U.S. Bancorp (USB) Q3 2017 Earnings Report, Transcript and Summary

Good morning. Welcome to U.S. Bancorp's Third Quarter 2017 Earnings Call. Following a review of the results by Andy Cecere, President and Chief Executive Officer; and Terry Dolan, U.S. Bancorp's Vice Chairman and Chief Financial Officer, there will be a formal question-and-answer session. [Operator Instructions] This call will be recorded and available for replay beginning today at approximately noon, Eastern Daylight Time, through Wednesday, October 25 at 12 midnight Eastern Daylight Time. I will now turn the conference over to Jen Thompson of Investor Relations for U.S. Bancorp.

Thank you, Melissa and good morning to everyone who has joined our call. Andy Cecere, Terry Dolan and Bill Parker are here with me today to review U.S. Bancorp's third quarter results and to answer your questions. Andy and Terry will be referencing a slide presentation during their prepared remarks. A copy of the slide presentation, as well as our earnings release and supplemental analyst schedules are available on our website at usbank.com. I would like to remind you that any forward-looking statements made during today's call are subject to risks and uncertainties. Factors that could materially change our current forward-looking assumptions are described on Page 2 of today's presentation in our press release and in our Form 10-K and subsequent reports on file with the SEC. I will now turn the call over to Andy.

Thanks Jen. Good morning, everyone and thank you for joining our call. Terry and I will discuss third quarter results and provide you with some forward-looking guidance, after that, we'll take your questions. I'll start in Slide 3 of the presentation. Third quarter net income totaled $1.6 billion or $0.88 per diluted share. Our performance was highlighted by record revenue in net income and earnings per share and our return on tangible common equity was 18%. Slide 4 highlights our key profitability metrics, each of which improved on both the linked quarter and year-over-year basis. The return on average assets for the third quarter was 1.38% and return on common equity was 13.6%. You can see on the far right of the chart that our efficiency ratio improved to 54.3%. On our second quarter earnings call, I told you that we will deliver positive operating leverage in the third quarter on a year-over-year basis and we did. Our revenue growth remained strong in the third quarter while our year-over-year expense growth dropped to 3.7% which is a significant improvement compared with the year-over-year growth rate we've experienced over the past several quarters. The above normal expense growth rate over that timeframe was primarily tied to expenses incurred to address the AML consent order. The people and processes needed to address these issues are substantially in place. And these costs have beginning to normalize towards the company's overall expense growth rate. We've reached in inflection point and we expect to deliver positive operating leverage on a year-over-year basis in the fourth quarter and in 2018. I want to emphasize, however, that we'll continue to make prudent investment in our business to world that is changing at a faster pace never before. We are embracing the new reality of constant change and evolving customer behavior. Our ability to leverage technology and innovation to drive growth and improve efficiency will be fundamental component of our success. While the banking environment continues to evolve, our balance sheet is strong and growing. Credit quality is stable, we are winning market share in our businesses and we are delivering positive operating leverage. In summary, we are well positioned heading into the end of the year and looking ahead to 2018. Terry will now provide some details on the quarter.

