In the third quarter of 2023, U.S. Bancorp held an earnings conference call where they reported earnings per share of $0.91, which included $0.14 per share of merger and integration charges. Excluding these charges, they delivered earnings per share of $1.05. The results were driven by fee revenue growth from their acquisition of Union Bank, strong client relationships, and business activity.

The company is successfully achieving cost synergies and managing expenses after acquiring Union Bank. Their Common Equity Tier 1 capital ratio has increased, and average deposits have also increased. Credit quality is improving, and the company has strengthened their balance sheet. They have received relief from certain commitments from the Federal Reserve and are now subject to existing capital rules. The company's income statement and key performance metrics are provided on slides 4 and 5, and they expect their net interest margin to bottom out in the fourth quarter.

The business model of the company provides a balance between spread and fee income businesses, which helps reduce earnings volatility. Noninterest income grew by 12% and investments in digital capabilities and partnerships are expected to drive further growth. The company is also making investments to leverage its scale and market positioning in various areas. The potential to deepen relationships with legacy Union Bank clients is promising and cost synergies are expected to be fully realized by 2024. Total average assets, loans, and deposits decreased on a linked-quarter basis due to prudent management of the balance sheet.

In the fourth quarter, the bank's noninterest-bearing deposits decreased by $16.2 billion due to a customer upgrade. Excluding this reclassification, the decrease would have been $6.2 billion. The bank's mix of noninterest-bearing to interest-bearing deposits remained consistent at 19%. The bank has also been reducing the duration of its investment securities portfolio, with an effective duration now less than 3.5 years. In terms of earnings, the bank reported diluted earnings per share of $0.91, or $1.05 after adjusting for merger and integration charges. Net interest income decreased by 4.1% on a linked-quarter basis, but increased by 10.7% from a year ago. Noninterest income also increased by 11.9%, driven by higher payment service revenue, trust and investment management fees, virtual products, and mortgage banking revenues.

In the fourth quarter, the company saw an increase in fee income due to other revenues and a decrease in noninterest expense, driven by lower compensation expenses. Credit quality remained in line with expectations, but there was an increase in the reserve ratio for commercial real estate office loans. The company also took actions to improve its capital ratios, resulting in a 60 basis point increase in CET1 ratio. The CET1 capital ratio is now 270 basis points above the regulatory minimum. Forward-looking guidance for the fourth quarter will be provided on Slide 16.

The company expects to have a net interest income of $4.1 to $4.2 billion in the fourth quarter, with total revenue estimated to be $6.8 to $6.9 billion. Noninterest expenses are expected to be $4.2 billion, with a flat core basis for 2024. The income tax rate is expected to be 23%, and merger and integration charges of $250 to $300 million are expected in the fourth quarter. The company has received full relief from Category II commitments and will continue to focus on capital-efficient growth opportunities.

The Fed's decision has put the company in a good position to increase capital levels and strengthen their balance sheet. The CEO thanks employees and opens up the call to Q&A. The Fed expects the company to take further actions to reduce risk and increase capital, but the company is committed to managing their balance sheet and increasing regulatory capital.

The company expects to see an increase in earnings as they complete the merger and realize the full Union Bank synergies. They also plan to optimize their balance sheet and focus on high-margin, high-return businesses. The company is not under an asset cap and will continue to manage their balance sheet and capital efficiently. The company also expects their net interest margin to improve, driven by a steeper yield curve and changes in consumer behavior. They have confidence in this forecast due to their rate forecast, which includes a rate increase in December.

The speaker is discussing the impact of the Fed's interest rate decisions on the company's net interest income and net interest margin. They believe that regardless of the Fed's actions, their interest rate risk is stable. They expect a slowdown in deposit growth and a stabilization of noninterest-bearing balances. They also anticipate a slight decrease in net interest margin in the fourth quarter, but overall, they are confident that it will bottom out and their net interest income will remain stable.

In the third quarter, the Fed's decision has given the company more time to phase in the AOCI. The AOCI had a 250 basis points impact, bringing the capital to around 7.2%. The change in AFS was expected and consistent with the duration of the book. The company expects to see a full run rate of $900 million in merger savings by the fourth quarter. Currently, they are seeing about $100 million in savings. By the first quarter of 2025, the company could see an additional $800 million in expense savings.

John Stern, Andy Cecere, and Mike Mayo discuss the merger savings for the bank and how they will impact expenses in the coming year. The savings are expected to reach $900 million by the end of the fourth quarter, which will be fully reflected in the 2024 expense base. The bank is also focusing on deepening relationships with Union Bank customers and their fee businesses are doing well. However, the biggest challenge for the bank and the industry is net interest income and margin.

