Q4 2020 U.S. Bancorp Earnings Call
And he review of the results by Andy So theory, Chairman, President and Chief Executive Officer, and Terry Dolan, Vice Chair and Chief Financial Officer, There will be a formal question and answer session.
Would like to ask a question. Please press star one on your Touchtone phone and price per pound key to withdraw these.
This call will be recorded and available for replay beginning today at approximately 12 P. M. Eastern through Wednesday February 3rd 'twenty 'twenty, one at 12 midnight Eastern and I will now turn the conference call over to James Thompson Director of Investor Relations and economic analysis for U S Bancorp.
Thank you and Italia and good morning, everyone with me today.
Jerry for Chairman, President and CEO, and Terry Dolan, our Chief Financial Officer.
Also joining us on the call or our chief risk Officer, Jodi, Richard and our Chief Credit Officer, Mark Russell.
During their prepared remarks, Andy and Terry will be referencing a slide presentation that's on.
Three of the slide presentation as well as our earnings release and supplemental analyst schedules are available on our website at us think dot com.
I'd like to remind you that any forward looking statements made during today's call are subject to risks and uncertainties factor.
Factors that could materially change our current forward looking assumptions are described on page two of today's presentation.
And our press release and in our form 10-K, and subsequent reports on file with the SEC I'll now turn the call over to Andy.
Thanks, Jen and good morning, everyone and thank you for joining our call. Following our prepared remarks, Terry Jodi, Mark and I will take any questions you have.
Begin on slide three and the third quarter, we reported earnings per share of <unk> 95.
Revenue totaled $5 $8 billion for the fourth quarter, and we delivered a record $23 $3 billion for the full year 2020 in spite of the headwinds caused by the low interest rate environment and the economic shutdowns due to the COVID-19 pandemic.
The value of our diversified business model was evident this past year and strengthen our mortgage banking corporate trust and capital markets businesses offset pressure on our net acres net interest margin, which we expect to be stable and the near term and lower payments revenue due to reduced spend activity.
While uncertainty remains and I'm encouraged by economic data that have generally been coming and better than expected in recent months and then improving economic outlook given progress on the vaccine and the potential for additional governance stimulus.
And the fourth quarter, we saw a continuation of improving sales trends and are all payments data with the exception of some pressure on our merchant acquiring businesses European operations.
Which was affected by the economic shutdown and the second half for the quarter.
While we.
And to continue to experience pressure and the first quarter, we expect payments volume trends to continue to improve in line with consumer spend activity.
Noninterest expenses were stable compared with the third quarter and we continue to target flat sequential expense levels as long as revenue growth remains challenging.
Our balance sheet and a strong position credit quality metrics were a little better than anticipated this quarter and as expected, we neither bill nor release reserves and the fourth quarter.
We continue to maintain strong capital and liquidity positions, which will allow us to continue to support our customers and this environment.
And the results for the fed stress test and December which indicated that we will continue to be subject to the minimum stress capital buffer, we announced a $3 billion common stock repurchase program with buybacks beginning this quarter.
Slide four provides key performance metrics and the fourth in the fourth quarter, we delivered a 15, 6% return on tangible common equity.
Slide five shows that we continue to see migration to the digital channel.
Now, let me turn the call over to Terry will provide more color on the quarter. Thanks Andy.
Turning to slide six and I'll start with a balance sheet review, followed by a discussion of fourth quarter earnings trends.
Average loans declined by two eight per cent compared with the third quarter. The decline was primarily driven by lower commercial loans, reflecting continued paydowns like corporate customers and partly offset by higher mortgage loan balances while.
And I'll pay down activity continues to slow we expect it to remain somewhat elevated and these early part of 'twenty 'twenty one.
Turning to slide seven average deposits increased four 2% compared with the third quarter and overall deposit mix continues to be favorable on.
Our non interest bearing deposits grew five 3% while time deposits declined three eight per cent.
On slide eight you can see that credit quality continues to perform better relative to our expectations. Our net charge off ratio was 0.58% and the fourth quarter, which was down compared with 0.66 basis points and the third quarter, reflecting improvements in both commercial and credit card.
Loss rates.
Ratio of nonperforming assets to loans and other real estate was zero point for 4% at the end of the fourth quarter compared with zero point for 1% at the end of the third quarter.
Our loan loss provision was $441 million and the fourth quarter, which was equivalent to our net charge offs during the quarter.
Our allowance for credit losses as of December 31st totaled $8.0 billion or $2 six 9% of loans.
The allowance level reflected our best estimate of the impact of slower economic growth and elevated unemployment, partially offset by the consideration and benefits of government stimulus programs.
Slide nine highlights our key underwriting metrics and loan loss allowance and breakdown by loan category.