Thank you, Andy. If you turn to Slide 5, I'll start with the balancing review and follow-up with the discussion of third quarter earnings trends. Average loans increased by 0.8% on a linked quarter basis and grew 3.0% from a year ago. Commercial loan grew 1.0% sequentially. While we continue to gain market share across our commercial lending businesses, some large corporate customers took advantage of a mid quarter decline in interest rate to secure low, long term funding. This preference for bond issuance benefited our capital market business and continues to impact total loan growth. The decline in commercial real estate loans reflects our prudent outlook for commercial real estate lending at this time and pay down activities as customers refinance to extend maturities at relatively low interest rate. Retail loan growth of 2.6% was supported by robust growth in installment loans and retail leasing. Strong growth in retail leasing reflects customer preference shifts toward lease financing as well as market share gains with dealers and manufactures. Turning to Slide 6, average total deposits increased 1.2% on a linked quarter basis and 5.2% year-over-year. We saw 0.9% decline in noninterest bearing deposits partly reflect the normal third quarter seasonality in our trust business, as well as investment managers deploying trust cash balances into other asset categories. Our total interest bearing deposit beta is similar to previous quarters and in line with our expectation. As future rate hikes occur, we would have expected the beta will gradually trend toward a 50% level. On Slide 7, you can see the credit quality was relatively stable in the quarter, net charge-offs as a percentage of average loans were 47 basis points in the third quarter and non-performing assets declined by 7.3% on a linked quarter basis. Our $360 million provision expense reflects normal provisioning related to loan growth, as well as potential credit losses for markets affected by the two recent hurricanes which occurred in the third quarter. After an assessment of credit exposures within the impacted areas, we do not expect any impact to the provision for credit losses in future quarters. I'll now move to earnings results. Slide 8 provides highlights of third quarter results versus comparable periods. Record third quarter net income of $1.6 billion was up 4.2% compared with the second quarter and up 4.1% versus the third quarter of 2016. Revenue totaled a record $5.6 billion, up 2.2% on a linked quarter basis and 4.1% higher compared with the same quarter a year ago. On Slide 9, net interest income on a fully taxable equivalent basis was $3.2 billion in the third quarter, up 3.8% linked and 8.3% year-over-year. Comparisons in both quarters benefited from earning asset growth and higher interest rates. In the third quarter, the net interest margin increased six basis points to 3.10% slightly higher than our guidance. The third quarter margin benefited from higher than expected interest recoveries that contributed approximately two basis points on linked quarter basis. Slide 10 highlights trends in noninterest income which increased by 0.1% on a linked quarter basis and was down 0.9% year-over-year. On a year-over-year basis, credit and debit card revenue increased 3.0% on higher sales volumes. Credit and debit card revenue growth was muted somewhat by fewer processes and cycles in the third quarter of 2017, compared with a year ago and year-over-year impact of previously acquired portfolio. Trust and asset management revenue grew 5.0% reflecting strong core business growth and favorable market conditions. Lower mortgage revenue primarily reflects a lower refinancing activity from a year ago. Merchant processing revenue was down 1.7% on year-over-year. As we previously discussed our recent exit of two joint ventures negatively affected the linked and year-over-year comparison. In addition, the recent hurricane conditions adversely impacted sales volume and related revenue in the third quarter. Excluding the impact of the weather conditions during the third quarter, merchant processing revenue was essentially flat from a year ago as expected. Turning to Slide 11, noninterest expense increase to 0.5% compared with the second quarter of 2017, and was up 3.7% versus the third quarter of 2016. On a year-over-year basis, higher personnel costs were partially offset by lower legal professional expenses and marketing expenses. Slide 12 highlights our capital position. At September 30, our common equity Tier 1 capital ratio estimated using the Basel III standardized approach as if fully implemented was 9.4%. This compares to our capital target of 8.5%. I will now provide some forward-looking guidance for the fourth quarter. We expect linked quarter total average loan to grow at pace similar to the third growth rate. We expect that net interest margin to be essentially flat to the third quarter which included two basis points related to unusually high interest recoveries for this period in the business cycle. With respect to fee revenue, the third quarter is seasonally our highest quarter for growth. We expect fee revenue to be essentially flat on a linked quarter basis and on a year-over-year basis. As Andy discussed, we will deliver positive operating leverage on a year-over-year basis in the fourth quarter and in 2018, supported by expense growth in the 3% to 5% range. As a reminder, linked quarter expense growth in the fourth quarter is seasonally impacted by the timing of professional services and higher tax credit amortization expense. We expect credit quality to remain stable. I'll hand it back to Andy for closing comments.

Thanks Terry. This company has a history that is remarkable for its consistent high performance. But we are always looking for ways to improve. This is the time to look ahead and I am very optimistic about the future .At its core banking is a relatively simple business. As with anything execution will be the differentiator. The winners in this industry would be those banks that anticipate customer preferences and deliver the product and services they demand in a most convenient and efficient manner. Towards that end, every single leader in this company is focused on two mandates. First, deliver on the promise of one US Bank by putting the customer at the center of every discussion and every decision regardless which door their customer walk through. Second, figure out how to optimize everything we do whether it's optimizing the customer experience, the distribution model or the customer relationship. Figure out the most efficient and most valued way to deliver the highest quality product and services and then do it. If we execute effectively, which I'm confident we'll, results not only the industry leading but improving returns. And we will deliver those results within the parameters of a risk management framework that considers both the current and future environment. I am looking forward to leading this company to the next phase of its evolution. Supported what I truly believe is the best team in the banking industry. That concludes our formal remarks. Terry, Bill and I will now be happy to answer your questions.

[Operator Instructions] Your first question is from Matt O'Connor with Deutsche Bank.

Good morning. I was wondering if you could just talk a bit about the deposit pricing strategy both on the interest bearing side and the noninterest deposits were down a little bit linked quarter on average basis, little bit more on a trade end basis. And just comments in terms of what type of migration that you are seeing out of the noninterest bearing into other buckets?

