U.S. Bancorp (USB) Earnings Call Transcript & Summary

Good morning, everyone. This is Gerard Cassidy. Welcome to the 2020 RBC Capital Markets Global Financial Institutions Conference. Our fireside chat right now is with U.S. Bancorp. Joining us from U.S. Bancorp is Terry Dolan, Vice Chairman and Chief Financial Officer. Also with us is Tim Welsh, Vice Chairman Consumer and Business Banking. As many of you know, U.S. Bancorp is headquartered, of course, in Minneapolis. It has a market cap of about $55 billion and total assets of just under $500 billion. When you look at the deposits, they are about $362 billion and a loan portfolio of around $300 billion. As many of you know, it's one of our most profitable banks in the country. In last year, they put up a return on asset number of 152 basis points and a return on average common equity of just under 15%. With that, I'm going to turn it over to Tim, who will speak, followed by Terry, and then if there's time, we'll have some questions. Tim?

Thanks so much, Gerard. Really great to be with all of you today. For those of you who are listening in, I'll be referencing a presentation that is available on our website and I'll be referring specifically to individual pages in that, so you can follow along. First, I'll reference Page 2, which is -- this is about the standard forward-looking statements. All of you are familiar with this that the forward-looking statements are subject to risks. On Page 3, just as a quick overview, and Gerard touched on some of this a minute ago. We operate regional businesses, national businesses and internationally. We're going to focus much of today on the consumer and business banking activities, which we take deposits now in 26 states, and in addition to that, we have a mortgage business and an auto business, which are national businesses. And then you see we have corporate and commercial banking, wealth management and payments, which operate either nationally or internationally. We are on Page 4. We are the fifth largest bank in the country, and you see that, that's been fairly consistent, and Gerard referenced that. On Page 5, we operate in 4 business segments. We're going to focus today on consumer and business banking, which represents a total of 40% of our revenues. And Page 6, highlights the strong financial performance that Gerard alluded to a minute ago that we've had for many years. So on Page 7, what I'd like to do now is really go into detail about Consumer & Business Banking. And in particular, reference back to some ideas that we talked about at our Investor Day. We said at Investor Day, we were really going to focus on 2 elements of the consumer business banking. On the left-hand side, we need to build a very strong digital foundation and that is in everything that we do. And we're going to talk about our app, but we're also going to talk about how we've been digitizing small business processes, mortgage and many other places because we really believe that the customer wants an easy, simple digital process for many, many of their activities. And at the same time, they want human interactions but in different ways. And we are transforming our distribution system by entering new markets in a digital-first branch-light approach. We're relocating and redesigning branches in lots of our existing markets. We're closing branches where it's appropriate and also looking for new and innovative distribution partnerships. So this theme of digital and human is something we're going to continue to refer back to. So that's what we're doing. Page 8 really talks a little bit about why we're doing this and this is rooted in changing customer behavior. We really strongly believe that customer expectations of a bank are set across industries. In other words, the best customer experiences that they can have anywhere, they expect banks to be able to replicate. And we see that, as you note, on the left-hand side here, we see that in just how digital our customers really are. More than 70% are using digital channels, and what's really striking to us is the frequency of those digital channel usage. We see not just in our business but actually across industries that a customer will interact digitally approximately 30 times as frequently as they will interact in a physical location. And so what we're trying to do is really make sure that, that digital experience is superb and that we've been a -- they do operate in a physical channel that it's a very high-value activity. And so that's why on the right-hand side of Page 8, we're really thinking about each of the different people that we interact with consumers, corporate executive, business owners, et cetera, trying to really make sure all of our processes are designed for their really individual human touches, some of which they want to do themselves, we call that DIY, and some of which they want to do in conjunction with a banker. And so it's this constant not only digitizing everything, but making sure that we're optimizing the in-person interaction so that, that's just high-value as it possibly can be. So moving to Page 9. We really want to talk now about the details. So what are all those great concepts mean in practice. The first is around our mobile app, and we mentioned before that we have fundamentally redesigned our mobile app in the spring of last year, around not just new technologies but a new idea. And this was about how do we become central to the lives of our customers? How do we become really important to them? And critically, that means a few things. First, it means that we want them to be able to do lots and lots of things very easily on their phone. And you see on the left-hand side of Page 9, a whole series of new features that we've been adding to make everything as simple as possible for our customers. But a core idea of becoming central to their lives is interacting with them a lot. I mentioned earlier that a typical customer will interact with a mobile device 30 times more frequently than they will interact in person. So how do we make sure those digital interactions are really valuable. And what we're seeing is that we're -- a big increase in the frequency with which customers are interacting with our device and our -- particularly our mobile app. In fact, a 2x increase in the number of interactions. A lot of that is driven by personalized insights that we are providing to them. Since the launch of the app, we provided more than 600 million insights to our customers. The vast majority of which they find extremely valuable. So what was happening here is we're not only making it easy for customers to interact with us digitally, but we're providing them real value, and that's causing them to interact with us even more frequently so that we become central to their lives. We've also talked about the fact that we want to digitize lots of processes. And we've highlighted to investors before, the fact that since 2017, we've been aggressively investing in digitizing our mortgage process. We really want to make what has typically been a very complicated process, very paper intensive. We want to make that as simple and as digital as possible, and we've been partnering with a company called Blend to do that. And what we have seen over the last several years is a significant increase in the digitization process. You can see applications and closings, significant increases in the number of customers who use our digital tools for that. We're now at a spot where 90% of our mortgage applications are moving through our digital platform. That's allowing us to