U.S. Bancorp (NYSE:USB) Q3 2023 Earnings Call Transcript

U.S. Bancorp (NYSE:USB) Q3 2023 Earnings Call Transcript October 18, 2023

U.S. Bancorp beats earnings expectations. Reported EPS is $1.05, expectations were $1.04.

Operator: Welcome to the U.S. Bancorp Third Quarter 2023 Earnings Conference Call. Following review of the results, there will be a question-and-answer session. [Operator Instructions] This call will be recorded and available for replay beginning today at approximately 9:00 a.m. Central Time. I will now turn the conference call over to George Andersen, Senior Vice President and Director of Investor Relations for U.S. Bancorp.

George Andersen: Thank you, Brad, and good morning, everyone. With me today are Andy Cecere, our Chairman, President and Chief Executive Officer; Terry Dolan, Vice Chair and Chief Administration Officer; and John Stern, Senior Executive Vice President and Chief Financial Officer. During their initial prepared remarks, Andy and John will be referencing a slide presentation. A copy of the presentation, our earnings release and supplemental analyst schedules are available on our website at usbank.com. Please note that any forward-looking statements made during today’s call are subject to risk and uncertainty. Factors materially change our current forward-looking assumptions are described on Page 2 of today’s presentation, our press release, our Form 10-K and in subsequent reports on file with the SEC. Following our prepared remarks, Andy, Terry and John will take any questions that you have. I will now turn the call over to Andy.

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Andy Cecere: Thanks, George. Good morning, everyone, and thank you for joining our call. I’ll begin on Slide 3. In the third quarter, we reported earnings per share of $0.91, which included $0.14 per share of notable items related to merger and integration charges. Excluding those notable items, we delivered earnings per share of $1.05 for the quarter. Third quarter results were highlighted by linked quarter and year-over-year fee revenue growth that benefited from our acquisition of Union Bank, deepening client relationships and strong underlying business activity. We are achieving the cost synergies we anticipated from Union Bank and continue to prudently manage core expense as we identify operational efficiencies across the business.

As of September 30, our Common Equity Tier 1 capital ratio was 9.7%, an increase of 60 basis points this quarter. This is the same level that it was prior to our acquisition of Union Bank. Total average deposits increased 3% or $15 billion on a linked-quarter basis. Credit quality continues to normalize this quarter, in line with expectations, and we further strengthened the balance sheet by adding $95 million to our loan loss reserve, reflective of an evolving credit environment. On October 16, the Federal Reserve granted us full relief from certain Category II commitments made in connection with the Union Bank acquisition given our balance sheet reduction and capital actions. As a result, we are now subject to existing capital rules or, if adopted, the same transition rules as all other Category III banks related to enhanced capital requirements under the Basel III and game proposal.

As proposed, this would include a three-year transition period for the expanded risk-based approach and AOCI regulatory capital adjustment starting in the third quarter of 2025. I will discuss the impacts of these decisions further in my closing remarks. Slide 4 provides income statement results as reported and on an adjusted basis, ending in balances and other key metrics. Slide 5 provides key performance metrics. Excluding notable volumes, our return on average assets was 1.04% and our return on tangible common equity was 21%. While net interest margin declined 9 basis points to 2.81% this quarter, in line with our expectations, we continue to expect the NIM to bottom in the fourth quarter as we reach the end of the current rate hiking cycle.

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Q&A Session

Turning to Slide 6. A great benefit of our business model includes a balance between our spread and fee income businesses that helps us reduce earnings volatility through a business cycle. On a year-over-year basis, noninterest income grew approximately 12%. Within Payment Services, we continue to invest in our digital capabilities, expanding our payments ecosystem and optimizing our distribution. Emphasis on expanded partners and integrated capabilities will continue to support tech-led growth across merchant processing and increased opportunities across other areas of payment services businesses. Additionally, we are continuing to make investments that leverage our scale and strategic market positioning across our corporate trust, mortgage banking and capital markets businesses, which should enhance our already strong annualized growth trajectories.

Slide 7 highlights a few of our many post-conversion revenue opportunities and expected energies with Union Bank. Early indications of the potential to deepen relationships with legacy Union Bank loyal, affluent and diversified client base are promising, and we continue to be on track to realize approximately $900 million in cost synergies, which we expect to be fully reflected in our run rate as we head into the year 2024. Let me now turn the call over to John, who will provide more details on the balance sheet and results for the quarter.

John Stern: Thanks, Andy. Turning to Slide 8, we ended the quarter with total average assets of $664 billion and total average loans of $377 million, down $9 billion and $12 billion, respectively, on a linked-quarter basis as we prudently managed and optimized our balance sheet given the current macroeconomic and regulatory environment. Average total deposits were $512 billion, representing a 3% increase linked quarter, driven by expected seasonality and growth in money market and time deposit accounts. Specifically, average noninterest-bearing deposits decreased $16.2 billion this quarter, primarily driven by our Union Bank retail customer upgrade at conversion from noninterest-bearing checking accounts to our interest-bearing Bank Smartly product.

Excluding this reclassification, the decrease would have been $6.2 billion. Our mix of noninterest-bearing to interest-bearing deposits was approximately 19%, consistent with where we expect the mix shift to stabilize based on historical performance and the operational nature of our core deposit base. Slide 9 provides an update on the investment securities portfolio. As of September 30, our available for sale securities were 97% of our total securities. We continue to reduce the effective duration of the AFS portfolio, which is now less than 3.5 years. On Slide 10, we provide a detailed earnings summary for the quarter. This quarter, we reported diluted earnings per share of $0.91 or $1.05 per share after adjusting for merger and integration charges of $213 million net of tax or $0.14 per diluted common share.

Turning to Slide 11. Net interest income on a fully taxable equivalent basis totaled approximately $4.3 billion, which represented a 4.1% decrease on a linked-quarter basis and a 10.7% increase from a year ago due to the impact of rising rates and the acquisition of Union Bank. Our net interest margin declined 9 basis points to 2.81% in the third quarter. The linked quarter decline was primarily due to the impact of lower earning assets, deposit pricing and mix shift, offset somewhat by better loan spreads and funding mix. Slide 12 highlights trends in noninterest income. Fee income increased 11.9% or $295 million on a year-over-year basis, driven by higher payment service revenue, trust and investment management fees, virtual products and mortgage banking revenues.

On a linked-quarter basis, fee income increased 1.4% or $38 million, driven by other revenues, which included servicing revenue from previously executed balance sheet optimization actions. Turning to Slide 13. Reported noninterest expense for the quarter totaled $4.5 billion, which included $284 million of merger and integration-related charges. Noninterest expense, as adjusted, decreased $13 million or 0.3% on a linked-quarter basis driven by lower compensation expense that was somewhat offset by our investments in marketing and business development. Slide 14 shows our credit quality performance this quarter. While asset quality metrics reflecting changing conditions in the commercial real estate office segment, results this quarter continue to trend in line with our expectations, and key metrics remain below pre-pandemic levels.