Q1 2021 U.S. Bancorp Earnings Call

Welcome to us Bancorp first quarter 2021 earnings conference call following a review of the results. Chairman president and chief executive officer and Terry Dolan Vice chair and Chief Financial Officer. There will be a formal question-and-answer session. If you'd like to ask a question, please press star one on your touchtone phone with the pound key switch wrong. This call will be recorded and available for replay beginning today at approximately 1:00 p.m. Central Time through Thursday, April 22nd 2021 at 10:59 p.m. Central Time.

I will now turn the conference call over to Jim Thompson director of investor relations and economic analysis for us Bancorp. Thank you and good morning. Everyone with me today are chairman president and CEO and Terry Dolan our Chief Financial Officer. Also joining us on the call for our chief risk officer Jody Richard and our chief credit officer. Mark runkel during their prepared remarks Andy and Terry will be referencing a slide presentation the copy of the slide presentation as well as our earnings release and supplemental schedules are available on our website at usbank.com. I would like to remind you that any forward-looking statement made during today's call are subject to risk and uncertainty factors that can materially change. Our current forward-looking assumptions are described on page two of today's presentation in our press release and in our form 10-K and subsequent reports on file with the SEC dead.

I'll now turn the call over to Andy Thanks Jen. Good morning, everyone.

Thanks for joining our call today following our prepared remarks Terry Jodi Mark and I will take any questions. You have a beginning fly three in the first quarter. We reported earnings per share of a dollar forty-five credit quality Trends were better-than-expected and the economic Outlook has improved meaningfully over the past several months given the pace of the vaccine rollout and the ongoing impact of significant government stimulus based on these factors. We release a little over 1 billion dollars in loss reserves this quarter.

Revenue total 5.5 billion dollars in the first quarter as expected net interest income decreased compared with the fourth quarter. However, we expect loans to grow as the year progresses and given a Securities reinvestment rates are now a creative to asset yields and our belief that premium amortization expense is likely peaked. We expect that. The first quarter will be the low point for net interest income.

Improved economic activity is driving better consumer and business spending Trends which in turn is translating into improving payments volume in each of our payments businesses volumes, am covered impacted travel hospitality and entertainment sectors, exceeded first quarter 2019 pre pandemic levels are expenses were relatively stable compared with the fourth quarter wage in the lower right quadrant. You can see that our Capital liquidity positions remain strong and during the quarter. We return one point three billion dollars to shareholders in the forms of dividends and share BuyBacks home by four provides key performance metrics. This quarter are returns benefited from improved credit performance and Reserve release longer-term. We believe we will continue to deliver in distributing Returns on tangible common Equity driven by strong ppnr performance consistent through the cycle credit performance and prudent Capital Management sci-fi authors.

What's the pay stub migration to the digital channel digital update is correlated with higher customer satisfaction, ease-of-use and lower cost of service which we measure very closely with get your oil transactions now account for nearly 80% of all transactions, you know lower right-hand chart. You can not see that more than 60% of the loan sales now occurred digitally which compares to a less than 40% a year ago. Now, let me turn the call over to provide more detail on the quarter. Thanks Andy. If you turn to slide six, I'll start with a balance sheet review followed by a discussion. The first quarter earnings traveled average loans declined 2.8% compared with the fourth quarter as the low interest rate environment continue to impact bar Behavior elevated corporate pay down activity late in the fourth quarter negatively impacted average commercial loan growth in the first quarter recently. We have seen improving pipelines and we expect inventory building dead.

An m&a activity to pick up as we move further into twenty Twenty-One similarly lower interest rates impacted Consumer loans as increased refinancing activity impact real estate loan balances credit card revolve rates continue to decline this quarter causing balances to contract as consumers used excess liquidity from government stimulus programs to pay down debt turning to slide seven average deposits increased 0.9% compared with the fourth quarter reflecting the level of liquidity in the financial system, as a result of our deposits are typically seasonally lower in the first quarter of the Year our overall deposit mix continues to be favorable in the first quarter our non-interest bearing deposits grew 2.8% of what time deposits declined 17.7%

slide

Shows our credit quality Trends which continue to be better than our expectations reflecting improving economic conditions supported by additional stimulus and increased vaccine availability off our net charge-off ratio totaled 0.31% in the first quarter compared with 0.58% in the fourth quarter, the Improvement reflects lower total commercial credit card and other retail net charge-offs the ratio of non-performing assets to loans and other real estate was 0.41% at the end of the first quarter compared with 0.44% at the end of the fourth quarter. We released reserves this card or reflective of better-than-expected credit Trends and an improving economic Outlook versus our previous expectations in the first quarter. Our loan loss provision was negative $827 or one point 1 billion dollars.

What's the net charge-offs of 223 million dollars our allowance for credit losses as of March 31st total of 7.0 billion dollars or 2.36% off the allowance level reflected our best estimate of the impact of improving economic growth lower unemployment and changing credit quality within the portfolios driven in part by the benefits of continued government stimulus programs slide nine highlights our key underwriting metrics and Loan loss allowance breakdown by loan category turning to slide down exposure to certain at-risk segments given the current environment are stable compared with a fourth-quarter the left table shows that customer balances included in payment relief programs continue to decline meaningfully in the first quarter to less than 1% of total loans.

