Q4 2019 Earnings Call

Chairman, President and Chief Executive Officer, and Terry Dolan, Usbancorp, Vice Chairman and Chief Financial Officer, there'll be a formal question and answer session.

Our next question. Please press star one on your Touchtone phone and please press the pound key to withdraw.

This call will be recorded an available for replay beginning today at approximately 12 o'clock P.M. eastern through Wednesday January 20 seconds 12, midnight Eastern I'll now turn the conference call over to Jim Thompson Director of Investor Relations for U.S. Bancorp.

Thank you James and good morning, everyone Who's joined our call Indeed, Syrian Perry donor here with me today to review your Bancorp fourth quarter results and to answer your question.

Indeed, Perry will be referencing slide presentation during their prepared remarks.

A copy of the slide presentation as well as our earnings release them supplemental analysts schedules are available on our website at U.S.U.S. bank good dotcom.

I'd like to remind you that any forward looking statements made during today's call are subject to risk and uncertainty.

Factors that could materially change or current forward looking assumptions are described on page two for today's presentation in our press release and in our Form 10-K , and subsequent reports on file with the FCC.

I'll now turn the call over to see Andy Thanks, John and good morning, everyone and thank you for joining our call. Following our prepared remarks, Terry and I will take your questions.

I'll begin on slide three.

We reported earnings per share 90 cents, which included 18 cents per share a notable items, which Terry will discuss in more detail in a few moments.

Excluding these notable items, we reported reported earnings per share of a dollar into the quarter.

Loan growth was driven by new client landscaping relationships across all our loan portfolios and we delivered very strong deposit growth.

We continue to see strong account and volume growth across our businesses.

Credit quality were stable and our book value per share increased 6.7% come a year ago.

In November we received approval from the boundaries your partner for incremental share repurchase plan authorized the repurchase up to $2.5 billion a common stock in addition to our existing authorization of $3 billion.

In the fourth quarter, we returned $2.9 billion of earnings to shareholders through dividends and share buybacks.

As indicated on slide four.

Is it a lot pig trends remain strong.

We are significantly wrapping up the launch everybody I like digital experiences that will continue to drive more and more customer interactions both on and off the mobile app as well as higher Theres no transaction volume.

Slide five provides key performance metrics on a core basis, we delivered an 18.1% return on tangible common equity in the fourth quarter.

For the full year, our core return on tangible common equity was 18.8%.

I will turn it over to Jerry will provide detail on the border as well as forward looking guidance.

Thanks, Andy.

Let's turn to slide six I'll start with a balance sheet review all the by a discussion of fourth quarter earnings trends.

Average loans crew, 0.8% on a linked quarter basis, an increased 3.9% year over year.

Linked quarter growth was driven by strength in residential mortgages commercial real estate and credit card loans.

It's you know I pay down activity muted overall growth in the fourth quarter, primarily reflecting the rate environment and robust capital markets conditions.

New commercial business activity is healthy however, paydown activity is likely to continue to be a headwind near term, albeit a diminishing had when assuming that the interest rate environment a stable.

Turning to slide seven deposits increased 1.9% on linked quarter basis than grew 6.6% year over year.

Notably average savings deposits grew by 11.1% driven by across the board growth in wealth management investment services consumer banking and commercial banking.

Turning to slide eight credit quality was stable in the fourth quarter on a dollar basis nonperforming assets declined approximately 15% on both at linked quarter and a year over year basis, the ratio of nonperforming assets to loans plus other real estate owned also improved linked quarter and year over year.

The new accounting standard related to a credit losses, commonly known as seasonal became affective January 1st and has no impact on our 2019 results. We estimate that the adoption excuse for result in a 1.5 billion dollar cumulative effect adjustment to our allowance for loan losses compared with December 31.

2019, which is inline with our previous guidance [noise].

Slide nine highlights fourth quarter earnings results, we reported earnings per share of 90 cents, which included several notable items, which reduced earnings by 18 cents per share.

