Q4 2021 U.S. Bancorp Earnings Call

Welcome to U S Bancorp's fourth quarter 2021 earnings conference call.

Following a review of the results by Andy This 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.

If you would like to ask a question. Please press star one on your Touchtone phone and press the pound key to withdraw.

This call will be recorded and available for replay beginning today at 11, a M central time through Wednesday January 26, 2022 at 10 59 P M Central time.

I will now turn the conference call over to Jen Thompson director of Investor Relations and economic analysis for U S Bancorp.

Thank you Natalia and good morning, everyone with me today are Andy <unk>, our chairman, President and CEO and Terry Dolan, our Chief Financial Officer.

During their prepared remarks, Andy and Terry will be referencing a slide presentation.

A copy of the slide presentation as well as our earnings release and supplemental analyst schedules are available on our website at U S Bank Dot Com I.

I would like to remind you that any forward looking statements made during today's call are subject to risk and uncertainty factors that could materially change. 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.

Now turn the call over to Andy Thanks, Jay and good morning, everyone and thank you for joining our call.

All in our prepared remarks, Terry and I will take any questions you have.

I'll begin on slide three in the fourth quarter, we reported earnings per share of $1 seven and generated total revenue of $5 7 billion.

We saw strong balance sheet growth this quarter, including deposit growth of over $18 billion or four 3% compared with the third quarter average loans grew by 2% linked quarter or two 7%, excluding the impact of loan forgiveness related to PPP.

We are encouraged by the loan growth momentum and we have a positive outlook for 2022, given improving client sentiment and business conditions and continued strength in certain focused commercial portfolios, such as ABS lending and supply chain financing.

The significant increase in liquidity provided by the strong deposit inflows this quarter puts us in a favorable position to support future balance sheet growth.

Deposit growth provided the opportunity for tactical investment and cash management strategies that pressured the net interest margin for the fourth quarter, but was both accretive to net interest income and maintain asset sensitivity for a rising rate environment.

Turning to fees underlying client acquisition and market share trends across our business lines were healthy and payments sales trends continue to improve on a year over year basis.

This quarter, we released $145 million of loan loss reserves, reflecting continued strong credit quality, including a record low net charge off ratio.

In the lower right quadrant, you can see that our book value per share totaled $32 71 at December 31, which was one 5% higher that September 30th our CET, one capital ratio was 10% and 31.

Slide four provides key performance metrics slide five.

Trend highlights trends in digital engagement.

Digital transactions now account for over 80% of total transactions and digital loan sales account for two thirds of total loan sales.

Turning to slide six we continue to believe our initiatives aimed at connected or banking customers with their payment products and our services and our payments customers with our banking products and services will allow us to grow our small business relationships by 15% to 20% and related revenue by 25% to 30% over the next few years now.

Now, let me turn the call over to Terry will provide more detail on the quarter. Thanks.

Thanks, Andy.

If you turn to slide seven I'll start with a balance sheet review, followed by a discussion of fourth quarter earnings trends.

Average loans increased 2.0% compared with the third quarter driven by a two 6% increase in commercial loans, which benefited from new business activity and improved utilization rates.

Retail loan growth was driven primarily by higher credit card balances growth in residential mortgages as strong production of installment loans, including auto lending.

At December 31, PPP loan balances totaled $1 $4 billion compared to $2 $4 billion at September 30th excluding PPP loans fourth quarter average loans grew by 2.7% on a linked quarter basis.

Turning to slide eight total average deposits increased by $18 $4 billion or four 3% compared with the third quarter.

We continued to see a favorable mix shift with an average with average noninterest bearing deposits increasing by five 4% on average savings deposits, increasing by four 4%, while higher cost time deposits declined by 3.0%.

Slide nine shows credit quality trends the ratio of nonperforming assets to loans and other real estate was 0.28% at December 31, compared with 0.32% at September 30th 0.44% a year ago.

Our fourth quarter net charge off ratio of 0.17% improved on both a linked quarter and year over year basis.

Borrower liquidity and stronger asset valuations continued to support repayment to the recovery of problem loans.

Our reserve release was $145 million this quarter, primarily reflecting strong credit quality metrics, our allowance for credit losses as of September 30th 31 totaled $6 $2 billion or 197% of loans.

Slide 10 provides an earnings summary.

In the fourth quarter of 2021, we earned $1 seven per diluted share.

These results included a reserve release of $145 million turning to slide 11, net interest income on a fully taxable equivalent basis of $3 $2 billion came in a little higher than our expectations.

The $47 million decrease compared with the third quarter was driven by a $82 million decline.

In P. P P interest and fees, partially offset by earning asset growth.

Our net interest margin declined by 13 basis points on a linked quarter basis to 2.40%.

The net interest margin decline was related to a six basis point impact from lower PPP loan interest and fees and a six basis point impact from elevated liquidity and related investment portfolio and cash management strategies aimed at optimizing our asset sensitivity going into 2022.