Slide 11 provides an earnings summary in the first quarter of 2021. We earned a dollar forty-five per diluted share these results include a reserve release of one point 1 billion dollars turning to slide twelve net interest income on a fully taxable-equivalent basis a three point 1 billion dollars declined 3.55% compared with the fourth quarter due to fewer days in the quarter lower average loan balances and a 7 basis-point decline in net interest. Margin. The decrease in entrance margin was Prime driven by higher premium amortization expense lower portfolio reinvestment rates and mortgage loan prepayments.

As mentioned earlier, we expect loans to grow as the year progresses also given that Securities reinvestment rates are now a creative to eat fields and are believed that premium amortization wage is likely peaked. We expect the first quarter of will be the low point for net interest income slide 13 highlights Trends in non-interest income, which as a reminder is typically should be lower in the first quarter of each year non-interest income declined 5.7% from a year ago primarily driven by lower mortgage Revenue off over year basis strong refinancing activity drove higher production volumes and related production Revenue. However, in the first quarter, we recorded a reduction of a hundred twenty million dollars took the fair value of our mortgage servicing rights that have Hedges which Compares with a favorable increase in the valuation that have had just of twenty-five million dollars a year ago this prepayment speeds

Declining we would expect future.

Changes in the MSR fair value adjustment to be more moderate business activity and strong underlying market conditions drove growth and trust and Investment Management fees treasury management office and Commercial product Revenue. Although deposit service charges were negatively impacted by lower consumer spending and increased consumer liquidity from government stimulus.

Slide fourteen provides information on our payment services business including a breakdown of segment volume for the first quarter of 2021 compared with more normalized 2019 Chef slide fifteen indicates of sales volumes across our payments businesses have continued to rebound since bottoming in April of 2020 in the first quarter total payments fee. Revenue was essentially flat compared with the first quarter of 2020 credit and debit card Revenue increased 10.5% on a year-over-year basis driven by higher revenue and higher prepaid card fees as a result of government stimulus programs.

Merchant services Revenue decreased by 5.6% compared with a year ago, which was better than what we had expected coming into the quarter you proving sales growth in North America was more than off was more than was more than offset by expected declines in European sales due to COVID-19 shutdowns corporate payments Revenue declined 13.1% off here as traveling entertainment Revenue continued delay turning to slide 16 non-interest expenses were relatively stable and a linked quarter basis as expected year-over-year growth of 1.9% was driven by increased mortgage and capital markets production incentive costs and expenses related to business Investments and digital and technology, which was partly offset by a decline in a class related to COVID-19 and a future delivery liability incurred in the first quarter of 2020.

Slide 16 highlights. Our Capital position are common Equity Tier 1 Capital ratio at March 31st was 9.9% compared with our Target CT 100 up 8.5% Give an improving economic conditions in the first quarter. We bought back 650 million dollars of common stock as part of our previously announced 300 billion dollar repurchase program now provide some forward-looking guidance for the second quarter of 2021. We expect fully taxable-equivalent net interest income to increase in the low single-digits compared with the first quarter and we look for a modest loan growth. We expect payments fee Revenue to continue to improve sequentially as economic activity continues to accelerate starting in the second quarter growth rates will be meaningfully impacted by favorable year-over-year comps given the 20/20 COVID-19 environment.

We expect non-interest expenses to be relatively stable compared with the first quarter. The outlook for credit quality has improved in the past two quarters along with the improving economic environment. However, we think that the net charge-off ratio is likely to remain low as the first quarter level of 0.31%

as well

We move further into the year. We expect the net charge-off ratio to normalize toward pre pandemic levels. We will 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 rates and approximately 21% I'll hand it back to Andy for closing remarks. Thanks, Jerry 1 years ago. We were at the beginning stages of a pandemic driven economic downturn which had no president President. We were confident in the strength of our balance sheet and our ability to support our customers employees and Community cross through a difficult time, but we with along with the entire industry faced an uncertain Outlook a lot has changed in a year. Our first quarter results were reflective of the lingering impact of an economic economy continues to heal but there's not fully recovered to free pandemic and activity levels. However, we are optimistic about the trajectory from here.

We believe we are well-positioned to benefit from what many expect to be the strongest economic growth. This country has seen in decades as we capture the potential of increased consumer and business spending across all of our business lines most directly related to our three payments businesses importantly, we expect our multi-year investments in digital and payments to continue to pay off well beyond and he's cyclical benefit that we see in the upcoming quarters these Investments aimed at enhancing the customer experience and leveraging the power of our payments ecosystem will position us at the Forefront in banking and drive market share gains for many years to come home. Ultimately. Our goal is to deliver industry-leading returns through the cycle and if such be invested to drive top-line Revenue growth while prudently managing expenses credit quality and capital with the same interests of our long-term shareholders in mind.

In closing I'd like to thank our employees for all their hard work and their commitment to serving our customers with the expertise and integrity. They have come to expect from us. Well now open up the call to Q&A off as a reminder to ask a question. You need to press star one on your touchtone phone, press the pound key. Please stand by while we can power off. Your first question comes from the line of David Rochester with compass point.