Now so this is Terry, Matt. Let me talk a little bit about the deposit balances first. When you end up working at core deposit balances we really saw a little change relatively stable. Where the decreases did occur principally in a couple of different areas about $900 million it is really seasonal decreases that we always see for the second and the third quarter that's really tied to kind of our corporate trust business. Then we also saw some balances that went out simply because of custodial type of activities so those tend to be a little bit -- they fluctuate a little bit. Our time deposits were up a little and that was principally because of some decisions related to large customers. We expect that to be relatively short term and for those to flow out early in the fourth quarter. So but when you end up looking at the core deposit balances, they were reasonably stable during the quarter. The deposit pricing standpoint, let me just kind of talk about it, we haven't seen a lot of change relatively what we've been experienced in the past. We end up looking at retail deposit pricing or deposit beta they are essentially unchanged at this particular point in time and we don't see a lot of competitive pressure with respect to that. Our wholesale deposit pricing, we are essentially just being responsive to competitive pricing in the marketplace and that can be in certain markets a little bit on the West Coast and little bit in the New York area but not a lot of widespread competitive pressure that we are seeing. But those rates on the wholesale side are starting to go up. I'd also say if you end up looking at our corporate trust and deposits, those tend to be highly operational and fairly stable as well. So and keep that in mind too.

And Terry you focused on average deposit being core relatively stable because any day period end could be very volatile given the trust.

Exactly, yes.

Your next question is from Scott Siefers from Sandler O'Neill & Partners.

Good morning, guys. Terry you had just sort of given the outlook for sort of flattish fees as you see them in the fourth quarter and then I guess year-over-year as well. Just as you see what are sort of the major nuisances in that guidance? In other words what are the puts and takes? And as you think about just the payments business in particular, appreciate the comment on both the JV exit and the hurricane activity but just how you are thinking about progression in those businesses?

Sure. Yes, when you end up looking at fee income it's typically seasonally flat to down in the fourth quarter. And that comes from a variety of different categories. Mortgage banking, from a market standpoint is a typically seasonally and little bit lower in the fourth quarter. Our payments businesses are typically a little seasonally down especially in the corporate payments space. So there are a number of kinds of categories that tend to be flat to down. Our commercial product revenue is typically flat to down a little bit as well because capital market activities tend to slow a little bit in the fourth quarter. So there are a number of different areas where you see that seasonal impact taking place. Let me tell you -- let me talk a little bit which is kind of your second question on the payments revenue. And you kind of keep in mind that we have really three businesses that are part to that. First is the credit card and debit card business and year-over-year the growth is about 3.0%. That was impacted by fewer processing days, and that's something that's unique to US bank because it's based upon how we best process those sales transaction in any one quarter and the third quarter happened to have one fewer processing cycle if you will. Sales on a reported basis, on a credit card perspective were up about 5.1%, without that processing cycle would have been about 6%. So that's pretty consistent with what we've seen in the past. That 3.0% is probably impacted by about one percentage point because of that processing day. When you think about the fourth quarter, we would have expected that credit card revenue to rebound a little bit because of that processing cycle that I talked about. And when we think about that particular business we can think about kind of mid single digit in terms of revenue growth on a year-over-year basis. Second category is really merchant acquiring and last quarter we talked about the fact that we exited the joint ventures. And we expected revenue to be essentially flat. And when we look at the impact of the joint ventures, that about 2% to 2.5% but the other thing that happened in the quarter as you know as we had three hurricanes and earthquake in Mexico and a variety of different things like that that end up impacting revenue growth by about 1.5%. As we think about fourth quarter, the impact of the hurricanes is going to continue. We still have a significant number of merchant that are either offline or have relatively slow sales as they continue to kind of come online. And so when we think about the fourth quarter we really think that merchant acquired revenue is probably going to be flat year-over-year. And then last business is our CPS business and we had a great quarter in CPS. If you end up looking at the total revenue within CPS it was up about 5% -- little over 5%, 5.8% on a year-over-year basis. Then you know we've been investing in a business pretty significantly, we talked about virtual pay in and some other things but we were investing in a couple of years ago. And we are starting to see some really nice dividend and momentum in that particular business. And when we look on a year-over-year basis we would expect to see continued growth and strength in that particular area but on a sequential basis or a linked quarter basis, it typically is a lower quarter in the fourth quarter.

Your next question is from Erika Najarian with Bank of America.

