1st Tuesday - US Bancorp CEO and President Andy Cecere

Thank you, Sri. Everyone, thank you for joining today. Sri was looking at the flyer with the invitation for this, and I noticed I was wearing a tie, and I think that was the last time I wore a tie. It was over eight months ago. I hope I remember how to tie a tie again when we get back to normal. But in all seriousness, I hope everyone in the audience attending today, I wish them health and safety for both you and your family. As Sri said, this is Election Day, and I do encourage you all to vote. I wasn't thinking about that when I signed up for this over a year ago, Sri, but I would encourage you all to vote. If you need to exit right now, I will not be offended. Please feel free to exit; you can always watch it on tape. I also want to commend Sri and the Carlson School. She mentioned I graduated from the Carlson School in 1991, and I tell people often that I would not be where I am today without the Carlson School. The way you've led the University and the Carlson School in this very tumultuous time, you've really led in an exemplary fashion, and the ability to juggle in this environment is incredibly impressive. So thank you for that. I'm going to talk about three things today: I want to talk a little bit about U.S. Bank, our company; I want to talk about the banking industry and the disruption that's occurring; and finally, I want to spend a few minutes on the current environment and what we're facing both with COVID and some of the civil justice activities that are occurring. Let me start with the history of the company. U.S. Bank was founded in 1863 as the First National Bank of Cincinnati, so we are a 157-year-old company and trace our roots back to the Lincoln administration and the National Banking Act, which started banking and the use of paper money. It was really the establishment of banking where we started many, many years ago. Fast forward to today, we are an international company, as Sri mentioned, with 70,000 employees serving customers, shareholders, and communities across the United States, Canada, and Europe.

This next slide is one I use often in investor presentations to give a snapshot of the company. As I mentioned, founded in 1863, a market cap of about $60 billion. We serve our customers through 2,700 branches and 4,400 ATMs. If you look to the right, just over $400 billion in deposits and $300 billion in loans. As we think about the company, I describe it in three ways. First of all, in the red on the left, we have a branch in every state. There isn't a national bank that has a branch in every state, so to speak. The highest is in the high 30s, so we are one of the larger branch presences in banking. In the middle section, you see where we serve our corporate, commercial, wealth management, and investment service customers, and that is really across the company, across the country, in every state that we serve those customers in a series of offices throughout the country. And then finally, on the right, international. We have a few business lines internationally, principally in Europe, and the one that Sri mentioned is our merchant processing business, which is when you go to a retail establishment or a restaurant, it's that machine that you slide your card into or swipe that really makes sure that the merchant gets paid from the card-issuing bank.

In the United States, as we mentioned, we're the fifth largest, right in the middle. Banking in the United States is a fairly concentrated business, although we have 5,000 banks across the country, which is actually quite a bit more than many other countries. For example, Canada just has a couple dozen. The fact is that if you look at the top ten banks, it's just under $8 trillion in deposits, which is against a total deposit base of just over $15 trillion. So the top ten banks out of 5,000 hold over 50% of the deposits in the United States, so quite a concentrated business. So what is banking? I've been at the bank for a fair bit, and I tried to explain this to my mom multiple times, often with failure. Banking is the intermediation of capital among diverse partners. Those who are savers or have surplus capital store their money with the bank, and those who are borrowers or seeking capital seek money from the bank, and we're the person in between to make sure that that occurs without disruption. Secondly, we provide maturity transformation. What does that mean? That means that we can take a series of short-term deposits, a checking account, a CD, a savings account, and transform that into a long-term loan, best example being a 30-year mortgage. We do that through liquidity and risk management structures and tools to ensure we're doing it in a safe and sound manner for both our customers as well as the industry overall. So definitionally, that is what banking is.

Saving for retirement, paying for a vacation, it's really your financial objectives and achieving those to achieve your goals and dreams. In fact, our mission statement at U.S. Bank is 'We invest our hearts and minds to power human potential.' We do that not just for consumers but for businesses as well. For businesses, we provide capital and debt management for large corporations, we provide receivables and payables management, facilitate payments, facilitate funding and capital to start a business, and often serve as a trustee for bond or corporate issuances. So we have many roles, but if you step back at the highest level, banking is really important. As we call it, it's the oil and the engine of the economy. Without a strong banking system, you cannot have a strong economy. So we take our role from a consumer, business, and economic standpoint very seriously.