Hey, good morning. David. You guys mentioned payment activities to continue to recover into Q was just hoping you could frame that potentially in a range. And then as you look out to a more normalized back half of the Year versus where we are today, what kind of year-over-year growth and transaction volume. Do you think we could see at that point? I just heard some some other person's face talk about some pretty robust year-over-year growth as we move into the back of the year was just curious what you guys are expecting.

Yeah, I mean it's a great question. So, you know when we end up obviously the the comparables on a year-over-year basis kind of going forward is going to be pretty strong simply because of what was happening in 2019 long as we you know, kind of look at you know different components of our Revenue. Let's take Merchant acquiring as an example, you know in the first quarter we saw, you know overall wage, you know, it was down about 15% But as Andy said, you know, the non-airline non-impact is sort of Industries was actually up about 10% off, you know, and and the airlines continue to be depressed as you know kind of in that 70 to 75% level, but we do expect you know, all those different things all those different categories to continue to improve our expectation we end up looking at payments revenues kind of overall, you know across the categories that by the time we get to 20 by the end of the fourth quarter dead.

or certainly is very early in the

2022 sort of time frame that we will be back to pre pandemic levels on a a total basis in terms of Total Merchant acquiring total credit debit card as well as the CPS businesses, right? That's great, I appreciate that. Maybe just switching to him real quick. You mentioned new security Shield or created for the book deal is or declining. So that should bring down Securities Premium app expense. I know you mentioned nii with moving higher from here. Are you also saying you think you'll get some margin expansion here as well?

Yeah, well, here's the way I would kind of frame it. You know, first of all nem is kind of an output with respect to how your balance sheet is changing. And of course, there's a lot of different dynamics that are occurring within a portfolio today, you know, our expectation from Nim perspective is that you know in the second quarter, it's probably reasonably flat but expecting from there and the the Dynamics are going to be a really around loan growth balances, which will you know, probably continue to be a little bit of a pressure but offset by expanding and improving Investment Portfolio, and that's a driver a premium amortization at the driver of the fact that the differential from a reinvestment rate is getting much stronger because of the real curve and other factors.

Great the flattest in 2q expanding in the back of the Year. Potentially. Yep. Yep.

Great. All right. Thanks guys.

Your next question comes from the line of John pancari SI morning. Yes. So on the name on the loan demand side and do you acknowledge that you do expect to be pressured near-term. I guess. Can you just talk about when do you see a more notable inflection in bone growth? And what do you see as the drivers? And I guess also within the commercial side. Can you just talk about the demand that you're seeing in terms of Pipeline and utilization? Thanks God. Yeah and great questions. So what we are seeing in terms of low and so let's talk about loan growth that you know, we said that you know in the second quarter we do expect us to start to expand but it's going to be honest, you know, I mean, there's still there's still for example pressure that will exist in certain categories on the commercial side. What we are seeing is that pipelines are getting stronger.

You know really across most areas and most geographies in addition. You know, when we think about the stimulus that's been put into the system, you know, there's a lot of consumers spend especially as the second half of the Year developed and I think that business is what we are starting to see is a businesses are becoming much more optimistic. They're thinking about inventories build and they're thinking about the capital expenditure and I think that those are all really good signs and there's a second thing I would say probably more so for the second half of the year is that we do see each believe that m&a activity is going to start to strengthen and that will have positive implications with respect to see Ni loans, which is all good. We have if you have located off of the other categories, you know, the significant amount of stimulus on the consumer side has allowed consumers to be paying down debt, which is I think one of the things that that the ending wage

Has been seen, you know revolve rates have come down and that that necessarily ends.

Impacting balances, but just as a reminder, we do typically see an increase in credit cards in the second quarter. And so, you know, those factors will offset each other, but our Autoland life has been very strong and I would expect that will continue to be strong. So it's a bit of a put puts and takes in the near-term but we do, you know, I think the encouraging thing is we are seeing a lot of nice wood green shoots and as consumer spends starts to expand and Grill, you know, I think that consumer lending will will come back as well.

Got it. All right. Thanks Terry. And then Andi, when did you could talk a little bit about m&a interest both on the whole Bank side and bank and do a lot of attention out there regarding potential deals, and that's only a big discussion around the scale the need for scale by within the the bank space given the competitive backdrop. So I just want to see if you can give us your updated thoughts on that front booth on a whole Bank side, obviously, but also non-bank. Thanks.

Yeah, thanks John and I think our view is consistent with what we talked about in past calls, which we're we're open to looking at opportunities meaningfully move the needle from a Traditional Bank standpoint in terms of our wiring customers or new geographies. And then in the non-bank space and we are active in this group that you saw on our payments business looking to expand our capabilities and or distribution and those are areas that we continue to focus on particular as we think about this payments ecosystem and adding either Partnerships or capabilities through m&a.

Got it. All right. Thanks Annie you bet.

Your next question comes from the line of that secret with Morgan Stanley.

Hi, good morning. Hi. Hey a couple of questions one. Just wanted to dig in a little bit on payments and what you think you can do there on the corporate side, especially as you're you know, one of the first to offer the RTP and I hear from different institutions like clients are not that invested about are on the corporate side, but I'm thinking you might have a different point of view. So so wanted to drill into that a little bit and see if there's a needle mover. That's that's coming over the next few years or not.