We have a strong relationship based credit culture and U S bank supported by cash flow based lending that considers sensitivities sensitivity distress proactive management and portfolio diversification, which allows us to support growth through the economic cycle and produces consistent results.
Turning to slide 10 exposures to certain at risk segments, given the current environment or stable compared with the third quarter. The top left table shows us the volume of payment relief declined meaningfully in the fourth quarter to one 4% on total loans.
Slide 11.
Provides and earnings summary.
And the fourth quarter of 2020, we earned 0.95.
<unk> per diluted share.
Slide 12 shows that notable items that impacted earnings in the fourth quarter of 2019, we had no notable items and the fourth quarter of 'twenty and 'twenty.
Turning to slide 13, net interest income on a fully taxable equivalent basis of $3 $2 billion declined one six per cent compared with the third quarter, reflecting lower average loan balances and a 10 basis point decline in net interest margin the decrease and the net interest margin was primarily driven.
By higher cash balances, which hurt our NIM by eight basis points and higher premium amortization, we expect.
Stability and cash balances and the near term and given the current outlook for mortgage refinancing activity. We believe that fourth quarter 2020 will prove to be the peak level for premium amortization expense.
Okay.
Slide 14 highlights trends and noninterest income excluding notable items and the fourth quarter of 2019, noninterest income declined 1.0%, reflecting the impact of lower industry wide consumer spending and activity on our payments businesses and deposit service charges, partly offset by strong mortgage banking revenue.
And higher commercial product revenue.
Slide 15 provides information about our payment services business lines, including exposure to impacted industries year over year of payments revenue was pressured by reduced consumer and business spend activity compared with pre COVID-19 levels. However, consumer sales trends generally improved throughout the fourth quarter, albeit at a slower pace.
And we saw on the third quarter.
As expected card sales volumes were impacted by lower prepaid card volumes and the fourth quarter as payment activity related to the stimulus programs moderated and the fourth quarter.
And acquire and volumes were negatively impacted by the mix of sales volumes and a decline and spending activity in Europe, following and increased economic shutdowns related to COVID-19.
Commercial business spend within our corporate payments business continued to improve during the fourth quarter.
Turning to slide 16 on a linked quarter basis noninterest expenses were stable as expected.
Excluding notable items and the fourth quarter of 2019 noninterest expenses increased by five 1% on a year over year basis growth was driven by higher compensation related to revenue generating business production technology and communication costs and COVID-19 related expenses.
Slide 17 highlights our capital position, our common equity tier one capital ratio at December 31 was $9 seven per cent.
I'll provide some forward looking guidance.
For the first quarter of 2021, we expect fully taxable equivalent net interest income to decline in the low.
Low single digits and parts due to seasonally fewer days.
We expect our net interest margin to be relatively stable.
Loan balances are likely to decline and the first quarter as PPP loans are forgiven and as corporations continue to us attractive capital markets funding alternatives and our strong cash flow to continue to pay down on loans. However, we expect to start to see average loan balances growing and the second quarter.
We expect mortgage revenue to decline on a linked quarter basis in line with the industry as refinancing activity continues to moderate.
And the first quarter, we expect both merchant acquiring revenue and corporate payments revenue to decline between 10% to 15% on a year over year basis, reflecting lower travel and hospitality volumes compared with pre COVID-19 levels. However, we expect sales volume trends, excluding travel and hospitality.
To continue to improve on a sequential basis in line with consumer and business spend activity.
And the recovery of travel and hospitality spend will be dependent upon the timing and efficacy of the explanations and changes in consumer behavior and business activities.
We expect credit and debit card revenue to increase and the low double digits on a year over year basis as growth and debit and prepaid card volumes more than offset and lower travel and hospitality volumes we.
We expect noninterest expenses to be relatively stable compared with the fourth quarter.
<unk> economic indicators have generally been better than market expectations and the outlook has improved and the past few months.
However, given current uncertainties that exists related to recent trends and COVID-19 cases and related state level restrictions, we expect nonperforming assets remain elevated and we expect net charge offs to remain relatively stable and the first quarter. We continue to expect net charge offs to increase and the second half of the year.
We expect the allowance for credit losses to begin to decline when there's more certainty regarding the economic outlook and the timing of when peak net charge offs will occur.
We'll continue to assess the adequacy of the allowance for credit losses as conditions change.
For the full year 2021, we currently expect our taxable equivalent tax rate to be approximately 20% I'll hand, it back to Andy for closing remarks. Thanks, Jerry 2020 was a challenging year for many and I am proud of how our employees came together to support our customers and communities to help them find solutions for their individual needs.
As we move into 2021, and I'm confident that U S Bank is well positioned to continue to deliver industry leading results are diverse revenue stream will continue to service well as we move through the various phases of the economic cycle.
