U.S. Bank’s Bill Jones believes if owners can’t quantify investment risks they will wait until market conditions are more predictable
By Ed Lane
Ed Lane: U.S. Bancorp (NYSE: USB), with $321 billion in total assets, is the parent of U.S. Bank, the fifth largest commercial bank in the United States and the fourth largest by branches. As a community banking division manager, you oversee operations for U.S. Bank in markets located in Kentucky, Indiana, Tennessee, Arkansas, Ohio and Southern Illinois. With your ability to review business activities throughout the bank region you manage, how would you evaluate current economic conditions?
Bill Jones: The economy is improving, but at a slow pace. The new normal is getting reset in today’s economy. The good news from U.S. Bank’s standpoint is its just-released third-quarter earnings. U.S. Bank’s average loans increased, at the corporate level, by just short of $10 billion or a 5 percent increase year-over-year. Total new loan originations (excluding mortgage production) totaled over $46 billion last quarter compared to $37 billion in the third quarter last year – a 25 percent increase.
In Kentucky, U.S. Bank provides three primary categories of services. Consumer loans include home equity loans, refinance, second mortgages, purchase of cars, boats and things of that nature. My division had the largest quarterly volume of production that it has had in perhaps the last five to six years and was up close to $80 million on a $2 billion consumer loan portfolio, just in the third quarter. This is impressive growth and very encouraging.
Driving a lot of the new loans are extremely low interest rates. My division is basically in a conservative part of the country where home values are maybe down 8 to 10 percent, but homeowners still have a lot of equity. So low interest rates were being taken advantage of by homeowners.
Year-to-date growth in the small business segment (companies with revenues of $5 million or less) has not been near the pace consumer loans have grown. Of the bank’s three business areas, the small-business category has probably struggled the most.
The commercial loan category (companies with revenues greater than $5 million) is the bank’s third category of service. Commercial loan activity has increased slightly. Our loan commitments to those customers are probably up year-over-year 8 to 10 percent, but we’re not seeing loans fall through (utilization of the credit line) in terms of outstanding balances. Businesses have lines of credit to finance inventory and receivables. They may have a commitment for $1 million but only borrow $300,000.
U.S. Bank tracks these data very closely to determine the utilization of credit lines. My division tracks its lines of credit utilizations every month. Today the division’s credit utilization is running around 34 percent. Prior to the downturn in the economy, utilization would have been closer to 50 percent. The media talks about getting banks to lend people money. Many individuals and businesses don’t need loans. U.S. Bank evaluates general trends from the customer’s standpoint. The good news is businesses are becoming stabilized-to-slightly improving financially.
EL: What do you feel are some of the key issues that could retard expansion of the Kentucky economy and the creation of new jobs?
BJ: One of Kentucky’s strategic advantages is low-cost power. One of the major resources of America and Kentucky is an abundant supply of coal. It certainly appears to me that the EPA is currently taking steps that are so burdensome on coal-based power generation that it stands to have a very negative impact on Kentucky’s low-cost power advantage and economic expansion in Kentucky.
EL: What effect will the Dodd-Frank Wall Street Reform and Consumer Protection Act have on new loans?
BJ: Banks don’t even know what the full implication of Dodd-Frank legislation is going to be. It’s been estimated that only 20 percent of the regulations have actually been promulgated. The Dodd-Frank law has 2,300 pages; it will create an estimated 5,000 more pages of regulations, 250 new rules and the commissioning of approximately 65 new studies.
My father-in-law borrowed money the other day. He hasn’t borrowed money in 15 years and had to borrow a small amount of money to finance a home purchase. He told me he signed approximately 50 pages of documents at the closing. Dodd-Frank is not making banking easy. Kentucky is fortunate that it has a stable, solid banking industry. To my knowledge there has not been a bank failure in Kentucky in recent years. Most bankers would tell you bank examinations are overly restrictive, and the auditors that review bank activities are often contradictory in their conclusions.