Hi, good morning. I just wanted to follow up on Scott's line of questioning. I completely appreciate that's probably too early to give outlook on the puts and takes behind the commitment deposit operating leverage for 2018. But I am wondering similarly how you walk through in the fourth quarter. Could you give us a sense of the big trend that you are seeing over the next 12 months that could drive fee growth next year? And I am wondering that because clearly you outlined the seasonality in the fourth quarter but also the fees are expected to be flat year-over-year. So just the big trend would be great.

Yes. At a very high level, again this is Terry. I think one of the biggest drags that we had this year was really related to mortgage banking revenue and so when we look into 2018, we see that has been relatively stable or starting to grow from there. And that was one of the biggest factors. And then within the merchant acquiring I think is probably the other major area that we'll continue to see strengthening in terms of the year-over-year growth rate because as those joint ventures kind of lapse in the second quarter of next year, some of the hurricane effects and some of the investments we've been making in that business, we should continue to see strength. Andy you want to add anything else here?

The only thing I would add to your question Erika is that on the expense side the equation as we mentioned in our prepared comments, I think we've reached an inflection point in terms of their higher growth rate that we've seen in the past. What you saw this quarter is more consistent with that 3% to 5% that we talked about. So balance sheet growth together with the income growth that Terry articulated and more normalized expense growth will give us that positive operating leverage.

Thank you. And just a follow up to that. There has been a wide swing in terms of expectations for rate from just early in September to now. And I am wondering Andy you seemed very committed to the expense side of the efficiency ratio equation, if the revenue outlook for next year is not as robust as we think because of whatever the rate outlook is, is there enough flex in the expense base and that you could continue to make the investments that you referred to in prepared remarks but still deliver the positive operating leverage.

So, Erika we are projecting what the market has in terms of rate increases both in December and then for next year. And that's set of assumptions that we are using to talk about and discuss positive operating leverage. To the extent that doesn't happen, we'll continue to manage expenses as best as we can like we always have and making sure we have the balance for the short-term result as well as the long-term investment in the businesses to make sure we can have growth going forward. So that's something we've always done and we'll continue to do.

Your next question is from John Pancari with Evercore.

Good morning. On the loan growth side, I know you mentioned that the growth in the fourth quarter in average loan should be similar to that what you saw in the third quarter. So then about less than 1% so we are annualizing to about 4% or so. Is that a long, a fair assessment of where growth should really be trending even into 2018 and what could bring about strengthening outside of any -- as they are all macro factors that you need to see to really see pickup there in that growth rate. Thanks.

John I'll start and then ask Bill to add some more color. So first of all it is lower than what we would expected over the long term and what we are seeing with our customers are couple of things. Number one is Terry mentioned taking advantage of lower yield curve and low rates, the lock in either to dead issuance and sometimes pay down bank lending activity is impacting us. So that's one. Second is much of the growth that we are seeing is M&A related and that I would call core CapEx and expansion. And I think that's a little bit of function of waiting for more clarity and certainty around principally tax policy and tax rates. And I think that will be a key driver of accelerated loan growth in 2018 when there is more clarity around tax policy. We also have some nuisances within category so let me ask Bill to talk about.

Yes. The factor that Andy cited are macro factors right, low rate or the refinancing was certainly affects number of our C&I and commercial real estate. And then uncertainty holding back some of the natural activity, investment activity that our customers will make. So those are probably the two biggest drivers. That being said, we continued to be very aggressive in terms of our market share amongst prime customer base which is our customer base on across all the retail categories. So you could see we did grow our home equity loans that somewhat unique we never backed off from that. Credit cards, we've been growing those throughout the down turn in the cycle so we had steady growth in that. Auto loan, same thing, I mean we are in the super prime space there. Retail leasing, we never exited that, we stayed in that and we benefited from that lately. So we do have levers in the prime space that continues to give us loan growth regardless of what's going on a macro basis.

And I'd also mention that John our revolvers, utilization rate on a commercial revolvers are still right around 24% -25% that's about 10 points below what I would say is normal. So we are still growing commitment. We are taking market share but the utilization continues to be at low level.

All right. Thank you, Andy. And then separately on the credit side, I just want a little bit color on the consumer credit trends you are seeing, your card and auto charge offs and delinquency were up in a quarter and how much that is storm related versus not? Thanks.

Well, none of it is storm related now. That's too early for that. We did put in programs for reaching out to customers, providing loan application; we've already started that process. So that's well underway. But the reserve build that was mentioned that's really for what we expect to be kind of future credit losses as a result of the storm but that has not shown up. I think the increase that you are referring to in auto and cards, it's really just the seasoning effect, the fact that those portfolios have grown fairly significantly over the past several years. This is natural seasoning so they are performing within our expectations.

