, we've made them in areas that allowed us to extend our scale, extend our market share and build upon the platforms we've had. I will also tell you that we had a divestiture in that process. We formed an alliance with Nuveen and basically, contributed our loan asset management process. Again, that was a business that we didn't have scale in, open architecture, cost and conflict, and that was a business that we chose to get out of. So we'll do this both ways. We'll get in businesses, we'll build the scale, and in this case, we got out of one. But right now, we're in the businesses we want to be in, and there aren't any that we're seeking to get out of. So I think we are low risk, I think we are high growth and I believe that we have high returns. This is also another unique aspect of where we are today. And that's from a capital management perspective. Richard mentioned we're in a perfect spot and I think we are, too. Because if you think about what's happened with Basel over the last couple of years, what has effectively occurred is there's been 3 classes of banks that have been created. Those at the top, the G-SIBs, the top 8, are bound by higher CP ratios, bail-in debt, the leverage ratio and really, have most of the impacts from a negative standpoint on the way they manage capital. We're in the middle. We have a SIFI ratio, but it's well below the others. We're not bound by the leverage ratio even though, if we were, we would be fine. And we have the likelihood of not having to bail-in debt issue. What we do have is the volatility around OCI. And then those below us have none of those things. They're bound by the standardized approach. But it's important to note on this page that it's unlikely that those in the gray above are going to fall down below. But it is not unfeasible that those below will move up. And then the advance we have on that is that we've spent the last 5 years building Basel II or is now the advanced approach. We have the models. We have validated. We've gone through that process, huge investment. We've made it. We're behind that. We're in parallel run right now. So we're in a very sweet spot and we can manage the volatility around OCI and let me talk about that.
Here's how we think about capital. A few very simple pieces and this is consistent with what we've talked about. First, there are the 2 components that everyone has that goes for 7% Tier 1 common under the Basel III methodology, 7%. In addition, we believe our SIFI ratio will be in the neighborhood of 50 basis points. We have not done a specific guidance on this. But I'll tell you, this is what we've used for the last 2 CCAR submissions that have not been objected to, so I think we're in the ballpark. The smallest G-SIB buffer is 100 basis point, so we're half that. And on top of that, we have 50 basis points for the volatility I talked about with OCI around the capital ratios. So 8% is our target. And today, we're at 8.6%. So we're not trying to build capital, and we're not trying to shrink capital. We're in a very good spot. We're just above our target goal. I will also highlight for you is that 8% -- and that 8.6% is under the standardized approach because that is our binding constraint. I go back to that low-risk balance sheet I talked about, our advanced approach methodology which is much more specific and detailed and gives credit for the high credit quality of our balance sheet, actually, would be well above 8.6%. So our binding constraint is a standardized ratio and we're there. And we generate tremendous capital through this period. As you can see from this, a consistent capital generation of 20-plus percent, which allows to reinvest in the company, as well as build our tangible book value.
So as you think about how we -- what we do with that money is pretty simple, for every dollar we make, our objective is to return somewhere between 60% and 80% to you, the shareholders, 30% to 40% on dividends, 30% to 40% in buyback and reinvest the remainder in the company. And we're there. In the second quarter of 2013, we returned 73%, 30% and 43% to get to that 73%. Now, I'll tell you that we're an ideal capital spot because it all -- all the math works. I love when math works. So if you look at this slide, if we're reinvesting 30% in the company and our tangible return is about 20%, which is what it has been, that allows for 6% risk-weighted asset growth. Risk-weighted asset growth that would be either accommodated through our internal core growth or through acquisition. And that's exactly where we are right now, right in that target area. To the extent that we have higher growth opportunities and the risk-weighted asset growth to the loan growth is more opportunity, allows us to be more rapid, we'll scale back on the buyback and allow for that growth to occur. But in this position as we are today, we're able to return the mid-70s, reinvest and accommodate the growth that we're seeing because of that high generation.
So let me talk about long-term growth rate now. 3 years ago, in this room, we gave you this slide. We said we expected revenue to grow somewhere between 7% and 8%, expense 4% to 5%, gets to a bottom line EPS of 8% to 10%. So how did we do there in that timeframe? If I looked at the numbers of what we said, we actually did much better on the bottom line, 28%. But you won't know that's because provision was unusually below. Charge-offs falling well below the 1%, reserve releases allowing for negative build and the provision was much better. And our revenue growth was a little lower and our extent growth was a little higher.
Now I'm going to give you some adjustments. Now the adjustments I'm going to show you are things we already talked to you about. If you look back at our earnings statements, they were what we called notable items. Notable, significant, likely not to be repeatable. And they're all highlighted on Page 31. So these are -- none of these should be a surprise to you. But let me just -- 2 simple things, that legislative impacts is the impact of that $1.1 billion I talked about related to CARD Act, Durbin and Reg E, took out $1.1 billion of revenue. And the expense -- the big adjustment in the expense is the consent to order, the final reviews that occurred, we talked about that, just about $180 million in expense that were passed. So we're passed both those things, I adjust provision to 1%, which increases provision by 39%. You'll see them -- we're pretty much in the range of what we talk about 3 years ago. So what do we think about today? Those were the numbers 3 years ago on the next slide, Slide 51, and here are we -- he we are today. You'll notice 2 things. First of all, we lowered our noninterest income from 8% to 10%, to 7% to 9%. We lowered it 1%. We did that for 2 fundamental reasons. The first is the consumer spent projection that we have today, because consumers have been delevering, because they've been more cautious, we brought that down a bit. That impacts both merchant processing as well as card issuing, about 1%. The second factor is, 3 years ago, we were building our mortgage business and we were building our Capital Markets business as our commercial products businesses as high-grade underwriting, municipal underwriting. We've done a great job. We've built it, we're growing, and we have a much bigger base then now to grow it from. So those are the reasons for that decline. You also see that we lowered our expense by 1%. Again, under the philosophy that we'll manage our expense consistent with our revenue opportunities. We get to that same answer of 8% to 10%, and I highlight that difference between net income and EPS is driven by that buyback that I talked to you about to the extent the net income is higher, the buyback will be lower. If the net income is lower, the buyback will be higher but we'll get to the same answer.
Here it is by business line, and you will see that those same factors that I talked about are reflected in wholesale and payments, showed the 2 principal drivers, as well as the mortgage business. So our long-term goals and how we're doing against those long-term goals. First, optimal business mix. We have the 4 simple and stable businesses. There's nothing we're trying to get into. There's nothing we're trying to get out of.
Investments generating positive returns. I talk to that we're past the investment curve, but we've made these investments. And you're going to hear more about from our business line leaders how those investments have paid off to allow us to build the market share. They were good investments. But I also tell you this, that we're past the peak investment curve and more on return side of the equation.
Profitability, we got 3 simple objectives: 16% to 19% in ROE, 1.6% to 1.9% on ROA, and low 50s in efficiency ratio. Check, check, check. We are in all those.
And then finally, from a capital the submission perspective, 60% to 80%. As I said, we're in a very good place from a capital, neither too much nor too little and the generation we have allowed us to stay there. Thank you.
Richard K. Davis
[indiscernible]. I loved it. I just thought it was brief. As we conclude the morning [indiscernible] before I do, [indiscernible] that I set it the right way. In our earnings call, 3 years ago, we invited Bill to start joining us because you want to hear from me on high-level stuff, you want to hear from Andy on financial, and it's all about credit. Everything was about credit. And we love having Bill join us, and there's a big story to be told about how we got through the credit circumstances. One of the reason this company is so strong is because of what we didn't do when we could have. He's going to come up and spend 15 minutes and bring you up to speed on where we are financially as it relates to credit quality. It is not that. It is not that the numbers won't impress you, and they're like everybody else, they're record low. It's what we're going to do about it, and whether or not we're going to be tempted to do something stupid. So I'll say it right now, we're not going to do something stupid. But I want to remind you that in times of stretch, when people want to try to get a 90-day turn or they want to get some impressive high-level numbers, credit is a place you can do that by taking advantage of additional risk, taking some structure challenges, making decisions on things like lease residuals that you will not know for years, we will not look at for years, but it would be a mistake to do because it would not be a prudent way to run a company for a long period. So we're going to spend a couple of minutes on our philosophy, as well as our positioning and give you a sense of what we'll well take advantage of our strong starting point that we will not give that up any more than any other advantage that we have.
So Bill, come forward, if you will, and welcome to the otherwise not as interesting as it used to be, but still interesting to me, credit.
P. W. Parker
It's good, Matt [ph], to be as interesting. So starting my lending philosophy, I'm going to start with words. Andy went through a lot of numbers. I'm starting with words because I think the lending philosophy is critical to the success and continued success of our bank. So what I mean by that is we're a relationship bank and that means you get better credit selection upfront. You know your customers a lot better. And most importantly, it also means that it builds a great annuity stream, so we get to cross-sell all our products and services into our relationship clients. Secondly, we've use the word conservative a lot. I think that's appropriate when we talk about the culture of the bank. And we've also used the word prudent. I like the word prudent because it means that you're actually thinking about what you're doing, you're evaluating it. That's what we do, we evaluate the risk. We're risk managers, and then you take action on that. So that's -- prudent is a good word to describe our credit culture. In doing all this, how do we then take what we evaluate, turn that into good portfolio for credit risk? Well, we have very clear policies. Their evaluated at least annually. We educate the entire organization on exactly what those policies are. We concentrate on diversification, not just through geography but product type. We look at customer level concentrations. We have intensive review processes. We establish risk tolerances for all of these measures. That's something we've spent a lot of time on in the last several years, and we continue to refine that. And then, how do we oversee all that activity? Well, it starts at the very top, it starts with our board, evidenced by them being here today. Then, we have the Risk Management Committee of the board. We go through a lot of the things I just talked about. We look at how the new originations are performing, what the credit statistics are on those, making sure that we're meeting the expectations of what our underwriting is. And then, internally, I've talked about this 3 years ago, we have the Executive Credit Management Committee. So myself, Richard and Andy, every Friday, though we've been doing this since 2001, has not changed. We do it in good times and bad times. The business lines come in. We split it between wholesale, retail, small business. And we go through everything that's going on, not just what's going on in the markets but all the policies, all the portfolio performances, and again, making sure that we're on track with what we think risk tolerances are.
And so, now, we're back to some numbers. These are the last 5 quarter results, so there's nothing new here, other than to say you can see continued improvement in delinquencies. On the right, you see our criticized, classified measures. We measure this as against our Tier 1 plus allowance, so our capital ratio, you can see continued improvement there. At 26.9%, that's back to pre-recession lows and there's still some additional improvement that we'll garner out of that. Charge-offs, continued improvement, steady improvement. Nonperforming assets, steady improvement. And so how is all this looked -- how did we perform relative to our peers? We went back and looked at the last, in this case, 10.5 years, back to '03. So what this represents is the highs and lows of the net charge-offs rate as reported by our peer banks, obviously, including us there on the left. And you can see, we we're the least volatile in our net charge-off ratio, the bars where -- the blue bar is where everybody reported last quarter. Because we're the least volatile, we were able to -- we did not -- we had the smallest reserve increase of any of our peer group. Consequently, we also have more moderate reserve releases.
Now let's switch to normalized losses. This is something we talked about last time. And again, just as a reminder, what normalize losses are, it's really a forward-looking kind of through-the-cycle, expected loss. So it's a very -- it's a long-term view of losses. It's not some people say, "But when are you going to return to normalized?" You don't really returned to normalized. You're either above it or below. If you're in a recession, you're going to be above it. And in times like these, you're going to be well below it. But normalized losses are a function on your underwriting, your portfolio mix, credit cards, which are obviously going to be higher versus secured credits. This is a chart that I showed 3 years ago, the exact same chart from Investor Day, showing we were just post peak of the losses. We're the heavy line there. Obviously, we were doing better than the industry. Now we go forward. Here is where we are today. You can see everybody is converging. We still have a 1%. Our estimate for our bank and our portfolio is still at 1% normalized. But you can see, if you look between the shaded bars, which are recessions, losses will be below the normalized as long as you're in an expansionary environment. So we anticipate we'll stay well below normalized.
Here is a chart that shows again, what, I showed at Investor Day 2010, and then on the right, 2013, there are some changes in there. We did breakout small business separately just because we think that, that's a more significant portfolio to us today. But dropping down the residential mortgages, you could see it's drop from 1% down to 60 basis points. And that's a function of mix. Back in 2010, we have a lot more of the pre-'09 originations on our books. Now, the pre-'09 is down to about 25% of our residential portfolio. The new originations, we anticipate to be quite a bit below the 60 basis points in terms of an expected loss. But we still have included in that 60 basis points what's remaining of the pre-'09 portfolio. Credit cards, we dropped. We think there's just a fundamental improvement in credit cards and the higher minimum payment, and how people go and use their credit cards. We think they're essentially using them perhaps in a more prudent manner than they used to. They protect their card more than they used to. Other retail, that's one area that we did increase. I mentioned auto lending expansion, I'll spend just a minute on that. If you look at the very bottom of this slide, you can see that we have about 1% share. This is both loans and leases. We were one of the few banks to actually stay in the auto leasing business, and we're very glad we did. It's been very good for us coming out of the recession. But this shows us with only 1% market share and we think we can increase that market share and we can do it prudently. We have what today, what I'd call a super prime portfolio, very, very high credit scores. And we don't have a very large percentage of the used market where you need to expand your credit to get more of the used car business. So we're looking to increase our market share and that is through an accredited expansion. It's what I call a modest and controlled expansion. We're estimating 15% of the portfolio. We'll be in this non-prime space. And in this portfolio, when I say non-prime, I mean, below 675, that's how we define it for auto. So that's still pretty high threshold.
And to show that we do know how to manage credit, I think you believe that, but to show it again, this is what I showed in 2010. These are some of the origination statistics, high-level statistics for the different portfolio types. You can see the bond equivalency ratings for the wholesale side, FICO scores, loan-to-values, where loan-to-values are appropriate. And what we reported just this last quarter, you can see the growth from 3 years ago has been very good, and importantly, you look at the bottom and you can see the consistency in the underwriting. The consistency of what we put on the books, and it gets back to what Richard says, it's the very easy and good times that make lots of loans. What you want to do is make loans that are consistent with what you expect. And that's the hard part. And I look forward to coming back in 3 years and showing you that we did it again. So, thank you.
Richard K. Davis
I don't know, Bill. You may not be invited back. You may not be [indiscernible, I'm not sure. I will say to you that in -- it would be not unlike us in the future years and some of our peers to bring forward instead of, or an addition to credit risk, there's other risk, set of circumstances, compliance risk, litigation risk and some of the reputation risk that are present. We can focus on those at any time you'd like. But for us, we think that continues to be another relative advantage. As I bring you to break, I want to introduce you to a way of looking our business that you'll see for the rest of the presentations this afternoon. We're going to look at our positioning as it relates to the smaller and larger competitors. And we didn't fit only everything, but we think we have an advantage, but I think you'll see that our scale and our story resonates across either direction as you look at us being in the sweet spot right in the middle. To follow Andy's nomenclature, under a low-risk scenario, under our business profile and our risk profile, we believe that we're advantaged in both circumstances. Our business mix, I think it is simpler, better, easier to control and easier to manage than our large competitors and much more robust than the smaller. Pam will speak to you, particularly, about the more than 1,000 -- many hundreds of banks that we do business for. And Dick will also mention it under correspondent banking. We actually are the bank behind the small banks, and they use our business mix to advantage themselves under some white-labeling program. Under risk profile, I think I've showed you a bit earlier, our position against the larger banks is enviable. And against the smaller banks, well, I know there's a -- quite a momentum toward trying to protect the small banks, community banks and having some of the same governors that we all have. I would say that from a starting point of just safety and soundness, we would take our position over there as well. Following the above-market growth category, we also think that we are advantaged to both circumstances under our industry position. We like, as you've seen and we'll see, our market share growth. We like the reasons we're doing it. We think it's completely repeatable and sustainable, and we believe that based on even a few things you've heard from Bill and you'll hear from others, we do intend to extend where we are. We think, likewise, for the small competitors, our original book of business and our diversified earnings stream is advantaged. Under scale, we think we're competitive, but this is one area that we have to challenge our circumstances where a very large portion, 10 [ph] company might have a $2 billion lending or line transaction. And our ability to hold at the same level of the 4 large banks above us is not the same. We can do it in most cases and certainly meet the unnecessary needs of almost every customer. But there are a couple of very, very large global companies where our hold positions would be limited by our size. But our ability to get the other business or to be a book runner or to participate in some of the capital market's activity is not diminished. So we consider ourselves competitive, and versus small things, the whole point is scale, and as I said earlier, it's not scale at national level for branches and for consumers and small businesses, scale would be MSA level.
And then finally, under industry-leading returns, we think our capital generation and mostly our execution is what matters the most. Perhaps, most notably, is that our playbook were left on the airplane seat, a peer of ours who would take that seat next and they will open it up and look at it. We think execution is really all that matters because our strategies may or may not be that unique but it's how we manage them, how we're disciplined around them and how we celebrate the milestones to move and inform the next decision that matters the most. So that approach to -- arrows up and down is what we'll use as we describe our positioning in each of our key lines of business. And I'll close the morning with this, extending the advantage, that will be the focus that we'll be speaking to.
I'll ask you for a minute to indulge me, if you worked for our company, if you worked for any bank, you, of course, have your day job, you know your responsibilities, you have your obligations, but wouldn't it be great to be knowing you're working under a banner of some sort of a mantra, some sort of a culture, some sort of a theme? And so we welcome these 3-year opportunities to tell our story, but we also use them to parley them back to the entire 66,000 employee base and we will talk about extending the advantage. We built it for you, those who invest and analyze us. We think it's the right way to suggest where we are at this point in time. It has a lean and forward view. But we will use it as well for employees and they will start to begin, over the next 3 years, to live what we did for 3 years, which is positioned to win and now, we're in position to win and want to do something about it.
So with that, we're at our morning break. We're going to ask you to be back either on the line or in your seats at 10:30. That gives you time to do some other important work and we'll see at 10:30 with our business line overview. Thank you.
Richard K. Davis
Ladies and gentlemen, welcome back from break. Those of you online, we're going to get started again. And I'll ask you to draw your attention to the section in the slide entitled Enterprise Revenue Focus.