EL: How is the pending Patient Protection and Affordable Care Act (ObamaCare) going to affect businesses?
BJ: If you take healthcare, EPA regulations and tax policy and lump all of them together, there’s not a business man or woman with whom I talk who is not concerned about their ability to compete, to make or sell their product. With the uncertainty of all these issues, business owners don’t know how to plan for the future. If you’re a business man or woman ready to make an investment and you can’t quantify what the risks are, you are probably going to wait until market conditions are more predictable.
EL: Have federal regulations limited the banking industry’s ability to make loans to agribusinesses, farmers, auto dealers, home builders and similar businesses that are the backbone of Kentucky’s rural economy?
BJ: In spite of increasing regulations, U.S. Bank is growing loans. We were fortunate to have weathered the financial downturn as well as any of our peer banks. U.S. Bank was not immune to problems in the industry, but we were able to stay outwardly focused as opposed to inwardly focused. We have found ways to continue to make loans to our customers because of the bank’s strength and stability.
EL: Did the Troubled Asset Relief Program (TARP) plan work?
BJ: All major commercial banks were kind of painted with the same brush and more or less had to participate in TARP. The taxpayers had $245 billion (of government money) invested in banks by TARP. To date, the banks have already paid the federal government $256 billion of it back. The feds earned $11 billion on the $245 billion in TARP loans. That’s a pretty good return. U.S. Bank paid its loan back; its allotment was $6.6 billion.
The Federal Reserve required top-tier banks to take TARP loans whether they wanted funds or not. “Required” may not be the way they look at it, but they strongly encouraged banks to take it. In our case, U.S. Bank was the first bank to pay the TARP loan back. U.S. Bank paid it back in seven months at a return to the taxpayers of 5 percent plus $139 million, which was the value of the warrants associated with it. So put your pencil to what was a pretty effective return for taxpayers – when interest rates were relatively zero. U.S. Bank had to take a stress test to make sure it was stable and sound. The bank’s debt ratings also support the conclusions of the stress test.
EL: By the time this interview is published, the gubernatorial election will be over. Regardless of the winner, Kentucky has major issues to address. As a former chairman of the Kentucky State Chamber of Commerce and a Kentuckian, what do you think the top issues facing the governor will be during the next four years?
BJ: Healthcare, retirement (pension funds) and incarceration costs (prisons). The other area that needs overhaul is the tax code. Let’s simplify taxes so Kentucky can be more competitive with the states that are growing. Kentucky has an economic development disadvantage from a tax code standpoint that needs to be addressed.
EL: Are there any local initiatives specifically impacting the western part of the commonwealth or Paducah?
BJ: Western Kentucky, and more specifically Paducah and the Purchase areas, have embarked on a major educational expansion. We would all agree that education is going to be the backbone of future economic growth in America.
Murray State University, Western Kentucky Community and Technical College, University of Kentucky College of Engineering and Mid-Continent University have educational expansions planned. UK offers BS degrees in chemical and mechanical engineering that students can attain without leaving Paducah.
Western Kentucky Community and Technical College was just named one of the top 10 community colleges in the country and is actually in the running as No. 1. So you’ve got a Western Kentucky education initiative that will be a significant advantage to new businesses in our area that need highly educated employees.
Another major undertaking sponsored by Congressmen Ed Whitfield and Sen. Rand Paul is proposed legislation that deals with allowing the Paducah Gaseous Diffusion Plant to re-enrich depleted uranium tails. That would extend operations at the plant, retain 1,200 high-paying jobs in the area and pump nearly $150 million directly into the local economy every year. The estimated net value of the tails has been calculated to be as much as $4 billion.
EL: How cooperative have the universities in your area been in helping to boost local economic activity?