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Slide 12 highlights trends in noninterest income compared with a year ago noninterest income declined by 0.6% as compared as strong growth in payments revenue Trust and investment management fees deposit service charges in commercial product revenue was more than offset by a decrease.

And mortgage revenue, reflecting the interest rate environment, and lower securities gains and other fee revenue.

On a linked quarter basis noninterest income declined by five 9%, primarily reflecting seasonally lower payments and capital markets revenues and declining mortgage banking revenue as expected.

Slide 13 provides information on our payment services businesses.

Sales volumes in each of our three businesses expect exceeded pre pandemic levels in the fourth quarter. Despite some omicron related softness in late December .

We expect year over year payments momentum to continue into 2022 as lagging sectors, such as airlines hospitality and corporate T benefit from a continued cyclical recovery towards pre pandemic levels and as our multi year investments in ecommerce and tech led drive secular grew.

Both improvements.

As we saw in our earnings press release. This morning effective January 3rd U S Bank has eliminated fees for certain non sufficient funds. We believe this is not only the right thing to do for customers, but it is a smart business decision.

For some time, we have been at the forefront of using digital technology to help our customers avoid overdraft charges and our efforts have helped our customers more easily and effectively manage their money, which has contributed to increased customer satisfaction.

This latest move is simply the next step in the process.

Turning to slide 14, noninterest expense increased by $104 million or 3.0% compared with the third quarter. This increase was driven by higher medical claims within employee benefits expense and higher professional services expenses higher marketing and business.

<unk> costs.

<unk> credit amortization expense was also higher in the fourth quarter in line with typical seasonal trends.

Slide 15 highlights our capital position, our common equity tier one capital ratio at December 31 was 10.0%, which decreased slightly compared with September 30th driven by risk weighted asset growth and the impact of acquisitions completed near the end of the quarter as a reminder, at the beginning of the third quarter.

We suspended our share buyback program due to our recent announcement that we have agreed to acquire Union Bank. We continue to expect that our share repurchase program will be deferred until the second half of 2022. After the closing of the acquisition, we expect to operate at a CET one capital ratio between our target ratio.

And 9.0%.

I will now provide some forward looking guidance.

We expect both net interest income on a taxable equivalent basis as well as our net interest margin to be relatively stable on a linked quarter basis with growth expected in subsequent quarters.

With our base case under our base case scenario, which incorporates three rate hikes. We expect full year 2022, net interest income on a taxable taxable equivalent basis to increase at a mid single digit pace.

We expect mortgage revenue to be slightly lower in the first quarter on a linked quarter basis in line with slower refinancing activity in the market.

Payments revenue is seasonally lower in the first quarter on a year over year basis, We expect total revenue to increase at a high single digit pace driven by double digit growth in both merchant processing revenue and corporate payments revenue, we expect credit card revenue to be stable on a year over year basis.

As high single as high single digit growth in credit and debit card fees is offset by lower prepaid processing fees.

Excluding the prepaid headwind, which will abate after the first quarter, we expect total payment revenue to increase at a low teen rate on a year over year basis in the first quarter.

We expect other revenue to approximate $125 million to $150 million per quarter over the course of 2022.

We expect expenses to be relatively stable in the first quarter compared with the fourth quarter credit quality remained strong over the next few quarters. We expect the net charge off ratio to remain lower than historical levels, but will normalize over time as the effects of the pandemic continued to subside.

For the full year of 2022, we expect our taxable equivalent tax rate to be approximately 21.0% I will hand, it back to Andy for closing comments. Thanks, Terry fourth quarter results were in line with our expectations and we are starting off the year with momentum building across our lending and fee businesses.

We feel good about the trajectory of loan growth and are well positioned to benefit from a rising rate environment.

We expect client acquisition growth and account penetration to drive market share gains across our fee businesses.

In particular, we believe 2022 will be another good year for our payments business.

Due to the omicron search year over year sales growth have slowed somewhat in the past few weeks from the exceptionally strong pace. We saw in the second half of 2021, however growth rates remained strong and we believe this will likely prove to be a speed bump rather than the extent of extended slowdown. Nonetheless, the situation is fluid and we will continue to monitor trends closely.

And update you along the way.

Our investments in technology to support our digital transformation and payments ecosystem initiatives are paying off.

And we continue to look for uses of capital that will drive higher returns.

In the fourth quarter, we acquired travel bank or Fintech that provides tech driven expense and travel management solutions to help businesses manage their operations more efficiently also in the fourth quarter. We closed on the acquisition of PFM asset management, which not only increased our assets under management, but has enhanced our position in a niche area within the money market.

World.

We're looking forward to closing our previously announced acquisition of Union Bank later this year.

The addition of Union Bank will increase our scale improve our market share in a demographically attractive market and add over 1 million consumer clients in over 190000 business banking customers to whom we can offer our leading digital capabilities and our expansive product set.

The strategic and financial benefits of this combination will accrue to shareholders over many years.