And again Bill they are -- they are prime portfolios, their average cycle on the leasing side 770 so nothing is going down stream in terms of that credit.

Got it. So nothing underlying in terms of deterioration starting -- okay, got it, thank you.

Your next question is from Betsy Graseck with Morgan Stanley.

Hi, good morning. I just wanted to dig a little bit on the comments you made in the presentation on the AML BSA. It sounds like it's coming to close in your compliance program are nearing maturity I think were the words you used. Could you just give us a sense as to is that going to accelerate over the next few quarters and so we should see pull back in the expense side there?

So as we've talked about before that the story and that has not changed. Betsy, the people processes and technology what we -- pretty much in place by the end of the year. They are almost on a place, we have a few more technology releases but that part of the spend, which is the bulk of it that will be in place by the end of the year. And then we'll see the compliance related expenses migrate more towards what I'd call a normal expense rate. I don't expect them to go down because we have to continue to maintain the levels we have but I'd expect them to normalize and that will normalize our overall expense growth rate back to that 3% to 5% like you saw this first quarter. With regard to the consent order overall, once those people processes and technology component have in place we go into a sustainability mode which is proving the back that they are working as intended and that will start beginning of 2018 and flow into what I would expect the middle of 2018.

Okay. And then once you get the green light from regulators you passed the test, there is an opportunity to reengage in M&A. Could you just give us a sense as to how important that it is for you over the next kind of planning cycle here or is that one of the cores that you are looking into or is that just gravy or something comes up?

Betsy, our M&A activity hasn't really been impacted by this. There hasn't been traditional bank deal that we not been able to do that we wanted to do because of the consent order. Our M&A has been focused on categories like card portfolios, payments businesses as well as trust and fund services. Both that deals that we've been able to do, we continue to look at and I'd expect that our emphasis and focus going forward would continue to be on those deals. If after a consent order exit we see an opportunity on our traditional banking, yes, we will take a look at it but it have to be meeting our criteria which is increasing our market share in our current states having the core customer capabilities that we are looking for and so forth. But it's not causing a significant disadvantage today.

Okay. And then just separately, the OCC changed their guidance on deposit advance product right, not allowed before now they are allowed again. Is that something that you would look at?

So Betsy we are looking at a number of different products in that category and that maybe something we pursue over the next few quarters over the next year.

Okay. And then just lastly on the online lending, you have kicked off a couple of new relationships and product recently. Could you give us a sense partnership, could you give us a sense as to how these are progressing and what your expectations are from those relationships?

Yes. So I think one that's doing very well is our mortgage partnership with Blend which is online application tool, mobile application tool which is doing terrifically. It is exceeding our expectations, it's very well in terms of highly thought of and functioning as expected both from the perspective of a customer but importantly also the mortgage originator. So it is a real positive because they are able to do some of the simple things in a more digital format and really add value to the customers in terms of consultation. So that has been very successful and we expect to continue to grow that into 2018.

Okay, all right. And then just last on the deposit advanced product. That was like 2 percent-ish of your fee I think when you had to wind that business down. So is it your expectation at this stage that you could over time build that type of level of revenue back into your business model getting back into that type of space?

Likely not, Betsy. If it comes back it would probably be at a different fee level and probably not with the same size as what we saw historically. And again there is not much certainty that it will come back right.

Your next question is from Ken Usdin with Jefferies.

Thanks. Good morning, guys. I just wanted to come back to the NII side of equation and think about the balance sheet mix. So you are seeing as you mentioned all these ins and outs and out of flows and some might be temporary, some might be kind of this natural mixing and relate to the beta. But just wondering how did you think about just overall size of the balance sheet from here? I think we've seen a bit of slowing in AEA progression and given that loans are slower, how do you think that loans versus deposit growth is going to look for the fourth quarter and then beyond?

Yes. When we've talked a little bit about what we think loan growth is going to end up looking like in kind of what those categories are. Obviously from a balance sheet standpoint growth in loans is going to be really demand driven as much as anything. From a deposit perspective, I mean we are always looking for good core deposits and so when we have the opportunity to grow good core deposits they are going to be long term stable, we will take that opportunity to be able to do that. But I think what you are going to see really from here for a period of time is just some fluctuation with respect to deposit balances.