It was 6 years ago this month in Minneapolis that we had our first Investor Day since 2001. If you were there, we invited you to dinner the night before to show off the skyline of the Twin Cities and then we promised you the next morning we would have a full-on Investor Day. At dinner, I asked if there were any questions that any of -- for those of you attending that you want us to particularly focus on in the next day. And one of you, I remember where you were sitting, I remember who you were, raised your hand and said, "Look, I heard your opening thoughts this morning. You talked a lot about employees and focusing on the employees, taking the company into a revenue focus, blah, blah, blah." This person said, "We just want to see the bottom line. And let's face it, you guys are just a great expense company, nobody better at it." And that was one of the best bits of feedback we could get because it informed the entire next day. And more germane to that, it informed a change in the way I created our management structure. And I brought on Mac McCullough, promoted him to a new role of Enterprise Revenue. Mac, as you may know, had Judy's job before. So many of you may know him from a long time ago, he's an investor partner. And at first, I built it just to make the point that we are not going to be just expense, we're going to focus on revenue. And then lo and behold, that actually worked. And so here we are 6 years later, we have everyone focused on revenue, everyone is focused on discipline, spending money in the form of investments, not expenditures. But Mac has taken a full-on across all lines of the business stability to bring revenue and disciplines and routines and celebrations to the floor. And we've not had that before. So when I saw you 3 years ago, we were talking about the early stages, the nascent stages of Enterprise Revenue and now, we're moving into the more mature stages. It is definitely one of our secret weapons, and I want Mac to have a few minutes with you this morning before we get into the line of business review. So Mac, please join me here on stage and walk us through the Enterprise Revenue focus that you helped build in the last 6 years.
Howell D. McCullough
Thank you, Richard, and good morning, everyone. So I'm going to talk to you today about the things that we're doing at an enterprise level to really drive distinctive organic revenue growth. And to summarize, right upfront what those things are: it's building deeper relationships with our customers, ;it's investing and executing in our digital banking channels; it's customer experience; it's data analytics -- and I know if I was cool, I'd say big data, but we like small data too; and it's innovation.
So Richard talked to you about the strong defense era. And he made it perfectly clear, I think, to all of you that we're not going to waver from the things that we did in that era. But in 2007, Richard sent a message to the organization, and the message was: we're going to focus on customers, we're going to make investments, we're going to grow revenue. And probably the best story I could tell you is when I came into the role, the first thing we did was a project called Building Deeper Relationships, BDR. And it's all about exactly what it sounds like. What can we do to deepen the relationship that we have with our customers? So the first thing I did, I brought about 50, 60 people together from around the bank, and I said, "What ideas do you have? What should we be doing? We've got a great customer base and we should really be thinking about how we can deepen that relationship. You've got a week. Come back, tell me what you're going to do." So a week later, everyone comes back and I've got a bunch of decks dated 2003, 2004, 2005, and they were great ideas. And I said, "Why didn't we do this? Tell me why?" And I heard things like I couldn't get support, we wouldn't make the investment. I couldn't get another business line to help me and I needed their capabilities, I needed their resources. And that is really what's changed because it's not like that anymore. We work across the organization, we are very collaborative. We make sure that we understand our customers, we make sure we understand the opportunities. We get the right people involved. And my group focuses on the big things. We don't sweat the small stuff. But it's very complementary to what the lines of business do.
So I mentioned BDR, and you're going to hear a lot about BDR today. It really was 15 initiatives originally. I've got the 3 up here that were most impactful. And this isn't rocket science. It's all about changing process. So we introduced product packages. What's a product package? You open a DDA account and you offer a savings account, you offer a credit card, you give the customer a value as a part of that. Higher rates on a deposit, better rates on a loan, more rewards on a credit card. Today, 75% of our new customers take a package.
Mortgage referrals, again, not rocket science. How do we get the branches to refer more business to the mortgage company? Put a new process in place, make it a focus. We quadrupled the referrals coming from the branch to the mortgage company.
Relationship review. Get the relationship manager to get all the Product Partners in the room. Let's talk about the customer. Let's talk about what they need, let's talk about what they're trying to accomplish. Let's plan for that customer. Not anything new, right? $500 million of incremental revenue in 2012.
So these are big ideas, it's changing the process but really changing the culture along with it. And again, you're going to hear every one of the business lines talk about BDR today.
So over the last 3 years, we've continued down this path. We've -- we are very focused on customer experience, we are very focused on leveraging technology, making the right investments. And I will tell you that we are just starting to see the benefit from some of the technology investments that we've made.
So in summary, when you think about this time frame, it's been a very deliberate process. We recognized the opportunity, we engaged the entire organization, we changed process, we changed culture, we invested in technology. You might ask, what have we accomplished?
So in 2007, we set some goals for Building Deeper Relationships. We said we would achieve $500 million to $750 million in incremental run rate revenue by 2011. We came back in 2010. We updated that to $850 million to $900 million by 2011, because it was performing so well. We came back in 2010, and we also said we're going to sign up for an incremental $875 million to $1.25 billion by 2014. So the chart on the right basically shows you where we are in 2013, $1.550 billion, and we're well positioned to achieve our goal by 2014. So a significant incremental revenue from these activities. Again, we changed the process, we invested in technology, leveraged technology and we're just starting to see the benefit from the technology investments in, probably, 2012, 2013.
We made significant investments in mobile banking. You can see the chart, top left, we have significant growth in our customer base. But maybe more impressive, if you take a look at the bottom left, where we started back in 2011, we were in the growth curve, we were in the investment curve. But you can see, we've actually achieved nice rankings, we're #1 by Celent. We are recognized as being probably the most innovative in the industry in terms of what we do at mobile banking. Pam's group is extremely innovative when it comes to payments in mobile banking. And I think one thing to consider, there is a big cluster of banks there, if you take a look at third quarter 2013. And I think, you could probably expect this, we are all going to have the same capabilities over time, but it's how you create unique customer experiences with those capabilities, that really will be the differentiator going forward.
So we've made significant investments in Online Banking as well. I hope you agree that the right side looks better than the left side. The left side is where we were in 2010 from a homepage perspective, and the right side is the new homepage. But it's not just about the look and feel. We've added significant new capabilities. We've significantly improved our ability to have customers apply online. And we've actually won awards for this. We've increased our ability to use data analytics online, and this allows us to better market and better identify customers on what they're trying to accomplish and better lead management across the entire enterprise.
In the fourth quarter of 2013, we're going to actually introduce the secure site of Online Banking. This is actually where customers go to log into their accounts, pay -- make payments, use transactions, those types of things. And we've added significant capabilities there as well. We have the ability to actually make targeted offers to our customers based upon what we know they're trying to accomplish. It's all about trying to understand what our customer is -- what their goals are, what we know about them and how we could actually target them with the right offers as they show up online. And that can be a revenue generator, it can be a customer experience improvement, it can be helping them with the service transaction. So lots of value that is going to be created through these investments.
So you might ask where are we going to take this in the future? Lots of opportunities we can see to expand deeper relationships. But it really comes down to how we change the customer experience, how we use data analytics to really understand what the opportunities are and how we can provide the right experience to our customers. Again, I think the customer experience is going to be a key differentiator in our industry going forward. And it really is going to take the right data and data analytics to help us understand that. It's going to take the investments that we've made in technology to get the right connectivity across the entire organization so that we really recognize every customer for the relationship that they have with U.S. Bank, regardless of what channel they choose to access U.S. Bank through. And that's a key to the technology investments that we've made, definitely opportunities to generate revenue from those investments but also, a great opportunity to improve customer experience.
We are going to do that, as I mentioned, through data analytics. We think we have lots of opportunities to use data better, not only to generate revenue but to help with the whole customer experience.
And then innovation. Lots of innovation takes place in the organization, and we think it's a differentiator in terms of what we do and how we do it. And it's definitely adding to revenue growth across the organization. So I do want to talk about that a bit. The way we think about innovation is that the outcome of innovation is creating value for our customers which, in turn, creates value for our shareholders. And it's really important to understand that of all the innovation activities we have underway in the organization, they are all focused on this and they're all adding to revenue growth in some form or fashion.
So let's talk about innovation a bit. Richard mentioned the distinctive leadership practices, and you can see to innovate is one of those practices. Everyone in the organization is actively engaged in all 8 of these distinctive practices. So every one of the managing committee, every one of our direct reports, we are all very focused on building a foundation for leadership in the organization using these practices. But I'll tell you, we're actually very good at these things today. And I think that tells you a little bit about the organization. We think this is important. We think it's going to be a differentiator. We think it's the right thing to do for the company and the employees. So we're investing in it and we're making it a priority.
But I will tell you that we do have a very active culture of innovation in the company. And I want to talk a bit about some of the things that we're doing. So from a core product perspective, let's talk a bit about S.T.A.R.T., Savings Today And Rewards Tomorrow. So this was a way for us to bring new customers to U.S. Bank. Through deep customer research, we found out that customers want help saving. What can you do to help me save? So we constructed a product that basically rewarded customers for saving and also made it is easy for them to save. So they could easily transfer money from their checking account to their savings account on a regular basis. They could also do this, basically, every time they have a debit card transaction, they can also transfer money into their savings account. And we gave them a reward when they actually achieved $1,000, a $50 Visa gift card. If they kept the money for a year at $1,000, we gave them another $50 Visa gift card. So extremely successful, about 1.5 million customers in the product, about $4 billion in balances and many, many new customers came to the bank as a result of this.
If you think about the Wholesale Payments Voice of the Customer, this is something that is taking place in Dick and Joe's world, where they're actually bringing their customers into a centralized location, having a facilitated session around what the pain points are with payments; problem-solving around products, capabilities, service; what are things that we can do differently to add value to the customer. And I can tell you that there are a number of new product ideas that have come out of this process. And I think that's the other thing to point out here, is that every business line is represented on the next 3 slides that you're going to see. So that's a really good indication that innovation is really prevalent throughout the entire organization.
The last one I'll touch on is the multifunction Campus Card. This is something that Pam's group came up with. So basically, it's the -- a prepaid university ID at North Carolina State. It's the campus security card that you needed to get into buildings. It's also a campus payment vehicle. But what we've done is we've added a video teller to the capability so we can actually service these accounts out-of-footprint. We don't have branches in North Carolina, but we added a video teller to be able to service those students in the bookstore with this capability.
John will talk about this a bit later. But it's something that we're experimenting with, trying to understand what the opportunities are, not only out-of-footprint, but how do we optimize the distribution network in-footprint? So it's important to realize, we always have pilots going on also. Pam probably has the most pilots of any of the business lines. But lots of pilots across the entire organization.
The next slide is digital capabilities. And I will tell you that this is probably something that we are well known for in the industry. Pam's group and my group both collaborate and work on these opportunities. Let's talk about these, maybe fairly quickly, because Pam will cover this later in her presentation. But I do want to mention that we've got the Mobile Real-time Credit Card, you can actually apply in a store, REI. You can actually get approval while you're in the store and you can actually use the credit card, virtually, when you're in the store the same day you get approval. So if you think about the experience that this creates in the merchant, they can immediately issue credit for customer, helps sales, it's great customer experience. If you think about Mobile Photo Bill Pay, that's an opportunity to basically take a picture of a bill and have it set up in Bill Pays. No manual entry, you avoid all the issues with that and you can also pay the bill at the same time. So you can actually pay the full balance. You can split -- whatever you want to do, and you can do that every time you get that bill.
So great customer experience, makes it a lot easier to go through and set up a bill for the first time. The Virtual Merchant is what Pam is doing to answer Square. So this basically shows you that we can compete with the smaller companies, and we have great capabilities to do that. So there are also a lot of payment capabilities that Pam is working on, but I think I'll let her touch on it later. But we've really been a leader in this area. When you think about the payment moving to the mobile device, something that Pam has been very aggressive in terms of pilots and learning so that we're ready when this happens.
So the last area I want to talk about as it relates to innovation is really business model innovation. And from my perspective, this is probably the biggest opportunity in the industry. When you think about the shifts in customer preference and behavior, when you think about the new technologies that are available, it's actually an opportunity to change the experience and change the customer expectations around interacting with the bank. So we've actually been very successful in doing this. If you take a look at the insight from millennials, the Dynamic Dozen, this is a group that we actually form new every year. It's made up of millennials, and they actually help us with product development, they help us from an employee perspective. How does a millennial think about working for a bank, what are the things that we can do to help them in the workplace. But we actually get significant value from a customer perspective as well. So these individuals, actually, they have a project every year based upon what they're interested in and where we think it could be helpful. This particular group actually came up with the ability to graduate a millennial through the bank over time based upon the changing lifestyle and needs of that individual. So how do they enter the bank, what's the experience that they are looking for and as they grow older and their life experiences change, how do we graduate them through that process to keep them with the bank and deepen the relationship? And it's actually something that we're executing against today.
The Ascent Private Capital Management, Terry will talk about this more later. But it really is a completely different experience, completely different business model from what you see in the industry today. So it really is about managing the impact of wealth and thinking about it from that perspective, as opposed to be focused on the investment part of the business. So it's changed the experience, it's been extremely successful. And just another example, I think, of the opportunities that we have to be able to do that.
And finally, the distribution network optimization. So this, in my opinion, is a huge opportunity for the industry and for the bank. And John will talk more about this later. But when you think about changing customer preferences and behavior, you think about technology, you think about the cost of physical distribution. There's an opportunity to really optimize the distribution network in specific geographies to create a better experience based upon how customers want to interact with the bank today. And this really is an innovation activity that's currently underway. We think we have advantages here because we have assets like in-store banking and on-site banking, which are smaller-footprint branches in high-traffic locations, which really lends itself well to optimizing that distribution network in the future.
So I think you'll hear more about business model innovation in the industry. It really is, I think, the largest opportunity that we have. And what more is, in the future, we have lots of activities underway at the bank to really bring innovation to life. Pam had her first annual Shark Tank in Atlanta this year. So basically, a number of employees in Payment Services competed for funding on business concepts that they brought to the table. Very well received, lots of really good ideas and fantastic for employee engagement. Just -- the individuals worked on these projects in their spare time and the ideas were fantastic. We do have Ideas From US, which is basically an open innovation, open suggestion forum, where anyone in the company can suggest an idea and we get it to the right part of the organization to evaluate. And we've had a number of good ideas come through that process. We also have Innovation Advocate Training, it's a 3-day program where we actually teach people to be innovative. What are the processes, what are the tools, how you go about doing this, how do you apply it to your line of business. Thinking about it from a customer perspective, most importantly. And then finally, the Innovation Advisory Leadership Group, is our new group that is going to help us with the distinctive leadership practice of innovating. So I think a good evidence that we've been very innovative as a company and there's a lot more to come. Thank you.
Richard K. Davis
Thank you, Mac. So I want to develop a little street cred for this last topic. You also probably never thought about U.S. Bank and innovation in the same thought. But what he has shared with you, and what Pam will share with you a little later, is pretty remarkable. From my perspective, as a CEO that's willing to spend money on failures, and we've been doing that. Our R&D, our laboratory is in no less impressive for a financial institution than you would expect from a pharmaceutical company or a medical device company or a technology company. We are no longer going to be fast followers. We want to be leaders in a space that particularly aligns itself with changing customer patterns. And if you ever thought about -- one distinct advantage of having the Payments business that we have from corporate to merchant to issuing, it emboldens the sense of entrepreneur thoughtful changes in the way people move money and it aligns itself back to traditional mobile banking.
So Bank Technology Magazine 2 months ago ranked our Chief Innovation Officer, who works with Mac and Pam, his name is Dominic Venturo, as the #3 Most Innovative Technologist in our space. #2, ahead of him, was Jack Dorsey from Square; and #1, ahead of him was some guy from Apple (sic) [Capital One], who's name I don't remember. It doesn't matter. So we're actually in the space now but I want you to know that some of our efficiency ratio is actually higher than it would be if we weren't spending the kind of money to learn and test and pilot and evaluate. And that's quite important for me -- for you to believe because the world is going to change fast and we're going to try it out in a number of places before we lock it down.
So now I'm going to ask you to draw your attention to one of our more -- the most important core lines of business we have, which are Consumer and Small Business Banking. I'm going to ask Kent Stone and John Elmore on the stage now and join me. And as they come up, I want to -- this is my old expertise. As I started to tell you, this is my space. And I want to tell you, what you're going to hear here is we're not going to make any big fast decisions, big fast moves. Because if there's anything I know for sure, is the rate environment that we're in will eventually become greater. You guys come on through. And when the rate environment goes up, you're going to wish you had every place you could gather deposit left to your devices. We love branches. We love Online Banking, we love mobile transactions, we love them all. And until we know that one isn't going to be important for our future, particularly when deposits start to become more valuable, and when we can't find enough deposits to make the loans we will be making, we're going to really, really get smart in this space. And Small Business Banking, as it relates to something 3 years ago I would've told you we were on the advent of making that a core competency, and now we are moving well ahead, well ahead. Our loan growth in Small Business is record to all and our approval rates that you've read about in the last 24, 48 hours from other sources of 17%, 18% approval rate in some banks, ours are 43% to 45%. We hunt better, we relationship-manage better, we approve more often because we meet the needs of the customer and we've cultivated those needs well before the actual particular loan is requested.
So these 2 fellows are going to talk to you about those businesses. Kent is responsible for all of our national businesses, National consumer lending, national mortgage business, all of our call centers and alternative deliveries, Small Business. John is in charge of 3,086 unique and distinct branches and 168 unique MSAs around the country, with 20,000 people who come everyday to work to change peoples lives and make this company better. That's what you're going to hear in the next half-hour. We'll start with Kent and we'll -- end with Kent, and John will be right in the middle.
Kent V. Stone
Thanks a lot, Richard. It's always great to manage a business that's right in your boss's wheelhouse, isn't it? I'm on Page 99, Consumer and Small Business Banking profile. And if you look at our revenue in the pie chart, it's really in 3 distinct groups. First is branches: the metro, the Community and the in-store, about 55% of our total revenue. If you look to, then, Mortgage Banking and consumer lending make up the other 45%. Very simple, very easy to explain. If you move to the right side, our contribution, major contributors to U.S. Bancorp in terms of revenue, pre-provision income, also were major, major providers of the loans and deposits for the company. As you can imagine, being a large loans and deposit provider, we're big in net interest income where -- Pam may talk more about fee income, we are the net interest income providers, about 57% of our revenue.
If we move to Page 100 in our financial performance, and we're talking about the last 3 years of average annualized growth in various categories. Kind of similar to what Richard and Andy have been talking about, our average annualized growth rate of loans has been about 6.8%. Mortgages, you can imagine, but also, Small Business, big for us. Our installment business and also our Consumer Business in indirect auto and leasing has contributed. Deposits, along with that, up 7.2% on an annualized basis. Still a little bit of flight to quality, we've had some scale from the branches we purchased back in the prior year, starting to get into the groove. Enhanced distribution, product placement, such as the S.T.A.R.T program that Mac talked about in our packages, but all helping us with our average annual deposit growth. And then with the loan growth and deposit growth, then, it moves to total annualized net revenue growth of about 7.6% and that really -- a lot of it's market share, a lot of it's mortgage and we've had a little bit of headwind, as you can imagine, about $400 million short -- we're a little bit -- about $400 million short in there as a result of the impacts on OD, of our overdrafts, by Reg E.
