U.S. Bancorp (NYSE:USB) Q4 2023 Earnings Call Transcript
U.S. Bancorp (NYSE:USB) Q4 2023 Earnings Call Transcript January 17, 2024
U.S. Bancorp reports earnings inline with expectations. Reported EPS is $0.99 EPS, expectations were $0.99. U.S. Bancorp isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and welcome to the U.S. Bancorp Fourth Quarter 2023 Earnings Conference Call. Following a review of the results, there will be a formal question-and-answer session. [Operator Instructions] This call will be recorded and available for replay beginning today at approximately 8 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. Please go ahead.
George Andersen: Thank you, Sarah, and good morning, everyone. Today, I'm joined by our Chairman, President and Chief Executive Officer, Andy Cecere; our Vice Chair and Chief Administration Officer, Terry Dolan; and our Senior Executive Vice President and Chief Financial Officer, John Stern. With their prepared remarks, Andy and John will be referencing a slide presentation. A copy of the presentation as well as 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 that could materially change our current forward-looking assumptions are described on Page 2 of today's presentation, our earnings release, our Form 10-K and its subsequent reports on file with the Securities and Exchange Commission.
Following our prepared remarks, Andy, Terry and John will take any questions that you have. I will now turn the call over to Andy.
Andy Cecere: Thanks, George. Good morning, everyone, and thanks for joining our call. I'll begin on Slide 3. In the fourth quarter, we reported earnings per share of $0.49, which included $0.50 per share of notable items that John will discuss in more detail. Excluding these notable items, earnings per share totaled $0.99 in the fourth quarter. For the fourth quarter, on an adjusted basis, net revenue totaled $6.9 billion, and for the full year, we generated record net revenue of $28.3 billion. We demonstrated strength across our fee businesses, which helped to offset pressure on net interest income. Turning to Slide 4. Total loans were lower on a linked-quarter basis by 1.1%, reflecting slower demand, particularly in corporate lending and continued focus on lending opportunities that meet our return hurdles.
Average deposits declined compared with the third quarter as our strong funding position allowed us to be more disciplined on deposit pricing while maintaining our liquidity profile. Credit quality continued to normalize towards pre-pandemic levels this quarter, and we further strengthened the balance sheet by adding $49 million to our loan loss reserve. As of December 31, tangible book value per share increased 14.7% from a year ago, and our common equity tier 1 capital ratio ended the year at 9.9%, an increase of 20 basis points this quarter. This ratio is 150 basis points higher than when we completed the acquisition of Union Bank in the fourth quarter of 2022. Supported by a strong capital accretion this year, the Board approved an increase to our quarterly common dividend in December to $0.49 per common share.
Slide 5 provides key performance metrics. On an adjusted basis, we delivered 19.6% return on tangible common equity in the fourth quarter and 21.7% return on tangible common equity for the full year. Let me now turn the call over to John, who will provide more details on the quarter as well as forward-looking guidance.
John Stern: Thanks, Andy. Turning to Slide 6, we reported diluted earnings per share of $0.49 for the quarter, or $0.99 per share after adjusting for notable items. Notable items totaled $1.1 billion on a pre-tax basis or $780 million net of tax, representing a $0.50 reduction per diluted common share, including an FDIC special assessment charge of $734 million, offset by a benefit from tax settlements in the quarter. Other notable items this quarter included, merger and integration costs of $171 million, a charitable contribution to fund our community benefits plan of $110 million, and a balance sheet optimization charge of $118 million. This quarter, we opportunistically restructured a portion of our investment securities portfolio, which we expect will enhance our net interest income trajectory, while also strengthening our capital and liquidity positioning.
Slide 7 provides a more detailed earnings summary for the quarter. Turning to Slide 8, we continue to manage the balance sheet prudently as we saw reduced loan demand this quarter and the competition for deposits remained heightened as system-wide liquidity declined. Total assets ended the year at $663 billion. Average loans declined 1.1% on a linked-quarter basis, as growth in credit card loans supported by consumer spending and low payment rates was more than offset by weaker commercial loan demand. Average deposits declined 1.9% linked quarter. Given our strong deposit balances in the third quarter, we moderated our deposit pricing somewhat in the fourth quarter even as we grew consumer deposits by 1%. During the quarter, we rebalanced a portion of our securities portfolio, which provided risk-weighted asset relief and improved our overall earnings trajectory.