40 in these notable items, we reported earnings of a dollar eight per share.

Slide 10 list. The notable items that affected earnings results for the fourth quarter of 2018 and 29 team.

Fourth quarter 2019, notable items included restructuring charges, including severance and certain asset impairments and an increase in Devon derivative liability related to visa shares previously sold by the company.

As a reminder, we recognized several notable items during the fourth quarter of 2018, including a gain on the sale of our ATM servicing business and the sale. The majority of the company's covered loans as well as charges related to severance asset impairments and an accrual for certain legal matters.

Along with a favorable impact deferred tax assets and liabilities related to changes in estimates from tax reform. The net impact of notable items in 2018 was an increase of three cents per share.

[laughter] my remarks through the remainder of the call will be referencing results. Excluding notable items incurred in the fourth quarter's of 2019 and 28 cheap.

Turning to slide 11, net interest income on a fully taxable equivalent basis declined by 3% year over year inline with our expectations as the impact of loan growth and higher yields on reinvestment of securities has more than offset by the impact of a flatter yield curve and deposit funding mix.

Our net interest margin declined by 10 basis points versus the third quarter about four basis points and the decline was due to higher premium amortization expense in the investment securities portfolio.

Remain under pressure can be attributed to the yield curve compression and earning asset mix, partly offset by lower deposit costs.

We expect the net interest margin to be stable in the first quarter compared with the fourth quarter.

Slide 12 highlights trends in non interest income on.

On a year over year basis, we saw good growth in merchant acquiring revenue driven by accountant volume improvement as expected credit and debit card revenue declined 1% year over year due to two were from processing days in the fourth quarter of 2019.

We look for credit and debit card revenue true to return to a mid single digit growth pace in 2020.

Corporate payments or corporate payments products revenue declined 3.1% driven by lower commercial business sales volumes. However in the past few weeks sales volume growth has returned to a mid single digit growth brands.

Trust and investment management growth, reflecting business growth and favorable market conditions.

[noise] deposit service charges were impacted by the sale the Companys ATM servicing business in the fourth quarter of 2018.

The decline in Treasury management fees from a year ago reflected the impact of changes in earnings credits it residual effect of the rising rate environment in 2018.

Notably Treasury management fees increased on a linked quarter basis reflective of the recent interest rate declines in the third and fourth quarters of 2019.

Mortgage banking revenue increased 42.7% year over year on strong origination and sales revenue and strong origination and sales revenue growth.

Paired with the fourth quarter of 2018 mortgage production volume increased by 92.3% and mortgage application volumes increased by 83.8%.

Refinancing activity represented approximately 50.

And in the fourth quarter of 2019 compared to about 40% in the linked quarter refinancings represented 52% of applications in the fourth quarter as of November our digital mobile mortgage App was being utilized by about 86% of all mortgage applications.

Turning to slide 13, the 3.1% year over year increase in noninterest expense reflected increased personnel expense higher technology, and communication expense and higher net occupancy and equipment expense, reflecting actions to support business growth.

Slide 14 highlights our capital position at December 31st our common equity tier one capital ratio estimated using the Basel three standardized approach was 9.1%.

I will now provide some forward looking guidance for the first quarter of 2020, we expect fully taxable equivalent net interest income to decline at a low single digit pace year over year, but to be relatively flat linked quarter normalized for day count.

We expect to mid single digit growth in fee revenue year over year, we expect low single digit growth in noninterest expenses.

Year over year basis credit quality in the first quarter is expected to remain stable compared to the fourth quarter and we expect our taxable equivalent tax rate to be approximately 20% on a full year basis I'll hand, it back to Andy for closing comments. Thanks Terry.

We are operating in a dynamic environment and this quarter's results reflected the challenging interest rate environment facing the entire industry as well as the impact of actions, we took to better position or company for the future.

However, as our core financial metrics indicate we ended the year on a solid note and we're in a strong position as we head into 2020.