Banking through the years, I'm going to talk a little bit about the disruption that's occurring. I used to start this slide with a slide from Bonanza, which was a Western that was prevalent in the 1950s and 60s in the United States. But I found when I was doing that and I started presenting to younger students in classes that nobody knew what I was talking about, so I stopped using that example and really talk about the fact that banking, from the 1860s till about 10 or 15 years ago, really hasn't changed much. Most of the activity that occurred at a bank in the 1900s hadn't changed much over many, many years. When I started in banking in 1985 at what was then First Bank System, I was told that checks, branches, and money movement would start to diminish and actually go away. For 25 years, that just wasn't true. In fact, the trends were the exact opposite; they were increasing across all categories. But in the last five years, that has started to happen for sure. It is about disruption. Disruption is occurring in all of your industries, I'm sure. Disruption, as defined by Professor Clayton Christensen, displaces an existing market, industry, or technology and produces something new and more efficient and worthwhile. It is at once destructive and creative.

Most of this change actually occurred within the last ten years, and I think the best example I can give you is the way people interact. I want to talk about that in just a moment. The way this is changing is a function of three things: technology, money movement, and competition. I'm going to hit on each of those for just a minute. First of all, from a technology standpoint, and you know this is true not just in banking but in many businesses of those attending the call today, I know that you are all impacted by the customer behavior changes that are occurring because of technology: digital devices, cloud computing, artificial intelligence, machine learning, open platforms, APIs, and most recently, 5G. That is all changing the way people interact. Ten years ago, 100% of transactions occurred within a branch and nothing occurred digitally. Today, over three-quarters of that activity occurs on a digital device. It's fast, it's convenient, it's secure, it's private, and it's the way people are choosing to interact, not just in banking but across many industries.

The second thing that's changing in a dramatic way is money movement. This next line gives a time frame of how people will move money over the ages, starting with the barter system and cash and coin, checks, credit cards, wire and ACH. Checks, credit cards, wire, and ACH have been around for a number of decades, but I'm putting this new payment rail, Real-Time Payments (RTP), on the right, and I feel it's going to disrupt all those other payment mechanisms in a very significant way. RTP is fast, it's secure, it's lower cost, but probably most importantly, it comes with data and information. The transaction will have auto-reconciling components that allow your accounting groups, your payables groups, your receivables groups, and individuals to transfer money in a much more not only fast but efficient and effective process. It's going to be a game changer in terms of the next few years on how money is moved and how we think about financial services.

The last thing is competition. These are some headlines of some non-bank entities entering the financial services arena. You can see some of you do to talk about our key strategies as a component of that. Just like many of you, we always talk about the competition. For years and years, as we talked about the competition, it was around the traditional banks, those banks that were on that page, the top ten banks in the country: JPMorgan, Wells Fargo, Bank of America. Those are the banks we compete with, and that's how we thought about competition. But in the last four or five years, we expanded that substantially. We talked not only about banks but on the right, small fintech providers, and on the left, large tech platforms, the likes of Google, Apple, Facebook, Amazon, who are all entering the banking or financial services arena. They're doing it for three reasons. Number one is the revenue pools that go along with that. Obviously, you can make money in financial services. Number two is data. They know what you shop and what you bought every day of the year, but a bank knows all that plus where you live, what your house and what your mortgage is, when you went on vacation, are you near retirement, some of your key life events. Think of the value of that data for a data-driven company. Those are one of the influences and forces causing financial services to be extended to fintech providers. And finally, customer centrality. I talked about the fact that we're in the middle of very important decisions and components of people's lives. A lot of these technology platforms want to be in that position. They want to be close to the customer, and they want to be central to their lives, and being a financial services provider is a way to do that.

