U.S. Bancorp

Welcome to U.S. Bancorp's fourth quarter 2020 earnings conference call. Following a review of the results by Andy Ciceri, 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 1 on your touchtone phone and press the pound key to withdraw. This call will be recorded and available for replay beginning today at approximately 12 p.m. Eastern through Wednesday, February the 3rd, 2021 at 12 midnight Eastern. 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 Anne and Terry, our Chairman, President, and CEO, and Terry Dolan, our Chief Financial Officer. Also joining us on the call are 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. A copy of the slide presentation, as well as our earnings release and supplemental analyst schedules, are available on our website at usbank.com. I'd like to remind you that any forward-looking statements made during today's call are subject to risk and uncertainty. Factors that could materially change 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. I'll now turn the call over to Andy.

Thanks, Jen, and good morning, everyone, and thank you for joining our call. Following our prepared remarks, Terry, Jody, Mark, and I will take any questions you have. I'll begin on slide three. In the third quarter, we reported earnings per share of 95 cents. Revenue total $5.8 billion in the fourth quarter and we delivered a record $23.3 billion for the full year 2020 in spite of the headwinds caused by the low interest rate environment and the economic shutdowns due to the COVID-19 pandemic. The value of our diversified business model was evident this past year as strength in our mortgage banking, corporate trust, and capital markets businesses offset pressure on our net interest margin, which we expect to be stable in the near term and lower payments revenue due to reduced spend activity. While uncertainty remains, I'm encouraged by economic data that have generally been coming in better than expected in recent months and an improving economic outlook given progress on the vaccine and the potential for additional governance stimulus. In the fourth quarter, we saw a continuation of improving sales trends in our own payments data with the exception of some pressure on our merchant acquiring businesses European operations, which was affected by the economic shutdown in the second half of the quarter. While we expect European operations to continue to experience pressure in the first quarter, we expect payments volume trends to continue to improve in line with consumer spend activity. Non-interest expenses were stable compared with the third quarter, and we continue to target flat, sequential expense levels as long as revenue growth remains challenging. Our balance sheet is in a strong position. Credit quality metrics were a little better than anticipated this quarter, and as expected, we neither built nor released reserves in the fourth quarter. We continue to maintain strong capital and liquidity positions, which will allow us to continue to support our customers in this environment. Following the results of the Fed stress test in December, which indicated that we will continue to be subject to the minimum stress capital buffer, we announced a $3 billion common stock repurchase program with buybacks beginning this quarter. Slide four provides key performance metrics in the fourth quarter. We delivered a 15.6% return on tangible common equity. Slide five shows that we continue to see migration to the digital channel. Now let me turn the call over to Terry who will provide more color on the quarter. Thanks, Andy. If you turn to slide six, I'll start with a balance sheet review followed by a discussion of fourth quarter earnings trends. Average loans declined by 2.8% compared with the third quarter. The decline was primarily driven by lower commercial loans reflecting continued paydowns by corporate customers, partly offset by higher mortgage loan balances. While paydown activity continues to slow, we expect it to remain somewhat elevated in the early part of 2021. Turning to slide seven, average deposits increased 4.2% compared with the third quarter, and overall deposit mix continues to be favorable. Our non-interest-bearing deposits grew 5.3%, while time deposits declined 3.8%. On slide 8, you can see that credit quality continues to perform better relative to our expectations. Our net charge-off ratio was 0.58% in the fourth quarter, which was down compared to 0.66 basis points in the third quarter, reflecting improvement in both commercial and credit card loss rates. The ratio of non-performing assets to loans and other real estate was 0.44% at the end of the fourth quarter compared with 0.41% at the end of the third quarter. Our loan loss provision was $441 million in the fourth quarter, which was equivalent to our net charge-offs during the quarter. Our allowance for credit losses as of December 31st totaled $8.0 billion or 2.69% of loans. The allowance level reflected our best estimate of the impact of slower economic growth and elevated unemployment, partially offset by the consideration of benefits of government stimulus programs. Slide nine highlights our key underwriting metrics and loan loss allowance breakdown by loan category. We have a strong relationship-based credit culture at U.S. Bank supported by cash flow-based lending that considers sensitivity to stress proactive management, and portfolio diversification, which allows us to support growth through the economic cycle and produces consistent results. Turning to slide 10, exposures to certain at-risk segments given the current environment are stable compared with the third quarter. The top left table shows that the volume of payment relief declined meaningfully in the fourth quarter to 1.4% of total loans. Slide 11, provides an earnings summary. In the fourth quarter of 2020, we earned 0.95 cents per diluted