US Bank at Barclays Conference Notes

Richard Davis – Chairman, President and CEO

Largest non G SIFI bank in America

“we’re the largest non-G-SIFI bank in America, that’s a new designation I call, us we’re just a small little bank from Bloomington, Minnesota [don’t you know]. But this company is growing to be a really perfect sweet spot at $400 billion, we’ve got a really good breadth and depth and also have this ability to I stand at the radar screen in terms of some of those G-SIFI too big to fail issues that some of our brethren has to deal with.”

Efficiency isn’t a goal, it’s an outcome of growing revenue faster than expenses

“We are focused on efficiency never as a goal. In my time as CEO I don’t think we ever been above 54% but we’ve also been as low as 50%. It’s never been a goal but it’s an outcome. But it’s an outcome that usually gets better because we grow revenue faster than expenses and we’ve not done that in the last year more than we ever had in the past and we’re concerned about that. ”

Credit wont be a concern for a while

“We continue to see credit is a not a concern for us but you should worry about it because you would know about it for three years anyway, so I can be doing some cavalry and risky things right now you wouldn’t see it for a while and so one of the things you should be checking with us on our one-on-ones and you look at the quality of the portfolio its really what are you doing in credit quality, what are your focuses today or things like energy, stocks, China, non-precious metals, commodities those are all the right questions to ask because the percentages of the portfolios but they are an insight for you to ask what kind of credit disciplines do our companies have at a time when credit hasn’t talked about for a while and frankly won’t be for a while.”

Credit problems aren’t going to come from recession they will come from higher rates

“when the next downturn will happen or when credit quality finds itself at harmsway. By the way it won’t resession, it’s going to be higher interest rates and its probably not now, not for a while but if 300 basis points to 400 basis points above where we are there is stress in the credit quality based particularly on consumers but sometimes corporations as well and that’s where this next thing will start showing up.”

Tried to sell a large student loan portfolio in April and the market broke on them

“in April of 2015, we moved our $3 billion student loan portfolio both public and private into the held for sale with the intent to sell the portfolio. It’s in a trading portfolio, I declar we would stop originating student loans in April of 2012, it just seemed to me to be a category that more hazard future around it and we simply didn’t want to be involved in that business.

As we looked at it, it was in a trading portfolio so if the market would bare it and we thought it would let’s go ahead and move those assets off and sell them. In my entire career when I look back on it, there’ll be a couple of moments I’ll look at, they were just luck, something you just can’t control. This will be one of those bad luck moments that will turn into hopefully good outcome. But in the early months of our being out to bid, things are moving along swiftly before we put the portfolio to bid one of the largest rating agencies started downgrade a couple of the FFELP portfolios and then others started to follow. The pricing margin started to gap and in the very two weeks we’re in the market getting the bids, I even use a phrase that isn’t official but the market broke, there literally wasn’t bids, in fact I wish there weren’t any bids but they came in at very-very low levels and you know at that point you’re stuck with the decision of whether or not you’re going to take the bids, sell at a loss or remarket the portfolio put it back on.”

There is some remarkably bad behavior in commercial real estate markets

“commercial real estate cap rates, commercial real estate right now the cap rates are probably reasonable. The pricing is probably reasonable, here what’s not. There are some remarkably bad behaviors in long term 10 year deal and in some of the non-recourse deals and I’m tellign you, I’m calling it out it’s a worry and I’m saying commercial real estate in certains markets”

CFPB hasn’t changed much about how we operate

“CFPB is what four years old now so they’re not the new kid anymore. I am happy to report they really haven’t adjusted anything significant for us, but for the fact that they are very watchful on anything consumer like think complaint. And so they’re tracking complaints very closely and one of the things that I have just asked is, every complaint isn’t equal but now apparently they are”

Credit quality isn’t too good to be true, but it is too good to last

“it’s not too good to be true exactly what you would expect, it’s just too good to stay this way and that’s important because it is very fundamentally ease to watch it’s transparent. I would say two things, the regulators are much more on the scene than they were last time, so you will not see the kind of big surprises I don’t think in any category anyway that you did in the last 20 years.”

Listen closely for banks growing in subprime and near prime. That wont be sustainable when rates go up

“Energy China non-precious commodities all those are things worth you’re asking to get insight for the way banks are thinking. The one thing you want to listen for the milestone as whether or not they’re going to take advantage of moments in time that might not be sustainable. Sub-prime, near-prime are great examples. It’s easy to do right now. Even thinking non-banks they can get in, do loans and look like they’re good because they’re all paying off and when rates go up, they’re going to have a lot of charge off.”

Non-performers are the canary in the coal mine

“remember non-performs is always the [canary] in the mine before charge offs so non-performs should be very interesting to you guys going back up because they’re a tell teller whether or not there is a structural problem or some reason that we’re having to restructure the deal even if it will never be a loss. That’s well in advance of probably six months to a year of real charge offs and that’s the way to look at it.”