And also about another $300 million have -- has come out of that based on the fact of where the margin has been on our deposits. But nevertheless, very strong growth in loans.
Our noninterest annualized expense of 7.3%, we have invested in these businesses -- as Andy was showing you the chart a little while later -- earlier, we have invested heavily in our mortgage business, we have invested heavily in our branch platform, in our call centers, and it's paying off. We do have, in that number, however, the regulatory impact of the consent order of about $180 million. But nevertheless, we have positive operating leverage over the past 3 years, and we're poised for growth in investment going forward.
Page 101, the competitive advantage, and Richard kicked this off, where he talked about Consumer and Small Business Banking. In our perspective, we're very fortunate. We have either an advantage or a competitive advantage in all of our key categories within John's and my businesses, either versus larger competition or smaller competitors. And these things just aren't done overnight, okay? We do things on purpose. Take, for example, the Small Business franchise and if I take you back to 2005, it was all about branches. One of my ex-colleagues called Small Business a rounding error, and that really, really got under my skin at that point.
And we looked at it and said, "You know what, not everyone is selling business. We have business banking officers doing it, but not branch managers, how come?" So we went through the big 3, people, process and a little bit of investment, and said that it is everyone's responsibility to talk to the customer about Small Business. Each Small Business customer has a relationship with the bank -- business banker, a branch and the call center. And it really helped us well when we got into 2008, when we had a -- this downturn. We were open for business. We not only took care of our existing customers and understood what happened to them in the years, and we're able to, with the help of Bill's group, continue our relationship. We also picked up many, many new relationships, and that helped us enjoy a double-digit growth through those years. And as we get into 2013 and those folks need more and more credit, they're coming to us because they remember what we did.
Another quick example is customer experience. It's one where we're doing well but we can do better. Again, we acknowledge that we weren't consistent in our nearly 3,100 franchises or branches, and what we've done is we've said, "First, you have to educate." We've done that. You have to model what the behavior ought to look like and take the best branches and say, "What are they doing? Help them with the others," and what we do at -- very well at U.S. Bank, we measure. We measure each branch. We started out monthly, weekly. Now I believe it's daily. It's possible that you go into a branch on a Friday and that feedback gets back to the branch manager on Monday, if we were able to talk to you and find out how things have done. Just gives you a little idea behind what we're doing.
Last is market position. And really, look at market position on Page 102, 3 things, all right? First is our market rank, and we're top 5 -- 1 to 6 in all of our key categories. Second is market share. In every one of those categories from first quarter '07 to second quarter '13, we've grown. And then third, every one of these categories we have scale, okay? And scale is an interesting thing because if you look at our branch network, which has grown -- certainly, home mortgage has grown.
But look at branches, and Richard, you touched on it. But we get asked time and time again, how come we're not in any more than 25 states with the branch network. Why aren't you in the East? Why aren't you in the Southeast? Why aren't you down in Texas? We have scale where we're at. We haven't maxed out where we're at. We have great pockets of opportunity, John will talk a little bit about that, to still expand in our marketplaces. We still have opportunity to deepen our relationships with our customers that we haven't quite gotten done. You know what, we can go on these markets. We want that to be by choice, not by the fact we have to, okay?
So I'll turn it over to you John.
John R. Elmore
Great. Thank you, Kent, and good morning, everyone. As we have tried to express, we're very well positioned to have continued success. But really, our focus is on how do we elevate that success to an even higher level. And as we look out over the next couple of years, a couple of things that we're focused on, first is, the new economy.
The environment is changing. You have to recognize that we have a tremendous amount of employees who have never lived in a rising interest rate environment. So we're spending a lot of time training them on what the dynamics of that will be like, what the opportunities that, that will present. And we're also training people to be better full-service bankers as opposed to, perhaps, just being able to deliver on a particular product or service.
Client advocacy is something that you're going to hear each one of us mention and Richard has already mentioned briefly. Client advocacy has been a significant cultural change for us. It's been a process of us putting the total focus around the customer, of us being an advocate for the customer, of us understanding their needs and doing everything we can to accelerate their success, and I will talk about that in a moment as well, and then us being able to deliver upon our industry-leading digital channel capabilities that gives us a huge competitive advantage.
As you look at the presentation that was made in 2010, these are the strategies that we've presented. And I want to tell you that we are continuing to execute on each and every one of these. A couple of them that I might mention, the building deeper relationships, which Mac touched on briefly, really falls under the client advocacy umbrella. And if you think of it this way, this is us getting better at bringing the total focus of the bank to each and every customer interaction. And it's not just wholesale and it's not just Small Business. It's in our wealth business, it's in our retail business. And we're having great success of doing a much better job of understanding our customers and delivering to meet all of their needs. That being said, we really feel like we're just beginning to touch -- to scratch the surface of what the potential is in this particular area.
And then Kent also mentioned the Small Business side. We're having very strong success there. It's not just on the loan growth side. And one of the things that we've done is each and every one of our branches is focused not just on retail but on business banking as well. In fact, there was a survey released this morning that recognized us as one of the top small business banking organizations in the country delivering to meet the full product set of needs of the small business customer as opposed to just the loan side. We're continually changing and adjusting our operating models. And Kent and I are going to spend just a brief time talking about each of these particular areas.
When we talk about a branch, most people think of a branch as a traditional retail operation. And we've been evolving for quite some time to where not only is a branch for us retail distribution, but it's also our small business, it's also a substantial portion of our payments distribution, as well as our private banking. So as you think of that, one of the things that we require today is our branch managers will spend 40% of their time outside the branch, getting to meet the various businesses in their particular geography, getting to meet the civic leaders, being involved in that particular part of the business, as well as just being inside the 4 walls. Part of that evolution has also led us to continue to be an even more dominant player in the in-store and on-site business. This is a great business for us, and it really is something that gives us an opportunity to continue to change and deliver services to our customer base that has changing needs.
I'm going to touch a little bit upon the Community Banking side. The Community Banking model that we operate has been in existence in our Tier 2 markets and smaller markets for a number of years, and that's a business that I ran for U.S. Bank for a number of years. One of the things, when I assumed this role, that I started asking the question of what are the similarities between these 3 distinct models and really, what are some of the best practices. And as we look at it, we realize that there are tremendous amount of similarities, but we could do a better job of sharing some of those best practices.
So I'm going to spend a little bit of time talking about Community Banking. But I would challenge you all to think just a little bit differently about large metropolitan markets for a second, in that I would view that a large metropolitan market is really a quilt of numerous smaller communities as opposed to being 1 large similar marketplace. And as you think of it that way, I think it shows what the opportunities are when I start talking about Community Banking.
Community Banking to us is really kind of a bank within a bank. And as you think of it that way, recognize that the competitive landscape that we participate in is a landscape that we compete against small community banks, medium-sized community banks, large community banks, regional banks, large regional banks, national banks, credit unions, insurance companies, farm credit system. So our approach, as a community banking model, is we want to be as local as anybody that we compete against.
Now what does that mean? It really means that we want our leadership to be as engaged and as connected to their respective community as they can possibly be. We want them to be the leaders in their community. We want them to be involved in the various organizations, whether it's the Chamber, whether it's the United Way, whatever the organization is, Economic Development, absolutely. But even more than that, we want each and every one of our employees to be involved in giving back to that community as well. And to highlight that, under Richard's leadership, each and every one of our employees has either 8 hours or 16 hours of paid leave, depending upon their tenure, to be able to give back, on a volunteer basis, to their particular charity of choice in their respective communities.
So we want to be thought of as, as local as anyone. We want to be thought of as the local bank. However, we also bring to the table the products and services of the 5th largest commercial bank in the country. And as you think of that, that really gives us a significant competitive advantage. Now many of those attributes, quite honestly, we are executing to in the larger metropolitan markets as well. We have lots of opportunity, and we think it gives us a huge competitive advantage.
Now Mac mentioned, just briefly, the network distribution. And as we talk about this, I want you to think in a couple of different ways. First off, we're not talking about just branches. When we look at distribution, we think you have to think broader. Let's think of bank distribution, not just branch distribution. The second aspect that we get asked a lot is, "How many branches do you have? How many are you going to close?" And you have to understand, first off, for years, we have had a very, very disciplined approach to analyzing the branches we have. We have a P&L on each branch, and we are continually evaluating where we are, what the performance is, and we're always doing what we call rightsizing of our respective branches.
Overall, though, I would expect the number of our total branches to remain pretty close to where they are. They will just be different branches than they are today. And as you think about how our in-store and on-site has been such a critical part of our strategy and will continue to be a critical part of our strategy, as we look at markets, and we do it market by market, we're always looking to optimize and understand how the community is changing, how the needs of the customers are changing so that we can be located or be able to deliver to them.
Now underneath all of that, we're also doing a number of things as either pilots or things that we've been trying for a period of time and we're actually implementing in some other areas. As you look at this, we are talking about an anchor branch. And we're, in one of our very large high-density markets, in the process of establishing a branch that will use the newest technology that we have, as well as the existing delivery system, to meet the needs of that particular geography. Now that also creates a need for us to have a slightly different employee expectation and those employees being able to not only handle what goes on inside the 4 walls but also what is taking place in the community and the area around it. So we're piloting that particular model.
We have another model, where we have a 400-square-foot branch in one of our larger markets, that is a very successful operation for us, again, where we're testing different types of technology to make us even more efficient. We're soon going to be piloting a 1-person branch, again, using technology in a very, very high-traffic area. So we're looking at distribution. We're looking at various ways for us to leverage the technology, leverage the physical structure that we have and make sure that we're always optimizing what our distribution is in each and every one of our markets.
And just to show you how we're also using technology, I would like to introduce just a short video, and again, Mac touched upon this. But this is a place where we're able to deliver financial services to a student body campus, which is North Carolina State, where, quite honestly, we're not even on that campus or around that campus with physical structures nor are we even in the state from a physical structure perspective. So join me in watching the video.
Kent V. Stone
Three years ago, we stood in front of you and talked about our investment in the mortgage business. And as we shared with you earlier today, we've had great, great gains. And if you're like me, you probably heard the word mortgage way too much lately either in the paper or you're reading it, you're writing about it. But it's here. It's about GSEs. Its about monetary policy. It's about the fact that interest rates have gone up. It's about policies of the FHA.
But there's 2 things, 2 things I want to talk about today of how we're positioning ourselves for the new economy. One, we don't want to loose sight of the fact that we are big loan servicers. If you look at the chart on the left side, we are increasing our servicing year after year after year. And through Q2 of this year, we've also increased it. We don't want that to get lost in the fact that interest rates have gone up. That is a nice source of fee income for us.
And secondly, we are in the business of mortgage. We've always been in the business of mortgage, and even though rates are changing, and we acknowledge rates are going up, we're in the business. And while we are moving from a refinance market to a purchase market, there's still refinancing going on through our HARP programs, through our adjustable-rate mortgage programs. As markets across our United States get a little bit better and the equity positions get a little bit stronger, individuals are still refinancing. So it's not something that, overnight, we realize that the market was shifting to a purchase market one. We've realized that, we're preparing ourselves for that, and we will still continue to get our fair share.
So what are we doing? We haven't utilized the web, mobile or telesales capabilities like we should. In the boom of the refinance marketplace, we were just dealing it paper to paper to paper. We are utilizing that. We think it's a great source of business for us. We have a built it out with Mac's help and with others. We are using that, and we think that's a great source for us to capture both types of business.
We are leveraging the branch network. We've always leveraged them in a refinance market, but it's a unique leverage. As John talked about the fact of reeducating his bankers about higher rate environment, we've also reeducated them about the fact that mortgage and home purchase is a great thing to do. Mortgage in a house is an investment. And in doing so, instead of them out looking for those at lower rates, they're out looking for contacts for us from the brokerage side, the real estate side.
John's Community Banking group of 1,100 branches took it upon themselves in April to run a 1-month promotion to see how many referrals and contact names can they set up for brokers and real estate agents within the community banking market. Over what, John? Over 5,100 referrals in April has resulted in about 157 new ongoing partnerships and relationships for us. Needless to say, we're doing that in the branches, the in-stores, the on-site. But it's those types of things that we can turn on a dime, move quickly to move things forward.
We're also looking at advertising and media. We spent $50,000, yes, $50,000 in 2012. We really didn't need to. We had a fairly strong market share and presence. We're spending multiple times of that this year, and we're not adding grossly to our budget, no. We're shifting resources around within our existing budget to make sure that people know we are open for business for mortgages, for purchases and for refinances.
And lastly, we have reeducated our mortgage loan officers, who have been out there looking for -- have been there and used to the next deal coming to them, reconnecting them with our contacts. And we will have our fair share. You see in the bottom left, our industry originations dropped a bit in the first half of '13, but still clearly above where we were in '11 and one that we see a bright future for. And we're going to do that -- we'll still have our industry-leading cost position and maintaining our pricing in that business. Andy will talk a little bit more later about where we are in terms of our bookings and those types of things for Q3.
The other thing I would like to talk about, the other initiative that we are putting our line in the sand and this is the national consumer lending expansion. Now Bill Parker had a slide a little bit earlier that -- the same one that you see here. But our national lending business, our indirect auto and leasing, we've been in business since 1953. We've never been out of the market. Good times, bad times, average times, we're there. You've seen a lot of partners come in and go out, be category killers. We've been there.
We're one of the few banks that offers a leasing product. Leasing is a little bit more difficult than a loan, with residuals and taxes and all those types of things. We're in the business. And if you look at the bottom right, we've grown that business, okay? We've grown it fine. But if you look at our market share, our market share is about 1.2%. And like anything else at U.S. Bank, we like to have scale, which we do, but we like to grow, and we think we have an opportunity. And as we did in 2010 with the mortgage business, we're putting in our stake in the ground, our line in the sand, your saying. We can double this business in the near term. Now 1.2% to 2.4%, you might say, "Well, its not much." It's a lot of volume. But we can do it. Partly, it will be what Bill talked about. We will open our credit window a bit. We will go to a little bit of near prime and adjust our credit scores and adjust our mix of preowned. That will get us part way there.
The rest of it is about relationships. We have great relationship with our manufacturers, and with strategic partners, we just don't have enough. We have engaged -- Mac, you talked about -- a while ago, about you sent everyone out to go find out where their ideas are. I sent everyone else to say, "Where are our partners? Where are opportunities?" Because sometimes it's the easiest things you put down and start building your blocks for growth and we're starting that process with all of us, myself included, calling on new strategic partner opportunities.
It's certainly leveraging the preowned business that I've mentioned a bit ago. We are really good in going out to the dealer and talking to the new cars, but forgetting about the used car, preowned car, preowned market down the block on the other side of the lot. We need both of those. And that's what we're doing. We're going there with a 2-sided offer and opportunity, and we'll do it that way.
We're going to continue with product expansion. We're going to look for opportunities. But at the end of day, it's putting feet on the street. It's having the people out there accountable of getting the business, asking for the business. Looking at the record we shared with you today, sharing with them our story about how we're here, how we're built to last, how we're investing in this business is going to get as to where we need to be and beyond. It is going to be the business that we'll double, and then we'll look to what's our next peak -- next opportunity after that. I think it's a great opportunity.
And in addition, even while we're doing that, we have the opportunity to market our services. We have a really robust loan system, both for leasing and for the loan system. We can use that for other third parties in other markets that might have an opportunity to use us instead of building out their own capabilities. So we're looking at every opportunity we can within that business to build a leadership business. Don't get me wrong. We've had nice growth. We think we can energize that with a few strategic steps, using what we've done in Small Business, using what we've done in building deeper relationships, using what we've done in the mortgage business.
Let's bring it to a conclusion and look at our current growth drivers. The revenue drivers that John and I talked about today are the same ones you saw 3 years ago. They're the same. They're the ones that drive our business. It's a simple business, but they drive our business. You look at the environmental factors. There's challenges certainly, but as we, John and I, shared with you today, many more opportunities than challenges. And for every challenge, there's an opportunity for us to overcome them.
And lastly, here is our strategy, pretty simple to see. It's the list of them that you saw before, that John referenced, plus the 3 new ones, how we're going to have a distribution network optimization; how we're going to position mortgage in the new economy; and lastly, how we're going to expand our consumer lending business, all things that will move us forward, and they'll help us extend the advantage.
Richard K. Davis
Thanks, Kent. Thanks, John. Before I bring up the wholesale folks, I've realized for the first time, as I looked at the video again today, along with you, that financial literacy is a big part of our responsibility. And we're probably going to help that student realize that depositing $20 and then taking out $20 is not a very efficient action. Note to self, think it through.
I'm now going to bring up Joe Hoesley and Dick Payne, who head our wholesale businesses. And you'll appreciate the fact that, in 2007, I would have told you what a strong regional business we have in both Commercial Real Estate and particularly in commercial banking, not necessarily corporate. And 3 years ago, in this room, I would've told you we've now made amazing progress in moving ourselves to the national stage and creating a place for ourselves in, particularly, a challenged environment, where many of our peers, some of them international banks and some of them local banks, they were no longer able to step at the moment when customers needed them. But in the last 3 years, we've auditioned in many places, and I have to say, we got the job.
The last 3 years have been remarkable, and what the development has done was guaranteeing to take us from regional to national, national to top of class. [indiscernible] first call is pretty amazing. And with that is momentum that's unparalleled because we're just starting to scratch the surface. So as you think about our company and you wonder where we have tapped all the resources, where there is still opportunity, this one has probably the best momentum, as we think of a boomerang or a slingshot. We're just trying to move through this very, very quickly. And as the world recovers, we will now be at first call and considered part of the short list of banks you can rely on for guidance, advice and funding.
So we're going to start off with Joe, and then we'll have Dick join in. Joe?
Joseph C. Hoesley
Thank you, Richard. Good morning, everybody. Let me get right to the wholesale line here. Let's talk about the revenue mix within Wholesale Banking and Commercial Real Estate at U.S. Bank. It's pretty simple. It's generated by 3 components of the corporate bank, commercial bank and the Commercial Real Estate bank. The differentiation between commercial banking and Corporate Banking is commercial banking are clients under $500 million in revenue and Corporate Banking is clients with $500 million and over in revenue. And in Commercial Real Estate, basically, it's the national reach throughout the country. It lends to local, regional and national developers, so there is no demarcation on sales in Commercial Real Estate.