increase market share, as you see on the far right. And very importantly, it's allowing us to increase productivity because what we're seeing here, we're seeing the loans funded for FTE increasing 45% over the period that we're talking about here. So that increasing productivity expands the overall capacity of our mortgage operation. And so you can imagine in an environment like we're in right now, the fact that we have such a digital process allows us to handle the volumes much more easily and in a way that is very positive from a customer experience perspective. So we're able to grow capacity, simplify the process, make it better for customers, and that's the result of multiple years of investment in the mortgage area. Not only do we think about consumers and how do we make their lives easier, we also think on Page 11 about small businesses. And if you think about the things that the businesses want to do easily, they want to do lending simply and they want deposits simplified. So about 1.5 years ago, we launched an entirely new loan process. We took the number of fields down from -- by 70% so we make the application process much simpler. This can all be done online. We've been able to fund loans up to $250,000. The fastest loan, in fact, we were able to do in 13 minutes from the time that the application began until the time that the money was in the person's account, 13 minutes. So when you have that kind of very simple loan process, what you would expect is the demand for it increases, and that's exactly what we're seeing on the right-hand side, a real explosion in this volume. What's very interesting about this back to the concept of digital plus human though. It's not only that customers love this very simple process for getting loans, but they often get to learn about this in conjunction with their conversations with business bankers. We're finding the conversations with the business banker is now more broad and holistic and then the conversation turns to, "oh, and if you need some loan assistance or liquidity, we can very quickly do that for you." So that's part of enhancing the effectiveness of that in-person interaction with new digital tools. And we've been so successful with the loans up to $250,000 that we're now, in fact, expanding in a partnership with nCino for simplifying the loan process and the deposit process now for loans up to $2.5 million. So we're really seeing a significant improvement in digital capabilities here. But critically -- and I want to underscore this without changing our credit guidelines. So we're making the process simpler for everybody, but we're keeping the standards of credit that you have always come to expect from U.S. bank. On Page 12, I simply wanted to highlight here that we have a whole series of new innovations that we're constantly thinking about. These -- many of these are pilots what were -- in concept we call, test and learn, see what customers respond to, some of that they like, some that they don't, and we're constantly learning and adapting. A couple that I'd highlight here, personalization, we're really trying to not only provide analytical or digital insights, but we're looking at ways that in the human discussions, we can provide much more personalized assistance. This concept of test driving, on the far right of Page 12, how do we allow new users, people who have not been customers of U.S. Banc in the past, how do we allow them to try out our app and see the benefits of it. We're also looking to make transferring money or transferring your checking count from one bank to another much easier. We're looking to preapproved loans in the mobile app, a whole set of innovations that we've got going -- working on. And the underlying reason that we're able to do so many of these innovations is that it's because we're working in different ways. We now have several dozen agile teams. There are about 40 agile teams across the organization who are working in different ways, working much faster and constantly interacting with customers in the course of these innovations to make sure that what we're designing is really important and really valuable for our customers. On Page 13, I just want to touch a bit more on the concept of transforming our digital -- or excuse me, our distribution network, which we've talked about a little bit earlier. We're transforming everything about how people interact with us in what have historically been our branches. First of all, we're investing in new branches. You know about our launch in Charlotte, which is an example of our branch-light digital-first push, but we're also investing all across the footprint, with dozens of renovations, new branches and redesign models all across our footprint. So we're really investing in that in a significant way. At the same time, we are taking the branch count down to reflect the frequency of interactions, which is just less in branch and is more digital. But make no mistake, we're continuing to invest in places we think there's growth opportunities. We're also redesigning roles, and this is a really important part. I've alluded earlier to the fact that people will do things very similarly, digitally, and then they want that human interaction to be different. So we're investing in business bankers, we're investing in universal bankers. And critically, we've created an entirely new role called the Client Relationship Consultant, which is all about a much more proactive and personalized approach to customer interaction. So we're changing the physical locations, we're changing the design of locations and we're changing what happens in those branches all across our network. On Page 14, we're also looking for new alliances. So what I've just been talking about is how we take our traditional distribution and modify and adapt that to the changing environment. But we're also looking for new ways to distribute to customers. And so what that has led us to on Page 14 is looking for a partner, in this case, state farm that we can create an alliance with that really has a purpose and values that are consistent with our own, a very, very strong desire to serve customers in new and innovative ways. And what this alliance does is bring together not only the purpose and values of our 2 respective organizations, but also the strength in assets. Just a couple of the examples of the assets that these different companies bring to this alliance. State Farm has a network of 19,000 agents across the U.S., and many of those agents have been involved for a long time in banking. We're now bringing the banking tools from U.S. Banc, particularly the digital tools that we've been talking about through those agents. And it's our hope that this alliance will allow us to really serve customers in very new and exciting ways. So in summary, on Page 15, we're really continuing to rapidly transform our consumer and business banking model. First of all, we're much more digital and agile, as I described, but constantly making sure that the new digital tools are coupled with changes in the human interaction because we really do think that those 2 will always be inextricably connected to one another. We're looking at new markets, as we've talked about and new alliances, while also looking for ways to become more productive as we referenced in the mortgage example. And so we hope from all of this that we will not only see growth in the total number of customers, but that we'll become more central to their lives, and we're very pleased with the results that we've been seeing so for. Terry, over to you.