BJ: Murray State University, which is domiciled primarily in Murray, and Western Kentucky Community and Technical College, which is domiciled in Paducah, are partnering on programs and have been for a number of years. The plan allows individuals to get a four-year college degree without having to leave Paducah. There are approximately 6,000 students at Western Kentucky Community and Technical College; 2,000 at Murray State University; 1,000 at Mid-Continent University and 150 at the UK College of Engineering. That adds up to a college student population exceeding 9,000 in Paducah.
EL: Do the universities tailor some classes to meet the needs of local employers?
BJ: Healthcare is a big driver with two major hospitals located in Paducah: Western Baptist and Lourdes. Both are major healthcare providers, and the community technical university has developed specific programs targeted at healthcare.
EL: One major initiative for communities near rivers is to upgrade the bridges connecting Kentucky with Ohio and Indiana. What is your suggested solution to this need?
BJ: I kind of like the idea of toll bridges. I haven’t studied this financial approach extensively. If you are looking for a revenue source to pay for a bridge, tolls work.
If public infrastructure can be done privately, it probably should be pursued that way. Take, for instance, dorms on college campuses. Western Kentucky University may have been one of the first in the state to actually privatize college housing. That’s debt that goes off the books of the university.
EL: As a banker and its former chairman, how would you evaluate the work of the Kentucky Chamber of Commerce?
BJ: I’m biased. The Kentucky Chamber couldn’t have had a better chief executive officer at the helm over the last few years than David Adkisson. He’s tireless in his efforts. He has raised the profile of the chamber in a bipartisan way. The “Leaky Bucket” campaign gave the legislators something to think about, and taxpayers have already started seeing some signs of new legislative reforms by the General Assembly. I don’t think there is any doubt that the state chamber is viewed as Kentucky’s leading business advocacy program.
EL: What are major issues facing the City of Paducah, McCracken County and surrounding areas?
BJ: Paducah has a declining population base. The City of Paducah has not annexed as growth has occurred outside of its existing city limits. The city is having to shift from property to payroll taxes for revenue. There is a major study underway today looking at a merger of city and county government. A charter merger commission is working on a recommendation.
EL: How effective has the Kentucky Cabinet for Economic Development been in helping recruit new and expanding business activity to Western Kentucky?
BJ: First, a community has got to start with local economic development efforts. The state can’t do that job for a community. The way you recruit and attract companies today is different than the way it was done 25 to 30 years ago.
Paducah has recently hired a new economic development director, Chad Chancellor. There certainly appears to be a lot more economic activity, and it’s my understanding Paducah’s relationship with the Kentucky Economic Development Cabinet is on solid ground today.
The biggest advantage Paducah has is the river, rail and interstate highway system. We also have air service to Chicago.
EL: I recently read in a financial journal that U.S. Bank managers are “penny pinchers and keep operating expenses down.” Is that correct?
BJ: U.S. Bank is very cost efficient. As we like to say, “If you can grow revenues faster than you can grow expenses, it’s a good thing.”
EL: Do you have a closing comment?
BJ: I value The Lane Report. It’s one of the standard publications that I like to read every month. As someone with responsibilities that span from Maysville to Murray to Paducah to Pikeville, I find the information your editors compile and publish keeps me abreast of economic and business activity around Kentucky.
U.S. Bancorp is a diversified financial services holding company, headquartered in Minneapolis, Minn. It is the parent company of U.S. Bank. With 3,089 banking offices and 5,092 ATMs, U.S. Bank’s branch network serves 25 states.
U.S. Bancorp offers regional consumer and business banking and wealth management services, national wholesale and trust services and global payments services to more than 15.8 million customers. The company employs over 63,000 people.
U.S. Bancorp is ranked 121 in the 2010 list of Fortune 500 companies.
Founded: St. Louis, Missouri (1850), Milwaukee, Wisconsin (1853), Cincinnati, OH (1863), Minneapolis, Minnesota (1864) and Portland, Oregon (1891) Headquarters: Minneapolis, Minnesota
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One-On-One: Bill Jones
U.S. Bank’s Bill Jones believes if owners can’t quantify investment risks they will wait until market conditions are more predictable