We continue to carefully manage operating expenses, while our scale, our innovative culture and our focus on optimization will allow us to invest and our businesses and our digital and payments capabilities.
We view, a prudent and consistent approach to credit risk management and our track record is good stewards of shareholders' capital as meaningful Differentiators for this company, which is why we will always manage this company with a long term lens.
I want to thank our employees for all their resiliency flexibility and hard work over this past year and for all they do to bring our culture to life every day.
Now open up the call for Q&A.
At this time, if you would like to ask a question. Please press star followed by the number one on your telephone.
Again that is star one to ask a question to withdraw your question press the pound key.
And we'll pause for just a moment to compile the Q&A roster.
Your first question is on the line of Betsy Crazy with Morgan Stanley.
Yeah.
Hi, good morning.
Hi, Betsy.
I wanted to just understand a little bit about how you're thinking about the progression of loan growth as you go through the year and any kind of timing are drivers that you can speak to on the consumer side and the commercial side.
Yeah. So Betsy you know when we end up looking at loan growth you know, we do expect US we said that the first quarter. It is likely to be down because of the factors that we've talked about but we are starting to see an inflection point I think there's better activity from an M&A perspective and.
Business, then in terms of Capex and it seems to be getting a little bit stronger.
So our expectation is that in the fourth quarter, we kind of hit that inflection point in low and start to grow.
The biggest challenge for US has really been on the commercial side of the equation.
And we've gone through 2020, and it's really when that starts to change and which overall loan growth starts to improve.
We do expect that us consumer spend and consumer behaviors continue to get stronger throughout the year.
Some of the pressure on credit card will alleviate them. So I do expect on as we get into second quarter and second half of the year that credit card balances will start.
To come up as well and.
And that's kind of gives you a little bit of flavor with respect to consumer and commercial.
And can you give us a sense on how youre thinking about your own appetite for M&A, we've had obviously and the industry quite a bit of.
Consolidation activity over the past couple of quarters.
And I know you know from prior comments, you've mentioned that look you know you'll you'll look at.
And you have a high bar just wondering.
And given flush with capital liquidity and reserves.
That.
Changes at all the opportunities that from your perspective, you know for any M&A.
Hey, Betsy this is Andy our position on that is consistent with what we've talked about we'll continue to look at opportunities for in addition to organic growth partnerships Alliance like we did with state farm as well as M&A. If it meets the hurdles both from a financial and strategic sense.
To really increase our capabilities our scale, our customer acquisition opportunities. So we'll be open mind, you and about that.
Okay. Thanks, and then just lastly on the state farm and the Charlotte market expansion and some of the other locations where you're doing that.
Digital first branch light strategy could you give us a sense us to you know the.
The kind of pace of us.
Benefit to gross that you anticipate those strategies will drive over the next couple of years.
Yeah, Let me start on the state farm side. So as you know that was and acquisition of card balances as well as deposits and so we would expect continued increases and both of those categories and in addition to other opportunities and small business and other banking products with that alliance and that is going very well and the conversion was very smooth.
Charlotte is also exceeding our expectations both in terms of extending current customer relationships as well as new customer acquisition, we slowed a little bit in terms of us additional branches because of COVID-19, but we're going to get back on track. There. So I would say in both cases, they are exceeding our expectations.
<unk> for them, a little bit more material, just given the size and the Charlotte acquisition and Charlotte increase got it.
Okay. Thank you.
You bet.
Your next question is on the line of John <unk> with Evercore ISI.
Hi, John Good morning.
Morning.
On the credit front just wanted to see if you can.
And just give us a little bit more.
The color on your thought process regarding the reserve and why not.
Really share I know you indicated that you are.
But you're watching the macro backdrop, what economic factors are you looking forward to give you that signal.
Around reserve for leases and then separately I know you mentioned, a peaking of charge offs. So are you implying that you have to see that chart. The charge offs peak before you release I'm, just trying to become a library Derek.
Yeah, and then maybe with respect to your second question, though and I don't think we need to see them peak I think we need to just have confidence in terms of when that's going to occur.
And you know I think that you know and.
And as time continues to move on and I think that the economic outlook continues to get better and stronger.
And that's generally our expectation, obviously unemployment and some of the high level economic factors continue to improve which is great. I think the biggest thing that we're waiting to see US just you know win.
When we thought about the fourth quarter, you know COVID-19 cases, and things like that continued to be and <unk>.
To be spiking.
And there were a number of state economies have continued to put more and more restrictions on and we just kind of wanted to see that change.
Change and reverse which I think you know as we were starting to see now that's positive and I think there's enough uncertainty and we wanted to be conservative as we think about the appropriate and that's what the reserve to.
We wanted to see those some of those uncertainties alleviate.
Yeah.
Okay.
Alright, Thank you and then.