If I ask anyone in the audience who is 50 years old or older, their first interaction with financial services or a bank was a savings account, a CD, perhaps an auto loan or a student loan or mortgage. That was lending and deposit taking. Deposit taking in particular is protected; it's a regulated industry. There's a wide moat around it. Only banks can do that, and only banks have done that. But I'm going to also guess if I ask anyone in the audience who is 20 years or younger, their first interaction with financial services was likely payments, and it was either Venmo, or Uber, or Apple Pay, or Zelle. That is a different entry point into financial services. That is where the non-bank entities are entering the financial services arena and where the threat is occurring. I would expect that to continue on in future periods. Now, what's happening is all these trends are colliding. You have the consumer trends and expectations, the technology trends, the demographic trends again, young people and the focus on payments and money movement, in addition to the social and economic trends. When trends collide, that convergence actually accelerates the disruption that I'm talking about, which is exactly what's happening.

When I started in banking in 1985, on the next page you'll see that there were 14,000 banks. Today there are 5,000. There was excess capacity. There were financial crises that occurred, credit crises, interest rate crises. Many of those occurred over time, and the importance of scale and technology started to grow. My belief is, for all the reasons I just described, my expectation is those 5,000 banks on the right are going to be far fewer in the next five to ten years because all those aspects of the disruption that are occurring are only accelerating and becoming more impactful on the industry overall. Banks have to react to that. They have to react like any company is reacting. You have to be more agile, you have to recognize the digital capabilities you need to have, you have to be more innovative, and you have to be willing to change in a very quick fashion. That's what we're doing at U.S. Bank.

I think there are a few things that will ensure our success. They are speed, convenience, and personalization. I talked about those things in the use of data and the use of information. I talked about data as well in terms of how banks have a lot of data. What we want to use that data for is to enhance and offer suggestions to individuals to meet their goals and objectives. We don't sell the data; we don't try to monetize it in other ways, but just for the benefit of the customers. That's the area we're focused on. But those last two components are tremendously important: trust and people. The fact is, individuals, and this is true of consumers as well as businesses, want to trust the institution they're dealing with. We make sure you have that high level of trust. The financial services industry and U.S. Bank for sure is very focused on that. That final component is people. Financial services, banking, is a complicated subject. If you don't study that in school, it can be very complex. Because of that, banking will continue to be a people business. That's true for both consumers and businesses overall. While we have transactions that occur in a digital fashion, if you want advice, if you want counsel, if you want direction, oftentimes people want to sit across from someone else, ask questions, get that consultation and advice in a personal way. So it's the combination of all those things that will allow us to meet the needs of the customers we serve.

I want to now shift gears a little bit and talk about what's happening with COVID and the reactions that we've had. Just like many of you, for me, COVID started on March 11th, and within a matter of two weeks, we were able to move 75% of our staff, over 70,000 employees, to work from home. You think about that: if we were going to undertake that as a project, it would have probably taken years, and we were able to do it in two weeks, just like many of you. It's really a credit to the entire team and the leadership group at the bank, as well as the employees. We've been in that mode ever since. But I will tell you that the indications and the data that we're seeing are actually quite positive. Despite the environment we're in, with unemployment, negative 30% GDP, many businesses closed, shut down, and many filing for bankruptcy, in that environment, our credit stats are some of the best we've ever seen. Our consumer spend, which we have a large payments business, is almost back to normal, except for certain industries like you would expect, airlines and the like. Consumer delinquencies, the ability to pay, are at all-time positive stats. It's fascinating. Our early-stage and late-stage delinquencies are at all-time lows for the last 30 years. So why is that? Why is it we're having this very difficult environment where we're seeing such good credit stats? I attribute it to both the stimulus package that occurred and I think the Fed and the banks. Banks, unlike the last financial crisis, are actually in a much stronger and better position and are trying to be part of the solution in this downturn. They're working closely together with all our consumers to make sure we're doing anything we can to help them through this very difficult time.