If you look at the contribution to U.S. Bank, we like to think -- Dick and I like to think it's pretty significant. It generates a lot of revenue. It generates a lot of earnings and also loans and deposits. Last year, 2012, as a percentage of revenue, you can see 63% was from noninterest income and -- excuse me, interest income and 37% noninterest income.
Let's talk about financial performance, and these are real numbers. You might look at loan commitments, you might look at average loan growth through this period and say these are pretty high, but they're actual numbers. Right now, the commitment base of the wholesale bank and real estate bank is about $175 billion in commitments. Our deposits average about $86 billion right at this point in time. So we've grown a business that's been very significant.
You might ask how we've done that. Well there is a flight to quality. That's very important to understand. And I also think there's another component here that we -- sometimes, we live with every single day and we've talked about it, and it's a flight to quality because we've upgraded our people in this company significantly in the last 6 years. Dick will talk about his team. My team -- we have 400 people in my team. We probably added 100 people, changed out 100 people, but we've brought in 100 very capable people that understand times have changed, business has changed. So you get these growth patterns not by just the flight to quality because people want to come to U.S. Bank. We've talked a lot about that and that's a big piece of it, but we have a really, really dynamic group of people in wholesale bank today.
One other thing I will talk about here is the noninterest expense. Again, Andy talked about it earlier. It's cultural here. And in fact, in Wholesale Banking, you should have a very efficient operation. We have 3,700 people managing $175 billion in commitments throughout the country. So it should be very efficient to drive the numbers that you saw in the prior page.
Let's talk about competitive advantages. I only really want to talk about 2 of the competitive advantages. A lot of them can be debated. You see we're negative there and that Andy talked about the smaller competitors have a little bit of an advantage because different capital requirements. The competitive advantage I want to talk about, the 2 that I'd like to talk about and have you focus on are our debt ratings. When you stand before a CEO, CFO, a Treasurer, a COO of a company and you talk about U.S. Bank, every one of our relationship managers talks about our debt ratings and talks about the quality of this bank and the fact that we have collectively the highest debt ratings of any bank in the country. That means a lot to those individuals on the other side of the table. And it means a lot because they're not looking at somebody that's performed well, but they're looking at people that they can trust in, that they can say, "Okay, if I need the money or I need a commitment, I know I can get it from you guys. If I needed service of Capital Markets' market execution, I can trust you guys." So the debt ratings do more than just make us at the top of the heap. We talked about earlier today, it really, really, builds into the business and gives us the opportunity to build with our clients because we didn't get these ratings if we hadn't performed in the past and again, as Judy said earlier, sometimes things -- or Richard said things will indicate future performance. Debt ratings will indicate the future performance to many, many of our clients out there. So it really is -- debt ratings will give us great quantitative metrics, but they give us tremendous qualitative metrics in our people. So it's very, very notable to us as we talk to our clients and build business with them. And then the other factor I like to talk about is cost of funds. Andy had a couple of slides today, talked about cost of funds, talked about how we fund the bank. 2010, we were still enjoying kind of a dislocation in the market and '11 came and things got a little bit better. Economy didn't get better, but banks got better. And then we got into '11 and '12 and a lot of banks started to come back. And you go to pick up the journal any day of the week and they were talking about banks need loan growth, and where are they going to get the loan growth? So what happens in that scenario when you have an event like that occurring, where banks get healthy again, they're able to step back into the market. Two things happened: loan structure goes out the window and pricing goes out the window. Okay? We've made a conscious decision here, I think, to not compete with a crazy loan structure. But we can compete because of who we are with the cost structure and that means that we will not lose business because of a cost structure, a pricing scenario that would put us at a disadvantage with a client because someone's trying to get business, not win it, not earn it, but get it. So we've made a decision that we will compete on price within reason. We're not crazy, and we're going to do something that's going to damage the revenue stream and/or the balance sheet here at U.S. Bank. But we're going to -- we can compete because we generate a low cost of funds structure and we can offer that to our clients. Again, we offer a lot more to the client out there today than just pricing, but it is competitive today. And I've told our guys and Dick is saying with his folks, respect our competition, but also the clients got to understand where the long-term benefits are going to be and then nurture them if they do business with us. So we use -- these 2 metrics right here are very, very powerful metrics, when you're talking to any client out there today.
This market position -- this is probably my favorite page in my whole presentation and probably in the entire presentation today. And the reason I say this is it tells a story of, as Richard said, where we were in '07, where we were in '10 and where we are today. And you look at these market shares on the balance sheet side. Looks incremental, doesn't it? Andy talked earlier today about a 1% or 0.5% jump. Let me tell you about commercial real estate. We're 1.6% of the market share in the first quarter of '07. We're 2.5% today. You might think, well, that's great. That's 1%, essentially. But that 1% -- now this would be an outstanding -- so that 1% means about 11 billion -- excuse me, $11 billion of the market, the Commercial Real Estate market that banks hold today. Banks hold about 40% of all the commercial loans out there and that translates into around $1 billion. So that 1% is a huge jump for us because this is outstanding. So it's earnings. It's in the earnings stream and it's something that we're continuing to build off of.
So these -- you might call them incremental steps -- are very, very positive in how we build our balance sheet. The other thing to note, too, is that we didn't build our balance sheet at risk. We built it through a cycle with, as Bill said today, a lot of prudence in what we do. So we have a great balance sheet in wholesale bank. I think we have a great client base and it's represented in the fact that we're having significant growth in our balance sheet because again, it goes back to clients, building with us, trusting us. I'd also say one other thing about our balance sheet. And this is something the flight to quality still continues. About 75% of our commitments today in Commercial Real Estate are with existing clients. 25% are with new clients today. So we're still having a significant flight, I'll call it, to the quality of U.S. Bank to the benefit of our ability to reach beyond our client base today and in fact, new business. And then down below in debt capital markets, I have to give all the credit to Dick Payne on this. And he's going to be up in just a second to talk. But you can look in 2007. It didn't really exist here at U.S. Bank. We had a few things we're running around with, but when Dick got here in 2006 -- is that correct? Dick took over and took charge to build out debt capital markets for U.S. Bank, and he did it one by one, product by product and this goes to the fact that he attracted a tremendous amount of talent to build this, new talent to U.S. Bank. And even business lines that we had, like Commercial Real Estate loan bookrunner, to accelerate that capability and that sit par with what we were doing. What I'd like to say is, if you look at this slide, just look at the investment grade bookrunner and look at real estate investment trust bond bookrunner. It didn't exist in 2007. And again, these small percentages, they may be small and they're all in the right direction, but these percentages mean tens and billions of dollars in revenue to this company. So with that, I will turn it over to Dick.
Richard B. Payne
Thank you, Joe. Thank you, Joe, and thank you, all, for being here. I appreciate this opportunity to talk about Wholesale Banking and the opportunities for growth and also banking here with my partner, Joe Hoesley.
Our Wholesale Banking business, Richard talked about our business being consistent, repeatable and predictable. There's one other thing that I would add to our Wholesale Banking business and that is simple. It's a very simple proposition. We extend credit. That's generally the first thing we do in a relationship. And once we extend credit, we then sell our other noncredit services against that commitment. And by doing that, we enhance the return on capital on that credit commitment that we've extended to begin with. A very few of our relationships are credit-only. In fact, they are not credit-only relationships. They're not things that we seek. And I think the big change in Wholesale Banking over the last 20 years has been that Treasurers and CFOs know if they are -- if you are extending credit to them, you are almost immediately looking for the other opportunities in ancillary business. So it's pretty simple and if you look at some of the metrics that Joe showed you earlier, we've had some good success and a little bit of good luck over the last few years.
But I would turn your attention to the bottom left-hand metric here, which if you think about the first thing in a relationship that we do is extend the commitment and you look at that close to 20% growth in our commitment, that tells you 2 things. That tells you, number one, we have been increasing the importance of our bank to our existing customers by taking larger credit commitments so we have been up-tiering ourselves and that's a phrase that I'll use a couple of those, but we've been up-tiering our position from third- or fourth-tier position to a second tier or a lead position with existing customers. It also means we have been extending commitments to prospects and converting them to customers and starting the entire process of selling against that commitment to enhance the return on that commitment over and over again. So you can see that our commitments have actually grown faster than our loans. That also tells you that our utilization of our commitments is lower than it has been in a long time. That's true for us as an industry and us as a bank. That provides us with a lot of dry powder when things turn around and the economy gets even stronger and our deposit growth has also been extremely strong.
Richard mentioned the investment phase that we've been through and I'll have to say that we were one of the largest beneficiaries of that investment phase. And for us, it happened in the teeth of the downturn. We needed to hire more people. We needed our people for relationship management jobs. We needed our people for new jobs in high-grade bond business and municipal securities, and we needed to hire people to bolster our existing product areas, foreign exchange, treasury management, et cetera. It could have been very -- it would have been very easy in the downturn of 2008 and 2009 to say, let's wait, but the fact of the matter is there was an awful lot of talent that was on the street back in those days. And we knew that we would only have a small window of opportunity to get some of that talent and attract them into the bank. We also knew that as a cultural institution, once we got those people into the bank, we knew that we could sell them with our culture, they would be comfortable with our culture and as we grew, they would grow with us and become really inculcated in the who we were. And that has actually happened.
Mac talked a lot about Building Deeper Relationships. It's been a very important part of our strategy. And I thought I would just for a moment -- this is a little simplistic, but this is kind of -- we have 4 avenues of revenue that help us grow. The first is if -- and I'm going to take an example of a Fortune 1000 company. If we have a $25 million position in a credit facility in that company, we can grow by doubling that and becoming a second or third-tier bank. So we double the commitment and all of a sudden, let's say we're a second-tier institution. We've doubled our credit around that. So that's revenue line #1. When we do that, we also enhance our opportunities for selling our ancillary services because the company knows that if we double our credit -- our capital commitments, that we're going to want to at least double our ancillary business. And so 2 things happened. Number one, we get more opportunities to sell ancillary services. And miraculously, our hit ratio on the things that we win goes up. We still have to be competitive. Our products have to be as good as anybody else's. Our pricing has to be good. But generally speaking, if you go up-tier and you have the products, you're going to increase your revenue in the ancillary business line.
The third line of revenue that increases is when you add new products. So in our case, it's been high-grade bonds and municipal securities. That has been another way for our customers to pay us for our capital commitment, if you will. Sometimes, that's pro rata relative to your credit commitment. But when you built a high-grade business like we have in Charlotte, generally speaking, we have a shot at being a joint bookrunner, which doubles and triples the economics we get on these transactions.
And then the last line of revenue, which is the one that has been most exciting over the last couple of years and I think when you see some of the numbers we're going to talk about in a second, hopefully, will excite you. That is converting prospects to customers. So several years ago in 2007, and again in 2010, we told you that we were a very good regional wholesale bank transitioning to a great national wholesale bank. Regardless of what the relationship group of customers was, we were only calling on them and half the country. So in terms of new customers, roughly speaking, we had half a country to look to. No matter what market we were talking about, there was a whole another half of the country that companies and governments and states and education and nonprofit customers that were just like the ones we were already covering. So from an opportunity point of view, we had then and we have today a huge opportunity in terms of new customers. Whether or not we've gotten too great, I'll leave it to someone -- I'll leave it to somebody else to judge, but we're a lot closer than we were 6 years ago and a lot closer than we were 3 years ago when we talked to you in this room.
The last thing on this slide I'll mention is the increased market satisfaction scores. Mac may have mentioned this. It's easy for us to sit up here and tell you how wonderful we are. We actually look and pay attention to outside objective observers and our client satisfaction scores have increased consistently over the last 4 or 5 years.
The 19,000 relationship reviews, if you think back to those 4 lines of growth of revenue, that is what that is directed to. That is sitting down customer-by-customer and saying, "Okay, where can we -- where can we up-tier from a credit point of view? Once we do that, what are the opportunities that come in from an ancillary business point of view and what are the new products we can sell?" $435 million of incremental revenue in 2012 from that process. It is now part of our DNA and we wouldn't think about calling on a customer without having an in-depth relationship review before we do that.
Extending the advantage that Richard talked about earlier, there are a number of things that I wanted to touch on here. The first is our distribution system. So let's go back to 2007. We actually -- I think the New York office actually opened with one person on February 1, 2007. So by the time we got to Investor Day, we probably had about 10 people. In 2010, we had about 100 and today, we have about 200 in our New York office.
In 2007, we did not have a Charlotte office. In 2010, we had about 15 people there. Today, we have over 100. We also -- there is only one geographic area that we are not physically located in today that we'd like to. Those 2 red dots in Texas represent Commercial Real Estate offices that Joe has opened down there. That is a place that we would like to be. We've been interviewing and talking to folks, but hopefully, by the end of this year, early next year, we will have an office in either Dallas or Texas for our Corporate Banking business.
The light blue states there are what we call our contiguous state commercial banking strategy and that's where we actually call on in addition to our footprint, Commercial Banking customers, as Joe mentioned, under $500 million in sales. We call them contiguous states.
Now for me, the most interesting thing about this slide is, given the things that we have done, the offices we've opened, the new products like high-grade bonds, private placements, municipal securities. When I speak to groups of Wholesale Banking employees, I always get the question, "Okay, what's next? What's the next, next Michael Lewis' book, the next, next, big, big thing?" And I showed them this map. And I said, "That's the next, big, big thing." They said, "What are you talking about?" I said, "In that map are all the growth opportunities that we need to look at for the next 3 or 4 years. We've got to maximize the potential from those growth opportunities. We don't need any new products. We don't need any new offices other than the one in Texas. What we need to do is execute against the customers in that customer base that are waiting there for us to become more important to them and prospects that are waiting for us to convert them into customers." I always kind of get a funny look and we get ideas all the time and comment, "When are we going to open a London office? When are we going to open a Tokyo office, et cetera, et cetera?" I'd say, "Look at the map."
So that's the map. That's the simple part of our business. We have the products we need. We basically have -- of course, we always need more good people, but in general, we have the people that we need. We are investing in several of our Capital Markets products, but are in heavy investment stage, as Richard and Andy said, is basically coming to an end, and there are no new projects other than the ones that are underway that we are contemplating.
So the Fortune 1000. This is -- this slide is really a proxy for how we look at our other -- all of our businesses. So we have a market. We say, "Who's important in that market?" And we say, "How are we doing against them both from a lead relationship point of view, a tiering point of view and a prospect-versus-customer point of view?"
I want to go back to what Joe mentioned earlier in the debt ratings and the cost of funds and Andy mentioned it as well. It can't, for our business, be emphasized enough how important that is. And just imagine for a moment you're with us on a customer call and we're going into the office of a Treasurer to pitch a treasury management product. We always start with a pitch book that has 5 or 6 pages that are the 5 or 6 page -- 5 or 6 pages out of Andy's presentation. They start with our bond ratings. They talk about our return on equity. They talk about our return on assets. They talk about our credit history and they talk about our efficiency ratio. And it's important to talk about this one more time because not only does that have an impression on the people that we are trying to sell the product to and sets the stage for what we're going to do, it gives the people on our side of the table tremendous confidence to be sitting there, representing an institution that has those sorts of industry-leading metrics. And it creates the conversation that it's much more powerful than if we just came in and said, "We want to talk to you about your wholesale lock box." So we start every conversation with that. I've actually been around for a while, as you may notice. 20 years ago, CFOs, Treasurers, CEOs and Boards of Directors did not care what banks' bond rates were. They cared today, all the way up to the board.
If you were a Fortune 1000 company, if you were a large nonprofit company and you were being touted inside that company as an additional bank, you, as a Treasurer, the CFO, have to represent the CEO and the board that as a counterparty, you, the CFO, are bringing in a very strong back and I'm not saying that it's quite like the old days when nobody got fired by buying IBM. But it's almost like that and that nobody is going to get questioned for bringing in U.S. Bank when people look at our bond ratings and our performance metrics, so very powerful and also very much appreciated by our distribution network.
With regard to the Fortune 1000, these are metrics that you can look at. I just wanted to say 2 things. Number one, you can see that our commitments rose 76% and yet, our customers, we were already fairly highly penetrated here, our customers rose 9%. And our annualized revenue rose 40%, which tells you that we are increasing the amount of business we are doing with our Fortune 1000 customers, not to -- each customer, we are Building Deeper Relationships with. We track this for the what we call the state and municipal 500. We have increased our penetration there over the last few years from 50 customers to 150 so we still have 350 left in the 500 largest. In the not-for-profit education world, we have gone from 20 customers to 100 customers and that -- by the way, we tracked that on the largest 300. So if you look at those 3 that I just mentioned and then you take it to the commercial banking, the 2,000 customers and prospects we track there, it all comes back to looking at each one of those customers in this Building Deeper Relationships and forward revenue stream discipline.
Last slide here, very quickly is optimizing low-risk Capital Markets product set, and we like to talk about customer-focused Capital Markets products and we like to talk about low-risk Capital Markets products and what we mean by that is everything we're doing in Capital Markets, the investments we are making are focused on our customers and what they need from us. We are not traitors. We are not taking capital and going out and taking risk in the marketplace every day. We are focused on our customers and what they want to do. We're focused on high-usage Capital Markets products. You can see the investments -- the results of the investments we've made, 29% CAGR over the last few years and the penetration has gone up. The interesting thing about the penetration is the dollar amount per customer has also gone up. So we penetrated more and the products that we've sold have been worth more.
This is where -- we're now in the middle of making some investments, partially due to Dodd-Frank, but partially due to improving our derivatives and foreign exchange capability and we're kind of in the beginning of that as it was approved last year. But we expect to see those products escalate as well. So that's when if -- just one summary. The numbers of companies, nonprofits, small, middle market companies, large companies that we do not do business with represent a huge growth opportunity for us in the coming years. So back to Joe.