Separately on the loan growth front I hear you in terms of the likely inflection that you're beginning to see so as you think about it could you help us frame.
How would you think loan growth shape up for the year I was at some collection materializes and you'd see the strengthening through the year, how should we think about for your loan growth versus GDP and then separately.
What do you think will be the greatest contributors to loan growth in terms of your asset classes for 2021.
Yeah.
So relative to GDP, obviously GDP is projected to be pretty strong you know so I think that are you know from a loan growth perspective, I think the entire industry is going to see that lag a little bit behind that.
But you know as as the economy continues to get stronger you know that loan growth will occur you know the biggest challenges I think that you know the.
He has had and certainly that we've seen us that with very low rates.
On companies with good cash flows and been able to go out to the markets and refinance and our use their own cash flow is to pay down balances and so similar to what we saw in the last time you know.
Positive, there's a lot of liquidity out there with the with our corporate America.
And they need to start using some of that liquidity themselves.
In terms of capital expenditure M&A activity and all sorts of things. So the positive thing that we see now is that there are some green shoots associated with all of those things and that's kind of the front end of of our loan growth starting to reverse and take off and similar to what we saw last time, that's right Jerry and I think the areas that like you've just said the areas that probably offer the most opportune.
Our corporate loans as companies start to increase Capex spend and M&A accelerates and credit card spend starts to increase most of the credit card and increased activity right. Now is trans actors are supposed to us don't using balances.
Got it okay. Thanks, guys.
Beth.
Your next question is from the line of John Mcdonald with Autonomous research.
And then John John Hi, Good morning.
Andy and Terry gave some detailed guidance items for 2021, I guess at a higher level. How are you thinking about what kind of year 2021 will be in terms of maybe headwinds and tailwind on the revenue front and how you're thinking about managing for operating leverage.
Yeah, John So you know, let me start by thinking about the year 'twenty and 'twenty, because I think one of the great attributes of our company is our diversified revenue model. So we had headwinds and a couple of businesses like payments and and NIM offset by positives and mortgage and auto and and our corporate trust business and our corporate and commercial products businesses as we think about.
As I think about 2021, I think some of those headwinds, particularly and payments will begin to dissipate.
We know we have some pressure and the fourth quarter because of our European operations, but as you know spend starting to get back to normal, particularly those areas outside travel and hospitality and I think that will start to come back, particularly in quarters, two three and for so that'll be a positive mortgage continues to be strong.
Maybe not as strong as it what it was in 2020, but we have a high retail activity and new purchase activity given the expansion and the investments we've made there so and she positives there.
Trust businesses and investment because we will continue to do strong and then as Jerry talked about I think the other area of opportunity and loan growth. So as we think about the year.
And that diversity of revenue is going to be very helpful. And we will continue and manage expenses given the revenue opportunities we have and as we said as we think about the first quarter, we expect it to be relatively flat.
Okay and in terms of the operating leverage.
Achieve ability this year, how would you handicap that I know, it's a tough tough call yeah.
And it's always our goal Jack let me start there you know we're going on we're going to make the investments we need to but also recognize the current environment and try to perform as best we can given the revenue so positive operating leverages all of US our goal and we will strive for that in 'twenty and 'twenty one.
Still a lot of uncertainty on the revenue friends. So we'll see how that plays out and we'll continue to give updates.
Okay, and then Terry maybe you could just weigh in on in terms of capital management.
And just remind us where do you think you should be running the company you've got a fair amount of excess here.
In terms of common equity tier one and how you think about using buybacks beyond the first quarter over the course of time. Thanks, Yeah. So you know our overall target is eight five per cent and we typically operate somewhere between eight five per cent and 9% are you know.
In terms of tier one.
Shell currently as you know, we're at 97 and soldiers capacity and Theres certainly opportunity for us to be able to bring that down.
I think the thing that will we will do is we'll continue to watch the uncertainties of the economic outlook continues.
To strengthen and on E strengthen.
Bill.
Take advantage of but there's clearly a plenty of opportunity from a capital management perspective too.
Use that capital on a variety of ways.
Thank you.
Your next question is from the line of Scott <unk> with Piper Sandler.
Good morning, guys. Thanks for taking my question on Scott.
Terry.
And I was hoping to ask you to expand a bit on one of the comments you touched on a second ago with regard to corporate liquidity just on deposits generally you know the whole world is kind of a Washington and all these deposits just your top level thoughts on sort of when and how those.
And kind of get drawn down and if they if they could come down.
And just overall kind of what your what Youre thinking there.
Yeah, you know certainly our expectation for 'twenty and 'twenty. One is that the from a policy perspective. The federal reserve is going to continue to support a fairly high level or accommodate us sort of an environment.
And you know our expectation is that you know deposits will continue to grow up and certainly not and maybe at the pace that they were.