Okay. And will that mean will you be willing to -- the cost of your short term borrowing has actually started to increase a lot too. I would assume that's more market based type of funding. And so does that mean that we see a mix more towards that wholesale if there is more fluctuations in deposits and how that is kind of weigh on the forward outlook for the margin past the fourth quarter.

Yes. I don't think that you are going to see a significant shift in how we end up funding the balance sheet. I mean what ends up happening from a short term standpoint is just what sort of cash level needs, you need in order to have in place in order to meet liquidity requirement either on an average basis or the end of the month and so that's probably what you are seeing more than anything.

Your next question is from Saul Martinez with UBS.

Hi, good morning. I have couple of questions on taxes. Any updated thoughts on your expectations for your tax rate assuming no changes in quarter in terms of corporate tax rate? And I think last quarter you said FTA adjusted 29%. And secondly on tax reform I think in the past you guys have indicated you feel like you can get something along the lines of 60% of the benefit. Obviously the devil is going to be in the details and there is lack of detail out there. But the blueprint did specifically seem to protect low income housing credit. So curious if there is any updated thoughts in terms of how you see yourself benefiting from tax reform and how much of that you feel like you can garner from any reduction in the corporate tax rate?

Yes. Well, so I'll take the first question which is really how we think about the fourth quarter. I think the tax rate in the fourth quarter would be pretty similar to what the third quarter was. So that's kind of our expectation. In terms of tax reform, I don't think our view has really changed in terms of what the impact of that might be on the company kind of going forward. But to be quite honest, we were in Washington here recently and what's going to ultimately be in the tax reform bill, there are still moving around a lot even though that there are some framework associated with it. So we are kind of in a wait and see mode in all honesty.

About 29% in the fourth quarter.

29% in the fourth quarter.

Got it, that's fair. And then just finally on Elavon? Was there any FX impact? I didn't see that in the release.

Yes. The impact of FX was very insignificant in the third quarter.

Your next question is from Brian Foran with Autonomous.

Hi, good morning. Just think about the payment business longer term. And I assume merchant processing is the biggest piece of that but really all four line items that we see on the face of the P&L. There has been department of percent issue, there was some FX headwinds, now there is the JVs so I appreciate there has been lots of puts and takes but what do you think it take kind of takes for those line items to show little bit more momentum and get back to the normal more significant growth rate that maybe they enjoyed in the past.

Yes. Well, I think that maybe when you end up looking at the merchant acquiring business, we think on a longer term basis as kind of a mid single digits are a little bit stronger than that. One other things we are seeing or seen stronger sales volumes in their business and I think what we've to do is we have to get beyond the impact of the joint venture as well, some of the hurricane effect. And from a hurricane standpoint as an example, we've now -- we face four hurricanes and earthquake and some wildfire so I think there is a few things that we are going to end up having kind of work through over the next quarter or two. The hurricane effect in Puerto Rico where we have a fairly significant amount of merchants who is going to be there for several quarters. So I really look at it in terms of timing probably mid next year before we get back to that normalized sort of growth level because we'll lap those joint ventures. And I'd also add Brian and we talk about investment and innovation, this is an area we've been focused on historically and we continued to be going forward. I remind you we have a couple of great platforms, our international platform, our dynamic currency conversation capabilities because we invest in the business and merchant processes an area we continue to focused on particularly as it relates to e-commerce and value added services principally around data so it will continue to be an emphasis and an area of focus for us in terms of investment and capabilities.

And then maybe just turn into the auto leasing business. Totally appreciate your comments that are all prime and partly driven by customer preferences. But maybe you could just talk about -- I mean the growth rates have been very high. One, are there specific strategy that are in place to gain more shares with dealers or geographic expansion or anything like that? And then two, you gave some helpful commentary, I believe it was back in April kind of citing some of the green shoots in used car pricing so as you roll forward today, are you still seeing the kind of stabilization and even recovery in used car pricing? And is this growth you are pursuing in auto leasing kind of you are saying that you think the market is overdone and how does it feed into the overall used car price outlook?

So this is Bill. No, we are still bullish on our retail leasing portfolio. So it has been a good business or remains a good business. Used car prices have actually picked up even more in part because of the hurricane that increased demand for pickup et cetera. So in terms of expansion, we do go after different manufactures and we are very competitive in that space, provide an alternative to some of the old captives. So it's an area that we continue to work very hard to keep the growth rates up.

Your next question is from Mike Mayo with Wells Fargo Securities.