But the numbers only tell part of the U S Bank story as we start a new year I want to emphasize that how we do things will continue to be as important as what we do.

So in closing I'd like to thank our employees who've come in every day with the goal of doing the right thing for our customers our communities their fellow employees and our constituents.

For helping to make 2021 access full year and position us well for the future.

We will now open up the call to Q&A.

Ladies and gentlemen at this time, please press star followed by the number one on your telephone keypad again Thats Star one.

Your question press the pound key.

Pause for just a moment to compile the Q&A roster.

My first question is from the line of Scott <unk> with Piper Sandler.

Good morning, everybody. Thank you Scott.

Okay.

Let's see maybe Terry was hoping you could please discuss in just a bit more detail.

Your updated thoughts on rate sensitivity given some of the changes in the balance sheet in the fourth quarter.

Yeah. So we had the opportunity because of the deposit flows to be able to both invest in investment securities to help a little bit in terms of the fourth quarter, but we also.

At the same time utilize hedging strategies to keep the duration of that part of those purchases relatively short.

And the expectation Scot is that.

When long term rates rise, which we're starting to see now that we're going to be able to unwind those.

Swaps and to be able to take advantage of the rising rate environment. So we did all of that.

Fundamentally to be able to maintain as much asset sensitivity going into 2022, as we possibly could.

Perfect.

Okay, great. Thank you and then perhaps either for Terry maybe you can just add.

Daughter comment regarding the anticipated kind of composition of loan growth our growth through 2022, starting it sounds like a constructive outlook, but maybe just kind of commercial versus consumer as you see it.

Yeah. So.

Maybe I'll just kind of start with fourth quarter, you know one of the things we saw in the fourth quarter is not only strong consumer continuing but the C&I portfolio actually starting to expand very nicely and we talked a little bit about that so as we look into 2022. You know we continue to expect that consumer credit is going to continue to strengthen.

Auto lending may be a little bit more moderate than it was in 2022, but I think credit card continues to be very strong as payment rates.

Come down and then we also would expect that residential mortgage portfolio loans would would be growing.

But I think the real story is that we're now starting to see a nice shift with respect to the commercial.

The C&I portfolios, we're continuing to see growth in certain segments like asset backed securitization lending in some of those sorts of things that we.

We saw earlier in the year, but at the end of the.

In the fourth quarter and the end of the fourth quarter I know we saw.

Nice expansion of utilization rates.

I think it was like 60 basis points on average third versus fourth quarter, but in December was up almost two 5%.

And we would expect to kind of see that I think the other thing I would say is that the sentiment on the commercial side.

People are rebuilding their inventories.

From a supply chain perspective, they still have some concerns about that and so I think that theyre being.

Cautious about making sure that they have inventory to be able to run their business and you know what I think they're starting to make business investments ahead of the consumer spend that they see in the economic growth that they see in 2022, So Andy what would you add Jerry I think you hit the high points.

To track changes in trends in the fourth quarter that look positive going into 2022, Scott number one as Terry mentioned the increase in utilization rates, which we haven't seen for a number of quarters and secondly, as this started to decline in payment rates, which helps credit card volumes. So those are two positives I call it as well.

Perfect Alright, you very much.

Your next question is from the line of Gerard Cassidy with RBC.

Good morning Gerard.

Good morning, Terry.

Andy coming back to the.

Big transaction that obviously you guys you touched on all the benefits of Union Bank will bring.

Cable to U S Bancorp.

Can you share with us would be updating on the regulatory approval process. There's a lot of uncertainty in Washington today at the fed and other regulatory agencies with the hedge new heads coming in overtime.

Could this be is what is the risk of it just being delayed getting approval.

Yeah. Thanks Gerard.

Submitted our application in early October we have been working with with Union Bank and we have a number of acquisition teams both on our side as well as the Union bank side, working on integration activities, including technology and as well as the business lines and we've been responding and working with the regulators in terms of questions on the on the submission which is normal course for this process.

So we continue to believe that this will close in the first half.

Later in the first half, but that's our continued belief with the with our conversion in.

Later in the third.

Third quarter.

September October timeframe, so nothing too.

I have I believe that it would be any different from that and and we're preparing for that timeframe.

Very good thank you sure obviously.

Discussion on your call and other calls about that.

Some sensitivity and what the outlook is for this year are pivoting for a moment.

Kind of looking at what we're all going to be talking about on the fourth quarter call for 'twenty, two and January 23.

Get a sense it might be more about credit.

And you guys sort of stood out as being.

Some of the best underwriters in the industry can you share with US what are you seeing out there in terms of underwriting from your competitors.

I think people are getting more aggressive to generating revenue our loan growth or.

Everybody is still pretty conservative.

Yeah, Gerard I think that what I would the way I would kind of describe it you know from our perspective, we havent changed our credit box really at all we really try to underwrite through the cycle I think that there has been a lot of competition in the industry for loan growth over the last 12 months and as you know.