And all in 2020, you know so you know that that's going to be a bolt on opportunity for us as you know we have the deposit flow to be able to look at.
And on investing for example on the investment portfolio et cetera, but it's also been a credit challenged from a cash from corporate America in terms of them on liquidity that they have.
Okay perfect. Thank you and then I was hoping you could touch on the commercial products revenue line a bit.
And in a sense, it's kind of reverse some of the trends, we see appears where it sort of peaked earlier and the year and it has been declining.
And just curious if you can sort of talk about some of the underlying trends there and expectations.
Yeah, certainly what do we think about commercial product revenue on the peak really was kind of in that second and third quarters sort of timeframe.
For US you know our focus is really more on the high investment grade.
For our customers as opposed to high yield and.
And that mix in terms of what's happening in the marketplace ends up impact and you know our growth rates, maybe relative to the industry.
Fourth quarter is always a low there's always a little bit of seasonality for us and kind of comes down you know when we look at 2021, though you know work generally bullish with respect for capital markets activities.
Okay perfect. Thank you very much.
Your next question is on the line of Erika Najarian with Bank of America.
And good morning, and my first question and I'm, just teasing out the NII outlook for the rest of the year and I think about your comments on loan growth and that fourth quarter will be peak for premium and should we expect the first quarter of 2021 to represent a bottom and.
Net interest income and.
And if so.
Would you expect it to grow from there and and sorry pardon me. If this question is there any P. P P related.
Income that youre putting into guidance.
Yeah, well, maybe with respect for the last one I mean, PPP, obviously will impact net interest income as per gives us occurs et cetera, but it's not it's not a big driver associated with it for US no maybe kind of coming back to your first question, though our expectation and you know from here.
Debt.
Starting point and net interest margin is going to be stable.
And certainly in the first quarter and our expectations through the year I mean, the pressures associated with the yield curve and those sorts of things that we saw last year.
You know actually we will probably be helpful to us as we see that inflection point in terms of loan balances that's gonna be a big driver in terms of the inflection point with respect to net interest income as well and.
And then certainly as deposit flows if they continue to be strong.
And we don't believe that we need to build any more liquidity and so you know we'll look at Opportunistically, you know reinvesting that in the market.
Got it and then just thinking about the trajectory for payments for labeled.
Fee income and a 799.
Quarter versus not alright, and fourth quarter versus 945 and for Q 19, and you think about your outlook for the global economy. Do you think you could go back to the run rate of 945 five for Q2 'twenty one.
Or do you think that certain parts of payments will take a little bit longer to come back.
Yeah, well generally I would say that when we think about the payments business, we're optimistic with respect to sales volumes as the year progresses and how we do you know if certainly when we saw fourth quarter and we saw good sales.
Expansion in terms of credit card debit card and and the commercial spend so on our and our corporate payments space.
The domestic spend from a merchant perspective was kind of flattish and the fourth quarter, but we do expect that to continue to expand and grow.
Throughout the year I think that the thing that you know getting back to your question, though in terms of how quickly do you get back to pre COVID-19 revenue levels.
On a driver of that is just the travel and entertainment piece, which is gonna be probably a little bit more subdued at least in 'twenty and 'twenty one.
Got it and and if I could sneak them on a final question.
Here and this is for Andy as a followup to Betsy's question I do get a lot of questions from investors on whether or not you know us.
Bank would do something more transformational from and Nonorganic growth perspective, I'm seeing that your closest peers in terms of size did something you know.
Either transformational or somewhat transformational and the.
A question here is with onset at 554 billion as of year end debt.
And as does the and 700 and Bill at 700 billing a bright line for you and indicate.
Current tier in terms of regulatory treatment.
I think.
Erika the short answer is I don't think about that as a bright line yes.
And as we talked about we're making investments across all of our businesses, particularly on the digital channels and we spent $2 $5 billion a year and we have good scale, but we'll look at opportunities to increase that scale and increase the customer acquisition opportunity across all the businesses. So but there arent any bright lines in terms of what we look at or would do with us.
Would or wouldn't do.
Got it thank you for sure.
Your next question is on the line of Matt O'connor with Deutsche Bank.
Good morning.
And Oh.
First day, a clarifying question and sorry, if I missed it but the expense guidance I think you said stable on the first quarter versus <unk>, but did you give full year 'twenty one guidance on costs.
Yeah, we did we didn't necessarily give full year guidance I would just kind of come back to what Andy said and that.
Our goal and our expectation is to manage expenses flat.
Especially you'll get.
On the revenue environment and you know our target is always to achieve positive for leverage is going to be challenging and the especially in the earlier part of the year.