Thanks, Tim. So you know, there's been a lot of activity, obviously, in the markets over the last several weeks. And so one of the things we want to do is provide updated guidance with respect to the first quarter relative to the earnings call that we had in January. So let me start with net interest income. When we think about net interest income for the first quarter, we continued to expect kind of low single-digit decline in net interest income on a year-over-year basis for the first quarter. But given the recent moves in interest rates, we now expect that we will see a couple of basis point pressure on net interest margin in the first quarter compared to the fourth quarter, which was 2.92%. With respect to loan growth, our loan growth for the first quarter is typically seasonally a little bit lower than the fourth quarter because of credit card and other businesses. But overall, we expect loan growth to be relatively flat to the fourth quarter. And a lot of that is going to be driven based upon higher levels of loan pay downs in our C&I portfolio because of the attractive low interest rates and the ability for our large corporates and middle market commercial bankers to be able to access the capital markets in order to pay down debt. With respect to fee income, we continue to expect mid-single digit fee income on a year-over-year basis for the first quarter. But let me highlight a couple of different things. Because I think there's going to be a couple of different puts and takes that will take place with respect to fee income. As Tim talked about, in the mortgage banking business, that's an area that we have been investing over the last few years as well as in our capital markets businesses. And so with a decline in interest rates, we do expect the mortgage banking revenue to be more robust, both in terms of applications as well as gain on sale. Margins have been expanding in that particular space because of capacity within the industry. The investments that we've made in digital and other things within the mortgage business, though, will allow us to be able to capture more of that volume probably on a relative basis. And then the capital markets is going to be a little bit better than what we expected. And again, that's because of the investments that we've made with respect to fixed income. The thing that we're going to see a little bit of pressure on, though, I think, is related to consumer spend and corporate spend. And so that will show up principally in our payments businesses in the areas of merchant acquiring and our corporate payments revenues in the first quarter. Turning to expenses, given the stronger than expected mortgage banking activity and the fixed income activity that we would see commissions, incentives and production-related costs associated with those activities are going to be higher than what we had expected. And while we originally gave anticipated expense growth within the low single digits on a year-over-year basis, we now think it's going to be in the low end of the mid- single-digit range. With respect to credit, while we continue to expect credit quality and net charge-offs to remain stable compared to the fourth quarter, the recent adoption of CECL accounting standards related to provisioning will require us to evaluate the impact of the recent market volatility and the changing economic conditions during the quarter. And as we've talked about, and the industry has talked about CECL will cause more volatility relative to the provision within the industry. Finally, we continue to expect our taxable equivalent tax rate to be approximately 20% on a full year basis. And Gerard that's the guidance that we wanted to provide to our investors. So turning it back to you.