Yeah. T. I it's Andy. I I think there's a pretty significant opportunity here. First of all, there are a number of use cases that we're currently working with with the number of customers across many different Industries wage. But I do think that everything from the way request for pay daily payroll the way your manager receivables and payables the information that comes with it. The Autumn Auto reconciliation. There is a lot of opportunities now the challenge is there's a lot of times your investment required to get to that opportunity and that's why we're working with the with our customers because we want them to understand the opportunity wage and we want to work with them on that investment and the changing their processes to gain that opportunity and but I do believe that there's a pretty significant change coming and you know, the payments mechanisms that we may have used for years and years particularly in business-to-business using about checks and and wires are all going to migrate fairly rapidly over the next few years.

And then your monetization of that is through increasing deposits or is is there a hard dollar?

Fees Associated I think it'll be a combination of both not on like how our payments business works today part of it is from the balance sheet and part of its for bees and part of it might be just having a a a fee structure to allow you to do the things that are TP will allow as supposed to have perhaps a per transaction fee. Okay, and then follow-up question just on credit. I know you spoke about normalizing towards prepaying wage levels over time. Is that mean, you know around a 50 bit been CEO rate or is that something lower? Because you know during pre pandemic. We also had certain asset classes that were, you know, net net positive on the meaning that negative. Right? Like you had you had recoveries and some of the asset classes. So just trying to understand what you say pre pandemic what kind of number you're talking about. I'll give you the high-level answer then Mark Mark runkel is here with this Aladdin, but but yes is the short answer to your question. If you think about pre pandemic we were in that 45 to 50.

Basis point range is Terry said 31 is probably lower than one is normal over a longer period of time and I would expect him to migrate back to that level Mark. What would you ask you have a exactly spot on there's not much more to Edward. Just thinking off over time. We'll get back to More normalized Level and we'll see some of those recoveries that you're seeing potentially come down and we'll see the portfolio start to normalize back closer to that fifty basis point range and just giving birth experience and how many you know Cycles you've been through what should we be thinking about as a time frame for that is that, you know next 12 months or that's more like next 36 months or some other time.

I you know, first of all any time I've tried to predict time frames in this environment. It's been it's been challenging. So I I don't claim to know any more than anybody else. But you know as we see the Home Improvement we have today I think things start to get back to that normal level in the latter half of this year.

Okay. Thanks.

Your next question comes from a line of Scott siefers with Piper Sandler guys a little more nuanced on the margin. Are you able to qualify how beneficial an impact the decline in premium amortization could be for the margin and going forward in other words. So where is it? Where is it now? How long would you expect that to normalize out to and then does that any thoughts on contribution to the margin from ptpp in the second quarter to I think given the the window closure from the FDA and the first quarter maybe a little lumpier than we might have figured it previously.

Yeah, let me take a second question first, you know from a standpoint first quarter versus second quarter. We don't see that as being a big driver, you know for us just based upon the size of our book of business and that sort of thing that we ended up originating, you know from a premium amortization perspective. You know, what we have seen kind of on the way up is that you know on a quarter-over-quarter basis it kind of in that anywhere from two to four basis points sort of range to the five basis points sort of range and you know a big part of it Scott will depend upon you know, how quickly prepayment speeds do seem to come down. So it's a little bit, you know a little bit hard to kind of put an exact, you know, an exact impact in terms of you know, what it will have on the second quarter. But let you know our expectation is that the prepayment speeds, you know continue to linger a little higher in April, but then starts to come meaningfully down in May and June.

Okay, perfect.

Great. Thank you. And then maybe if I could return to the payments business, um for a second as well once once we get sort of back to normalization, it seems pretty clear. There's a large opportunity here both in the US and Europe as things, you know, kind of kind of normalized. Once we once we get back to that steady-state, maybe just a thought or two on where the growth rate of those businesses in the office, It kind of flushes out. You know, how does it compare to sort of the rest of the ugh just the the Traditional Bank part of of USB, maybe any any thoughts on sort of longer-term trajectory, they're dead. Yes, Scott, I'll take that one other Sandy again, you know, I think as you said we have the short-term cyclical positive that's going to occur as as spending activities off for businesses and consumers get back to normal as well as corporate. I think our longer-term opportunity is in that ecosystem we talked about so, you know, we have a over a million business banking customers that we Define as twenty-five Million Dead.

Revenue and above and we believe we can grow these relationships just overall relationships in the neighborhood of fifteen or twenty percent over the next few years. And in addition, we believe we can grow overall Revenue levels twenty-five to thirty percent because of expanding the share of wallet because the fact is, you know, less than 40% of our Merchants customers have a business banking products and and even lower number of our business banking customers have a merchant products. So there's a lot of opportunity there and and I think the upside is pretty significant and and it's sort of like what I talked about with the it's just not about card Solutions, but it's about managing their payrolls their cash flows that our payables and receivables leveraging data helping them run their business and and that's just in the business banking category. I think there's additional opportunity in commercial and corporate as well. So that that that'll be our focus and I think that will be one of the drivers of growth going forward.

The other thing that I might add is that, you know, we've been making fairly significant investment in Commerce and Tech LED sort of capabilities within our Merchant acquiring space. I know that is a that is a segment that you know over the course of the last 12-18 months have been growing and even that twenty-five to thirty percent range and as that becomes a bigger and bigger part of our business office that that continues to help our Merchant acquiring space.