Okay. That's helpful. And then separately the alliance that you have with state farm just talk about some of the kind of a longer term opportunity. There I think you brought in about 10 billion and deposits and a little bit north of 1 billion of card loans, but what do you think the revenue and earnings contribution from that can be over time.
Yeah, Let me tell us the dollars that you mentioned in terms of deposits and credit card us is pretty close.
And when we think about the business, though and and and he's talked about this before you know theres just a lot of opportunity and they have 19000 agents that are out there.
And the other was there one of the biggest organizations with respect to small business customers and so when we think about it and we think about theres opportunity in terms of deposit gathering and there's certainly opportunity to enhance and improve the credit card program that has existed but.
We have a number of different initiatives that are going to focus around us.
Really expanding that and also expanding our relationship with them.
In terms of auto lending and as well as as well and small business opportunities.
And I guess, what im getting out like if we look out five years like is this something that could all of us starting to start moving the needle right like so mortgage you are investing heavily on it.
For a number of years on all of a sudden activity picked up and it's just massive number and youre at this type of favorable it just shows kind of the fruits on the investments is this something that could move the needle or is it just kind of a building block along with some other under sort of like you know I think I think it is one of those things that can move the needle for us I mean anytime you have accessed through 19.
<unk> thousand agencies.
That's very significant and you know the us.
And the thing Matt is that you know we've invested a lot and digital capabilities. We plan on leveraging all of those digital capabilities in order to be able to support their customers and ours. So we're very bullish and we're very excited about and the state Farm Alliance.
A lot more to come.
Thank you.
Your next question is from the line of Ken and Houston with Jefferies.
And Ken.
Guys. Good morning, just a couple of quick follow ups first of all.
On the on the point about premium am and it bottoming is there and where you can help us help us understand how much of an impact that currently is either and numeric terms are.
How much directional change there has been to get to this point given your point that it spot on to the point that it's bottoming.
Yeah, I mean, we haven't necessarily disclosed any dollars associated with premium amortization you know if you end up thinking about the 10 basis points. This.
And this quarter.
No eight of it is really related to card balances for the rest of us.
It was really driven by premium amortization and a significant amount and also I I think with respect to first quarter you know its or.
Fourth quarter, it's really Pete first quarter, it's really and into 'twenty 'twenty, one and it's really going on track I think along with how refinancings occurred within the mortgage industry.
Okay and as you as you look into.
This year and consider the stimulus that's already started too tough flushed through and potentially more stimulus how does that impact on.
And what you expect to see and the payments businesses at least domestically. So does that does that net help revenues does it weigh on revenues and what other kind of through the income statement.
The FX do you are you anticipating given the prospect for even more stimulus to come through thanks.
And when you think about stimulus you know certainly in the short helps our prepaid card businesses pretty significantly and.
And and you know with respect for the most recent one and if there's another round of it I think that that would continue to help throughout the year, but I do think that it will and we did see and Alaska unless you know it does it does stimulate consumer activity in terms of buying.
And you know that is going to help us and did help and and will help our payments businesses as we think about 'twenty 'twenty, one and so.
You know that for me as a very favorable thing I think the other thing is that when you think about it from a credit standpoint.
You know the $900 billion, maybe it was a little bit lower than what had been hoped for but it's a nice start and I think there's a most likely a heel thoughts in terms of more to come.
The real question. There is does that create the bridge for the consumer customers from a net charge off perspective to really keep those at and <unk>.
Keep those that day, so to speak and I think that the stimulus is going to be a positive both in terms of revenue as well as on the net charge outside if it's if it occurs.
Yes, and just one follow up on the European side of the payments business how quickly.
And Ken does lockdown changes move into the revenue stream, meaning that is a coincident does it start to lag from what you've observed and the prior.
First lockdowns as opposed to this one that's happening now and wait on the fourth quarter results and what's the experience that you've seen and would expect.
The bounce back us pretty fast.
And internally as you know within that within that 30 to 90 day sort of timeframe and you start to see it.
It does take a while for it to for that trajectory to get back, but it does happen pretty fast.
The thing and to keep in mind US up you know the European revenue.
The impact for U S Bank total revenue was probably around 1%. So it's a very small amount.
In terms of total revenue and.
And we'll continue to see what happens with respect to the lockdown.
Okay. Thank you.
Thanks, Ken.
Your next question you're spot on the line of Mike Mayo with Wells Fargo.
Hi, Mike.
And.
I guess, you stand out and unless I missed it so no reserve releases.
Pandemic related or did I Miss that.
Buildup, and what about $2 billion and reserves.
The prior three quarters, but no releases and the fourth quarter did I get that right and if so why no releases.
And like that that is correct you know, we when we end up looking at the allowance for credit losses.
Still see as I said, a little bit earlier.
We ended up looking at the uncertainties that exist out there at least existed out there.