When the cycle turns.

Decisions you made today that are going to end up impacting your two or three years down the road. So I do think that credit.

Normalized as we go through the year I don't know, if we can't quite get back to where we were.

Pre pandemic, but I think that it will start to migrate in that direction.

<unk>.

I would say that if there is loosening from an underwriting perspective, maybe stretching a little bit more with respect to structure.

But it is it has been competitive both from an underwriting perspective as well as from a pricing perspective out there.

And just to follow up on that quickly.

How about exceptions are you seeing more exceptions to the underwriting box to get deals done.

Again from our perspective, we really haven't we really haven't changed our approach at all.

Again, I think from a competitive standpoint.

Again, they're focused on.

<unk> been as competitive as they possibly can in terms of the underwriting and other structures in the <unk>.

Pricing, so but from our perspective, we haven't really changed our approach.

As always thank you I appreciate the color.

Thanks, John .

Your next question is from the line of John Mcdonald with Autonomous research.

Good morning, John .

Hi, Good morning, guys Andy.

Andy maybe from a high level perspective, you might not want to give specific guidance, but just kind of your thoughts about the revenue and expense dynamics that you are looking at heading into 'twenty two.

Maybe some thoughts on the.

The revenue headwinds and <unk> that you are looking at and how you plan on managing inflation on the expense base.

And just kind of overall, how does operating leverage feel as a goal for this year.

Sure John and Terry gave a little guidance on net interest income for the year, but I will talk about the poll the.

The full balance sheet and income statement, we continue.

To expect mid single digit, earning asset growth for the year that loan momentum that we talked about looks positive going into 2022, we would expect revenue growth of 3% to 4% John on a full year basis.

As well as positive operating leverage of at least 100 basis points for 2022.

Got it and then on the maybe just a question on the NII Guide Terry.

You mentioned three hikes, just what's the cadence of what you've built in on that and is there any rule of thumb for what one fed hike of 25 basis points does to the NIM or NII everything else equal that might be helpful for us. Thanks.

Yeah.

So our base case.

As we said.

Bakes in three rate hikes really starting in the second quarter, and then kind of.

As you might expect through the rest of the year.

What we if you go back to our just our disclosures at the end of the third quarter. It really hasnt changed a lot 50 basis point shock.

It's about three 5% from an from a net interest income standpoint, so that I would kind of refer you back to that if you think about three rate hikes kind of on that pace you are probably talking about.

The equivalency of about a 35 basis point shock.

So if you're kind of doing the math you can kind of go to that.

And Terry you all those numbers are the impacts of net interest income. In addition, we have our waivers which totaled about $70 million a quarter, Jon and you get about two thirds of that back at the first rate hike of 25 basis points and about 90% of it back at the second rate hike.

Okay got it thank you.

Sure.

Your next question is from the line of Betsy <unk> with Morgan Stanley .

Hi, good morning.

Betsy.

Hey, a couple of questions just on the guide a couple of cleanups.

The NII mid single digit pace is that a Q on Q from <unk>.

Full year 'twenty two versus full year 'twenty, one excluding Union bank.

That.

That is excluding Union bank and its.

<unk> tended to be the guidance that we're giving for 2022.

Right. So that's that.

Versus full year 'twenty, one full year full year versus full year, yes, right. Okay, Alright, just want to make sure.

And then when I'm thinking about.

The positive operating leverage.

You know at least 100 basis points.

That's obviously a nice uptick.

From what you've been doing recently can you over the past couple of years I guess can.

Can you kind of highlight is this a function of the rate environment being better primarily or is it also from some of the investments that you've been making that you are.

Leverage.

Basically able to.

Switch on the optimization side of the investment spend yes.

Yes, Betsy I would say, it's kind of a combination of both I mean, the the improving revenue environment certainly helps that but you know we have been as you say, making some significant investment in digital capabilities.

As that investment matures, we fully expect that we would see some operating efficiencies on the expense side.

We have been working through tech modernization, which that helps us.

We're always looking for kind of from a continuous improvement point of view trying to optimize the branch network as well as our operations. So I think it's a combination of both.

Okay and on the investment spend side there'll be some.

<unk> Union Bank.

Of course, but beyond that where would you be.

<unk> investment dollars from here.

Yes, I think that.

I think that.

When we think about our technology investment continuing to have investments in our mortgage business and our digital mobile app capabilities, but a strong focus on real time payments money movement and on the whole <unk> side of the equation is going to be important and then of course, we've been talking about.

The ecosystem between our payments business and our business banking and so we'll continue to make investment there. So I think it's kind of a continuation of many of the <unk>.

Same themes that we've had over the last year.

On a core basis, we really don't expect any significant increase in the investment levels, but we continue to to <unk>.

Expect that we will maintain those investment levels going forward.

Got it okay. Thanks for the color on that.

Thanks Betsy.

Your next question is from the line of Ken Houston with Jefferies.

Okay.

Hi, good morning, guys.

