U.S. Bancorp eyes another 15% reduction in branches

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U.S. Bancorp in Minneapolis will close another 15%, or roughly 400, of its branches by early 2021 and could consolidate some of its corporate real estate in an expense-reduction effort, executives said Wednesday.

Executives estimated the company would realize roughly $150 million in cost savings and said that some of it would be reinvested into digital capabilities. In an interview, Chief Financial Officer Terry Dolan said that about 75% of the branches earmarked for closing have already been shut down for months due to COVID-19 — and that customers have already adapted.

“A lot of the decisions with respect to branches are really tied to changing customer behaviors,” Dolan said, noting that three-quarters of service transactions and over half of loan applications are now processed digitally. “The role of the branch is changing, and as it becomes much more of an advice and problem-resolution center, the density and distribution you have to have changes over time.”

Over the past 18 months, the $540 billion-asset U.S. Bancorp has closed 10%, or about 300, of its branches as part of a broader effort to trim branches in legacy markets while opening them in newer markets. But as the coronavirus pandemic has pushed more consumers into digital banking channels, executives have eyed further reductions.

The company could also eventually reduce its corporate real estate, but Dolan said that would likely be something executives look at next year.

“The belief is that at least some portion of our employees will continue to be able to work from home and do that very effectively and we will have to take that into consideration for corporate facilities,” he said.

Overall net income in the second quarter fell 17% to $1.6 billion from the year-ago period. Earnings per share of 99 cents came in 8 cents higher than the mean estimate of analysts surveyed by FactSet Research Systems.

Noninterest expenses increased 7.2% from the year-ago quarter to $3.4 billion. Some of that expense increase was related to COVID-19, including extra pay for front-line workers, personal protective equipment, cleaning costs and technology needed to work remotely. Executives also saw an uptick in medical claims in the third quarter, as employees caught up on routine care after lockdown orders were relaxed.

Some of the expense increase was also tied to increased compensation for employees, particularly in mortgage banking and capital markets, where compensation is more commission-based, Dolan said.

Fee income rose 3.7% to $2.7 billion, driven by growth in mortgage banking revenue and capital markets income. That helped to offset a slight decline in net interest income, which totaled $3.3 billion.

Total loans increased 6.4% to $311 billion. Loans would have fallen 3.5% if not for the purchase of $1.5 billion in credit card loans from State Farm and loans made under the Paycheck Protection Program. Growth in residential mortgage lending was more than offset by a decline in commercial lending, as corporate customers continued to tap the capital markets and pay down credit lines.

The net charge-off ratio rose 18 basis points from a year earlier and 11 basis points from the prior quarter to 0.66%. While executives said that credit quality was in line with their expectations, they also anticipate some deterioration in consumer credit early next year.

“Credit quality has been surprisingly good, especially on consumer side. I think the stimulus package and deferral programs have worked very well in terms of creating that bridge,” Dolan said. “We just have to see if that bridge is long enough to get to the other side of the pandemic.”

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