We view the interest rate environment, as a manageable headwind and we're confident in our ability to prudently grow our balance sheet and gain market share in our fee businesses.

Fee growth was negatively impacted by several headwinds in 2019 as Terry discussed we expect a return to normalized growth in credit and debit card revenue this year.

In a more stable interest rate environment as a refi driven market shifts to purchase driven market. The investments we've made in our mortgage business over the past several years will become increasingly evident in the form of market share gains.

We are proud of our strongest and consistent financial track record, but we're always looking for ways to improve that means we are changing the way we think the way we work and the way we do business as we move into 2020 M. beyond we will continue to increase workflow agility and speed to market for our products and services while at the same time optimizing our core office.

Ration to up to fund investment for the future.

Our ability to leverage the combined power of our rapidly improving digital capabilities and our complete payment ecosystem will lead to higher staff customer satisfaction stronger revenue growth and efficiencies and ultimately improved returns.

In summary remain focused on managing this company for the long term, while delivering near term results to provide a pathway to the future I'd like to thank our employees for all we accomplished this year supported by their hard work and commitment to creating value for our customers. We will now open up the call for acuity.

At this time I'd like to remind everyone in order to ask a question. Please press star followed by the number one on your telephone keypad.

Pause for just a moment to compile the Q when a roster.

And your first question comes from the line of John Pancari from Evercore Go ahead. Please your line is open.

Morning.

John .

Just one of them.

Talk a little bit about the operating leverage expectation I mean, I forgot your comments around the quarter, but for for your 20 I know you had previously indicated that it could be a challenge to positive operating leverage for the full year given the re backdrop et cetera wanted to get your updated thoughts on that if you see that there's a chance.

You could see positive operating leverage and what type of magnitude.

Could you see.

Yes, John Thanks, and as a reminder, you know we.

We had a goal of achieving positive operating leverage in 2019 than we did that on a core basis for the full year.

What we think about 2020, our objective is to target positive operating leverage and we expect our expense growth to be going into continues to remain in those low single digits. So you know I think we have a number of levers that we continue to look out in Poland terms of optimization will continue with our physical asset optimization.

One of the branch system, our back office activities in the number of different things.

So that's that's our goal that's our objective at this point in time now that said as as few as you said in your question 2020 is.

More difficult year simply because of the revenue outlook I think.

Part of being able to achieve it is going to be really based upon what happens with respect to interest rates et cetera. So.

That's that's.

How we're thinking about it.

Okay, great. Thanks, and then.

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In terms of your some of the headwinds that had impacted your fee.

Progression I know there was a accounting change it impacted as well as a couple other items can you just talk about where do you expect underlying momentum to build into fee businesses as you look at 2020.

Yeah.

So when we when we end up looking at fee income I think theres a number of different things that we end up looking I think the credit card revenue is stronger.

Again mid single digits as we think about next year and know that particular line item was impacted by both in an accounting item in 2018 as well as.

Pretty slow first quarter, which we had talked about I think merchant acquiring continues to.

Accelerated gets from that we expect mid single digits, there and then as TPS revenue, while we saw a decline in the fourth quarter because of a little slower commercial spending that has come back in the first several weeks of the year and so our expectation in that category is kind of mid single digits as well.

This service charges I know what has been a drag this year because of the sale. The ATM business in 2018, you know so that.

Kind of normalize this is at least flat in 2020, I think treasury management revenue as another area that we would expect what's kind of hit an inflection point, so while it's down on a year over year basis.

Is up on a linked quarter basis, and we would expect that to be.

Better than 2020, so I think theres a number of different things I think the offset to that is and think about mortgage and we talked about mortgage market has been particularly strong last couple of quarters, but.

In 2019, it was also quite a bit of a drag in the for several quarters. So again, depending upon what happens with interest rates, but in the current environment. I think that continues to be a positive story. So that I mean, I think theres a number of different areas.

Okay. That's helpful. Thank you.