share. Slide 12 shows that notable items that impacted earnings in the fourth quarter of 2019, we had no notable items in the fourth quarter of 2020. Turning to slide 13, net interest income on a fully taxable equivalent basis A $3.2 billion declined 1.6% compared with the third quarter, reflecting lower average loan balances and a 10 basis point decline in net interest margin. The decrease in the net interest margin was primarily driven by higher cash balances, which hurt our NIM by eight basis points and higher premium amortization. We expect stability in cash balances in the near term. And given the current outlook for mortgage refinancing activity, we believe that fourth quarter 2020 will prove to be the peak level for premium amortization expense. Slide 14 highlights trends in non-interest income. Excluding notable items in the fourth quarter of 2019, non-interest income declined 1.0%, reflecting the impact of lower industry-wide consumer spending activity on our payments businesses and deposit service charges. partly offset by a strong mortgage banking revenue and higher commercial product revenue. Slide 15 provides information about our payment services business lines, including exposures to impacted industries. Year-over-year payments revenue is pressured by reduced consumer and business spend activity compared with pre-COVID levels. However, consumer sales trends generally improved throughout the fourth quarter, albeit at a slower pace than we saw in the third quarter. As expected, card sales volumes were impacted by lower prepaid card volumes in the fourth quarter as payment activity related to the stimulus programs moderated in the fourth quarter. Merchant acquiring volumes were negatively impacted by the mix of sales volumes and a decline in spending activity in Europe following an increased economic shutdowns related to COVID-19. Commercial business spend within our corporate payments business continued to improve during the fourth quarter. Turning to slide 16 on a linked quarter basis, non-interest expenses were stable as expected. Excluding notable items in the fourth quarter of 2019, non-interest expenses increased by 5.1% on a year-over-year basis. Growth was driven by higher compensation related to revenue generating business production, technology and communication costs, and COVID-19 related expenses. Slide 17 highlights our capital position. Our common equity tier one capital ratio at December 31 was 9.7%. I'll provide some forward-looking guidance. For the first quarter of 2021, we expect fully taxable equivalent net interest income to decline in the low single digits in part due to seasonally fewer days. We expect our net interest margin to be relatively stable. Loan balances are likely to decline in the first quarter as PPP loans are forgiven and as corporations continue to use attractive capital markets funding alternatives and their strong cash flow to continue to pay down loans. However, we expect to start to see average loan balances growing in the second quarter. We expect mortgage revenue to decline on a linked quarter basis in line with the industry as refinancing activity continues to moderate. In the first quarter, we expect both merchant acquiring revenue and corporate payments revenue to decline between 10 to 15% on a year-over-year basis, reflecting lower travel and hospitality volumes compared with pre-COVID levels. However, we expect sales volume trends, excluding travel and hospitality, to continue to improve on a sequential basis in line with consumer and business spend activity. The recovery of travel and hospitality spend will be dependent upon the timing and efficacy of vaccinations and changes in consumer behavior and business activities. We expect credit and debit card revenue to increase in the low double digits on a year-over-year basis as growth in debit and prepaid card volumes more than offset lower travel and hospitality volumes. We expect non-interest expenses to be relatively stable compared with the fourth quarter. Recently, economic indicators have generally been better than market expectations and the outlook has improved in the past few months. However, given current uncertainties that exist related to recent trends in COVID-19 cases and related state level restrictions, we expect non-performing assets to remain elevated and we expect net charge-offs to remain relatively stable in the first quarter. We continue to expect net charge-offs to increase in the second half of the year. We expect the allowance for credit losses to begin to decline when there's more certainty regarding the economic outlook and the timing of when peak net charge-offs will occur. We 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 rate to be approximately 20%. I'll hand it back to Andy for closing remarks. Thanks, Jerry. 2020 was a challenging year for many, and I'm proud of how our employees came together to support our customers and communities to help them find solutions for their individual needs. As we move into 2021, I'm confident that U.S. Bank is well-positioned to continue to deliver industry-leading results. Our diverse revenue stream will continue to serve us well as we move through the various phases of the economic cycle. We continue to carefully manage operating expenses while our scale, our innovative culture, and our focus on optimization will allow us to invest in our businesses and our digital and payments capabilities. We view a prudent and consistent approach to credit risk management and our track record as good stewards of shareholders' capital as meaningful differentiators for this company, which is why we will always manage this company with a long-term lens. I want to thank our employees for all the resiliency, flexibility, and hard work over this past year, and for all they do to bring our culture to life every day. We'll now open up the call for Q&A.