Joseph C. Hoesley
Thanks, Dick. I'll finish up. When you -- when Richard shared -- I don't know -- this morning, he talked about client advocacy. And again, it really wasn't defined as what it is. You've heard about BDR, Building Deeper Relationships. Mac talked about this. And you can read this slide when you have time. But really, what happened was we recognize that through this cycle, probably 2010 and on, that things were changing. Our clients have changed. Our clients went through -- quite frankly, many went through hell, the tough economic time, there's a lot of indecision, the banking business was changing, huge regulatory requirements on the banks today. So what we did is we sat down and said, "Well we can't wait for an outside firm to come in or a consulting firm to tell us we have to do something and be something different." We thought we were pretty good, but we took it upon ourselves to say we need to change and we need to deliver something different to the client, be ahead of the market when the market comes back, be more in line with the, as we say, the first call from the client. We have to be able to deliver solutions to the clients differently today. We have to be able to commit and perform. So we went out and saw the group and aligned with them and built a program, where we sent -- to date, we sent 2,300 relationship managers, product partners and credit partners within U.S. Bank to work on a 3-day programs, very rigorous, you stay overnight, they come in to Minneapolis, so they come in to another location and they start early in the morning and don't finish up until the third day late into the evening. And what happens from that is that we put them through a training process of looking differently at the client, looking at differently how we deliver day to day. And what the client not only wants today, but what we think they're going to need in the future. So we have to change. So instead of waiting, we took the initiative in our company to build something different with our people. Again, as you might say, that this is kind of soft stuff? Well BDR, you might have thought it was soft stuff when you first heard about it. But we monitored. We check it. As we've talked about, we have those monthly review meetings, financial review meetings. We have review meetings on BDR. We're already starting on client advocacy and we're following through how is this going to help us build business and the one way, as Andy said, he likes how the math works. That's what we look for here. We look for math. We look at our client base. We match it up against what we're doing with our clients, how we're delivering to the client. And again, it puts all our relationship managers on notice that we have to be different today. It isn't the old days where you just walk and talk about the weather, maybe talk about the New York Jets and talk about a little bit of business and you went home. Those days are long, long gone. We have to do something different today. So we're doing it. We're going to continue to upgrade the program. We have follow-ups over the next year to 2 years with our people that have gone through. So we think this is an ideal way to change the kind of the structure of how we're operating today with our wholesale clients. And then let me end here with the current growth drivers.
The revenue drivers we talked about them in one of the prior slides. Big drivers for us are loans and deposits. Also, as Dick talked about, the Capital Markets business is a growing business within wholesale bank. The environmental factors. When -- I think here is when you look at the challenges, the slow economic recovery, we've made that an opportunity here at U.S. Bank. We've taken a very difficult time with a very difficult economy and built, I think, a really, really, great wholesale bank and bank overall. So it's a challenge, yes, but we know how to operate in that challenged period of time. Pricing and structure we talked about, and then the opportunities, I think, those will just come about. So the business strategies, what I'd like to just say here is we're going to continue with BDR. Most of you know what that is and the value of that's been to the bank. The client advocacy 3 years from now, we're going to tell you how this has been a value to the bank. And then the optimization of the bank overall to our client and what we're going to present and build with our clients over the next 3 years. So thank you.
Richard K. Davis
Thank you, guys. Joe, you used the word "hell." I don't know if you can use that in an Investor Day. I'm not sure. But the transcripts are going to deal with that. So I thought I'd repeat it. We're a couple [indiscernible]. You've earned lunch. Those of you on the webcast, we're going to take a 45-minute lunch break. We will start at 12:45, and we will have a very brief and interesting wrap-up to the day, so thanks very much for your attention this morning.
Joseph C. Hoesley
Good job, everybody.
Richard K. Davis
Ladies and gentlemen, welcome back from lunch. Feel free to continue eating. And those of you joining us on the webcast, we are now going to begin the last segment of our Investor Day.
I'm sure you've had time to study our logic, but I hope it's as obvious to you that this morning we want to set up the entire company's purview. I want to launch into revenue. And then I want to get into the core business lines. And what you heard from Joe and Dick and Kent and John are undoubtedly the business lines that everybody else has, too. Everybody has commercial banking, everyone has wholesale banking, everyone has commercial real estate, some form of small business and consumer.
Now we move into the things that start to distinguish us from the average bank as it relates to size and types of business. We're going to start with Terry Dolan, who's going to walk us through the Wealth Management and Securities Services business. Terry, make your way to the stage now, if you will. And Wealth Management for U.S. Bank would be the last pieces of the puzzle, which I will declare to you, is not done yet. And so for those of you who love to know what things are still possible, besides what we've shared with you, consider a big canvas, and on this canvas a bunch of puzzle pieces. And you know how great it is to put in that last piece of the puzzle. And Wealth Management and the final development of a first-class national leading capability, we are well on our way to puzzle it in place. But the lines between the puzzle aren't quite blurred yet and erased, and the color on the canvas isn't quite as bright as we want. So Wealth Management is a tried and trued business of banking. But For U.S. Bank, it's still one of our last pieces to continue and to finish. And he'll talk about where we are on that journey. Securities Services, or trust business, is an amazing OMG for us. It's a huge part of our success and it's got amazing tethers into the future with great growth opportunities, particularly across the pond, as we will follow the same path we did the years ago with our Elavon payments business.
And then we'll come up and we'll talk about payments, which is one of our other secret weapons. We'll wrap up, and we'll go to Q&A and have you out of here well by 2:30. So ladies and gentlemen, let me bring forward Terry Dolan to walk you through Wealth Management and Securities Services.
Terrance R. Dolan
Welcome back. Maybe one of the ways that I can set this up a little bit is to talk a little bit about a couple of key messages that we had in 2010.
First message with respect to Wealth Management was that it was a business that was in transformation. We were going through a transition and that we would have to make some investments and efforts with our business in order to create the right sort of client experience among different segments in order to be able to become distinctive in that particular area. We also said that we think that there's significant opportunity for growth in that particular business. And we're starting to see that momentum growing, and we'll show you that you're in a minute.
The second message is what Richard talked about, and that is that our Security Services business, which includes Corporate Trust, the fund services business and our institutional trust and custody, truly are distinctive when you think about our peer group because there's really only one other bank that has parts of those, particularly our businesses. And it gives us some very strategic advantages when we think about our peer group. We also believe we have some competitive advantages in that space, even for those who we compete against head-to-head.
So when we end up looking at the profile of this business, it's 40% of it represents Wealth Management, 60% represents the Securities Services businesses that I just talked about, Corporate Trust, Fund Services, et cetera. Now why do we like these businesses? We like these businesses because they are fee-based businesses. In fact, 76% of the revenue associated with Wealth Management, Securities Services are fee based. So they help diversify the revenue of U.S. Bank. They're also a deposit-gathering businesses. And if you end up looking at Wealth Management, we represent about 10% of the company, but we gather 20% of the core deposits of our organization. And so it helps to provide a low-cost, stable funding source for our organization, which helps us from a net interest margin standpoint.
In addition, they're capital efficient business, and that's what Andy talked about earlier. If you end up looking at return on tangible capital, for example, in these businesses, the return is 40% to 50%. So they are significant, and they add to that high return profile of U.S. Bank, and it's part of the reason why these businesses are very distinctive in a competitive advantage. And then finally, they are essentially relationship-based businesses. And so when you think about how they knit and tie with respect of our -- with respect to the rest of our organization, our wholesale bank, our consumer bank, et cetera, being relationship-based businesses, we have the ability to be able to extend into that client base in order to be able to capture market share, and you'll see that here in a minute.
Now let me talk little bit about financial performance of Wealth Management and Securities Services over the last couple of years. And there's really kind of 4 themes there. The first is that we have been capturing substantial amount of market share as it relates to deposits. And that's been principally through our Securities Services business. And in fact, we've grown average deposits on an annual basis, 32% over the course of the last 3 years, and that is significant and dramatic. The other thing is that if you end up looking at assets within Wealth Management and Securities Services. But principally, driven on the Wealth Management side equation, you'll see that loans are starting to accelerate. Loan growth is starting to accelerate. 3.5% a couple of years ago in total, 8.1% in 2012, 25.4% in the first half of 2013. So we're starting to see that momentum take off in terms of asset building.
We're also growing assets under management of about 6%. We're growing client assets through our financial advisory network at about 11% or 12%. So the investments that we've been making, we've been capitalizing on. We've also been capitalizing on this concept of building deeper relationships we've talked about because if you end up looking at our sales productivity by penetrating those clients more effectively, we're actually seeing about 10% lift associated with that.
You also know, if you've been looking at our financial reports, that net interest -- note that revenue has been growing at about 2.6%. And that's been affected by the low interest rate environment because we are substantially deposit-based sort of business. And then our noninterest expenses reflect the investments that we've been making in this business over the course of the last 3 years.
Let's talk a little bit about competitive advantages, and this is really focused on our Wealth Management businesses. 3 years ago, I said that we need to be able to do 2 things. We needed to be able to create parity with respect to our competitors in terms of the business platform, in terms of our investment products and our banking services, and how we end up delivering it, and we've done that. We created parity with respect to our competitors in this market.
The second thing I said is that we need to be able to create a distinctive client experience. We needed to be able to create a good client experience for our customers in the segments that we wanted to serve. And we've made a very good progress with respect to Ascent Private Capital, which we rolled out 2 years ago and it focuses on the ultra-high net worth space. We have a distinctive client experience with respect to the middle market, which is the private client reserve. When Richard talks about the fact that we still have some things we still need to do, that focus is really around the private client group, which focuses on the affluent segment that principally uses -- utilizes our branch.
We have good brand awareness, and we think that we're very competitive in a whole variety of other ways, but still some work to do. We end up looking at competitive advantages with respect to our Securities Services businesses. We're green across the board. We have great operating scale. We've got technology. Our debt ratings that Andy talked about earlier and that others have referred to really give us a competitive advantage, and you'll see that our market position is strong and strengthening over the course of the last 3 years.
Here's the one thing though that I would point out, that I think is also very, very important with respect to Securities Services business. And that is that the barriers to entry are very high because we have this businesses and because we have commanding position with respect to these businesses, it's going to be very difficult for our competitors to be able to break in. So when we make investment, when we capture market share, we can protect that business very effectively going forward. And it's a very important competitive advantage.
Now when we think about operating scale, we know that within Securities Services operating scale is critical. If you're going to be successful in this particular business, operating scale is very important. And it's because it allows us to make investments. It allows us to make investments in people and technology. It allows us to be price competitive. It allows us to provide top-tier client experience and client service with any of our segments. And those are the things that are going to drive business line growth, and those are the things that are driving business line growth for us today. So let's talk a little bit about the market position for Wealth Management and Securities Services, and I'm going to distinguish between the Wealth Management and then the Securities Services business.
So when you think about the Wealth Management business, we're 19th in terms of assets under management. We have just a little bit under 1%. But I want to put this in context with respect to wealth managers in the United States. The top wealth manager has less than 4% market share. The top 25 wealth managers have less than 20% market share, and the top 50 have about 23% to 24% market share. So when we end up looking at this business, it's not a scale business, it's not -- a scale is not required to be a success. And if you think about it, the reason for that is because this is a very personal relationship that you're creating. It's built upon trust. And when you're dealing with clients form a Wealth Management perspective, they want to know that you're going to be there tomorrow, okay? They want to know that you have competitor products and services. But they don't care that you're big. They really don't. They want to know that you're deep and strong, and you've got the breadth. And that's what's important.
When you end up looking at our Securities Services businesses, where you need scale, we definitely have it, and we're #3 with respect to our fund servicing business, we end up looking at registered products. We've grown that market share from 17% to 24% during the last 5 years. We have scale.
When you end up looking at Corporate Trust, we're #1 or #2 across each of the 3 major product lines that we're involved in, and we're involved in all of them. And we've grown market share over the last 5 years. We've taken it from our competitors, and we've taken it because of the things that I've been talking about. We have the scale to be competitive in this particular space. Just got to push the right button.
When I talk about growth accelerators, and I mentioned that loan is starting to grow, we've been capturing market share with respect to deposits, et cetera. It really comes down to the factors that are listed here. We've been making and capitalizing on the investments within the various lines of businesses. We talked about client advocacy. And from a Wealth Management standpoint, that's really about putting the client in the center, developing dedicated teams around it, and be able to create the type of experience that enables them to know and trust that you're going to be there and be successful in helping them manage their relationships with their families and the transfer of their wealth.
In terms of building deeper relationships, you've heard it from a number of different parties, but that is a growth accelerator for us as well within the Wealth Management and Securities Services businesses. 3 years ago, about 5% of our sales in Wealth Management came from our partners internally. Today, that's about 15%. We're seeing lift with respect to our Corporate Trust businesses as well.
One of our best sales team is the Wholesale bank. Now there's great sales team within U.S. Bank as our Treasury Department. It's the connections that they can make with -- for us with our corporate clients, with issuers in the marketplace, with investment bankers with all the decision-makers in the Corporate Trust world that are going to make a difference in terms of being able to grow this business. And that's why building deeper relationships within our organization is a distinctive advantage. The other thing about this particular business, because it's principally been a deposit-gathering type of a business and it's overweighted in terms of deposit, is that as the economy starts to get stronger and interest rate start to move up a little bit, were going to be able to see and leverage that economic recovery very significantly within this business. So we're seeing deposits growing. We're seeing loans accelerating. We're seeing sales productivity improving about 30% year-over-year. And we're also seeing a penetration with respect to our Wholesale Banking partners and clients in the top 1,000 becoming deeper.
When Dick talked about the fact that we have 19,000 relationship reviews, our product partners, our Corporate Trust people our side-by-side with them, and that's what really makes a difference. In 2010, we talked about a number of different business strategies and all of those are things that I've kind of talked a little bit on already. I'm not going to focus any one in particular. I will kind of maybe single out a couple, and that is that when we got together in 2010, we talked about the fact that it was going to be necessary for us to be able to segment our client base and to start to provide and develop business models and service delivery that was unique for the ultrahigh net worth space, middle market and the affluent segment. And then to build a client experience around each one of those, that's exactly what we've been doing. Building deeper relations that I've already talked about, but within the Securities Services business, we're also very focused on building a global platform. And we have the ability to go essentially on a global basis on one platform, like Andy talked about, and that's important.
And now we're going to use both organic growth and strategic acquisitions. We've completed about 6 of them in the last year -- or in the last 3 years in the Securities Services world that is also part of our growth. And we're going to continue to be focused on each and everyone of those initiatives as we go forward because they're adding value.
Now when we think about extending the advantage, there's really 3 areas that we're going to be focused on as we go forward, and that is around building a distinctive client experience within Wealth Management. It's going to be around the alternative investment servicing within our funds services business, and it's going to be around the global trust global expansion, the Corporate Trust global expansion. Let me talk a little bit more about each of those. So when we think about Wealth Management and building a distinctive client experience, in 2010 and over the course of the last 3 years, we've been working hard to build a continuum of products and services across the different segments. We created 3 kind of distinctive businesses, but we want to make sure that there is a continuum as clients migrate into different segments over time as their financial situation changes. So in order to be able to do that, we wanted to make sure that we created the building blocks that would go across those segments that would be important to have some consistency around. But then we build on top of that, the services and the things that create value with respect to each one of those segments. So with respect to Ascent, as an example, the family office capabilities are very important. Ascent focuses on the ultra-high net worth space, individuals and families with more significant level of wealth. And they have very specific value set. Private client reserve is really, again, in the middle market of wealth, and the affluent is served by our private client group. And I'm going to talk a little bit about each one of those here.
So let me talk about Ascent Private Capital. Now when we got together in 2010, that was up completely whiteboard. In fact, I remember when we put the strategy up under the high net worth, the ultra-high net worth, we had TBD. So we rolled out Ascent, and it's essentially 95%, 96% complete at this particular point in time. And if you think about this particular segment, they have specific needs and specific expectations as part of their service model. So they're individuals, who generally are very contemporary. They're individuals that desire discretion. They're individuals that value the fact that you focus on managing the impact of wealth as opposed to simply managing money. And that's a very important distinction and something that we incorporated into Ascent. So all the way from the dedicated teams that are focused on about 20 families, being able to provide Chief Investment Officer type of investment capabilities, family services, et cetera, to those individuals within Ascent is a very important and unique aspect of the client experience. We've rolled out 5 offices. We anticipate a sixth office rolling out next year. So we're pretty close to being done. But again, it's really around managing the impact of wealth, and that impact that has on the individual, the family and the community in which they serve. So let's learn a little bit more about Ascent.
Terrance R. Dolan
A pretty cool experience that we've built. Now let me talk a little bit about the private client reserve. Private client reserve targets individuals with investable assets from about $3 million to $50 million. Their sweet spot is about $5 million to $15 million in terms of really the target market that they try to go after.
Now if you think about the private client reserve and Ascent, Ascent was whiteboard. Private client reserve was a different transformation that we ended up having to go through, and we've made some pretty significant investment around it. It's around people. It's around clients. It's around products and services and the platform. And it's around how we partner and how we market within the marketplace. And so if you can think of it, we've changed it. We've enhanced it. We've grown it. We've made it stronger and deeper and richer for our particular clients. It starts with leadership. And since we got together in 2010, 50% of the market leaders are new to our organization. 100% of the regional presidents are new to our organization. We've aligned talent and teams into dedicated teams around the services that we need to be able to offer. And we've improved all sorts of processes, whether it's credit processes or investment platform, to the point where we are at parity or we have a product offering that is distinctive with respect to this particular space.
We have an open architecture from an investment standpoint, and that's important from a distinguishing sort of standpoint because as we're acquiring new clients, the very first question that they want to ask is, "Are you thinking of me? And am I in your best interest? Are you thinking of me in terms of the best interest as a client?" And it's easier for us from an investment standpoint to be able to say, absolutely, because none of it's our product.
We've also focused on creating market visibility through media relations and by local marketing within each one of those markets, and we've been enhancing our partnerships in a whole variety of different ways. So with respect to private client reserve, a lot of the momentum that we are seeing in terms of loans and sales and deposits is being driven by this segment of our organization.
Now let me talk about the last segment, which is the affluent segment, and it's served by the private client group within U.S. Bank. And this is an area that is significant opportunity, and it's a work in progress to be quite honest. And this -- the opportunity is this: In U.S. Bank today, we have 1.6 million clients that would fit into the affluent Wealth Management space. They are clients of our community and our branch system, and we penetrate them at about 5%. Now these are clients that know us, they like us, they utilize our banking services extensively, and they utilize our branching network and our other alternative delivery systems extensively.
So the opportunity is really if we are able to increase the penetration of that even 5%, every 5% generates about $250 million of revenue to our organization. So the opportunity is significant. Now when you end up looking at the private client group, it's not a complete start. We have very good banking services. We have very good investment products. The trick with respect to creating a distinct client experience is when you can bring them together, okay? When you can integrate them. Because this particular client segment values integration, consolidation and simplification. They want to be able to use the bank for their investment in Wealth Management services. But because they see 2 pictures and because it's not integrated, it makes it difficult for them, and so then they look for other service providers. That's where our area of focus is going to be. And John Elmore and I are kind of joined at the hip to really deliver against this strategy and this opportunity as we go forward by rebalancing our resources, looking to hire private bankers where we need to, enhancing that service delivery by integrating the services and capabilities, and by aligning our performance metrics over time.
So now let me talk a little bit about Security Services, and specifically in fund services. Within the alternative investment space, we think that there's real opportunity. That's a space that's growing about 15% to 20% depending upon who you talk to and what product and fund offering you're really kind of looking at. So the opportunity in terms of growth is fairly significant.