At the end of the year and you know just have we want us well, we want to be able to see us we wanted to see kind of a reversal of some of the restrictions and a reversal associated with some of the.
The Covid cases, and I think that we're starting to see that happening which is a good sign.
But you know that's one of the reasons that we really can.
On a held Pat with respect to the allowance for credit losses at this point.
It's not your clients is just youre, just being conservative with the environment.
Well, Yeah, I think it's just the uncertainty and the environment, we'd like to see a few of those continue to improve.
Okay.
My my bigger question relates to your presentation.
From December which talks about recreating the the ecosystem.
And going after more of the payments business with your <unk>.
Middle market companies and small businesses.
And basically improving the share of payments with for.
And your business customers and I didn't completely understand.
And game for that any specific metrics around how youre trying to improve share. For example, one metric could be you have X percent share of the payments business with your middle market companies and you want to move it to why.
Anything concrete that you can put around what feels like a newer.
And our enhanced strategic direction and that coincides I guess with your closing of one fourth of your branches and if you could give an update on that also.
Yes, Mike This is Andy let me start with the branches. So we did complete the branch closures early in January so as we've talked about we were just over 3000 branches were down about 25% to just over 2300 branches and that's really a function of consumer behaviors as you shop on the chart 77% of our.
Customers are usually and the digital channel those using the branch channel, while still important and still seeking advice and counsel, it's down to about 40%. So there's a behavior change it's accelerated as a result of the pandemic and the closures reflect that that's number one on the small business business banking front I think it's a very significant opportunity we have.
Great payments business, we have a great banking business and weaving those two together to offer a full set of capabilities for.
For that ecosystem is critically important and I think there's three metrics that we're going to focus on payments customers that add banking capabilities banking customers debt payments capabilities, and new customer acquisition, and we havent articulated those goals, but we have goals for all three of them and we'll update as we go forward, but I think it's a huge opportunity.
Okay and as far as last question.
Extra spending I mean, if you closed your branches. It's done in January. So you certainly have savings your tech spend went up quarter.
Quarter over quarter and the fourth quarter. So are you looking to increase your tech spend why you create this kind of newer ecosystem.
So Mike we talked a little bit about our guidance on expansion, which is relatively flat and as you think about that flat expense guidance. There's really two components. One is achieving savings through optimization on the current business model while at the same time investing for the new so we're going to be able to continue to invest.
To allow us to expand and these areas, while retaining flat expenses by saving on the current business model.
Alright, thank you.
You bet.
Your next question is from the line of the victory and Asia with the Jpmorgan.
Hey, Andrew Hey, Terry.
Thanks for taking my questions I'm. Good thanks couple of questions Firstly.
Okay.
Branch closures, you'd obviously and did a lot.
And on the Gen.
And what's your thinking for the rest of the year are you a genre for this year do you think there's more to come you know and.
And in line with that given that this is all about consumer behavior with the pandemic.
What is how is that changing your thinking about opening more branches. I know you said you want to open more and Charlotte, but you get on that whole expansion strategy do you need as many branches how us.
And if it does sort of talked to book those pieces.
Sure Vivek, so as you think about Charlotte.
We were targeting on a dozen branches and if you think about the twin cities. We have nearly 85 200 and so the way we would open and a new market would be significantly different than our current business model in terms of the number I think we're at a relatively stable point right. Now we'll continue to look at opportunities to optimize branches at the same time opening new branches, but.
And I wouldn't expect substantial changes in the near term.
Okay.
Great.
A different question.
And what percentage of your much and processing.
And it was a small to mid sized merchants, especially for large.
Well I don't necessarily have that at my fingertips, but you know if you end up just kind of looking at the overall mix. We have we have a pretty good mix of small and medium sized sort of businesses that are part of that part of that equation and.
And you know they they have tended to be you know kind of on the distribution sort of merchants for customers as well.
One of the things, we continue to expand and grow as our E commerce sort of capabilities and that has grown very nicely over the last on over the last day a year or so.
Would you expect for their.
Harsha business over half what would your cash.
Yeah, if I were if I.
Okay.
If I were to venture a guess I.
You know I'd say, you know maybe a little bit.
And it depends on how you end up characterize and small and medium et cetera, I think that's something that I'm struggling with here a little bit below book.
One thing I'd add because I think we're going to go on in terms of the recovery.
And one way we look at it on a lot and very focused on is the component of our merchant acquiring that us travel entertainment and airline and you know a year ago back in 2019 that was nearly 40% and and so it was 37% and today, it's about 20%. So the decline that has occurred has been principally in that area as opposed to a small loss.
Traditionally it's been on that.
Debt focused area of travel and airline everything else is actually got back to normal and that 20% is where the opportunity exists for our continued improvement and spend as we think about the future.