That's perfect. Thank you guys very much. I appreciate it. Thank Scott.

Your next question comes from the line of can stand with Jeffrey.

Thanks. Good morning, guys.

Question for a cyst on the B-side. Just wondering if you can talk us through some more detail on your outlook for the mortgage business understanding it had 120, Ms. Or adjustment this quarter, but you should have been shared takers on the production side. But obviously you mentioned the gain on sale coming down. Where do you think the mortgage business can go from here and and some of those puts and takes thanks. Yeah a great question. Do you think about the mortgage business? You know, we continue to think that you know on the origination side that you know, we have been capturing market share. We think that there's still opportunity to do that. And here's the reason why you know over the last several years. We've been making of significant investment we've talked about the fact that we've been focused on the retail side of the equation purchase mortgage and home, you know mortgages that originated from the home sales office of the equation. So even as refinancing come down, you know, we do have the capability and the capacity to be able to continue to ramp up on the home sale side of the equation birth.

for the purchase mortgage side equations

I think that that is an opportunity. I think that our technology continues to outpace the competition and digital capabilities enable us to be able to capture that market share. So that's all good. You're right that there may be there will be impacts with respect to refinancing starting to slow as rates move up and you know, that's something that we would expect in the gain on the sale will start to decline of the capacity of the system has gotten stronger but I think that I think that, you know, the implications of the Investments that we have made have been have been positive and we'll get you to be positive. So while mortgage Revenue was likely to come down, you know during the year, you know, it is still going to be a good part of our business.

That helped. Okay. Yeah. I was just wondering do you mean come down on a year on a full year basis which is kind of obvious based on where we started or do you mean that it could still settle lower from where we just got to I got 99 know it's the latter.

I'm sorry, the 299 keep in mind in the 299 is about 120 million Ms. Our valuation adjustment. So when you back that out or when you take exclude that, you know, we still took some pretty significant production and origination of Revenue in the first quarter and while it'll settle down a little bit from there. We still think it's pretty strong through the year and not carry that that Ms. Our valuation is more of a temporary phenomenon. We wouldn't expect that to continue at that level going forward. That's right. That's right. So so it was more of a okay just to check you again. It was more of a obviously it's going to be a tough job on a full-year full year basis, but this might not have been you know, the top kick for Mortgage Banking revenues going forward. Absolutely. That's absolutely correct. Okay. Got it second. I just don't cost you mentioned flat year-over-year. The first quarter had a really high comp number even with the seasonal benefit in it. And so I just want to make sure that that that off.

As usual comes off and and how much of that seasonal adjustment is in there. And then and then I know you said the COVID-19 cost came down, but how much of a burden is that still in the cost number as well? Thanks. Yeah, I respect a COVID-19, you know, we had more costs last year, you know, we continue to have those costs, you know, and and while it's come down some if you know that hasn't been an impactful change relative to for example a year ago. We we still have all the cleaning costs and things like that that we need to do and I think that's going to continue until people get comfortable, you know being back in the office and Cetera, you know, when you when you end up looking at compensation costs Again part of it. It's seasonal part of it is also, you know, when you end up looking at our performance-based incentives, you know every year we had reset that to be fully funded and you know last year just given the performance, you know in the payouts being significantly lower, you know, there is the impact of kind of refunding

on an annual basis, so

Terry the third party is stock-based, for retirees all this is higher in the first quarter just because of the that's the seasonal matter that you talked about is higher because of the way the account for it all at times. Yeah, and that will come down in the second grade.

All right. Thank you. Thank you Ken.

Your next question. I just want a line of hi. I want to follow up first on Ken's question just want expenses. So the outlook for flat and to me that was good. But can you give some comments kind of looking for the back half this year and Beyond cuz it does feel like the costs are still bloated. And as we think about Revenue accelerating, you know from some of the things that you talked about maybe you can give us a sense of what you think you can do on the expense side and the operating leverage. Yeah. Well, you know as we've said, you know, our goal is always to manage the expenses as best we can and keep them flat especially in it kind of a challenging Revenue environment, which we're still, you know, certainly as we get into a more normal Revenue Office environment, you know, we do expect that we would be able to achieve the upper Lounge of the timing of that is still difficult to kind of get your get your head around and we have to you know, see things.

He's like, you know, either rising or a steepening yield curve kind of a normalisation of the payments space and you know, just settling out of where mortgage ends up being so a little bit hard to end up acting kind of the timing associated with that. You know, we we we do we do have a very strong focus with respect to expense as well as we think about the rest of the year and go back to 2022.

And maybe I'll see you a little bit of a different way and segue into like some broader business metrics you let it out Financial targets at the investor day was back in June. Nineteen. Obviously the world's changed those filled kind of stale. You know, what what would be some updated targets if you look out two to three years, and you know, I'm thinking the efficiency ratio off now, which has gotten quite high and then any kind of roee metrics that you'd like to update as well would be helpful. Thank you.