The other thing that's happening in the marketplace is wealth managers, like private client reserve or Ascent Private Capital, are really looking at asset allocation and incorporating hedge fund products into that asset allocation. Historically, that's then maybe around 5% in terms of middle market sort of clients. Wealth managers now believe that they need to incorporate hedge funds more aggressively in order to be able to minimize volatility within those portfolios. So you're going to see that that's going to migrate from 5% to 15% as much as even 25% in the future. That's going to create demand, and it's going to create opportunity.
Now when you end up looking at this, there's a couple of other forces, one is a regulatory force. And you'll see that after some of the issues in 2008 and 2009, the regulatory environment really starting to create more accountability with respect to the servicing and the trading and the custodial sort of capabilities. Those are all things that we can help bring to the table. More and more alternative fund managers are starting to outsource this capability, and we want to be ready to be able to take advantage of that opportunity. So what are we doing? We're looking at being able to grow that organically because we are a significant and very large servicer in the fund servicing space. We have the backbone and the capability and the technology and the client servicing teams to be able to do that. We're also going to be looking at how do we grow this business and to add certain things that are going to be important, such as geographical expansion into Europe, product expansion from what we provide today in [indiscernible] office or the capabilities. And then we're going to look to be able to grow this business through both organically and through strategic acquisitions over time. We think the opportunity is pretty significant. In the last area, the last initiative that we're focused on is with respect to our Corporate Trust business and the global expansion of our Corporate Trust business. We think that there's opportunity for growth both domestically, when we think about that global business, as well as internationally. And so we have a significant market presence today and market position, and we captured market share, but that doesn't necessarily guarantee that you're going to be able to do that in the future.
So what distinguishes U.S. Bank and our Corporate Trust business from our competitors in this particular space? Well, it's all the assets of U.S. Bank that really make a difference. We have a vast wholesale and commercial banking business that helps to deliver with our building deeper relationships access to the issuers. We have access to investment bankers through our treasury services. We have access through local offices. We have 47 offices that served a space in the United States. That's many more than most of our competitors. Although we do think centrally, we have a decentralized sort of distribution and local expertise. That gives us access to municipalities and issuers that are in the market. It's those sorts of things that when you have the access to the decision-makers that are going to be sending business your way, that gives you a distinctive advantage. And that's what we're going to be able to take advantage and focus on as we move forward, those centers of influence. The other thing is that given our alternative investment servicing capability and our access to investment managers, we believe that there's a real opportunity to cross sell between fund services and Corporate Trust. And that's going to allow us a distinctive advantage as we move forward in the domestic markets as well.
Now Richard talked about kind of an international expansion. 2 years ago, at the end of 2010, we ended up acquiring a structured finance business, and about 15% of that was located in Europe. And we have offices in Dublin and London today and about 100 people that are over there. We're making some very significant progress with respect to that expansion. For example in 2013, for the first 8 months, there have been 14 CLO deals that have been done. U.S. Bank has done 50% of that, that's 5-0% of all the CLO deal that were done in Europe this year thus far. So we have the ability to utilize our global platform, which gives us immediate scale to be competitive from a pricing perspective, to be able to extend our Corporate Trust services that we do today into Europe, and to be able to take advantage of that. And were going to look at opportunities both from an acquisition perspective, as well as how we grow it organically as we move forward.
So when we think about the drivers of this particular business, it's around how you're able to acquire clients, by capturing market share, by creating a distinctive client experience within Wealth Management. It's about deal flow, which is starting to pick up. It's about the funds that you service, and you'll see that we're capturing market share because of our client experience. And it's about the assets and the balances that are growing in the business. There are environmental factors that are going to come into play. And those environmental factors center around the economy, the strength of the economic recovery, or the lack thereof, as we move forward.
But as the economy does slowly gets stronger and interest rates start to move up, we believe that there's significant opportunity from a revenue standpoint. And as that revenue occurs, it drops right down to the bottom line. We don't have to add one more person in order to be able to deliver that revenue to the bottom line. So that's going to give us some real opportunities. Thing I would tell you is that, irrespective of the environmental factors, positive or negative, because of our distinctive advantages that we have and the strategies that we've employed, we believe that we can deliver significant growth in this particular business in the future. Thank you.
Richard K. Davis
Thank you, Terry. So as night falls here in New York City -- as rain falls in New York City and the wind is blowing, let's bring up our, probably, most exciting area, and that's Payment Services. We have -- have you -- just think back for a minute, our conference would've been done at lunch because we would've talked about Wealth Management under Consumer Banking. It would've been no Corporate Trust. We would've talked about payments solely as credit cards under Consumer Banking, and it would be none of this presentation you're about to hear.
And in my lunch table, we are speaking to what kind of cultural impact does the payment business have not the least to which is on innovation. But a point of pride might the best way to consider how important payment is. It makes us different, it makes us special, it makes us unique, and it couldn't be more relevant as the world changes. Payments, not mobile banking, but payments and the way people move money in a trusted way with people that they believe will take care of them is the future of this next economy. So no one better than that than Pam Joseph to bring us home on our last presentation, and then we'll wrap up. Pam?
Pamela A. Joseph
Thank you, Richard. I think we're going to get a lot of Q&A because nobody is going to want to go outside right now. We're going to take time now and talk about Payment Services. And just as a reminder, this is our electronic payment businesses. Our retail payments, which is our consumer and small business credit, debit card and prepaid card businesses. Corporate payments, which is our corporate travel, our purchasing, our fleet cards, as well as our freight payables business. And then finally, our on merchant acquiring business, which is where we actually process payment transactions on behalf of about 1 million merchants.
Again, as Andy pointed out, these are good recurring fee businesses and you can see that 2/3 of our revenue is generated by fee income here. So when we look at our financial performance, and as Joe Hoesley pointed out, these are real numbers. I wish they weren't, but they are.
So let's just talk a minute about net revenue growth. Our net revenue growth shows 2.8%. I would point out that we had 2 key events during this measurement period; one was the Durbin Amendment, and one was the CARD Act. Those 2 events cost our business $640 million in revenue. And if you actually did normalized just for those 2 events, our revenue growth would have been 7.6%, our compound annual growth rate over that same period. So I do feel and I do believe that right now, these businesses are quite healthy, and we're seeing very good performance, even though you might not claim that if you were just looking at these numbers.
I'm often asked how is the economy because we always get to see things up to the moment. And I would tell you that, again, we saw a very quick return of the affluent customer. We've seen very good spend from the high spenders, the transactors, as we refer to them. So they are spending a lot. Our spend metrics are good, but they pay us back every single month. And we've asked, even our board members sometimes, "Could you stop paying us every month? We'd like to carry some balances." and it's been to no avail.
Our balance growth is so-so. Mainly, that's because we've had middle class that's been very cautious. They are spending, but they really aren't carrying balances. We've seen an increase over the last couple of years in our payment rates. We have seen that recently stabilize, and so we do believe that there will be opportunity as we look out into the future years to see balances start to grow again.
And then, finally, many of you know that our corporate payments has struggled a little bit this year. We actually can say that the federal government has actually slowed down their spending. And we've seen our federal government business, which is about 30% of our corporate payments business, actually decline, primarily because of this sequestration.
So competitive advantages. We have tremendous technology and if I would to look at one thing that make us unique in this space, it would be our technology. I'd like to recognize Jeff von Gillern, who is sitting right here very nonchalantly. But Jeff actually runs all of technology for U.S. Bank. And he actually joined us here as [indiscernible] from Visa. So when it comes to the payment businesses, he has a great background and is really an asset, especially for my businesses, and has a great team that helps support us.
So let's talk about technology. Let me just talk about a few of the things that make us really unique in this space. First of all, in our merchant platform, you may be familiar, we'd talked about IPP, our international processing platform. Our international processing platform allows us to put all of our customers, no matter what country, no matter what geography through one back end. And again, Andy pointed out that the value of having one platform. We are the only folks in the acquiring business that can actually make this statement. We can put all of our customers through one back end and that back end accommodates -- it authorizes in 100 currencies and settles in 26. That means our very large multinational global customers can actually come to us, move their volume through us and eliminate processors in other countries. When we picked that -- we have Exxon, for example, Exxon oil, they could eliminate 17 processors by coming through our merchant back end. So a real advantage from a technology perspective.
In our card business, we have the only platform against our largest competitors that allows us to do multibank processing. So again, nobody we compete with has the ability to do multiple banks at one time and provide issuing to multiple banks. That's a real advantage. And if you look at one of our key advantages here, it's our FI distribution channel. As Richard mentioned, we do business with 3,300 banks right now. We provide them with some type of service. [indiscernible] Card issuing, merchant acquiring, sometimes ATM processing, again, we resell our services to other banks. It's a real advantage to us. The only comment I would make on here to brand awareness, we are a partner-based business. We do business on behalf of a lot of other partners, sometimes FIs, sometimes retailers or co-branded partners. And so again, we put a lot of our marketing into other brands and making sure that they're front and center in front of our brands.
We have scale in all of these businesses. More importantly, because of our technology and our in-house servicing, we have great cost efficiency. So it's important to have scale, but it's also important to have that cost efficiency to a single platform, and again, that in-house call center to help us compete.
Regarding market share in the businesses that we really want to grow market share in, we really want to grow share in our credit card business. We've done well there, and we continue the things that we can grow market share in the card business.
In our merchant-acquiring business, we are very focused on the international space. we're seeing very good growth opportunities internationally. And we will continue to invest and grow -- and focus our growth on that international market expansion.
And then finally, in corporate cards. We've had a lot of great wins this year, thanks to Dick Payne and Joe Hoesley. They have brought on a lot of new corporate customers, as they've pointed out. And they've done a great job of cross-selling our services into those corporate customers. So good opportunity there, and we believe that will continue to grow. From the standpoint of accelerators, we do believe that the economy will continue to improve. And with all that improvement, we will continue to see these businesses perform better.
Client growth. Again, as long as all of my U.S. Bank partners do well, we'll do well. We really have a lot of programs in place to work with them on Building Deeper Relationships. And then finally, from a regulatory environment, this is the one area where anything, any kind of stabilization at all, would be much appreciated and certainly would help us out in this businesses, especially in the card space.
So let's talk about what we've done since 2010. Again, this is a list of the strategies that we were deploying. And most of them are strategies that will continue take us out for the next 2 to 3 years. So first of all, we have our international expansion. And again, that's been very, very valuable to us in our merchant business. We have -- we launched Brazil in 2012. We're doing well in Mexico. And you can see, we've also opened up our corporate payments in Europe. And that's just starting to take off for us.
In our FI space, it's a very good growth market for us. It will continue to be a good growth market for us. And you can see the kind of account production that we have there. I will talk a minute about Syncada. You might have seen an announcement on September 1. This is one strategy that didn't work as well as we had hoped. We partnered up with Visa. We did a joint venture with our freight payables business. We were looking to move more into international banking space and Visa was going to bring us international bank partners. We did sign a few banks, but it certainly didn't take off in a manner that we had hoped. And so we bought Visa out. We brought the business back in-house. We are very committed to freight payables. It's a good business for us. It's still a good growth business for us, and we will stay at the course.
So where are we going? Still a lot of opportunity, especially in product and in technology. And we'll talk a lot now about some of the things that we're building out and some of the innovation that we see. In addition, we've talked about international. We'll spend a little more time on that, and then Building Deeper Relationships with U.S. Bank.
So let's talk a minute about prepaid. Early on, we were probably one of the largest in the prepaid space in terms of gift card issuing. So when prepaid first started to come to be, we jumped into that space. We learned quite quickly that we really wanted to get into something that was more recurring. And we really started to migrate and move into the reloadable prepaid space. So what you see now is we're very strong in government, in government benefit programs such as disability payments, unemployment payments, those types of programs. We're in about 20 states right now, and we're very strong in payroll cards.
And in December, we announced the purchase of a company, FSV, that was #2 in the payroll card space. We like this particular company and we went after this company because they had their own in-house processing platform. And it was very, very important for us to be able to have our own processing platform. Up into the point of this purchase, we were outsourcing our business. So with FSV, we now have an in-house platform, and we also have brought in an in-house call center. And so again, the prepaid business is a very low-margin business. You have to be very efficient in this business. And again, we're very pleased with this transaction because it gives us our own in-house technology, as well as our own in-house call center.
Our internal rewards. We actually have taken our rewards platform in-house. Again, we were outsourcing rewards on our card program. We decided to build this in-house, we are launching this in the next month, and it does a couple of things for us. It really helps us control redemption value and create a better redemption value for our customer. It allows us to enhance the customer experience. And most importantly, it really gives us the ability to customize rewards. So we now will have the ability for our cardholders to pay real-time with their points when they make a purchase. We will actually start to have reward points on our corporate card. And finally, it will allow us to provide rewards to our folks in the merchant processing business. So a lot of great opportunity because we were able to bring this technology in-house.
We're making some changes to our FI credit processing business. We will allow our banks to actually own their balances and just use us as a processing engine. That's something that we're building out right now. And again, as we see banks sometimes wanting now to put balances on to their books, this will give us more functionality in the FI space.
And then finally, innovation. We'll spend a bit of time here on innovation. A lot's going on in this space. We do know that in the next 2 to 3 years, things will move aggressively into mobile payments. We're very excited about that. The bank has invested a lot, and we've invested a lot both in our card business, as well as in our merchant business in the mobile capability space. I'm going to show you a video right now. It actually has to do with some of the services that we're providing around mobile, which has to do with a voice control and voice functionality.
Pamela A. Joseph
We actually did that program through the Carnegie Mellon University with one of their tech groups there. So we actually, every year, put out a project that we want to build out. And we actually shop at amongst some of the technical universities and actually get the students to help us on that. So it was a really great application and it really helps us actually, sometimes try to encourage them to come to work for us in our payments division. So again, you can see the kinds of things that we have going on here. What I would say about this space is: one, we have tested every application; two, we have -- I mean, in terms of every kind of device, so we've tested every kind of phone device out there and put it out in the marketplace with our customers. We've tested every kind of protocol. So that might be chips, that might be bar codes, that might be QR code, we just want to be sure that we know all the different technical solutions out there, and that we've worked with our customers on those different types of technologies.
And then finally, we have several wallets out right now. We have the Visa wallet out with our customer base and we have Square out. Again, we just want to be sure that we've tested all of these different technologies that we can basically look at them and talk with our customers and know what works well and what doesn't work so well, so that when the time comes and when the market really starts to move, we know what we think will work best with our customer base and make sure that we're aware of all the different options that are in the marketplace. We've also tried to create a lot of unique capabilities again for our own customers, whether those are our partners such as the REI instant credit app, we have a merchant instant decisioning app and different things that we provide out to our bank partners to make sure that we continue to be unique and distinctive in the industry.
I'm going to show one more video. It's about an application that's called Peerie [ph]. And this is a little bit further out, but we're actually very excited about this opportunity. It has to do with digital and audio watermarks. And it really allows you, when you're interested in buying something, whether that's through print media, television or radio to actually point your phone and actually pull up the offer on the phone, and actually make the purchase real-time. So let me show you this.
Pamela A. Joseph
We are working on a launch of that in '14. We're working specifically with the manufacturer and a magazine to put that out into the marketplace. I basically have said to my husband, "I will have no control over my spending once that actually goes into play." Because right now, we just don't have enough time to go a store, but if I can start doing that, I don't know.
All right. So that's what we have going on in innovation. That's just kind of the tips of the wave. We do a lot of try, test, implement; try, test, implement; and then try, test, dispose of, because there's a lot of trial and error along the way. It doesn't always work and it's -- sometimes it works, and we just don't like it.
So let's move to international. I had a couple of you asking the percentage of our revenue that comes from international. This is again in our merchant business. In 2010, it was 17% of our revenue generated through the international business. As of second quarter of this year, we were right at 24%. And as we look out to 2015, we'd like to see that be at 30%. And we feel like we're on that trajectory right now.
Again, we sometimes do transactions in markets that we're already in such as the U.K., perhaps. We have good organic opportunity in Brazil and Mexico. And then we look for geographic expansion and we're very, very selective. We're very particular as to where we might go next. And again, we look very carefully at opportunities to continue to grow our footprint. But right now, as you look out to '15, what we're looking at is a lot of opportunity organically. And we do think that this is still a very good growth market for us.
And then finally, Building Deeper Relationships. We really focused, over the last couple of years, on increasing our penetration with credit cards with our U.S. Bank households. And you can see we're up to 34% at this point. We still have room to continue to grow that. But where we really have great opportunity over the next couple of years is in our merchant and our corporate payments space. We still have large opportunities in our commercial segment specifically, as well as small business. We've had very, very good traction with our corporate customers and our very large customers. And now we need to get to that commercial space, as well as that small business space, specially, again, with our merchant and our corporate program. So very good future opportunity there.
So in summary, again, the drivers in this business are fairly easy. The strategy is, right now, we feel very good about. We've had a couple of good years of implementing these strategies and we still see very good potential in these areas. What I would like to say to you -- I had a number of you asked me during lunch, "Don't you feel like some of these are commodity businesses?" And the reality is this, to move a transaction electronically from point A to point B can be a commodity. But I hope that you see, there's all these things that we wrap around just moving that transaction. There's all these capabilities that we have and that we build out that really make us unique. So we've done a lot of things to make sure that we have capabilities that others don't or that we do better than others that we compete with. But I also think, as importantly, you can see we have some very unique distribution capabilities, as well as our own partner here at U.S. Bank, where we still have great opportunity to grow this businesses. And we'll continue to work and to find ways to continue to make these businesses distinct. And again, I feel quite bullish right now that this is still a very good growth business for U.S. Bank.
Richard K. Davis
I think you're right. Thank you, Pam. And as the sun starts to peek out in New York City, let me bring this to a close, and then we'll bring up some question-and-answer opportunities.
Extending the advantages where we started this morning, and I hope we were able to convey to you what that means to us. I always ask you to take a minute and replace -- switch places with me. And you're running a large bank in the middle of a recovery after a long recession, trying to create distinct and unique reasons for people to invest in your organization. And we thought the best way right now to characterize our position in the world, as we know it, is that we have a great advantage. And you should be pleased to know we know that. And further, we expect we can do things with it and extend it beyond where it has been so far because there's plenty left to do. There's plenty of opportunity that's already presented itself and great momentum that we've taken to the last couple of years. That would be one of the most important things we left with you today.
But as I build on this extending the advantage to the final piece of that ladder that we've used for many years, the first and maybe foremost and hardest to describe attribute of this company, is our culture. And our culture -- a culture is not just a place where people work to get paid. A culture is not a place where people come to work because they love the mission or because it's convenient. People actually work in a culture, not for a culture, in a place where they feel protected, they feel respected, they feel empowered, and they feel that they're making a difference. And if you have all of those things in a culture and you overlay it on a bank, we, honest to God, do believe we are changing peoples lives.