Your next question comes from the line of Erika Najarian from Bank of America Go ahead. Please your line is open.

Yes, good morning.

Hey, Erika I know that's money good. Thank you hard too loud and clear on that Youre expense growth and I'm wondering though if.

The increase severance charges that we've seen could lead to a different different geography in terms of expense growth and I guess I'm just looking back at your head count, which seems to have risen sort of along coincident with the consent order and I'm wondering if part of the initial statement.

Upfront Andy in terms of continuing to transform the business is trying to take some of the compensation growth that you experienced over the last three years and really putting that back in technology is that sort of how we should expect the geography could change underneath that low single digit expense growth that you're expecting for 20.

I think thats not an unfair description Erica.

Snatches technology, but its people and technology, but its optimizing the way we're doing business to continue to invest in the future and you know our expense growth was higher during the consent order periods, but as you know it's been in the low single digits last couple of years on a notable including notable items, 2.4% year over year in 2019.

And that includes optimization and expense takeout, while at the same time investing in technology people for the future and I would expect that to continue into 2020.

And I guess I'm wondering if this the our take away from that as because that seems like it's behind you and again feels like the severance charges are setting up for further.

Optimization rationalization that when you're accelerating the amount of dollars that you're putting into.

The feature so to speak whether its head count related to that or technology itself.

Yeah, I think Thats, a fair comment Eric done again, I think the shift is optimizing them, but what I would call. The back office in the branch network, where because but which are being impacted by customer behaviors as we transition to more of a digital environment, but at the same time, we're reinvesting that in technology spend.

To support those those that digital transformation, so maybe a little bit of a shift from compensation to technology type of cost, but our expectation. When we think about 2020 is to continue to make the investments in the business that we have been making over the last couple of years.

Thank you and just one more if I could squeeze it in deposit costs were down.

15 basis points.

Quarter over quarter, and I'm wondering I underneath the one Q Eni outlook, what do you expect for deposit cost trends for the first quarter and also if the curve outlook stable continues to be stable from here.

Net interest margin for the rest of the year stabilize or potentially increase from one Q levels.

Well certainly the rate environment continues where it is today our expectation is that 2020 net interest margin would be pretty flat the fourth quarter with some possible positive bias, depending upon what happens on the long into the curve.

No that's kind of our thought process and the reason for that as a premium amortization, we've experienced in the third quarter.

As stabilized at this particular point in time, when we think about.

Deposit costs deposit pricing, we have been pretty responsive on the institutional deposits in terms of bringing those repricing goes down as rates have come down and I think from here on out deposit pricing will be a function of a both competition what happens on the short end of the curve.

Got it thank you.

[laughter].

And again as a reminder, if you'd like to ask a question. Please press star followed by the number one on your telephone keypad.

Our next question comes from the line of Scott Siefers from Piper Sandler Go ahead. Please your line is open.

Thanks, guys got hi, Thanks for taking my question I, just curious if you might be able to offer any just top level comments on.

The overall.

The pace it pays of loan growth in overall demand. If you look at the DJ data, it's definitely been held up or supported by the consumer side, but it's been a little surprising to see the slowdown in growth on.

Commercial side harbors I'm, just curious given the breadth of your guys franchising and different types of customers you look at what you're seeing at a very top model.

Yes. It was at a very high level again, I think economically we feel pretty optimistic in terms of what's the outlook there is.

If you end up looking at the components of loan growth I think we saw pretty strong good growth with respect to consumer lending.

You know the area that was a little bit.

Softer in the fourth quarter was really our C and I are our corporate sort of London, and that's principally while we saw production and the pipeline continuing to be regionally strong we saw pretty significant paydowns that we're taking place in that space.

Driven by capital markets activities, and Thats a function of the long end of the curve coming down.

Third and fourth quarter without stabilizing while we would expect some of the pay downs to.

Continue into the first quarter I think that will moderate.

Okay perfect. Thank you I'm just any.

