Yahoo Finance U.S. Bancorp (NYSE:USB) Q1 2024 Earnings Call Transcript
U.S. Bancorp (NYSE:USB) Q1 2024 Earnings Call Transcript April 17, 2024
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: Welcome to the U.S. Bancorp First Quarter 2024 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 8:00 AM 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, Rochelle, 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 Senior Executive Vice President and Chief Financial Officer, John Stern. Together with some 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 on our website at usbank.com. Please note that any forward-looking statements made during today's call are subject to risks and uncertainty. Factors that could 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.
Andrew Cecere: Thanks, George. Good morning, everyone, and thank you for joining our call. I'll begin on Slide 3. In the first quarter, we reported earnings per share of $0.78, which included $0.12 per share of notable items. Excluding notables, earnings per share totaled $0.90. Our balance sheet remains strong. We are maintaining our through-the-cycle underwriting discipline and seeing the benefits of our multi-year investments in digital, technology and payments ecosystem in the form of strong fee growth across our business lines. Importantly, we continue to accrete capital this quarter. Our CET1 ratio ended the period at 10.0%, and our return on tangible common equity ratio was 17.4% on an adjusted basis. Slide 4 provides additional performance metrics on both a reported and adjusted basis.
On Slide 5, I'll provide some additional high level observations for the quarter. Starting with the balance sheet. Credit quality metrics continue to develop in line with our expectations and we achieved healthy growth in tangible book value per share on both the linked-quarter and year-over-year basis. Loan and deposit growth remains under pressure for the industry and that dynamic impacted our net interest income this quarter. Our NII on a taxable equivalent basis of approximately $4 billion was within our guidance, albeit on the lower end of the range. We are seeing good opportunities for loan growth in targeted portfolios and notably, we continue to see consumer deposit growth despite the impact of QT on industry deposit levels. Over the past few weeks, the outlook for potential rate cuts in 2024 has meaningfully changed as long-term rates have backed up.
Client behavior across the industry is adjusting in response to the potential higher for longer interest rate environment that has impacted our deposit mix and pressure deposit costs. As a result, we now expect our NII for the full year to be lower than anticipated. However, we are taking a closer look at our expense base given these near-term NII headwinds and plan to take actions to mitigate the impact of lower-than-expected NII to our overall profitability. John will go into more details on these topics, but importantly, we believe this is a near-term phenomenon. Turning to Slide 6, we continue to feel good about the momentum across our differentiated fee businesses. Fee income represents about 40% of our total net revenue, which stands to position us well in a lower interest rate environment.
Overall, we are encouraged by our current trends in our client growth and penetration rates as evidenced by the continued strength we have seen across many of our fee revenue businesses this quarter. Slide 7 provides an update on our differentiated payments ecosystem. Over the past few years, we have made good progress to both expand our business banking and payments relationships and grow related revenue associated with these relationships. You may recall, we discussed an opportunity to grow small business relationships by 15% to 20% and related revenue by 25% to 30% a few years ago. As you can see on this slide, we're making good progress and see even greater opportunity to further expand these relationships and related revenue in the medium term.
Let me now turn the call over to John, who will provide more detail on the quarter as well as provide forward-looking guidance.
John Stern: Thanks, Andy. On Slide 8, we provide an earnings summary. This quarter, we reported diluted earnings per share of $0.78 per share or $0.90 per share after adjusting for notable items, including the last of merger and integration costs of $155 million following our acquisition of Union Bank, and $110 million related to anticipated increase in the FDIC special assessment. Turning to Slide 9, total average loans were $371 billion, down 0.5% linked-quarter as growth was impacted by slow industry loan demand in the current higher interest rate environment. Despite tightening monetary policy and ongoing pressure on industry-wide deposits, our total average deposits of $503 billion were stable linked-quarter as we continue to see our efforts to grow consumer-related deposits materialize.