Thanks man. This is Andy. You know, I think we we talked about a 17 and 1/2 to 20% tangible return a common and I'm going to focus on that ratio, you know while was higher than this quarter that was all because of the crash or relation. We know that's not repeatable item and as I think about this year, it's going to be below that to your point. But we still feel comfortable that in the more normal environment where the economy continues to strengthen the rates continue to rise and we get back to the normal spend levels all the things we talked about on this call. We still believe we can get to that 17 and 1/2 to 20 and and that number is what we think we we get to when we get to that normal environment than likely will be later this year more likely as we get into twenty twenty-two from efficiency ratio standpoint same point in building on what Terry talked about. It's it's higher than normal right now, but the higher is principally because of the the the Dominator which is revenue and again as we get to know more normal levels are our expectation and our focus is to continue to get to the low 50s dead.

Okay, so from the 62.

Quarter to I'm sorry. You said the low 50s or the mid-50s? I thought have been the target once before the the long-term Target is the low 50s. Okay. All right, so that would obviously imply, you know outsized off leverage again the reading it needs to be there. I think everybody gets that but I think there's concern that you know, if Revenue grows 5% and it's being driven by you know rates and Loans, you know, you can't have 3% growth against that to meet the efficiency targets. Obviously, you know, if it's true by mortgage and things like that that have a lot of comp I think people understand the higher expense growth, but you would need mathematical years of outsize operating leverage. Yeah, and if you think about where the revenue opportunities are, they're less directly comp related. So for example margin and and payments have a different conversation structure wage for example mortgage to your point and and that just to tell you we're managing expenses very closely. We meet with all our business lines in the regular basis and we're always balancing the Investments. We're making to get that digital acquisition the customer

Where's the growth that we've talked about against managing the short-term expenses and looking for efficiencies and operations and the way we're doing business on a day-to-day basis. So that's a an area of focus that can assure you provoke Terry myself as well as the entire management committee. Okay, that was helpful. Thank you. Thanks, man.

Your next question comes from the line of Erika najarian with Bank of America.

Hi, good morning. Question is actually a piggyback off of maths question. You know, this is sort of the second straight cash or results are fine. But the the stock has responded less favorably and and and wondering, you know in the discussion of a normalized ROTC between 17 to 50% We hear you loud and clear through this call and other calls that you have made Investments, you know throughout the years and you did hit 20% in 2018 month, you know, I guess the you know, the investor base is really the feedback I'm getting is well, what's the upside from here? And I'm wondering clearly recap to normalize and to match point, you know, after reading leverage will be wider when we actually get short rate going but can the initiative get to to you know, at least the top end of the range again.

Imagine in the world where that you have some normalization the short end. But also we're past the point of of of Reserve releases, you know, in other words have the investment potentially potentially reset your normalized ROTC higher or you know, 20% as soon as the top kind of what you see. So let me take your question and maybe two parts. I'm from a revenue standpoint. I I do think first or short 20 20 was a low point for all the reasons you're well aware of and particularly the payments business which had significant headwinds and those headwinds now have become Tailwinds and I think the same as said it could be set for the margin component, which I think all the reasons Terry talked about net interest income. I think goes up from the from the points for our today and at some point particularly in the second half of the year, I think loan growth starts to come back. So I think the revenue has positive bias across all categories you go back to Thursday.

2018 a couple of things number one is

You know, we were investing in digital capabilities and we we had an increase step up into that investment that I think is more leveled off right now. So you're not going to see that same increase that, so the last few years. The second thing is we also have the opportunity from some of the branch closures that we've achieved the 25% over the last couple of years. Some of which will has been and will be invested some of which will come through the bottom line. And then as I talked about with Matt, we're looking for efficiencies from our from our Tech stack from the way we're doing business and operational component and those Investments and digital not only allow us to gain customer acquisition, but it also allows us to more efficiently run the business from an operating cost standpoint. It's available. So all those things add up to why ask the questions I do.

Got it and just a follow-up there, you know your efficiency arrange. So in 2018 when you achieve 20% ROTC was almost 55% And so I guess the question is, you know, are we being too optimistic like then concluding that if you do dial back down to the low 50s that your natural ROTC in a more normalized rate environment could be above 50%

Yeah, I think I think our return on tangible in a 17 and 1/2 to 20% is the way we think about it and the modeling that we have and the projections that we have. We get us to that level. I got it. Thank you.

Your next question comes from the line of vehicle with wolf research. It's good morning. Andy and Terry. Can you discuss how you think about pent-up demand Dynamics wage how they may differ across your consumer and Commercial businesses. Where do you think there's more gearing to the reopening? Is it you know, either though, is it consumer side commercial side? Are they pretty similar? And if you could work into your response how you think about extra security on hand impacts both sides, you know, in terms of logos outlooks. That would be great. Yeah. Let me kind of take it first and then handy can add on but we end up looking at the consumer versus commercial, you know, I think that you know, the stimulus has been put into the system will will see that on the consumer side pretty quickly. In other words consumer spending. We do expect to continue to ramp up from here and really probably through at least the end of the year and you see that in the GDP growth, you know predictions or projections that are out there Thursday.