Morning, Ken a.

A couple of NII cleanups. Please.

You mentioned that PPP was an $80 million decline, which I think was bigger than what you had anticipated previously.

60 to 70 I'm just wondering.

What kind of PPP decline do you still have in that first quarter outlook for NII flat sequentially.

Yes, so I mean.

The decline from third to fourth quarter was the most significant it was a little bit higher than what we had expected part of that is because some of what we had expected to occur in 2022 actually kind of got pulled forward into the fourth quarter.

Currently in our baseline or our expectation is that there will be a <unk>.

<unk>.

Immaterial decline in PPP going from fourth to first it's about it's about $15 million to $16 million so its pretty insignificant.

Okay and is that the last kind of meaningful step down from there there is a pretty much wind out from there just trying to get to like that baseline where we can.

I guess the PCB.

But really we look at 2022 is being passed ppb in all respects. So yes, I would agree that the first quarter is probably the last step down that we have and again, it's not really significant and it's incorporated into our guidance yeah. Okay second question.

Obviously, you did decide to buy securities. It looks like 30 something billion the yield on the book went down a little bit I was just wondering if you can help us understand that.

Premium and Delta and also just where you are buying versus runoff front book back book at this point. Thanks.

Yes, so youre right, we did step up the investment portfolio a lot of it has to do with what I talked about earlier and that deployment of excess cash.

We made that deployment in the fourth quarter.

And while we did it in treasuries, we swap its short and so that is why you see net interest margin coming down as well as the yields related to the investment portfolio coming down, but we also did that because we want maximum flexibility as rates are as long term rates start to rise, we would expect to kind of unwind that.

The benefit coming through in 2022, so that's that's kind of how we're positioned in it.

In terms of the overall investment portfolio. The vast majority of those are shorter term.

With the with the hedging strategies.

And then just to follow up on that so when you say you unwind. It do you mean that you are at the right size now or you would rather see it go into loans remaining like how do you think about the mix of the balance sheet and earning asset mix as you look further ahead.

As we go as we go forward I would expect that our investment portfolio will be relative relatively flat to fourth quarter levels thats kind of our expectation. So the vast majority of earning asset growth is more on the loan side than it is in other areas.

Okay understood. Thank you.

Sure.

Your next question is from the line of John <unk> with Evercore.

Hi, John Good morning, John Good morning.

Just on the loan growth front.

Okay.

The color you gave in terms of some of the drivers you saw in the quarter on the commercial side et cetera.

Period balances came in a fair amount above average is that a good indicator as we model out and then.

Currently.

Aside from just.

Macro strengthening.

Notable strength you saw in the period growth.

Quarter, I mean, it's better than a lot of your peer banks any.

Calling efforts are pricing campaign or anything.

On that front.

Yes, so youre right, John we did see some pretty significant growth in terms of end of period balances I think that that sets us up well with respect to 2022.

One of the things that's a little bit hard because you have LIBOR transition and everything else happening.

We don't know whether or not some of that is just people pulling forward LIBOR a little bit.

Into 2021, but when we talk to our customers I guess the thing that that we see is that the underlying momentum in the underlying sentiment is pretty strong there actively out building their inventories again.

All of those sorts of things I think is when we think about kind of our baseline growth going into 2022, why we're pretty optimistic.

But you are right. The end of period balance growth was pretty significant for us and it wasn't it wasn't because of any one specific thing that we were doing it was pretty broad based across across segments across categories.

Cross geographies.

Got it thanks, Barry that's helpful and then separately on the payment side this higher level.

No clearly intensely competitive.

Backdrop.

Wanted to see if you could kind of elaborate on U S bancorp's value proposition in the payments business.

We continue to get good.

Macro.

Reopening, we're strengthening MLP any spend rebounds, as you've been flagging how would you characterize.

Thats sitting in terms of the value proposition for customers.

Yes, John So we've talked about the fact that we're trying to really weave together, our banking products together with our payment products and a comprehensive product set to help businesses business banking customers basically manage the way they're running their cash flows and their business on a day to day basis, and that's our value proposition is that combination of payments and banking and easily.

Use dashboard information to help them run their businesses and manage their cash flows on a day to day basis, that's consistent with the travel bank acquisition that we made in the in the third quarter and other acquisitions, Bento and and others that we made earlier in the year. So that's the objective.

And we will continue to focus on that and I would highlight the simplicity component of that the navigation. The simplicity of use is a real key to that on a go forward basis.

Got it alright, Thanks, and then one follow up to that.

Regarding that strategy do you think would be bolt on deals.

On the Fintech side.

In fact that strategy or how much you need.

I think we've made a lot of investment both organic as well as acquisition in this capability, we're going to continue to focus on it as Terry mentioned, but I think we have most of what we need we just continue to model a refined the capabilities and simplify the offering.

Got it thanks, Andy sure.

Your next question is from the line of Bill <unk> with Wolfe Research.

Morning Bill.

Good morning, Terry.