Thank you, Terry, and thank you, Tim. Maybe circling back to the residential mortgage business, Terry, you touched on the capacity issue that you and your peers are confronting because of the high volume of refinancing activity. When do you think that may -- we'll see some relief there where the capacity issue won't be as much of a challenge for you and the industry?

Well, I think within the industry, people are trying to tool up with respect to underwriters and mortgage loan officers, et cetera. But for us, fundamentally, we have been able to take advantage of the expanding gain on sale margins because of the competitive sort of environment. We also have been able to handle on a relative basis, the increased applications in terms of dealing with capacity. So I think that from our perspective, when we have made those investments in both digital and expanding our retail mortgage lending sort of capability, we do believe that we are going to be able to handle that capacity. But in the industry, it's going to take a little while.

Sure, no doubt. Terry, you gave us some guidance on the margin, as you've pointed out. If this rate environment stays the way it is it looks like the Fed is going to reduce rates again next week. Assuming the long end of the curve doesn't change dramatically to the upside. What do you think about the pressure throughout the year for you folks?

Yes. So for us, again, for the first quarter, the pressure on margin will probably be a couple of basis points. And for the rest of the year -- I think right now, it's a little bit hard to just know exactly where rates are going to go. But we have, over the course of the last, really, 12 months or so, been repositioning our balance sheet, looking at hedging activities in order to try to manage the asset sensitivity. On the short end, we are relatively neutral with respect to changes in rates because of the -- as of the position of the income statement or the balance sheet, excuse me. We're still a bit asset sensitive with respect to the long end. So I think it depends upon exactly how that yield curve ends up changing.

No doubt. And as you pointed out, and we would agree with you. It's tough to, of course, to predict exactly where rates will be over that kind of time period. Tim, maybe coming back to some of your comments about the digitalization of the different lines of businesses. What do you -- with this increase in activity on the residential mortgage side, can you share with us any feedback you're getting from your customers about the process now that it's more digital than it was maybe 5 years ago?

Yes. Gerard, I think most of us who have gone through the mortgage process at some point in our lives, don't remember it as one of the most joyful experiences we've ever had, just given the paper intensity that it's historically had. And what we're finding now is that customers are -- it's just so much simpler for them. Examples of this, it's easy to upload documents. It's easy to link to other accounts that you have where you have assets and things, we can verify those assets digitally. And so it just really simplifies the process. And as a result of that Gerard, we've seen material improvements in customer satisfaction as a result of this as well as just a big size of relief that it's just a much easier process. And frankly, what -- it leads them -- gives them greater confidence that they're going to be able to close on time and that sort of thing, which is -- these are obviously very emotional decisions that people are going through with buying homes, and it just gives them much more comfort. So we're delighted at all those different dimensions.

And Tim, I don't know if you can give us any additional color. You mentioned about the expansion into Charlotte with a branch-light digital offering, I know it's early days. But any color on how it's initially going?