The speaker explains that there are many factors at play in the current environment, including slow loan growth. They also discuss the trade-off between increasing the CET1 ratio and potential earnings. Despite changes in regulatory requirements, the company plans to continue generating 20-25 basis points in CET1 quarterly.

The company expects to see an increase in earnings generation from 20 to 25 basis points due to merger-related costs and Union synergies. The less risk-weighted asset optimization did not have a significant impact on this expectation. There will be no additional OpEx impact from conforming to Category III regulations. The net interest margin is expected to see a little pressure in the fourth quarter but should stabilize after that, depending on interest rates at the time.

The operator introduces John McDonald from Autonomous Research and then Scott Siefers from Piper Sandler asks about the company's balance sheet growth and potential risks of exceeding $700 billion in assets. John Stern, the speaker, assures that they have complete flexibility with their balance sheet and will focus on higher return loans. He also mentions that the demand for loans is currently low, giving them more time and flexibility. Scott Siefers then asks about the AOCI burn-down and cash flow expectations, to which John Stern provides more information and the duration of the AFS and HTM books.

The company has about $162 billion in balances for AFS and HTM, with a 50-50 mix. They expect $3 billion of runoff per quarter due to current interest rates. They have hedged 30% of the fixed rate portion of the AFS book, resulting in a duration of less than 3.5 years. The HTM book is mostly agency mortgage-backed securities with a duration of six years. The company's CET1 level will be impacted by the recent regulatory relief and a tighter regulatory environment, and they will consider returning capital to shareholders through buybacks once they reach their target level. There are multiple factors to consider, including a transitional or fully phased-in target and a 25% reduction by July 2025.

The company has been able to increase its capital levels in a short amount of time and is focused on continuing to build. However, they are waiting for finalization of Basel III and CCAR rules before setting specific targets. The net interest income trajectory for the fourth quarter was better than expected, but the impact of RWA mitigation on EPS may be similar to earlier in the year. The company may continue to use methods such as securitization and credit linked notes, but may also have to warehouse more liquidity due to potential LCR rules for regional banks.

The speaker discusses potential changes to LCR and net interest income, and mentions that the bank is confident they will be able to adapt. They also congratulate the speaker on the release of commitments. The speaker is then asked about the competitive environment for underwriting and compares it to past cycles, but asks another speaker to provide more specific details.

The consumer and small businesses are in good financial shape as they enter this cycle, but there is concern about the impact of the pandemic on commercial real estate office space. The company has increased their reserve for this area and is closely monitoring it, but overall their underwriting standards have not changed significantly. Non-accrual loans, allowance, and delinquencies are all at relatively low levels, but there is an expectation for normalization to continue in 2024.

The speaker, Terry Dolan, believes that delinquencies and nonperforming assets will continue to increase, but the bank is well-prepared with sufficient allowance coverage. The interviewer, Gerard Cassidy, asks about competition from nonbank players and if their actions could impact the banks negatively. Terry responds that both banks and nonbanks are being rational and demand is soft due to cautiousness from corporate America. He also mentions a pullback in commercial real estate. The interviewer then congratulates Andy (presumably the CEO) on a recent release, and asks if there are any implications for the bank.

The speaker discusses the progress made in regards to capital regulations and the hope for rationality from regulators. They then shift the conversation to the normal business and discuss goals for growth in merchant processing and corporate payments.

The executives of U.S. Bancorp discuss the company's performance in merchant processing and their plans to improve it. They mention investments in tech-led initiatives and the business payments ecosystem as key drivers for growth. They also mention the expansion of their capital markets business, which includes loan syndications and debt capital markets.

John Stern discusses how the company is investing in back-end systems and acquiring talent to increase revenues. They have seen growth in high yield and foreign exchange, especially with the addition of Union Bank. They have also gained market share in investment-grade and high yield. On Slide 7, they highlight revenue opportunities, with the credit card opportunity being the highest priority. It is difficult to size the revenue synergies related to the UB deal at this time.

U.S. Bank's payments business is a strength, with a focus on increasing penetration and serving business clients. The bank is still determining the size and timing of its impact. The duration of the securities book is less than 3.5 years, but the burn-down is only 25% through 2025 due to a mix of fixed and floating rate securities. The shape and type of securities will affect the burn-down in future years.

The speaker thanks the participants for joining the earnings call and invites them to contact the Investor Relations department for any further questions. The call is now concluded.

This summary was generated with AI and may contain some inaccuracies.