And in the good times, we think we're dream makers. And in the tough time, we think of ourselves as dream protectors. But in all times, we feel that we have a relevant place in the lives of our customers, and particularly, in this economic environment and this industry called banking.
You heard a lot about client advocacy. It's a real deal, almost like the real numbers that Joe said we had. It's a real deal. And the client advocacy started on March 15 a couple of years ago. When Bill Parker, Chief Credit Officer, walks into my office, knocks on the door and said, "Hey, I think it's about time you and I were done being the Chief Apology Officers. I think it's about time that we turn the rest of this culture and let's get our employees to feel so empowered to advocate for their customers, starting with me, the Chief Credit Officer, and ending with you, the CEO. Let's make sure the environment is conducive for everybody to stand up and advocate and own the situation, and act like it's their own money, their own company and their own idea. And let's create that environment." And that's where client advocacy came from. It's not just another derivative of nice selling skills. It's a very, very important cultural distinction that you will see much more in the next 3 years because it's very nascent and it's introduction here.
I asked a few of our team members to focus on the economy. Every economy is new. There are fewer people in any part of America that can appreciate than this group that the economy does move in cycles, that's why they call it a cycle. We're at the low end of it, coming out of it. It will change. Do you know that over 47% of our 66,000 employees, we believe, have never worked at a bank during a healthy economy and/or higher interest rates. That's almost 1/2 the people that work here. And I do believe the bank that takes the time and the care to prepare their employees for the next economy will indelibly be better served and well ahead of the game, another advantage, because we're spending time talking about it, preparing for it and every strategy we talk to you about is to be the greatest bank in the difficult times and even more impressive to you when things are good.
And then, finally, we talked a bit about distribution strength; scale; opportunities to deepen, not necessarily widen. And you heard words like global and innovation and mobile and advocacy and relationship building. These are phrases we wouldn't been used in the years past. And while they may seem a bit nonfinancial, they are core to who we are and it's the reason the culture starts to move forward in a new place.
And so I close with this. This is what we brought you up until today. And we will add now to our strong defense, our investing for growth, our position to win, we will add now our culture, our distribution, the new economy preparation, and as importantly, our advocacy for the people who rely on us every day.
CPR. We called on this phase 7 years ago. It's easier to remember because CPR is easy for me. But there's no audience that likes this better than you. And it was built for you. If you're an investor, a partner at U.S. Bank, I want you to like us, know us and invest in us because you believe us to be consistent. You believe our approach, our model, our mantra. Our philosophies are predictable. And you will not be surprised, but pleased with the consistent, steady growth and improvement over prior period in a repeatable manner.
Well, the reasons we came through this deep recession better than most is because we didn't look back and have regrettably done things before the recession that were either easy or others may had well taken us into that place.
We aren't that profound. We're simply conservative. And we didn't do things not necessarily because they were wrong or the economy was going to falter but because they weren't repeatable. They weren't sustainable. They weren't what you would invest in for and expect of us. No surprises is one of the highest compliments you can give us. And high growth, low risk. In an environment like this, it's the best gift we can give back to you.
And so we believe growth in market share in an industry-leading conservative and prudent manner presents to you, ladies and gentlemen, what you deserve and what you expect from us, which is remarkable shareholder value creation.
Look, we're a bank. That's not altogether that interesting. But we are a servant of other people in an economy where banks make things happen and can be a catalyst to the future. That's a little more impressive. Better yet, we have people who their whole life trained to do the jobs that they do, many of them you heard here on the stage today that are prepared to take that and leverage it and lead in our company and in our industry to deliver a very, very strong and robust recovery for this company, for this industry and for this country. We do believe ourselves to be that relevant.
I thank you for your attention and the time you give us. I thank you for your investment. I hope we've accomplished, at a minimum, a level of trust and believability with you here today. And we're always at your disposal to be available for questions and for visits and we look forward to that as well.
So as we close, we're going to go to Q&A. I'm going to ask Andy to come back to the stage and give you a quick preview on quarter 3. And while he does, I will have the speakers come back up on the stage and grab a chair and join me here for Q&A. And you can see my method. You will, otherwise, be distracted by the people coming on the stage, but you will not because you are dying to hear what Andy has to say about quarter 3. So all eyes will be here, stage left. And as soon as he's finished, we'll begin our questions and answers, have you well out by 2:30.
So Andy, if you will?
Thank you, Richard. So about 2 months ago in our earnings call, we gave you a few forward-looking statements and I want to update you on them today, and let me start by saying they're pretty much the same. So it's not changed a lot.
First of all, we said at that time, our expected link quarter loan growth was going to be between 1% and 1.5%. And at that time, we expected it to be at the high end of the range. And I sit here today telling you we still expect it to be at the high end of the range, perhaps even a bit above that 1.5%. So loan growth is consistent with what we talked about.
Second is we expected stable net interest margin, and we still do. So given point one and point two, we're going to have modest net interest income growth.
Thirdly, we talked about credit and net charge-offs will continue to improve, driven by consumer improvements, lower losses. And we would expect modest reserve release like you've seen from us the past few quarters.
And lastly, let me update you on mortgage. Mortgage applications, third quarter versus second quarter, I expect to be down around 40%. Mortgage production will be down around 20% and mortgage revenue will also be down right around 20%. So very consistent with what we talked to you about, about 2 months ago. Thanks.
Richard K. Davis
They could not write fast enough. All right, so let's open it up. Everybody on the stage. We also have some of our other senior managers here in the room that are more than available to answer questions as well.
So let me open it up. And Judy, we have a microphones roving . Where are the microphones? Patty, Jenny, Val, okay? So we'll need that for the -- those on the webcast, we have a question right over here, Nancy. Right here, fellows. Right in front of you, Patty. Okay.
Nancy A. Bush - NAB Research, LLC, Research Division
Okay. First, [indiscernible] this whole client advocacy. I think you said it was in the nascent stages. But is this going to be something that's measured? Is it going to be part of compensation? Could you just flesh out the whole concept a little bit?
Richard K. Davis
Absolutely. In its earlier iteration, it was called business -- building deeper relationships, BDR, which Mac put out there for you to be about $1.550 billion in total for those 6 years. Now it's becoming culture. And so starting with next year, Nancy, it'll move from not just the quality -- quantitative aspects of what a business relationship manager brings to the table, but the depth of relationships they bring, the growth in those new businesses and they will be paid differently based on their ability to bring an entire relationship and protect and retain relationships based on first call and last offer. So yes, it will become very inculcated. It's gotten dollars numbers behind it under transactions, but now it's going to become more philosophical and more paid for on a performance basis.
Nancy A. Bush - NAB Research, LLC, Research Division
And if I could just ask one additional question. You referenced to the new economy.
Richard K. Davis
Nancy A. Bush - NAB Research, LLC, Research Division
Could you define that for us because many of us are trying to figure out exactly what that is?
Richard K. Davis
Sure. Let me start. I was a teller back in 1976, and as a teller, I was told to shut up and pay out the checks and don't ask questions. And as things started to move out -- as you remember, in 1978 to '81, interest rates started going to 12%, 13%, 14%. And I started asking questions about why would anybody get any kind of money at that cost although they were getting 8% on their CD. And then we went back to the deregulation. Through all these stages -- and I never worked for a company that told me how it all fit together, and therefore I wasn't nearly as engaged because I didn't know what my role was. And John and Kent, for starters, are spending a great deal of time explaining to a 21-year-old who's been here 2 years that it's okay to sell somebody a mortgage at 4 3/4% even though it's not 3 3/4% because you're young, and it used to be 20%. And so we're helping them understand that banks provide services dependent on the environment that we're in. As the world gets stronger and economies start to pick up, we want them to be more excited about talking about credit cards, talking about investment products. Imagine this, 7 years ago, a CD might have been at 4%, but an uninsured annuity or mutual fund could have been 6 1/2%. And our employees were struggling with how to sell the 2 of them, how they operate against each other. At interest rates that we're at now, there's virtually no distinction. But there will be again and people will trade out FDIC-insured deposits against a higher rate and a higher reward on perhaps something less safe, but perhaps more aligned with their risk appetite. Our employees have never been in that environment. They don't even know how to sell that. But they're going to because we're talking about it now. We're preparing them for that future. So the new economy is 2 things: it's a rising rate environment with rates higher, undoubtedly, than they are today; and, not or, a strengthening economy where people start moving money again a lot. Not just deposits and loans, but they start using our payment businesses. Companies and individuals want to know how to find their money, how to get to it and how to use it more effectively. Okay? Next question right behind Nancy, actually.
Two questions for Pam. First, you mentioned this new strategy for the FIs in order to be able to kind of be their processor as opposed to actually owning the balances or giving the balances back to them. Can you talk a little bit about how that's going to work financially for you? Are you going to give up revenues? Are you going to get more market share? And kind of a second question, just talk a little bit about what types of prepaid you think are the biggest opportunities for U.S. Bank?
Pamela A. Joseph
Sure. I can actually take the prepaid question first.
Richard K. Davis
Is your mic on, Pam?
Pamela A. Joseph
Yes, I think it's on -- it's coming on. I think from a standpoint of prepaid again, the payroll card space is a very good space for us. We do business right now with a lot of large corporations, the Macy's, the Dardens, Costco, those kinds of retailers. We like that business. It's recurring. And actually, we think longer term, it allows us to provide some products and services to employees of large corporates that may eventually involve, I think, migration into the bank. And so that payroll business is a good business for us. And again, we do like the government benefits space, so we'll continue to participate at the state and local level there. And again, all these because it's a recurring relationship with a customer that may be underserved in the banking community, and we think at some point, we might be able to migrate them into a bank customer. All of this will play well as transactions move to phone. Folks are all mobile and have mobile phone access. And so we're building a lot of capability around the prepaid card into the phone. And we know that, that will be a natural migration for them to eventually -- to do all this through the phone. It's kind of banking on a card, banking on the phone. In terms of your first question as to the processing capabilities, again we do have some customers that might want to move balances onto their own balance sheet. It's mostly larger customers. However, part of what we're doing with that capability that we're building out, we do have a very large partner, does business with banks that wants that capability, and so we will have a partner in that business. We're just not in a position yet to announce that partnership.
Richard K. Davis
Let me add to that, Pam. I think it's important we're not likely to lose customers that we have today who want to take it back up to the balance sheet. We have a couple of large customers, they're gone and we don't have any large. So now, we're going to need a market share where we can start to attract medium-sized and small banks because they'd love to have that credit card under my name and on my balance sheet, but I don't know how to process for it or do the back office. That's where we're going to start introducing ourselves to add more banks into the corresponding site. Other questions right over here. Richard?
Richard Ramsden - Goldman Sachs Group Inc., Research Division
Question for Andy. At some, your CCAR is going to move from Basel I to Basel III. When do you think that's going to happen and can you talk about the implications of that? And secondly, obviously the leverage ratio is not a binding constraint for you, but it is for some of your peers. Do you think that's going to result in a change in pricing, for things like commitments or repos? And would you follow that pricing? Or do you see that as an opportunity to take market share?
Regarding CCAR, we're going to get the rules here in the next quarter. My belief, and I don't know this for a fact, is we'll likely go to a Basel III constraint as opposed to Basel I since Basel III will become effective for us. We're under the standardized. If I look back on our last CCAR, it wouldn't have changed our results. We'd still be bind -- bound by these normal environment as opposed to the stressed environment. And it would all depend also on the economic outlook. So the more severe the economic outlook, the more severe the outcome under the Basel III methodology. Regarding your second question, we are above the 6% leverage ratio. I do think that, that comes in play, a consequence maybe to lower the less profitable aspects of your balance sheet regardless of the risk characteristics. So in a sort of odd sort of way, it might mean back to increased risk. But again, from our perspective, we're above the [indiscernible] Ratio at 6%.
Richard K. Davis
Right here, Bill?
This is also for Andy. Can you talk about expenses? It wasn't part of the 3Q update. Anything about for the quarter then also for the year. Especially when you're past the bulk of investing, can you get positive operating leverage in this environment?
Right. With regard to expense, I expect it to be relatively flat to second quarter. Our fourth quarter typically goes up because of tax credit amortization, so that typically what happens. I would expect that to happen again. But from a core expense base, I would expect it to be flattish the next 2 quarters. In terms of positive operating leverage, because of that decline in mortgage revenue, I think absent that, we would have it. But then mortgage revenue decline will not allow us to have positive operating leverage in quarter 3.
Richard K. Davis
And let me jump onto that. Because If we tried to strive for positive operating leverage to adjust to this fairly nurturing bridge where mortgage rates volume is down because high-end rates are up, but the curve hasn't been to the middle, we'd be making a mistake. And you wouldn't want us to do that because it would be unnecessary, which you'd also appreciate. In the Mortgage business, you don't hear about wholesale layouts because, as I said with the folks at lunch, we have the church, we have the parking lot and the parking lot's used for most Sundays. But we have that adjacent parking lot that we use for the peak times that we knew we were in and that parking lot now we're not using anymore and most of the people that were the commission-based temporary or contract are the folks that have moved away. But for the most part, the core is still the core and will be able to operate on that basis.
And third quarter, fourth quarter and next year, I expect us to continue to be in the low 50s efficiency ratio that you've seen us been.
Great. My second question, if you don't mind, just on the balance sheet and deposits. There's some talks still of some flight to quality, flight to safety deposits maybe beyond the balance sheet. Can you address how much that might be of the balance sheet. And are you worried about if things do get better that those reverse?
So I'll give you an update on the deposits also in the third quarter. That hasn't been so much of a focus. But I would expect deposit growth just below loan growth, so somewhere in that 1 2 at a 1 5, 1 6 range, that's what I expect. What we did see occur at the beginning of the year is the shift out of DDA into interest-bearing because we believe people, once the unlimited insurance went away, went to achieve -- move their money to achieve 20 -- 15 to 20 basis points. So that phenomenon occurred. But we didn't lose deposits overall. I do expect when I talked about to be conservative in our interest rate scenarios, we have increased the expectation or the assumption about deposit runoff in an increased rate environment, particularly your DDA. I'm sitting on a DDA balance of $60 billion, almost $20 billion more than we were just 18 months ago. And I do think as rates move up, some of that will move out and that's my expectation.
Richard K. Davis
Betsy. Let's go to Betsy.
Betsy Graseck - Morgan Stanley, Research Division
Sorry, a couple of follow-ups and then another question. So one follow-up is on the Basel III CCAR. Do you think you're going to start with a 5% minimum? Or do they phase it in?
It's a good question, Betsy. I don't know. So the question is, is it the final rule or the transitional rule? Is it 5% or some other number? And I don't know. Just we'll all have to wait for the instructions to come out.
Betsy Graseck - Morgan Stanley, Research Division
Right. But either way, based on your results from last year...
Based on the results from last year, I still believe our binding constraint will be the base case, the 8% that I talked about.
Betsy Graseck - Morgan Stanley, Research Division
Okay. And then separately, loan growth is a critical element of the story, the growth here. And you indicated that in many of your presentations. And in some cases, you're leading with credit; in some cases, it's a follow-on. But I guess my -- a couple of questions here is the 6% that you can organically drive, you're hitting. And so it begs the question as to how much of what you want are you actually getting? How much are you leaving kind of on the table for future quarters? But then, it's also -- the other side of the question is with auto I hear that you're moving into near prime, which is a little bit of a change for the credit culture of the organization. So want to understand how much of the loan growth that you're generating today is everything sitting on all cylinders and you have to move to that next degree of credit risk taking to continue that 6% loan growth, and how much do you have waiting in the wings to come in the future?
Richard K. Davis
I'll go first. You talk about the binding constraint of 6%. We are leaving no loans on the table because of any constraints we set for ourselves. So that 6% that Andy described is a coincidence, but a good one that we're growing at exactly the level that we can based on our capital calculations. So we are not limiting that. And we don't want to be at 6%. We want to be at 8%, 10%. We can grow this company that way. There's so much market share for us. So we'll respond accordingly to having growth above the 6% if we can get it, and we want to get it. So this movement in the near prime for auto is a missed opportunity if we don't grab it now because we have the reputation, we have the technology, we have the single platform. And we have these great relationships, either floor planning or new auto business. We just haven't extended into the pre-owned as much as we could and we haven't gone into many places in the country as we will. So if that serves us, and in part might offset some of the mortgage slowdown that refinances might have contributed to even in the jumbo space, then we'll find ourselves hopefully well above 6% and we'll manage that to our constraint. But it would be a good problem to have and we're not managing anything artificially.
And the other part of that equation is the fact that our commitment levels have been growing at 19% compounded were our loans are growing about 1/2 that, so we still have a lot of unused capacity, customers that are already in our house, so to speak, but aren't using their availability. And I think that'll drive once the economy starts to turn around. Then in terms of that constraint, our lever, so to speak, Betsy, will be the buyback. To the extent loans are growing at 6% I'll buy back X. If loans go up, the risk-weighted assets go up, I'll back less than X. And it's very easy to move that lever.
Betsy Graseck - Morgan Stanley, Research Division
And so should we also expect that there are opportunities in consumer where you could go further down the credit risk profile perhaps?
Richard K. Davis
No, no. We're going to stay with what we just said because we understand the indirect business. It's 19 50 [indiscernible], I think, had said. It's a business that we think has a robust future for America because cars are I think pent up. Not in small business, not in home equity, not in mortgages. We're going to deal with stuff that we think we understand, and we also believe that we have relationships with dealers that we can get the near prime, not the sub-prime, and get the best opportunities to get the best paper. Okay? Down right here. You got the mic?
I mean, you've said for years that you don't need an acquisition. And 3 years ago when you were here, it was even stronger than -- in a way it was like, oh, my God, the last thing I want to do is have a distraction and headache of dealing with somebody else's problems. But almost every one of the slides that you showed us where you compared your capabilities to the larger and the smaller banks, in every single slide, you had the little up triangle versus all the smaller bank. And so I have to believe that there is a compelling financial logic to expend -- extending your product capabilities over a bigger geography, and certainly, you have the currency to do it. So financially, it makes -- for all of us in the audience, it just makes a ton of sense that you would attempt at acquisitions over the next couple of years. And so, A, is my reading of that right? B, has your view changed since 3 years ago? And C, if there was a compelling opportunity to do that, would it be regulatory and politically feasible in this environment?