Yes, you're right, Gerard, it is very early days. We only recently passed 100 -- first 100-day mark, but we really are delighted with the progress that we've seen. Great receptivity from customers. Customers who have been with us before as well as new customers, very positive reception there. We're certainly looking for other locations as we've alluded to in the Charlotte area. And so I think what it has proven to us is that the concept of digital-light -- or excuse me, digital-first and branch-light is -- seems to be gaining some momentum, and we'll hope to see how that continues to play out over the next year or two in Charlotte.

Very good. Maybe, Terry, coming back to you. Clearly, there's been a lot of volatility. We all are experiencing what's going on with the coronavirus. What's your thinking of just credit quality overall as you look out further into the year?

Yes. Certainly, when we look at the portfolio today, we believe that credit quality is relatively stable. The areas that we're watching are the ones that are most directly impacted by the coronavirus. So you have airlines and transportation. You have the hospitality industries. Energy, maybe not quite so related to the coronavirus, but certainly has been in the news recently. And then anything that really is kind of dependent upon the supply chain relative to China and those areas. With respect to -- for example, airlines, it's a relatively small exposure for us. It represents about point -- about 0.5 percentage point just in terms of airlines. Transportation, overall, is a little over 1%. So when you end up looking at each one of those exposures, very manageable from our perspective. But there's going to be credit quality pressure, I think, in those particular spaces at least in the short term. And I think a big part of it is just how long does this pandemic continues.

Terry, I recall back a couple of years ago when, unfortunately, we had the tragedies with the hurricanes down in Puerto Rico and the wildfires in San Francisco. U.S. Bancorp indicated that it affected the payments business in terms of less activity. Do you recall, how long did it take from when those disasters hit to everything to come back to normal in terms of volumes and things like that?

Yes. Well, with respect to those disasters, it was really dependent upon how hard hit it was the -- for example, in Houston and Florida, it rebounded relatively quickly, certainly within probably 3 to 6 months of the time frame, Puerto Rico took longer. I think the expectation is that as you get beyond the coronavirus issue that you would see that recovery start to rebound, it is difficult to know exactly how quickly spend volumes come back, though. It's impacting small businesses, in particular, and then some of the industries that we talked about.

I see. And you mentioned, obviously, what's going on with interest rates, and you already addressed the net interest margin. Can you share with us what you guys are seeing with deposit flows? And are you been able to yet reprice those deposits down as quickly as the Fed has lowered rates?

Yes. So deposit growth has been pretty strong recently. I think there is a little bit of a flight to quality just as people are kind of thinking about their own balance sheet position, et cetera. From our perspective, again, about 50% of our deposits are institutional, whether it's in the wholesale or in the corporate trust world, and those tend to be pretty sensitive. So we've been fairly successful in terms of bringing rates down as the Fed has brought rates down as short-term rates have been dropping. And the lower it gets, though, obviously, there just tends to be a flooring effect that takes place and will be impacted by that, similar to the rest of the industry. And then certainly, on the retail side, the retail pricing never went up very much. So in terms of coming down, it's not that significant.

I see. And we're running out of time here. It looks like I have time for maybe one last question. And Terry, if you were sitting in an audience listening to a bank present similar to our institutional investors. What kind of question would you be asking of a bank today with your knowledge of how banks run?

Well, I think the areas that you've been kind of focusing on that are going to be most impactful. It's just how -- the volatility in the marketplace and what impacts the movement in rates it's going to have with respect to the industry and to kind of the banking industry itself. With respect to the coronavirus that really is how quickly you see recovery once you kind of get through that issue and then it's credit quality. So the questions you've been asking are kind of right on point.

Well, great. I really appreciate, and we're very privileged to have you gentlemen join us today, and thank you very much, Tim and Terry for participating in this year's virtual conference. And hopefully, if you can join us next year, it will be in-person. But thank you very much.

Yes. So thank you for your flexibility and your thoughtfulness with respect to going to a virtual conference as well. So we appreciate that.

Appreciate the invitation. Thanks, again.

Okay. You're very welcome. Thank you.

Yes. Bye-bye.