Great Alright, Thanks, and one last one if I may did you mortgage banking state still very strong I know it's down.
And I'm presuming you have been able to pass on the GSE refi fee. Thus far is that the case and what's the plan and for that as you look forward.
That would be that would be the situation for the case E on.
And when we think about the mortgage banking business too and we talk a lot about the refi, but you know the thing that I'd, maybe remind people is that we've made a lot of investment and that business in terms of the purchase.
Purchase money purchase mortgage and that it continues to do very well I think it's a if you end up looking at the production of applications.
Last quarter, it was about 52% purchase versus refinance it and so I you know I.
And I know that that people look at that as a headwind and I actually think that that's an area of opportunity as we think about the future.
Alright.
Okay great.
Thank you very much.
David.
Your next question is on the line of Bill car, Kathy with Wolfe Research.
Good morning, Bill and good morning.
And thank you for all the color on that you guys have given on payments.
I wanted to follow up with a bigger picture question.
Broadly speaking on how would you guys respond to concerns of some investors that USB is merchant acquiring business is tethered to the physical point of sale.
And as competitively disadvantage against some of the more digitally native names like Paypal and square stripe.
And also more broadly if you could discuss what USB is doing to compete against those kinds of players.
Yeah.
Good questions Bill and twofold number one is most of the investments we've made and most of the expansion that's occurred over the last two years has been on the E commerce side of the equation and it's not just E commerce, it's really.
Capabilities to help those businesses run their businesses and I think one of the advantages against those payments players you described as our banking business and that's why we're so darn focused on weaving together banking and payments because those customers need not just the payments mechanisms they need small loans and they need deposit that advice and Uh huh.
So I need the full array of services and I think if we can offer those and that convenient.
Easy fashion.
That solves their problems and helps them run their business I think that's where our advantage us and that's a combination of banking and payments and so they are an important.
And thanks, Jamie that's super helpful color, and if I could squeeze and another one I'm sorry for you guys discussed this already on the securities portfolio, what kind of reinvestment rates are you guys seeing relative to what we saw on the fourth quarter and and you know maybe a little bit on what kind of opportunity a steeper curve could represent.
Yeah, certainly when we see and a securities portfolio and the differential from a reinvestment has shrunk some.
On a relative to for example on third quarter fourth quarter got a little bit better and I believe and expect that probably to get better as well I do think us the long into the curve starts to come up I think that that is another inflection point and such just a matter of kind of what the timing of that us.
Got it.
Thanks, very much for for answering my questions.
Thanks Bill.
And final question is from the line of Gerard Cassidy with RBC.
Hey, Gerard.
Good morning and medium.
Jerry.
A question for you on the outlook for loan loss reserves clearly you guys have always been very conservative and you still are.
And we look out into the future.
Maybe Terry can you share with us I think.
If I read the number correctly reserves to loans for they are about $2 six 9% and.
And that's of course higher than where we were in January one when you guys had your Cecil adjustment and I think it was about one point and 99% do you eventually see the reserve for loan number coming back to where it was pre pandemic and about 2%.
Yeah.
And it'll be kind of really around timing, but certainly when we look at the overall mix of our business and our portfolio and our underwriting.
And at 2% to us makes sense as we get through the pandemic sort of environment.
Very good and then Andy and maybe a bigger picture question.
Clearly you guys outlook, and maybe a little more conservative and some of your peers, but there seems to be you know.
The expectation that as the vaccines are widespread.
By the middle of the year that the economy will come back strongly and the second half there are calls for real GDP growth of 5% to 6%. The equity markets are at record levels. As you know one when you go down the elevator and what risks do you worry about and should think about the next 12 to 24 months.
Well the principal risks are the ones, you've described which are the economic risks the headwinds and and a flat yield curve, but I think the economic headwinds that we faced in the second half of 'twenty and 'twenty are starting to dissipate for sure and starting to come back and again.
Gerardo mentioned.
We have a diversified revenue stream and different businesses do well and different environments and those businesses that struggled with some of the headwinds that we saw for ease already to NIM and loan growth and payments I think and we'll start to turn the other way as we start to see the recovery for all the reasons you described so.
And then different businesses will be impacted and different way. So the value of the diversified revenue stream really it was very helpful and one of the ways that helps us for me and whatever economic cycle, we're in but but the principal thing that we all think about is how the stimulus and how the actions of the government as well as some of them.
Forbearance and plans by the banks will help us get back on to a normal economic recovery I think thats. The principle area of concern for all of US right now.
Very good thank you.
You bet. Thanks, Jerry.
There are no further question.
Thank you for joining our call today, please call the Investor Relations Department and with any follow up questions.
Yeah.
This concludes today's U S Bancorp fourth quarter, 'twenty and 'twenty earnings call. Thank you for your participation you may now disconnect.
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