To be interrupted by that. I I do think that you know, that's going to help us on the fee side of the equation and also as the year progresses help us in terms of Consumer loans, which I talked about earlier on the commercial side, you know, I think that again there are things that the customers will need to do in order to be able to meet that consumer demand if you with them and that is in the form of you know, the continued to build their inventories and make some capital investment which say, you know, just like just like many of us have been kind of holding up. So with the timing of that there was probably a little bit more subdued earlier simply because of the fact that there's a as you said a fair amount of liquidity deposit balances that exist and so they need to burn through that somewhere to what we saw the last cycle that we kind of went through. So, you know, what we're first going to see is you know, that utilizing those deposit balances and then, you know starting wage.

Cee more robust sort of loan growth and that's why we think it's really

Probably more the second half of the year before that starts to happen.

I wouldn't have much to her. I think I think the last category to come back is going to be corporate T&E that category still 75% down versus 2019 levels. We all are experiencing what we're experiencing with not traveling right now and I think that's going to be the last category to come back.

Got it. That's it's very helpful on your excess liquidity commentary wanted to ask if your mix of investment Securities relative to averaging assets grew to just over 31% this quarter which I believe is the highest that we've seen relative to your history and it sounds like you guys expect to grow that from here if I heard you correctly. Can you discuss how you're weighing the incremental ni opportunity there from from growing that Securities book home with the oci risk and just from an overall asset-liability management perspective.

Yeah, you know, I guess when we think about it at least in the near-term and you know, one of the things we're going to end up having to do is to you know, kind of way the opportunity wage that the yield curve continues to sleep it even further from here. And so we'll kind of pick our points with respect to where we make those Investments, but I think in the in the near-term until Logan and that demand really starts to solidify, you know, I think that the ability to deploy low-cost deposits that that we see is part of inflows into the Investment Portfolio makes sense. And you know, you're right it is kind of a balancing act if you end up having to kind of take a look at you know, and and you just based upon kind of our expectations of the longer end of the curve continues to move up the shorter end of the curve probably legs at a bit that to us makes some sense.

Got it. If I could squeeze in one last one for Andy Andy, can you discuss how active you are in your discussions with Regulators regarding the uneven playing field with many of the fintech players particularly those who are benefiting from things like unregulated debit interchange, which was obviously traditional originally introduced as a small Bank exemption under Durban not for them. But is there any expectation wage a little bit more of a leveling of the playing field or or is this the competitive landscape that we're is just sort of the new reality, you know, I think our our focus on that from from a banking perspective is on the page news from the customers perspective, you know, you think about data protection liquidity ensuring that the deposits are there all those things which makes banks are very same industry. We want to make sure that that those same that same level of oversight is is there for our customers and for customers using some of those other capabilities and that that's a real area of focus.

Got it. Thank you for taking my questions. Sure.

Your next question comes from the line of Mike Mayo with Wells Fargo security. Hi.

Um, okay. I have one. I guess kind of negative question in one positive question so we can start with the negative one first. I guess you've heard but look there's six years of negative-option Leverage at us Bancorp and there's stories around it. Right? Yeah, the the regulatory situation and you have the pandemic you don't have your you know, your undersized and capital markets which have been a record versus some of your larger peers and you're over index and payments which has been her. So, I mean there's certainly reasons here but you know, you look at the cost link quarter of every month higher you look at the revenues like quarter year-over-year, they're lower so I know you've given some guidance, but just to be Crystal Clear are you saying that ppnr is at a low point after the first quarter and should improve from here?

Well, yeah, I mean when you again when you end up thinking about the Dynamics we've been talking about I do think that the rate environment and what we're going to see in terms of net interest income is going to be positive going forward. I think that that is a tale one. I think the Tailwind that exists with respect to the payments, you know will also help us as we start to look into especially in the latter half of 2021 and in the twenty twenty-two, so I think there's a number of things that create Tailwinds from a revenue standpoint that actually do help us quite a bit from a ppnr standpoint.

And you also said flat expenses at least in the second quarter. So I guess one question is with all the branch closures that you had why we haven't seen more or less negative operating leverage. I just suspect you're you're investing more in your digital infrastructure. Can you share any of those numbers like how much you're eating? I know you haven't disclosed that yet, but more generally, what are you trying to build? And when do you think you can get there? It's kind of like the the the payment ecosystem, you know connect to your payments customers with your commercial customers. You Know What's the total? Addressable Market? You know, can you become like a square like competitor just a little more elaborate on where you're spending and what the endgame is.

Yeah, Mike and and to answer your negative question with a short answer. The answer is yes. I'm positive ppnr from the first quarter levels for the rest of the year in terms of we're investing is what I talked about the money, you know, it's just in the business banking side or our business we have about a million customers and and we believe there's as I talked about fifteen to twenty percent growth and customer opportunity twenty-five to thirty percent growth in Revenue opportunity. And and that's just in the business banking segment not including commercial and corporate. So I think that's where a lot of opportunity exists where we've been investing is exactly in that ecosystem in the ability to acquire customers and additional fashion. He's of customer use from a customer experience standpoint reflecting the fact that they're not utilizing. So we're closing the branches as you talked about reflecting transactions are taking place. They're they're taking place in the Digital Way investigated digital site so that everything you said is correct and and dead.

And that's the way we're thinking about it as well.

All right. Thank you.

Your next question comes from the line of Terry McEvoy with Stevens.