Additional updates on ramification from the LCR rules I think you guys have been talking about 11.

Most of liquidity free up any any updated thoughts on how you're thinking about thought that dynamic.

Yeah, that's a in the ballpark in terms of the amount of Ah Ah how what the impact is with respect to LCR ignore continuing to look at a different alternatives and.

All part of it is thinking about extending duration a little bit.

Possibly investing a little bit more in agency mortgage backed securities, which would provide a little bit better yield, but I don't think I don't think it'll be on the margin that it won't be anything dramatic.

Okay.

All right that's perfect. Thank you very much loon.

And there are no further questions in queue at this time I'd like to turn the call back over to Jennifer Thompson for closing remarks, it looks like we did get one question.

We do other question from the line of the Vic Gina from JP Morgan Chase go ahead. Please your line is open.

Thank you Hi, Andy High and Terry just wanted to clarify on credit debit card fees.

What was the impact from two fewer processing base, how should what does that do and reserve reversal in 2020.

Yes, good question.

There was on the impact of two days it ended up really taking our fee income from.

Oh that low to middle single digits too.

So the negative 1% in the fourth quarter. There is one extra day in the in 2020 relative to 2019, but let me just kind of dissect that a little bit because I think that that as may be helpful.

When you end up looking at the growth rate for 2019. It was really impacted by three different things. One is if there was an accounting change that occurred in the first quarter 2018 that because of the lapping effect ended up depressing growth rates in 2019.

In addition, if you remember the consumer spend level in the first quarter was significantly lower and it's kind of at an unusually low.

Level on the cars as the.

As a concerns around the economy stabilized that consumer spend has come up that has been in the mid single digits in the second third and fourth quarter in terms of sales volumes and then as you know just getting back to the process and processing days quarterly results can be lumpy, but when we think about 2020 in terms of on a full year basis.

We really think that mid single digits is a good.

Target for us and I'm good estimate for us.

Our sales volumes over the last several quarters have been kind of in that range.

And and when you think about it on a on a day adjusted basis, you know, it's been pretty consistent from quarter to quarter. So in 2020, there's one more day and that will help a little bit above mid single digits for 2020, I think is a good estimate.

Again quarterly results will be a little bit lumpy, but when we think about the year, that's kind of how we're thinking about it.

And when I look back over the prior couple of years you've had.

This line item was growing at sort of more like nine Tonight on the hospice and when they look at 17 to 18 has there been either going to the mid single digits.

Reduction in pricing a shift in the kind of contracts or is this high end rewards expense what.

Terry is driving that.

So down from that's high single digit number to the mid single digits.

The growth rates in 2017 2018 were influenced in some respect because of some portfolios that we were acquiring during that timeframe.

More so than other factors and so when we think about pricing there hasn't been a lot of compression with respect to price. So we feel pretty good about that and rewards has been relatively flat. It back so that hasn't factors that mid single digit numbers a good way to think about the next 12 months.

Okay.

As you think about from.

As of the fee revenues.

Maybe just a true and Terry Treasury management should be good corporate hogs sees when I look at about that it was also a little bit software this quarter.

Yeah.

Actually down year on year any color on that because I know that the.

And I was just let you answer that.

Does that got the the impact of that is because we saw in the last half the fourth quarter corporate spend that can't be slow.

That had been running in the mid single digits alone is at higher in the first few quarters fourth quarter saw slowdown.

Almost flat and as Terry mentioned in his prepared remarks, we did see a pickup in the first two weeks of January back to the mid single digit so that was attributable that slowdown, but it seems to have come back and I think that one of the one of the reasons for that as you know if you think about where the yield curve, but how rates for moving there was concerns about recession.

People were uncertain with respect to economic data and then you had the hangover of tariffs I think the sentiment on a corporate side.

Appears to be is looking better.

We're going to be signing a.

Trade agreement with tying up today I believe in terms of phase one and.

The U.S., Mexico, Canada agreements.