And a follow up on slide six within your business banking relationships.

There was a modest increase in the number of customers that are now also payment customers from last quarter can you frame for us what the revenue benefit is of seeing that light Blue region continued to grow over time.

How high can that 28% goal.

Well again, we think that we can get.

Additional movement on both of those charts more banking customers using payments capabilities and more banking using payments, we talked about the number of customers. The revenue in that total bucket is about a $1 billion $5 as we think about the penetration so.

That's the base, we're working with.

Understood and then maybe separately.

Can you give a little bit of color on the process, we're converting some of those business banking customers.

This is taking hold and customers in that region.

Jos will be users of payment products, just curious what the receptivity.

Sure.

Yes.

Come across any pushback from customers, who may already be using alternative payment solutions or.

It's been broadly receptive.

I would say that it's early innings Bill let me start there, but I think the fundamental.

Operating which is a simple easy to use combination of banking and payments products in one simple dashboard to help them manage their cash flows is receptive thought from a from a consumer from a business standpoint. So.

And that's really what we're focused on and again many of the customers have a banking product or a payments products, but it's weaving them together for that offering that we're focused on it and the receptivity of that has been pretty strong.

Got it.

And then lastly, if I could squeeze in one final one on the increase.

As.

Attributable to compensation and employee benefits can you parse out for us how much of that was a function of greater production versus inflationary pressures and how much of that upward pressure you would expect to persist.

Yeah.

I mean, certainly what we ended up seeing for example in the capital markets business. It was a stronger so some of it is related to production incentives.

A fair amount of it in the fourth quarter is also related to performance based incentives that are driven by the overall performance of the company.

So we did we certainly did see that I would say and maybe Andrew you want to comment as well certainly there is a lot of competition for talent that's out there.

And I think the pressure is especially when you are looking for and a high skilled areas and technology and development payments.

And our digital sort of space.

If you're if you are in the hiring mode.

You are paying top dollar in order to be able to acquire that.

That that.

Competition for talent is certainly increasing and out there.

I think thats rytary and sometimes it takes a little longer and sometimes it's a little bit more expensive, but that's all been incorporated into the guidance that we offered for 2022.

As a reminder, we.

The other area that is.

Challenging in this environment as entry.

Entry level employees in the branch side, and we get the benefit of having Union bank combined with US This year, which I think is a positive and as we talked about we are committing to frontline employees in the branch side to employment in this environment Thats a positive.

Very helpful. Thank you for taking my question Dana sure.

Your next question is from the line of David Long with Raymond James.

Good morning, everyone.

Hey, David David.

The last remaining question I have is.

Related to your reserve, but wonder if you'd look back pre pandemic.

I think you guys are targeting close to 2% and reserves youre below that now just below that what is the right T.

T cell level of reserves for U S Bancorp herein and within your current reserves.

On the qualitative side, how much do you have built in for maybe <unk> or the pandemic still it still as part of that.

Yeah, David I mean, it probably the way I would describe the last one is.

We still certainly believe that there is some level of uncertainty that's out there in the economy and so we take that into consideration when we go through the different scenarios that we kind of model out.

Maybe kind of coming back to your first question.

What is the right level I mean, obviously, that's going to end up impact based upon economic outlook and what happens with respect to credit quality, but what I would what I would say and you're right we started.

Pre pandemic at the adaption of seasonal at about 2%. When you end up looking at the mix of the portfolio and how it shifted.

We're kind of right at.

We're right at kind of the level that we had started with I guess is the way I would describe it.

From a reserving point of view kind of I would just kind of keep in mind from in terms of seasonal.

You have to provide for loan growth on day, one and so.

As as loan portfolio.

I'll start to grow across the industry I think that dynamic of reserve release will probably change a bit.

Going into 2022.

And again all of that's been kind of taken into consideration when we're thinking about.

Our baseline forecast for 2022.

Got it. Thank you I appreciate the color.

Mhm.

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

Hey, Mike.

<unk>.

I'm going to give the question then I'll give a wide up they'll come back but my question is why are you not planning for even higher positive operating leverage in 2022.

And as you know going back in time.

Nominated Gary Grundhofer Dacron offer Richard Davis, who said if you grow revenues faster than expenses, great things happen and Ive asked this question before for the last five years you guys have had negative operating leverage and during that time. The stock price has barely moved as of year end when banks are up almost half the market has doubled.

So I think.

Some relationship between the two so it's it's good that you are guiding.

For positive operating leverage in 2022, I think that'd be the first year in six years.

To achieve that on a core basis.

But I think you're guiding for 7% to 9% Rev.

Revenue growth for this year, so I guess that implies 6% to 8% expense growth, which still seems to be a lot of spending I get it there's wage pressures.

So it seems to me that just.

From the benefit of rates you can get positive operating leverage.

Which means the tech investments arent paying off to the bottom line.

Whether they are paying off your conservative trustworthy Bang.