End of period deposit growth was a little higher than we would typically see in the first quarter. Trust and corporate deposit inflows are seasonally higher at the end of the first quarter. However, the impact of holiday timing at the quarter end delayed planned outflows of institutional deposits, which resulted in temporarily higher cash levels. We expect deposit outflows to move in line with more typical seasonal patterns. Importantly, we continue to proactively manage the balance sheet by prioritizing opportunities that exceeded our cost of capital and further optimized our funding mix. We continue to limit our reliance on short-term borrowings and remain disciplined on deposit rate paid as we focus on relationship based deposits. Turning to Slide 10, net interest income on a taxable equivalent basis totaled approximately $4.0 billion, down 3.1% linked-quarter, and net interest margin declined eight basis points to 2.70%.
Both net interest income and net interest margin declines were driven by continued unfavorable deposit mix shift and deposit pricing pressure as well as slower loan demand. Slide 11 highlights trends in non-interest income. Non-interest income increased 7.7% or $193 million on a year-over-year basis, driven by higher payments revenue, continued strength in underlying capital markets activity and stronger mortgage banking fees. On a linked-quarter basis, non-interest income as adjusted decreased 1.4% or $38 million, reflective of seasonal declines in payments volume and previously discussed the impacts related to the exiting of our ATM cash provisioning business, which pressured service charges and lower tax credit syndication fees, which impacted other revenue.
Turning to Slide 12, reported non-interest expense for the quarter totaled $4.5 billion, which included approximately $265 million of notable items. Non-interest expense as adjusted decreased $10 million or 0.2% on a linked-quarter basis, and $117 million or 2.7% year-over-year, driven by both cost synergies with Union Bank and our continued focus on operational efficiency. Slide 13 highlights our credit quality performance. Asset quality metrics continue to develop in line with our expectations. Linked-quarter, non-performing assets increased 20%, reflecting continued stress in our commercial real estate office portfolio and one idiosyncratic commercial loan. The ratio of non-performing assets to loans and other real estate was 0.48% at March 31st compared with 0.40% at December 31st and 0.30% a year ago.
Our first quarter net charge-off ratio of 0.53% increased four basis points from a fourth quarter level of 0.49%, and was higher when compared to a first quarter 2023 level of 0.3% as adjusted. Our allowance for credit losses as of March 31st totaled $7.9 billion or 2.1% of period end loans. Turning to Slide 14, our Common Equity Tier 1 ratio of 10.0% as of March 31st was reflective of a 10 basis point increase from year end, which included 20 basis points of net capital accretion, offset by a CECL transitional impact of 10 basis points. We remain well above our regulatory capital minimum requirements. I will now provide forward-looking guidance on Slide 15. We expect net interest income for the second quarter on an FTE basis to be relatively stable with the first quarter level of approximately $4.0 billion.
Full year 2024 net interest income on an FTE basis is now expected to be in the range of $16.1 billion to $16.4 billion. Our revised guidance reflects a shift in commercial client deposit behavior in a higher for longer rate environment and heightened competitive industry dynamics. For the full year, we continue to expect mid-single-digit growth of a non-interest income. Given the pressure we are seeing on net interest income, we are reducing our expense guidance for the year. We now expect full year non-interest expense of $16.8 billion or lower, which compares to $17.0 billion in 2023. Let me now hand it back to Andy for closing remarks.
Andrew Cecere: Thanks, John. We have been preparing for a wide range of economic scenarios for some time now and we continue to deliver industry-leading returns despite the current industry stress. Our diverse business mix is allowing us to differentiate in a competitive market and we are seeing the benefit of the investments we've made and continue to make in our digital capabilities, our technology modernization, and our payments ecosystem. The message I'd like to leave you with is that we will successfully navigate through the near-term challenges the industry is facing, but more importantly, we are well-positioned for the future and continue to manage the company with the long-term lens. Let me close by recognizing the many dedicated employees for all they do to support the constituents of our national banking franchise.
It is because of our exceptional talent pool that we remain poised to execute on our capital-efficient growth objectives and continue to deliver the financial performance our shareholders have come to expect. We will now open up the call for Q&A.
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