The Fed and the Treasury, in a matter of a few weeks, increased their balance sheet from $4 trillion to $7 trillion. That was liquidity provided to the market that built this bridge. If you think about the last financial crisis, it took years to build that $3 trillion, and this took weeks. So what they did in years, they did in weeks, and that was really beneficial. The way I think about it is this stimulus package that's out there, the forbearance plans by the banks, have created this bridge. But the bridge only goes so far. You can only go so far over the water. So a second stimulus and helping particularly small businesses in stress industries, I think, is going to be critically important. That's what's happening with the consumer. Then if I look at the business side, it is truly a tale of two sides. It is a K-shaped recovery. There are a number of industries, and you're all very aware of them, that are impacted quite heavily in a negative sense: the airline industry, lodging, travel, entertainment, and certain retailers that are dependent on physical forms of distribution. Those companies have built their balance sheets, increased their liquidity, and are really fortifying to get them through this difficult time. At the same time, we have a number of other industries that are actually having record quarters in terms of sales. So the business side is a little bit inconsistent, but I think it goes back to that stimulus plan and how important that is for the customers we serve.

Finally, I did not want to let this presentation go by without talking a little bit about the social justice activity that's occurring, particularly for us in the Twin Cities. DEI has always been a tremendous focus for our company, but certainly, and I know for a lot of those on the phone, it has increased in intensity and focus. We're focused on three areas. Number one is our employees: making sure we have an environment that regardless of your background, your race, your gender, you have the opportunity to advance within the company. We're very focused on creating programs and vehicles to allow that to happen. Second, for our customers, what we do in banking is provide capital. We have a number of programs to provide capital to minority-owned businesses. So it is a tremendous focus for us. And finally, the communities we serve. With the riots that occurred in South Minneapolis, North Minneapolis, three of our branches were destroyed, and we committed to rebuilding because we know how important it is to have that location and that service on Lake Street as well as on West Broadway. We're going to continue to be committed to those communities in the long term. So it's an interesting time to be in banking. It's an interesting time to be at U.S. Bank. I want to again thank you all for your participation and listening. Sri, I'll hand it back to you for questions.

Thanks, Sri. That's a good question. In fact, that was a focus before COVID, and it has only accelerated in intensity afterwards. We have created a couple of products for people entering the banking system who are currently outside of the banking system. We have a product called 'Credit Build' that allows people to build credit scores and build credit history. We have a 'Safe Debit' product that is a product on the deposit side without overdraft fees at a very low fee that is debit only, which allows people to again enter the banking system. I think digital access actually increases the opportunity for those who are unbanked to enter the banking system, coupled with the products that we're trying to develop to allow that to happen.

I think the more the merrier. I think the objective is to allow people to enter the banking system and to offer them alternatives to payday lenders. The problem with it is it's still more expensive than a typical lending product because the losses are higher, but we're not making any money on it. The objective again is to bring people in so they can graduate to other products and services.

Yes, I do. I think it's going to accelerate the trends I talked about in a tremendous fashion. I think it's going to really move this forward faster and certainly in a more permanent way. You think about the Paycheck Protection Program, PPP. We were able to issue over 100,000 loans, $7 billion, completely in a digital fashion in a very short time frame. We and other banks did over $500 billion in total. That's an example of a new way of doing business. I would expect that the trends I talked about are only going to be accelerated. The other thing I'll tell you, probably one of the unexpected outcomes of COVID is the employee workforce and how the workforce changes will occur over the long term. As I mentioned, before COVID we had maybe 5 or 10% of our staff working from home. Now we have 75% working from home. I don't think that's going to go back to 5 or 10% on a full-time basis, but there's going to be this great number in the middle that are going to be a hybrid approach. There are certain activities that you can do on your own from home, but you might have days during the week, weeks during the month, where you have to collaborate and work with others. That workforce dynamic is probably one of the unexpected but recurring themes that we're talking about and will continue to be important on a go-forward basis. I think that's going to affect all our industries, including ours.