Richard K. Davis
I don't know if it's yes, no or yes, but let me go that [indiscernible]. You're not reading exactly right. We really don't need an acquisition. The kind you're thinking of is a traditional bank deal with more branches and more states. And I think that would be a very big mistake for this company, but for an amazing and remarkable opportunity that we just couldn't pass, which we'll never leave the shareholders without the best efforts on looking at every opportunity. But if you think about what we were trying to describe here today, we have so much upside where we are. We could be so much better even with what we have. But for branches, which are not the only a single point of distinction for a bank, I don't think we need to be in more places in order to be better at what we do. But we do need to keep building up the rest of the national franchise is where I think we can build on the wholesale and the corporate and trust areas. So we really don't think we need a big deal. Now we're going to keep M&A going, particularly in payments and in trust. Small bank deals would not be out of the question, but they'll be in locations where we already are or we can get the scale that will be improved. So that's number one. Number two, as it relates to the regulatory side of things, I have no reason to know the answer to that. But I do believe based on the quality of our company, the relationship with the regulators and the size of the company, we could do a meaningfully sized deal and have a very good chance of getting to accomplish with all the appropriate steps that would be necessary. It's not a reason to do one, but I don't believe it's a reason that we're not doing it. We're simply not doing or looking for a large deal because we think it would dilute the momentum that we have today. Okay.
A couple of questions. Firstly, for Pam, can you update us on where you stand. JPMorgan has set up that pilot through Visa. And I know you were working on your own answer to that, so if you could update us on where you stand on that? And secondly, what's your best guess as to what happens to debit interchange fees given that the Fed's appealing it? Just want your view on that here.
Pamela A. Joseph
I can talk to that, but then I'm going to ask you to repeat the first question on Visa.
The Visa, the partnership that JPMorgan announced with and you were working on your response. If you could just update us on where you stand on that.
Pamela A. Joseph
Okay, all right. So on the Chase announcement with Visa, again our conversations with Visa is they don't have any capabilities that we don't have and that aren't open to us. We are working on some honest opportunities with 2 large merchants and with our card-issuing business to put something out in the marketplace just to test it. And again, as we get closer to when our launch will be, we will certainly let you know. As for debit, I have no idea what is going on there. We, as you know, the Fed has successfully appealed. Nobody has heard from Judge Leon yet as to whether they're to stay officially or not. But my understanding is if he opts not to put a stay in place, that can go back to the appellate court and they can override him with a stay. So we assume at this point that there will be a stay of the existing program, the existing pricing and that will carry us through at least the next 12 to 18 months. And then I would just say, for most of us, it's about starting to create and drive a migration strategy and start moving customers into other product options over time.
Richard K. Davis
With that, I want to just add -- I can't add anything to debit interchange because we're all waiting to see. But I would say on the former -- there's a philosophy that we, in general at the company, where this R&D I've talked about, this testing, we prefer to test something, run it through all kinds of pilots and then only and only if it works do we come outwith a grand announcement. Others like to announce the test. And so don't be dissuaded by the fact that we're not doing things just because we haven't announced it. We just have always chosen to do it and bring it forward to the market when it's working. And that gives us permission to try all kinds of things that might fail and not be held accountable if we haven't tried.
I have another question for you and Andy. You're expanding into a lot of different countries and the broad [ph] payment space as well as the corporate trust. What are the implications of that from a -- that's obviously going to increase operational complexity a lot more -- since there's a lot more regulatory scrutiny of banks and capital and operational requirements. What does this mean for you in terms of -- what does that increasing operational complexity mean for you? Is it worth it in terms of going to so many different countries and having to meet so many different rules and satisfy so many different regulators? And longer term, does that have any implications for your capital returns as that's a big part of it?
Richard K. Davis
I'll just go first. It is more complicated for sure, but yes it's worth it. Let me explain that. In Europe, for instance, we have the bank, the Elavon Bank in Dublin headquartered and it provides us with cross-country capabilities for all of our merchant processing across all of Europe. So in that particular case, we no longer need to go into a new country with a sponsor or anything like we did in the beginning. Brazil, on the other hand, we went in with another bank. They have the customers. We have the platform and we're starting to understand how to do business in places like that. For a Fed, OCC, overseeing companies, so the Fed has jurisdiction into our international activities, so it's not like we're piercing the veil by moving to a new company with this country. We're adding just another complexity and another the group for them to oversee. As a result, we are very, very careful as we move into countries to understand what kind of risks we have in terms of economic, political risk. But what we're not adding to that complexity is loan or deposit risk. We're not bringing balance sheet risk outside of the United States for anybody in this room to worry about because what we will do is move money or serve as a trustee in a native currency in a property location where everything is consistent in and within its own kind of environment of its in-country activity. So we will not add balance sheet or financial risk of that type, but we will add complexity and we're managing it quite carefully. And every time we do it, it's already been burdened into the costs of the start-up time and the return on first investment, which, so far, has met all of our hurdles.
And in terms of return, for that both the Corporate Trust business as well as the merchant processing, to the extent we expanded in Europe and that.
will be positive.
I see you're not taking on -- I mean, in Corporate Trust, you got a lot of deposits from your customers. You're not taking on deposits is what I hear in these foreign markets?
In the foreign markets, there are deposit -- there is deposit gathering, but that doesn't affect capital directly. It's just an offset to other deposit gathering or funding.
Richard K. Davis
Maybe a follow-on question to the capital question just asked. But I guess I'm curious given that there have been a couple of regulators in Europe who have forced SIFI buffers on domestic institutions that are above the BIS guidelines. Do you have a sense that, that might happen here in the United States if the regulators do that to the bigger banks and then decide that, that should flow downstream to banks like U.S. Bank?
Well, first, we're well below the $700 billion. Second is our exposure outside of United States and certainly in Europe, from a balance sheet standpoint, is really quite miniature. So it's not material. I mentioned when I was going through our capital bill that we're assuming the 50 basis points SIFI buffer. We haven't got specific guidance on this as we talked about. So that is our best estimate right now, and I think we're in the ballpark.
And then, Andy, a question for you on the balance sheet. You've got about $35 billion of securities held-to-maturity as of the second quarter. How much more of the securities portfolio do you think might go in to held-the-maturity if rates continue to rise and put the capital at risk? And then secondly, have you stated what your deposit rate beta is in terms of your estimates for interest rate risk? As short-term rates rise, how much of that are you planning on putting back into the deposit rate?
So in terms of the held-to-maturity versus the AFS, it's about 50-50 right now. 50%, 50%. I would expect -- and that's not going to grow tremendously, but as we continue to build the securities portfolio, I would assume that same mix, 50-50, to AFS -- held-to-maturity versus AFS. In terms of our deposit lagging on the increased rates, what we did do recently is increase the sensitivity to that and we also increased the expectation of reduced DDA that I talked about depending upon the product and it varies tremendously upon the sensitivity of the product. It can run anywhere from 20% up to 50% to 60% to 70%. So it's very specific product by product.
Richard K. Davis
Another question in the back.
A question for you about the wholesale bank. You have a slide in here that sort of illustrated for the sort of Fortune 1000 companies what the change in revenue has been, the changing commitments and so forth. And I think if I'm doing my math right, it sort of implies for the less than Fortune 1000, it's going to imply much lower rates of commitment growth and relatively flat revenue. So I may be wrong, but I think that. Could you maybe just give us some color about in that sort of less than Fortune 1000 category what sort of trends you are seeing in the market, whether you think you're sort of gaining share there or sort of maintaining share? And then could you also talk a little bit about how you would compare the economics between those sort of middle- and smaller-sized customers versus the much larger clients, whether the larger clients are perhaps good returns on capital, but not as good or maybe it's the opposite, I'm not sure. And then lastly, related to it, does the -- does this sort of mix shift in the customer base, does that explain part of the divergence between the growth and commitments versus the growth in the loans outstanding. I'm sort of wondering how much of it is -- of that divergence is sort of driven by the fact that people aren't borrowing versus how much of it is driven by your business mix shift?
P. W. Parker
I got all 3 of the questions, I believe. But there is something in there about the numbers on the Fortune 1000 and then I kind of lost you in the middle there. I know you said...
Richard K. Davis
Let's get the margins. Are they better on the 500 or 1000 or better in the 0 to 500?
P. W. Parker
The margins, the smaller the company, the better the margins, obviously. The margin on the individual products are the same. But the lending margins are better on, let's call it, the second Fortune 1000. And to answer your question, the second -- we do a lot of business with the second Fortune 1000, if you will, but there's more opportunity for additional customer penetration there. But we're not going to make as much money on the Fortune 1500 company as we could make. We might not be making it today, but what is representative is potential in, say, a top 10
amount of money you can make on Fortune 50 is a lot more than you can make on the bottom Fortune, the top Fortune 50 versus the bottom. And then there's a question about the return. In terms of return on capital, it really is a trade-off between more product revenue, not as great a return on the capital committed at the higher levels or let's say instead of by 5, let's divide it by a bond rating or a risk rating. So the return on capital is not going to be quite as high there. But you're going to be able to sell more of your products there. So the ancillary business, probably in my view, in most cases, is going to jack the returns on the larger companies because you're selling that much more ancillary business. I'm not sure I got all 3 of them.
Richard K. Davis
On utilization, if you look at our book, it's not different today because of the new customers we've added. There's no mix change. Because we looked at our core legacy customers, we used to be at 38% utilization and now we're about 25% for those large customers. And the core customers are behaving exactly like the newest ones. Everyone wants to have it at the ready, the ability of the line they're willing to pay for it, which means they're positioned to do something. But when something happens, they'll just keep the line open. Did we get all? All right. Other questions. Right here.
Just a follow-up on the utilization question and this new economy so to speak. Talk about this from time to time. But just we're now on the better side hopefully of the economic recovery, yet loan growth is really not changing for the industry much at all. So what are your customers telling you about either alternative uses of funding, keeping more liquidity? Are we going to see that utilization pulled down? And what's different as we go ahead potentially about the wholesale businesses, commercial, CRE?
Richard K. Davis
So I'll go first because I'm very firm on this opinion. But until interest rates are believed to be moving upward, the general population of our customers believe there's no reason to move quickly and take any action now. And if there's anything about QE1, QE2 and QE3, it's not the bond buying, this should be interesting, it's the fact that they started to telegraph for the first time and they would precision the second and third time at some date-specific moment when rates would start to move up. And so I can't even say how many CEOs today in our company are not hearing from their CFOs down the hall, hey, boss, rates are record low. They've been longer than they've ever been. I don't know when they're going up, but they're probably moving up. Let's start getting involved. Let's buy it, build it, acquire it, add to it, whatever. And they're not. And I talked to the Fed about this particularly and they understand that but they also are protecting other things like inflation. And as a result of that, they're not trying to be perfect, but their trying to telegraph. And as long as that telegraphing is perceived as perfect by our customers, which it is, there's really no catalyst for that. So I believe that while rates stay low, inflation will be in check as well. But until they start to move up, which will be the signal of a healthy economy, we will not see that kind of robust use of lines. But because once burned and twice shy is present, people do not want to be caught without usually more than one bank and more than one line of credit in case they need it given some unexpected circumstance. So our first canary in the mine will be deposits start to rollout because people use their money first. Then they'll use a line of credit and then hopefully they'll start getting more lines of credit and more loans. But we're just at the very beginning of that first step. And I think that's a couple of years to get there.
And you don't mind if can ask the second 1. Through the day, you continue to talk as you always do about innovation and spending technology. But you've also talked a little bit more this time about how you've gotten past the curve of your investment spending and you talked about having a lot of leverage and potentially then against that. But I'm just wondering what that means for -- maybe kind of work through what that means for expense growth when you're talking about sunsetting some of your deeper expenses. We know what's happening on the mortgage side. But then there's the regulatory pressures against it. So as you think about just longer-term operating leverage against an improving revenue environment, how is that the equation different?
So I think that investment curve -- I think the message I'd like to deliver to you is that you shouldn't expect that to cause the expenses to go up, but they're not necessarily going to go down because the investment horizon, the period of amortization is fairly long. So we're not going to continue to increase the slope of the curve. It's going to flatten, but not necessarily go down. In terms of our long-term expense, again you should expect us to be in the low 50s. So we'll continue to grow that expense to stay at that level and consistent with the revenue opportunity.
Richard K. Davis
Your question was very well complete. I want to credit you with that because the cost of compliance is a new and permanent issue for all of us for a while. But, and I would say this, but because we have the consent order, which I gnash my teeth over forever, it had a particularly high run rate of costs that are continuing to come down and they will undoubtedly be replaced with more long-term and systemic requirements of higher compliance costs, which we can handle and we'll not adjust the number upward. But as you said, It's also not going to bring it down. I think we're just giving you more confidence, the low 50s is sustainable for us and something that we think we can manage to. Over in the corner.
Richard, I understand that the organization has really taken on the mantra of focusing on revenue growth and looking for opportunities wherever they might exist within the bounds of your philosophy. Could you talk to us about some of the revenue opportunities you considered and decided not to pursue and some of the thinking behind that. For example, I clearly heard you're not going to pursue sub-prime auto loans. We get that. You're not going to pursue proprietary trading even if you're engaging upon investment banking. You're going to stay in the middle market. So I get some of what you already described. But perhaps you can amplify on things that you see happening in the marketplace today, which you think people will regret a few years down the road and that you've carefully considered and passed up on.
Richard K. Davis
Thank you. You answered a couple of them yourself so thank you for that, Rashal [ph]. But #1 would be sub-prime credit card. Looks good, feels good, great margins. Are you kidding me kind of a thing? Leverage lending, we do leverage lending very conservative. Between Bill and Dick, they are very careful in watching what kind of leverage lending we would do. It happens to be in the gun sight of the regulators is one of the areas they're most worried it would happen more quickly in a recovery where some companies might stretch for return. Things like leasing: equipment leasing, auto leasing where you could enhance the residuals. Where at the moment of the sale, bring the valuation up, have a smaller payment. At the end, you're going to be stuck with a higher cost to return to auction or return to market. Those are things you can do now. They won't show up for a while and they're different than just clear and normal credit quality. And then Andy, I think, just the way he run the balance sheet, too, we could take some near-term steps to provide some income in the near term, but we would either position ourselves inappropriately for an eventual increase in rates or we put ourselves in some near-term benefits that would otherwise not accrue over the long term based on the way we have priced ourselves. So we do have -- I'm glad for the question. We do have some pretty good parameters around what we don't like. I should have said capital markets as well. Maybe first and foremost, we don't trade for ourselves. We do nothing but for our customers at the high quality, high level they would expect us. And if they don't ask for it, we don't do it. Over here.
I think you kind of answered this question just now. But looking at the net charge-offs like early last decade, a lot of that was due to loan commitments.
Richard K. Davis
So what comfort level can we get from the spike of loan commitments that you've shown this time that you won't have credit problems down the road?
Richard K. Davis
Well, I guess, what I'd say is if you believe our underwriting prudence is indifferent for the commitments and the lines that are actually opened, then I believe we'll be in good shape. I would love to see the commitment levels go back up to 38%. It would be almost 2 years of loan growth all by itself. But I'm going to suggest to you that everything on there is at the exact same quality as the book is today, which would only say that we have more loans that are probably over-performing for a while. And I wouldn't worry that there's anything of the unused lines that's of less quality than those that are on the lines today. Anything else? Yes?
Nancy A. Bush - NAB Research, LLC, Research Division
Yes, a question for your wholesale guys. You talked a lot about ancillary services and traditionally when you sell services, the first one you sell is cash management. Is that still sort of the lead product in building relationships? Or is there something new?
Richard B. Payne
Both. So treasury management, there are more of our customers that you look at on a series of uses. They are more of our customers across-the-board, from the largest to the smallest, that use treasury management than any other product. So that's #1. Corporate payments is #2 in terms of revenue and #2 in terms of numbers of customers that use it. And then you get into high-grade bonds, foreign exchange, loan capital markets, et cetera, and they are -- the numbers -- number of customers that use that or not as great as the other 2, but the dollar amount of each transaction tends to be higher.
Richard K. Davis
Nancy, I'll predict for you that in a few years old-fashioned cash management will be replaced and supplanted by new wave commercial corporate payments where things are very much more online and more technical. And that one of the best things we have by having corporate payments in the company is we are selling them together with our clients for solutions where some of the banks actually outsource our corporate payments to sell at private label and they don't have the firsthand benefit of the next new innovation. So treasury management is going to be so old-fashioned in a couple of years. It's going to be corporate payments and that's going to mean a whole lot more technology like you see today for mobile banking. You had another follow-up? No. One more? No more.
Look, the sun's coming out, the rain stopped, life is good. But we have one more question and then we will take our last caller and then we will find ourselves adjourned. So folks, we're going to make our way to the corner.
Richard, could you share your thinking with respect to 2 areas: one is throughout the presentation in certain segments, I heard you talk about private labeling your capabilities for the benefit of other players in the market. When did you choose to decide to private label or, A, even do it; and B, when you do it, why do you do it; and C, why not do it yourself, I mean, as a branded product? And then the second part of the question is in certain businesses, clearly you choose to stay local and you want to know the customer, et cetera. But in the middle market, I think you said you would go for a nationwide footprint. I'm curious as to why you wouldn't do the same thing in, say, autos or credit cards only because there's an algorithmic element, I guess, to the nature of that business. It's more numerical or transactional and it would lend itself to a more nationwide presence, but you choose not to do that. So I'm not sure I understand.
Richard K. Davis
Okay. Private label, it's a good question because I want to redefine it. Private label means we do it always for ourselves and then we're willing to create a hybrid product and allow another bank to name it theirs and for which we do it for them and we get paid handsomely for doing it for them and their customers. So there are a number of banks that have our merchant acquiring. Down in Knoxville, they answer the phone, I think, 18 different banks. We're doing it. We're getting paid. But bank X can say we also have merchant acquiring business. It's under our brand. It's our label. But when they're calling, they're calling U.S. Bank's call center in Knoxville. They're getting everything from us. We get a nice upcharge for that and we start to build a brand for it. Private labeling can transfer to all kinds of things and actually we're thinking about even compliance consulting and things of that ilk, whether you're a $10 billion bank or a $5 million bank, you can't thing bring that kind of talent and you can't have that many people working on it but you love to have the ability to tap into the experience. We might well be able to outsource some of those things. The second issue was --
Richard K. Davis
National, right. So credit cards are national. Everything is national, but where a branch is acquired, which is traditionally a small business and local consumer activity. So if you are a middle market, it's a bit of a stretch because if you're a middle market that wants to have your office manager go down the street and make a deposit at a branch or go in and check on some form of a statement or something, we won't be able to service you in more than 25 states. But for small business and consumer needs, we are completely national and you saw North Carolina State Wolfpack nowhere near our nearest branch, but we can start doing business in that way as long as their nontraditional approach is willing to be accepted there.
All right. I think we've come to our timing perfectly. Thank you very much for your interest in our company. Thank you for all you do to keep us grounded.
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