U.S. Bancorp waits to free up reserves amid continued uncertainty

Amid a brightening outlook for the economy, many of the nation's largest banks have begun releasing some of the large reserves they built to cover loan defaults they expected as a result of the pandemic.

But U.S. Bancorp isn't quite ready to do that.

While the Minneapolis-based bank's executives said Wednesday that they have been encouraged by better-than-expected economic indicators, they want to wait a bit longer before freeing up some of those funds.

Terry Dolan, the company's chief financial officer, noted that COVID-19 cases were still spiking, and a number of states put increased business restrictions into place in the fourth quarter.

"We want to see that changed or reversed, which I think we're starting to see now," he told analysts on a conference call. "But I think there's enough uncertainty and we want to be conservative as we think about the appropriateness of the reserve. We wanted to see some of those uncertainties alleviate."

In the last year, U.S. Bank set aside an additional $2.3 billion more than it did in 2019 as provisions for credit losses, which pinched its bottom line as it did at many banks. U.S. Bank ended the fiscal year with a 28% drop in profit from the prior year.

In the fourth quarter, it stopped building up that reserve fund and its net income stabilized, rising 2.2%, driven by growth in mortgage banking. Net income came in at $1.5 billion, or 95 cents a share.

Revenue in the quarter rose 1.5% to $5.75 billion. Still, investors were disappointed with the results, as profit came in lower than in the third quarter. The bank's shares fell 5% on a day when broad market indexes hit record highs.

"While uncertainty remains, I'm encouraged by economic data have that 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 government stimulus," Andy Cecere, U.S. Bancorp's CEO, said on the conference call.

In addition to the business shutdowns and other economic pain from the pandemic, banks also faced a low-rate environment last year. That spurred mortgage refinancing activity, but put pressure on net interest income.

Still, the banking industry has managed to weather the pandemic better than many initially expected. Last month, the Federal Reserve loosened some of the restrictions on share buybacks, which were placed early in the pandemic to make sure banks had enough capital to function.

Soon after, U.S. Bancorp's board authorized the bank to repurchase up to $3 billion in shares. The company expects to begin doing so this quarter.

The pandemic has also hastened the adoption of digital banking, prodding U.S. Bank to shutter more of its bank branches than it originally anticipated. While it initially planned to close 10 to 15% of its branches, it ended up closing about 25% of them, or 700 branches.

Cecere said the company recently completed branch closures announced in the fall. The company is now down to about 2,300 branches in 26 states.

"It's really a function of consumer behavior," he said, noting that about 77% of the bank's customers use its digital channels, while about 40% continue to come to branches for advice and counsel.

He added that he doesn't anticipate another round of branch closings in the near term.

Last week, the second round of the Paycheck Protection Program to help small businesses affected by the pandemic began to open up for applications. Dolan said U.S. Bank has seen strong demand already both from customers that participated in the first round as well as from those who are applying for the first time.

He noted that the first time around, the program was new and rules were still being defined as it was rolled out. It's smoother this time around.

"We have invested a lot of technology in terms of digital capabilities that will allow our customers to be able to apply for and get funding through the PPP program much more effectively than the first round," he said.

He added that the bank is also serving non-U.S. Bank customers in the states where it has branches, as it also did in the first round.

"But I think there is the opportunity to serve them even more effectively this time as well," he said.

Kavita Kumar • 612-673-4113 Twitter: @kavitakumar