But are the tech investments paying off in a way that we as investors can see those and why don't you have higher positive operating leverage guidance. Thanks.

Yes.

Let me start with revenue just because I want to make sure that we're all on the same page in earlier in the comments, we talked about the fact that we expect total revenue growth in 2022 to be in the range of 3% to 4% and when you think about the components of it Mike.

Net interest income is probably going to be at the higher end or maybe even a little bit above that range.

<unk> income is probably going to be growing at the lower end or maybe a little bit below that range.

The primary drivers where do you think about fee income.

We're still going to see in a rising rate environment mortgage banking revenue coming down.

And then on our.

Our lease residual portfolio end of term losses will be coming and it turned gains will be coming down a bit and that shows up in other income. So I think that theres a couple of things that will mute the growth in fee income.

Other thing that we talked about a little bit earlier is some changes in terms of our overall our overdraft.

Pricing and Thats going to have a bit of a drag in terms of deposit service charges in terms of fee income. So the range of growth again for for 2022 in terms of total revenue is in that 3% to 4% range.

So maybe that kind of level sets us with respect to our guidance our expectations for revenue.

On the expenses and I'll have Andy kind of weigh in but.

At least at least 100 basis points of positive operating leverage.

Is is kind of what our expectation or target is that's going to be balancing short term and long term.

Expectations in terms of investment.

But.

We're very committed to being able to deliver at least that in 2022, So Andy what would you add regarding the investment Mike just to comment on your question overall, we've been focused on making the necessary investments in our digital capabilities in our payments business as we've talked about that we've talked to you about that and our objective is to position ourselves to be successful.

In this environment and I think we are we are in a strong position and I think youre going to start to see the benefits both from a revenue growth standpoint, as well as an expense efficiency standpoint, particularly.

Particularly as we see the secular trend starting to increase overall so.

We made those investments eyes wide open.

International while at the same time balancing some short term expense opportunities on the operating cost basis, So, but I think on a go forward basis youre going to see positive operating leverage because of those investments.

So just to follow up on the technology part.

When we think about your level of investments is that still increasing is increasing at a slower rate.

And my understanding was your past investments more work.

Foundation building non revenue areas and now the investments are for revenue area. So if you could just think in terms of the tech investing relative to the pay off where are you in terms of reaping those benefits.

Yes, Mike we're in level off so we're not going to continue to see increases in those investments. We did see some increases in the past five years, but I think we're at a level set.

Area right now number one number two and we migrated from about 40, 60 defense and offense to 60 40 offense right now so most of the investments we're making are for revenue generating.

Areas digital capabilities payments business banking and the other things we've talked about.

And then the other thing that I would just add maybe is this is really more kind of looking into 2023, we don't really see a need to increase the amount of investment.

Even with bringing Union bank into the U S Bank full and Thats because as.

As we've talked about in the past most of this is just <unk>.

Clift and shift from their systems to ours, and so we will be able to leverage all the investments that we've been making and bring a lot of digital capabilities to their customer base.

Alright, thank you.

Thanks, Mike.

Your next question is from the line of Vivek <unk> with Jpmorgan.

Hey, Vivek How're you doing.

Hi, Andy Hi, Perry.

Couple of questions.

Credit card.

Over a period end was up on the seed.

Like one 5% linked quarter.

So a big jump in certainly the fed weekly data any color on what's going on there.

Hi.

Slow for you guys in terms of credit card revenue credit card and debit card revenue all credit card no credit card loans period end loan all.

Yes.

What was really being still impacted at least for us is.

The payment rate is still relatively high it did peak in the third quarter. It came down just a little bit in the fourth quarter.

So until we start to see that measurably improve.

I think that's going to end up impacting growth rates of credit card loan balances our expectation, though vivek is that those payment rates do start to migrate down nicely.

2022 goes.

Progresses, so I do think that that's going to be a bit of a tailwind for us as we think about loan growth.

And then it will also help net interest margin and then obviously your net interest income.

Okay.

Second question the merchant processing decline in fees that you saw.

Quarter over quarter was that all on the crown related coming.

Coming in December or was there something else going on that too.

Yes from third to fourth quarter.

That's really.

Very very little is really related to <unk>, we did see a little bit of a slow up that was kind of late in December .

Really what is happening there is that as sales continue to pick up and travel.

And.

And does that sector that tends to be a little bit of a different rate or and so it's more of a mix thing that it is anything else.

<unk>.

Okay.

Thank you.

Uh huh.

Your final question is from the line of Erika Najarian with UBS.

Earning Erica Erica.

Okay.

Your outlook for positive operating leverage while the stock is open.

So maybe following up on <unk> question.

I think that the screen.

The anticipated.

Yes.

Much.

More or less.

Seasonal step down in payments so.

What happened with the interchange rate.

Yes, So let me kind of just kind of step back and when we think about kind of seasonality in the payments business overall.

Usually from third from third to fourth quarter credit and debit card.

Depending upon the amount of investment we're making at that particular point in time is usually.