Yes, Sri. In fact, we, like everyone else, migrated to a virtual internship this last summer. We had over 400 interns, 66 from the University of Minnesota, 33 from the Carlson School. I have a very soft place in my heart for both the Carlson School and St. Thomas, and we try to accommodate as many as we can. I think there are three characteristics that we always look at. When I talk to the students, I talk about these three. Number one is communication. Regardless of what job you're in or what function you have, being able to communicate either verbally or in writing is so important. Communicating with each other, with large groups, with your managers. That communication skill, and I find that to be a particular strength of those from the University of Minnesota at the Carlson School. The second C is collaboration. Being able to work with others, being able to work in teams, being able to work across functions on a go-forward basis, having that skill set is really important. The final C is curiosity. I always tell people, whatever you're doing, understand why you're doing it. Understand what happened before you did it, what happens after you do it. I find the Carlson School students also have a particular skill in that as well.

Thank you for both questions. I do think there's going to be a new payment rail, the Real-Time Payment system, that will ultimately take away a lot of what's happening with cash and currency, checks, wire, ACH. I do think that's going to take place. If the question is around currencies more digital, cryptocurrencies or Bitcoin, I am less convinced that that will replace traditional currency, in particular in the United States. I am a big believer in distributed ledger and the fact that blockchain has a huge opportunity within banking. Anytime you have many-to-many switches in between, something like blockchain can be very effective. But I'm less convinced about cryptocurrencies taking over traditional dollars. In terms of the branch, that's a good question as well. One of the hardest parts of this transformation and disruption that's occurring is the human impact. As many of you know, we announced about two weeks ago that we were reducing the number of branches that we have across our footprint. That's really in response to the changes in consumer behaviors that I'm talking about. But what we're very focused on is reskilling and retraining. Our hope is the great majority of those who are no longer going to work in a branch will work in other areas in the company. We have a very intense focus on that for the company overall, led by our HR group, to try to re-skill and retrain into other areas.

You will never hear me, and I never will, I hope, complain about regulation. I think the regulatory agencies that we work with, the OCC, the Fed, the CFPB, and the FDIC, all have an important role. I talked about how critical to a strong economy is a strong banking system. You need to have a safe and sound banking system. I think the regulators in place today are thoughtful, they're balanced, and we're listening. They understand their mission, they understand our mission, and they're trying to find that right balance.

That's a good question. One of the interesting aspects of banking with the new digital activities that are occurring in cloud computing and such is cybersecurity. You're often taught in school, when I was in banking school and when I took banking at the Carlson School, that the number one risk in banking always has been and always will be credit risk. If you think about it, it's a big number. We might have credit losses in the billions of dollars. But the risk that is growing the fastest and is the most concerning to me is cybersecurity. The idea of someone getting into your data and breaching and stealing from your company from an electronic method is a huge concern. Cybersecurity is one of my top concerns. The banking industry is very focused on it, and the banking industry probably is one of the better ones in terms of working together on making sure that we're controlling threats to the industry and individually. If a large bank today gets a threat from an IP address, I will know about it shortly, and I'd be able to shut it down here at U.S. Bank because of the collaboration that occurs. But organized crime, nation-states, and bad guys are focused on breaching and cyber, and that continues to be a huge weight on my mind.

We talked about community, and we talked about some of the initiatives we have underway. We're actually working with some minority-owned community banks. There are very few; there aren't enough, and there need to be more. There needs to be support from some larger banks, which we're working on, as well as the capital to allow that to occur. I do think that's important. I think that's important to the communities we serve, and it's an area of emphasis for us. We're actually partnering through a treasury program with a couple of minority-owned banks to allow that to occur.

That's a good question. A couple of things. I won't go back to the chart, but you'll see we're the fifth largest bank. We have a different business mix than the top four banks because of the business mix we have. We have a particular emphasis on our payments business. If we do a slice of the pie of the revenue sources of the bank, about 29%, almost 30% of our revenue derives from payments, which is rather unique in banking. That area where it's both a threat and an opportunity, where a lot of the consumers are entering banking and where a lot of the threats are coming, is in payments, and we have a large presence there. The second fact is I talked about that trust and safety component and how important that is in banking. We happen to be the number one rated bank in the United States with one of the rating agencies across the globe. Having that debt rating, which is a third-party determination that we are a safe and sound institution, is hugely important to our customers. The third thing is the combination of digital and physical. It's not just about having a digital capability or a physical location; it's being able to bring together the people and the digital capabilities. It's a function of three things. One is digital: having it available, convenient, fast, and certain, and safe. Secondly, using that data I talked about for your benefit. Sri, if you have a series of payments, we could offer you insights that here's a perhaps a loan that you could get that would be a lower cost, or here's an opportunity if you set a savings goal on a way you could go about it, offering you that insight via data. And then finally, that people component I talked about, that human touch, and really making those three come together in a seamless way. I think that is the critical success factor.