The average yield on total investment securities portfolio increased to 2.97% for the fourth quarter, a 55 basis point increase compared to a year earlier. As of December 31, the ending balance on the total investment securities portfolio was $161 billion. During the quarter, effective duration on the available for sale portfolio declined to less than three years as unrealized losses, net of tax, improved by approximately $2 billion given the movement in rates and repositioning. Turning to Slide 9, net interest income on a fully-taxable equivalent basis declined 3.0% linked quarter, driven by a modest decline in the net interest margin of 2.78%. The 3 basis point decline in the net interest margin reflected market dynamics including deposit pricing pressure and unfavorable shifts in the deposit mix, partially offset by better earning asset spreads and improved total funding mix.
In the first quarter of 2024, we expect net interest income on a fully-taxable equivalent basis to be in the range of $4.0 billion to $4.1 billion. For the full year 2024, we expect net interest income on a fully-taxable equivalent basis to be consistent with our annualized fourth quarter 2023 net interest income level of approximately $4.14 billion to up slightly. Slide 10 highlights trends in noninterest income. Noninterest income, as adjusted, increased 12.1% on a year-over-year basis, driven by new account growth and deepening relationships across the business. Year-over-year payment service revenue benefited by continued strength in consumer and business spending activities, while increases in trust and investment management fees and commercial product revenue were driven by underlying market activity, a full fourth quarter with Union Bank, and core growth.
Turning to Slide 11, noninterest expenses, as adjusted, decreased by 1.0% on a linked-quarter basis, driven by lower compensation-related expense that was partially offset by strategic investments in marketing and business development. Slide 12 highlights our credit quality performance. Asset quality metrics trended in-line with expectations, and key metrics continue to normalize toward pre-pandemic levels. Our ratio of non-performing assets to loans and other real estate was 0.40% at December 31 compared with 0.35% at September 30 and 0.26% a year ago. The fourth quarter net charge-off ratio of 0.49% increased 5 basis points from a third quarter level of 0.44% and was higher when compared to a fourth quarter 2022 level of 0.23%, as adjusted.
Turning to Slide 13, we increased our common equity tier 1 ratio to 9.9% as of December 31. The combination of earnings accretion, net of distributions, and balance sheet optimization actions resulted in a 20 basis point increase linked quarter. Balance sheet optimization activities continue to have a low to neutral impact on earnings and provided additional risk transfer benefits. As we move into 2024, we expect earnings to be the primary driver of capital accretion with limited reliance on balance sheet capital-related actions. As of December 31, 2023, our common equity tier 1 capital ratio remains above our regulatory capital minimum by 290 basis points. Let me now hand it back to Andy for closing remarks.
Andy Cecere: Thanks, John. I'll end my prepared comments on Slide 14. 2023 was a turbulent year for the industry. However, we achieved a great deal, including our successful conversion of Union Bank in late May and the realization of $900 million in run rate cost synergies related to Union Bank by year-end as we had targeted. Additionally, we accomplished our goal of accreting -- accelerating the accretion of CET1 capital and received full relief from Category II commitments we made in conjunction with the Union Bank transaction. Entering 2024, we are positioned to continue to deliver industry-leading returns on tangible common equity, are appropriately reserved for macroeconomic uncertainties and remain confident in our strategy for future growth and expansion.
We are seeing positive momentum across our fee-based businesses as we deepen our most profitable client relationships and continue to target flat expense growth in 2024 even as we strategically invest in key areas and further execute on revenue growth opportunities with Union Bank. Let me close by thanking our employees for their continued dedication to supporting the needs of our clients, communities, and shareholders in what was a meaningful year for the company. We'll now open up the call for Q&A.
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