Hi. You mentioned commercial real estate a little bit more caution, it's big chunk of loans at your company. So I guess is commercial real estate a friend or foe on the one hand or maybe you can make a case for home prices back above pre crisis levels and homebuilders or some others could do well. On the other hand you have retailers and a more competitive environment. Where do you come out on that?

So commercial real estate is a friend. We are -- I think we've always been in active in that space. We did not cut back or exit our construction lending after the downturn, that's grown nicely. We've continued -- we are very active in this space but with the low rates and lot of our customers are appropriately seeking long term fixed rate for financing something banks are not great at offering. There are better sources for that in insurance company, some of the smaller banks, CMBS market but we are -- we remain very active with our client base. Some of our client base is gotten a little more cautious as well. Lot of the growth has been in multifamily, so people are little more cautious in that space, that's just for our client. Residential mortgage, construction we have been very active in that. And we never pulled out of that, they extended into Texas, and we had really nice growth in the Texas market. That's obviously going to be little disruptive by what happened with the hurricanes but that will come back. So overall we are very active commercial real estate lender and we like the business.

So just one follow up. So one -- if you look at over the past couple of decades where are we in terms of being aggressive being conservative. When you look at your own experience, is this, 2010 is great and 5 is average and 1 is look out that's 1992, where do you think we are in the CRE cycle?

I don't really think of it that way because we stick with our underwriting criteria so we are consistent throughout the cycle. And different asset classes or a different spaces you mentioned kind of concerns with the retails. Well, that's been good for the industrial side. So we've seen nice growth in industrial activity. So there is balance of activity that we provide our customer base and its ebbs and flows, but it's a business we stick with.

Your next question is from Marty Mosby with Vining Sparks.

Thanks. Good morning. When you look at your owned portfolio, residential mortgage is now the second largest category and it's continuing to grow. When you look at the mortgage banking business, I am kind of looking at it in the sense there has been a shift from originate and sell and to originate and portfolio of loans because we just don't enough total loan growth in the market. So we are not squeezing out those loans like we used to. Is that a rational way to think about it? And if so is mortgage banking which is kind of business that you kind of continue to grow is going to pretty more fee income from that maybe just not going to get back on track from a fee income side but we have a heavier kind of contribution in net interest income.

Marty, I'd say it's balanced and we both originate a sell which are the qualified market just that we've always done and that continuous to be area for growth for us as well as the servicing component. And we portfolio those which are not typically jumbos in our core customer base. So I would expect growth in both categories and I wouldn't expect the major shift one way or the other. Bill, would you add anything to that?

No. I mean the portfolio activities that are a national platform along with qualified mortgages so we originate through retail channels and through from broker so we will continue to see portfolio growth in the jumbo category. And if you can look at the stack, extremely high quality and low loan to value so --.

Bill I think I was going to ask you about was seemed to be two things that kind of took a little bit of the earnings out this quarter in the $30 million build with net charge -offs going down and non-performers going down, you kind of handed that was hurricane related but want to make sure that because that's not what you have been doing in the past. So that big portion of that was related to hurricane and the expected losses going forward and then also the tax rate, the 29% this quarter and then foreshadowing that to next quarter, that's about 0.5% higher than what you have been. So just I was curious why the step up in the tax rate and the build and allowance for those two things.

Yes, this is Bill. I'll do the build and allowance, that was entirely related to the hurricanes. We had some modest -- we've been doing some very modest build related to loan growth. We will continue to do that but the loan bump up was definitely directly related to the hurricane.

And our expectations that is --

That is sufficient to cover

Sufficient and including what we know thus far in the wildfire situation in California.

And the tax rate, really the issue there is that again kind of comes back to tax reforms and some of the uncertainty there. When you had a lot of conversations around tax credit low income, renewal energy and all sorts of things. There is a lot of pull back within the market and lot of change in related to pricing associated with tax credit. So part of the reasons why you are seeing the rate going up is a little bit lower level of tax credit production which is market driven as much as anything and then as earnings get stronger you had just have the marginal effect on the tax rate and that will cause it to go up as well.

And your next question is from Kevin Barker with Piper Jaffray.

Hi, good morning. In regards to your credit, obviously it's been very good over last several years and running well below your long term target and what you think the normalized charges- off would be. And we start to see somewhat of an inflection point here in credit card losses moving higher after several years of being strong or even better than what we've seen in past cycles. When we look over into 2018 and maybe even to 2019, what are your expectations for where credit card losses are going and where charge -offs may actually end up given we are still at pretty good part of the cycle.