That's a great question, and thank you for that from Vienna. We actually did a roadshow to Europe as well as Asia to talk about what we're seeing in other countries. You're absolutely right, they're probably ahead of us. Many European countries have already migrated away from checks and currency, they have already fewer branches, and they do have negative interest rates and fintech competition. Even in those scenarios, though, when you talk to the individuals that run those banks, they'll tell you the same thing I'm telling you today: it's that combination. You can't have just one. You have to have the digital capability, you have to have the people capability, and the trust. In terms of negative interest rates, I don't see that to be a scenario, at least in the foreseeable future, for the U.S. for two reasons. Number one, some of the comments from the Fed regarding that indicate there are other alternatives that they would put in place first, and they've already done that. Secondly, I'm not sure that the European model for negative rates has been that successful in terms of outcomes. So for those reasons, I don't see that as a high probability, at least in the near term.

It's across the bank. If I would have answered this question a year ago, I would have talked about our agile studios. At the time, we had maybe 50 studios, which changed the way we develop technology. The old way of developing technology was the product group would write requirements, they'd toss it all over the wall to the technology group, technology would code it, they test it, then they toss it back to the product group, we put it out in a sort of user test process, we find out the customer maybe didn't want exactly what we thought they wanted, and we start all over again. By the time we started till we finished, it might have been a year in terms of development. The way we develop now is through agile studios and agile processes, which we have everywhere. Around the table, the customer is around the table with product and technology and risk management, and we're all developing it on the fly. We're starting with the minimal viable product and then enhancing from there, much like those tech platforms do. So we've learned a lot over the last few years in terms of how to develop technology. We're investing in data analytics, AI, machine learning, and cloud computing. Those are the key areas.

As she mentioned in my introduction, I graduated in 1982 from the University of St. Thomas and started working at Control Data, which was a large technology company at that time, one of the largest companies in the Twin Cities, from 1980 to 1985. But since 1985, I've been at U.S. Bank. When I started in 1985, First Bank System was about $20 billion in assets. Today it's over $550 billion in assets across 26 states, across the globe actually. It has been a wonderful organization to be a part of, and I'm very proud.

It's a good question. We spent some time on that this morning. We articulated that we do not expect a large-scale return to office until at least January. We did that about two or three months ago. We also have a set of criteria having to do with a number of cases, schooling, and the ability for people to find childcare. We also said we're going to give a 30-day notice. We're coming upon a 30-day notice if we want to come back in January. We're actually discussing that right now. Given some of the current trends, we probably will delay further, but we're still assessing. We do not have a firm date as of yet.

When we book loans through a cycle, we have a 1% loss rate. That's what you need to have in banking to be successful: a 1% loss rate. So 99% of the time you have to be right. We as bankers have been sort of conditioned over time to only make decisions when we're 99% right. You can't do that in this environment. You have to be able to experiment quickly, fail, adjust, just like I talked about the technology. One of the aspects is cultural. We have to be willing to make many small bets, take some losses, adjust, and move forward, and not expect to be 99% right. That is a banking cultural aspect that needs to adjust to be able to compete effectively with some of the fintech players.

One of the great things about having a company with 70,000 jobs is whatever you want to do, you can do at U.S. Bank. If you want to work with people or on your own, if you want to work with numbers or finance or accounting or technology or digital initiatives, you can do that. You want to work days or nights, wherever you want to work. We have jobs across every category, and many of those categories are actually growing and expanding.