As well on its way so I think that some of that uncertainty that might have been impacting discretionary spend on the corp, and the commercial side. The equation has been alleviate so we feel pretty good.

And I Wonder can from one last thing Cecil date too.

Could you talk a little better what do you see that doing to your provision expense and be true.

Yeah, No we've talked about certainly day, one day to as part of Investor Day.

You know the provision will increase we think that in terms of loan growth, providing italy at kind of that 2% level versus one the half for sentence kind of how we're thinking about but there's going to be more volatility related to see still and I think one of the things will end up looking out. It's just what is the stability in the overall portfolio on what our net charge offs doing.

On a quarter to quarter basis.

Alright, thank you.

To that.

Yeah, we do have another question from the line of Kinston with Jefferies. Go ahead. Please your line is open.

Hi, everyone. This demanded larsen on for Ken.

Yeah, and how you doing great. Thanks, I think it's understood that 2020 will likely be an aberration versus the long term trends that you set out at Investor day related to revenue growth headwinds.

But that you'll still strive to achieve positive operating leverage and 20, but I'm wondering how negative couldn't negative operating leverage being 20 before you do take actions related to slowing the pace of investment spend or creating more safe.

So as Terry mentioned again earlier, we expect and target positive operating leverage for 2020, we have a number of levers that we continue to see continued to pull to optimize the current organization structure to continue to invest in the future. So Amanda the way, we think about it was a balance of optimizing today and in.

Rushing in future, while always targeting that positive operating leverage and that's how we're managing the company.

Okay, Great and then can you guys talk about the capability adds this page pay and how you see you as banks position involving an e-commerce payment arena over the medium term. Thanks, yeah.

Yeah, we're very excited about sage pay no. It is a kind of leader in the e-commerce space within the UK in Ireland, and we also have the opportunity to be able to extend that into the rest of Europe , we have a pretty big footprint across Europe . So.

Pretty excited about that as we think about next year.

We ended up a rolling out sort of similar e-commerce capabilities over the course, the last 12 18 months here domestically and so we believe that that gives us more capabilities in terms of being able to.

Take advantage of e-commerce in the future.

Awesome. Thanks.

Thanks, Amanda Thank you.

Your next question comes from the line of John Mcdonald with Autonomous go ahead. Please your line is open.

Hey, guys, sorry, I have jumped on a little bit late did you give an update on the Charlotte expansion, Andy and how thats going and whether you're targeting new areas for this year to expand on the retail side.

Good morning, John .

Charlotte is going well, we opened the branch.

Three months ago, we've kind of new customer acquisition growth in current customers on plays you're fired up we are targeting a number of new branches to be opening yet this year and still targeting that number of 10, we're learning a lot from that investment we continue to track that measure our activity and I would expect us to continue to expand in new markets pent up.

Focus is expanding to our target number in Charlotte.

Got you, Okay, and then Terry just a couple of cleanup things on NII I think you mentioned the amortization kind of stabilizes.

Earlier this year is that right and then.

The roll off rates I get where the tenure as today's or those kind of breakeven or slightly accretable, where you're putting new money to work in the bond portfolio today relative to whats rolling off.

Yes so.

Dressing you kind of your second question first the reinvestment with respect to securities is still about.

15 basis points are so accretive it also and we would we would expect that based on where rates are today. The premium amortization does stabilize in the first quarter and so we think about net interest margin for the year. We think is going to be relatively flat, maybe a little bit of positive bias relative to the fourth quarter 2019.

Okay, so that the down and I for the year is just the tough comps of where you started last year I guess right things from a sequential standpoint, though feels relatively stephen.

Yes.

Okay. Thank you.

Yes.

And with that there are no further questions in queue I'd like to turn the call back over to Jennifer Thompson for closing remarks.

Thank you everyone for listening to our earnings call. Please contact Investor Relations Department, if you have any follow up questions.

This concludes todays conference call you may now disconnect.