Hi, good morning. And thanks for taking my questions. Actually just just one left on my left left on my list here the ACL ratio down for every loan class except cre up on a percentage basis. I'm just wondering is that something to do with the COVID-19 impacted Industries or anything else within that 38 thirty nine billion dollar portfolio?

Yeah, this is Mark. I'll just ask add to that. You know, that's an area that we continue to be very focused in on either you hit it right? There's some of those COVID-19 impacted Industries, but I think there's longer a systemic shifts if you will potentially with office and some of the multi-family that we're continuing to be very focused in on that could play out a little bit longer as we work our way through the cycle.

That's great. Thank you.

Your next question comes from the line of the exact with JPMorgan.

And thanks for taking my questions, but more importantly I applaud you for changing the time on your call. Thank you for listening. It's not all the ways that we see that.

A couple of questions firstly you can you do see good growth and Commercial products. Pardon me. If I even though you did move it there still been lots of calls today. So if I miss that song I'm making repeated what drove that growth and and what do you see as you know, the driver's what do you see as the outlook for that? I'll start with that. Yeah that's on the commercial products. I'd maybe a couple of dynamics of your part of it is year-over-year, you know, first quarter was fairly volatile year ago and had some implications on a year-over-year basis, you know, there's some growth that is that is occurring when we think about you know, the the future quarters for the rest of the 2051. I think one of the Dynamics that will help that is that what we are seeing right now is with Rising rates. There are a lot of companies when they're thinking about their debt.

For capital structure pulling forward out of probably twenty twenty-two into twenty Twenty-One some of their refinancing activities and then you know, if you remember from last year there was a lot of activity in terms of capital markets companies really trying to rebuild or bills as much liquidity as they could and a year later in life even given the environment and the economic Outlook, you know, they had the opportunity to refinance that even after just a year and so they're taking advantage of that. So it's kind of those activities related to turn pulling some things forward at cetera that are going to help commercial product Revenue kind of holds up through the year.

Yeah.

And then and it's a different question for you folks noticed that branches were down a little over a hundred or so and I had mentioned took it last quarter that you want to string you expect to shrink branches in the double-digit range. Is that shuttle part of the plan? And if so how much and you know, is that What's the timing of that as you as you look out sure vac, so you look at a couple of years ago. We were just over three thousand branches and now we're closer to 2,300. So we're down about 25% I wouldn't expect Edition major changes in the number of branches. You'll have some puts and takes. In fact, you'll see some editions in certain markets and some subtractions our Branch consolidation were appropriate but I wouldn't expect significant change from current levels.

All right. Thank you. Thank you.

Your next question comes with the line of Jared Cassidy.

Gerard how you doing? How are you Tere Hindi can you touch on and I apologize if if your address this, but I know you guys have talked about that the low level of net charges this quarter. It's not likely sustainable. And I think you said in one of the answers to a question earlier that it could start to creep up by the second half of this year to the more normalized wage and Emma Global's that you have identified. Can you share with us? What would cause it not to go up? What what were you guys have to see that if this would continue at 30 to 35 basis points through the remainder of the year?

Yeah, I'm going to start then marking that in, you know throughout so some of the things we're seeing right now individuals have a lot of cash either because of the stimulus checks that occurred or not spending money. In other things down payment rates and credit cards are we talked about that's that's impacting balances all those things drive to near-record levels or both charge-offs and our credit card portfolio and our delinquencies and the consumer is just very liquid right now. And that's that's part of the reason that we're such a such a low level and we do expect that to continue to normalize over time as they start to utilize those saving money back to spending money in a more traditional sense. So that's one of the things that we would expect if there's a delay on that then then we're probably going to be a low-level for a longer time frame and then, you know, the the area that we would expect is start to migrate up a little bit as well as on the areas impacted by the pandemic that that Mark talked about and all that Mark answered. Yeah the other the other area that I might focus in on is we've seen strong acid bath.

So if you look at you know Autos has been strong we've seen a 6% increase in auto value for example is in February alone as well as the residential real estate continues to be strong. So I think you know if those Trends continue to strengthen we could continue to be at these lower levels, but I think you know Harvey would be those start to normalize and and and he's point that liquidity start to come down and see spending activity picking back up which would lead you to kind of more normalized levels as we move through the back of the year.

very good

And then just as a follow-up Indie over the you know, past earnings College you've often commented about outlooks for mergers and Acquisitions. And I don't think you were asked that question today, but wage is your outlook for depository type of Acquisitions. I know banks are sold. They're not bought but just to get an update on what you guys are thinking about expanding possibly through that strategy. I'm sure that they'd come up a little earlier but our Focus continues to be from a Traditional Bank standpoint of something that would be meaningful from a customer acquisition a geographic sense. I do think the the value and the importance of scale is even more important than it was 12 months ago or 24 months ago. So that's something we've were very focused on and then the other areas that are focused on our whatever called Partnerships or m&a related to capabilities on the payment side building our ecosystem building the distribution and those are smaller deals technology birth.

Deals that we we've done already in the payments business and will continue to focus on thank you. I apologize. Thank you for answering it a second time. Thank you. That's okay. No problem.

There are no further questions at this time. I would like to turn the call back over to him is Jim Thompson. Thank you everyone for listening to our new. Please reach out to the investor relations department if you have any questions, you may now disconnect.

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