So they have gone up due to seasoning, due to sort of natural seasoning and growing the portfolio. But we do expect them to stabilize around the 4% rate that would be sort of normal -- that's not through the cycle rate but that's sort of normal rate during stable economic conditions.

Current environment 4%.

Yes.

And when you think about the outlook is it something where it grows to 4% in plateaus or is it something where you would incrementally continue to see move higher?

No. We will think it will plateau around the 4% in this kind of economic condition.

Okay. And then given the outlook on auto, we've obviously seen pressure on used car prices in here and to follow up on some of the John's questions, delinquency rates and frequency of the fall to start to slow across the industry, do you expect charge-offs rates decline in 2018 given some of the positive development we've seen with a little bit resiliency in used car prices and slight decline in frequency?

I would say -- I wouldn't necessary say decline but I think they are pretty stable right now. So I would say about where they are right now.

Your next question is from Gerard Cassidy with RBC.

Good morning. Hi, Andy, how are you? Terry, if I heard you correctly on the earlier part of the call talking about the net interest margin, I think you said you had some maybe couple of basis points improvement due to the recoveries on some bad credits. Could you make sure that's correct that it was a basis point or two? And was that in the energy sector that you had to recover in the credits?

Yes. So it was two basis points impact from interest recoveries that occurred in this quarter and actually these recoveries relate to loans that were probably charged up as many as 10 years ago. So they went back long ways which is in part why they were so unexpected and unusual. And it's not something that we would expect to repeat. But it was about two basis points for the quarter. So you think we went up six basis points and our core basis of this four and we are really expecting the core basis go up another two in the fourth quarter from there. But it will be flat because of the interest recoveries.

Good. Okay and thank you for the clarity. And then second, you guys talked about how the betas for the traditional consumer deposits really are not that high, but you did see some in the commercial area. What about within the Wealth Management segment? Some of the other banks that have reported have pointed out that the betas are rising and that part of their business. Did you guys see any of that in the Wealth Management business?

Yes. In the wealth management business we've not seen that yet although when we end up looking at the broader consumer sort of category that's the one area that we may start to see when we get into the next rate hike. But we haven't seen anything at this point.

Okay, good. And then with rising rates, obviously, some of your commercial customers will pay for the services you guys give them with compensating balances, and the credit they receive is reflective of the rate environment. Are you starting to raise those credits for them in a rising rate environment or not yet?

Yes. A little bit relative to what's going on with short term rate as well as the yield curve overall but I don't -- it's not material yet and we would expect to continue raise and as rates move up.

Okay. And does that show up in the treasury management fee line? I noticed it was down little bit sequentially. I don't know if that was more seasonal or not. But is that the way where we would see that?

Yes. Compensating balances show up there and the credit for compensating balances as you said but the decline was more seasonal in nature.

Next question is from Terry McEvoy with Stephens.

Hi, good morning. It was mentioned earlier that US bank is gaining share in the commercial lending business and it sounds like that will likely continue here in the fourth quarter. Could you expand on specifically what's behind those gains? Is it some targeted industries or some specific markets that standout?

Yes. This is Terry. Just kind of broadly we are seeing good growth in market share and loans in the middle market space across most of our markets. And we would continue to kind of expect to see although I would say recently we've seen some pay down occurring even in the middle market space so it's something that we are watching.

Yes. It really relates to the old products that we build out over the last several years in our national corporate strategy. So I think the capabilities in the capital market area for providing bond underwriting not only for our investment grade but also kind of middle market or non investment grade customers. So they can come to us and a more full service bank and that's providing a lot of fuel to the growth.

And currently to that point Bill, the other area that I have to highlight is the virtual pay product which is corporate payment system product which is targeted squarely at that middle market customer base as well above that but that one is one of the drivers of the growth that we are seeing is taking additional customers and using that product.

That's good to hear. And then Terry just a quick question for you, within the corporate lines or these equity investment gains that were up $46 million, I believe year-over-year, could you just talk about the nature of those gains and what type of typical run rate would you see in any given quarter?

Yes. We typically don't get into a lot of detail with respect to other incomes simply because there is a lot of different things and including the equity investments. Equity investments tend to be a little bit choppy from quarter-to-quarter so it's really I kind of stay away from giving guidance with respect to what I think they're going to be next quarter et cetera.

Ladies and gentlemen, we have reached the allotted time for Q&A. I'll now turn the call over to the presenters for closing remarks.

Thank you for listening to our call this morning. Please call us if you have any follow up comments or questions.

Thanks everyone.

Thank you.

This concludes today's conference call. You may now disconnect.