Fourth quarter is a little bit better than third quarter, but merchant and corporate payments typically.

Carter is seasonally lower and Thats fundamentally kind of what we saw both in terms of merchant carpet now corporate ends up getting impacted by government spend which tends to be highest in the third quarter.

You get the effect of holidays impacting.

Impacting travel in those sorts of things with respect to payments and that sort of thing that's why that tends to step down. So I think what we ended up seeing is fairly similar to what we would have expected in terms of the seasonality of the businesses.

And.

The lower interchange rates that you mentioned on slide 12.

Sure.

There.

Yes.

Again, I think that that ends up getting impacted by the mix of the business. So as travel grows the interchange rates and the margins associated with that particular business in the merchant acquiring is that narrower spreads and so as that is recovering.

It ends up impacting the margins of all of that.

Got it okay.

And just to take another step back.

Net interest income guide.

Sure.

Three rate hike mid single digit.

What kind of deposit beta.

Are you assuming.

I think.

Everybody is.

Very well aware that your corporate trust deposits are quite sensitive.

But has there been a change in your mix.

Thanks, Paul.

In general what have you.

Our NII guide for deposit repricing and what do you expect actually happening.

Yes, so maybe at a high level typically what we see in the early stages of rising rates is that deposit betas don't move a lot in any in any of the different categories, but you are right.

<unk>.

Our corporate trust deposits tend to be a little bit more sensitive as you get into maybe the second or third rate hike.

So when we think about maybe that <unk>.

First 50 basis points.

We would expect deposit betas will probably be in that 15 to 20.

Five range.

And then progressively getting a little bit stronger as the cycle continues.

But and that's kind of how we think about it now I would say that.

When we have looked at the mix of business we have had.

Today versus let's say four five years ago.

Kind of a strong mix of consumer base, so where we have seen a lot of the growth in deposits.

In 2021 was actually on the consumer side of the equation.

As opposed to some of the other businesses and so the deposit beta is my expectation deposit base deposit betas, especially in the early stages of probably a little bit lower than what we have experienced in the past.

Got it and just maybe a last one for Andy.

As we think about.

U S.

Our cost inflationary environment, but in an environment, where you and he said Oh my.

Investments.

What is really the underlying.

Thank you forget to 'twenty, two but going forward. The next three years, what is the underlying expense growth of this company.

Yeah.

You had mentioned that.

Conference.

<unk>.

In 2021 that low fifties as something that you could achieve from an efficiency standpoint is that something that can only be achieved with.

The deals that you have pending.

So erika.

Part of achieving that is also getting back to a more normal revenue environment, which we are starting to migrate to with rates as we've talked about in terms of our assumptions.

I would expect next year again that revenue growth to be well below.

That expense growth to be well below revenue growth and positive operating leverage and I would expect us to achieve that on a go forward basis. We've made the investments to position ourselves to be successful those investments are going to result in additional revenue, but also importantly, more efficiencies in the operation some digital capabilities allow us to do things more effectively and more efficiently.

We've also optimize the branch network and we're going to continue to focus on that so it started this balance Eric.

Erica optimizing the current to continue to invest for the future and that's what we've done and that's we'll continue to do.

Okay.

We do have a follow up from the line of John Mcdonald with Autonomous research.

Hey, John Hey.

Hey, thanks.

Two quick follow ups, one for Terry one for Andy.

Terry could you quantify the impact of the changes youre, making the customer friendly changes to the NSF fees.

And what that might be for this year on a go forward basis as well and then Andy just kind of wondering with all the dynamics in Washington people are worried about the deal approval process for you and others getting delayed.

What's the cost of that to the organization or you're doing a lot of prep work that gets put on hold and if youre kind of end up if you do end up waiting longer for approval.

Kind of cost is that to the organization and just some thoughts on that would be helpful. Thank you both.

So let me address the the overdraft.

If you end up looking at our call reports.

2021, I think our overdraft fees.

Fees were about little a little less than 2% of total revenue or $340 million in 'twenty.

On a full fully implemented sort of basis, we would expect that that impact of the changes, we're making is probably in that $160 million to $170 million.

It'll we'll probably end up realizing about 75% of that next year.

And the other thing that I would just mention is that with fee waivers from a fee income standpoint, and we've taken both these things into consideration fee waivers will help offset most of that.

Okay, Terry sorry, just next year does that mean.

Good luck this year.

In 2000, and 2022, we would realize about 75% of the.

Fully full effect, yes, okay.

And John we're not incurring a lot of incremental expense right now as part of the integration efforts. We have teams working on it but they are not what I would call incremental in nature of the impact of a delay would be really delaying the efficiencies and the cost takeouts that we projected for you.

And that would be the principal impact.

Got it okay. Thanks.

Sure.

I will turn the call back over for any closing remarks.

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

This concludes the U S Bancorp's fourth quarter 2021 earnings conference call. Thank you for your participation you may now disconnect.

Okay.