The U.S. Bancorp First Quarter 2024 Earnings Conference Call began with a formal question-and-answer session and was recorded for replay. Chairman, President and CEO Andy Cecere, Vice Chair and Chief Administration Officer Terry Dolan, and Senior EVP and CFO John Stern were present. Forward-looking statements were made, and the first quarter earnings per share was $0.78, with $0.12 of notable items. Excluding notables, earnings per share was $0.90. The balance sheet remains strong and the company is seeing strong fee growth due to investments in digital, technology, and payments. Capital is also being accrued.

The CET1 ratio and return on tangible common equity ratio for the period were 10.0% and 17.4% respectively. Credit quality metrics and tangible book value per share showed healthy growth. Net interest income was within guidance but impacted by industry loan and deposit growth. The potential for rate cuts in 2024 has changed and may impact NII for the full year, but the bank plans to take actions to mitigate this. Fee income, which makes up 40% of total net revenue, is expected to be a strong source of income in a lower interest rate environment.

The company is pleased with its current trends in client growth and penetration rates, particularly in its fee revenue businesses. They have made progress in expanding their business banking and payments relationships and expect to see even greater opportunities for growth in the future. The quarter's earnings were $0.78 per share, or $0.90 per share after adjusting for notable items. Loan growth was impacted by slow industry demand, but deposits remained stable. Trust and corporate deposits were higher at the end of the first quarter.

The quarter end holiday timing delayed institutional deposit outflows, resulting in higher cash levels. The company is proactively managing its balance sheet and limiting reliance on short-term borrowings. Net interest income and margin declined due to deposit mix shift and pricing pressure. Non-interest income increased year-over-year but decreased on a linked-quarter basis due to seasonal declines and impacts related to exiting a business. Non-interest expense decreased due to cost synergies and operational efficiency. Credit quality performance is highlighted on Slide 13.

The bank's asset quality metrics are in line with expectations, with a 20% increase in non-performing assets due to stress in the commercial real estate office portfolio and one commercial loan. The net charge-off ratio increased slightly and the allowance for credit losses is at $7.9 billion. The Common Equity Tier 1 ratio increased by 10 basis points from the previous quarter. The bank expects stable net interest income in the second quarter and mid-single-digit growth in non-interest income for the full year. However, due to pressure on net interest income, the bank is reducing its expense guidance for the year.

The company has been preparing for various economic scenarios and continues to deliver strong returns despite industry challenges. Their diverse business mix and investments in digital capabilities, technology, and payments have helped them differentiate in the market. They are confident in their ability to navigate current challenges and are well-positioned for the future. The company's talented employees are recognized for their contributions and the company remains focused on achieving its growth objectives. During the Q&A, the company discusses the pressure on net interest income and explains that it is primarily due to lower loan growth and the impact of higher interest rates on deposit costs. They do not anticipate significant additional pressure in the second half of the year.

The speaker is responding to a question about the decrease in net interest income for 2024. They explain that the decrease is due to changes in the economy, interest rates, and client behavior. They expect net interest income to be stable in the second quarter and to see growth in the second half of the year. They are also taking action to improve efficiency in this environment.

The company has benefited from cost savings and is focusing on further efficiencies in areas like procurement and operations. They are also making investments in technology to improve effectiveness and efficiency. The securities yield was relatively flat, but there was a surge in non-interest-bearing deposits at the end of the quarter. The company expects the typical churn in asset repricing to continue in the future.

The speaker discusses the anomaly of a surge in deposits at the end of the quarter, which they believe is temporary. They expect the non-interest bearing mix to continue to trend down and anticipate mid-single-digit growth in fee revenues, particularly in the capital market space. They are pleased with the quarter one results and see progress in Union and consumer spending metrics.

The speaker discusses the strong performance of the company's fixed-income capital markets and mortgage divisions, as well as the success of their Payments business. The company is focused on achieving higher returns and is confident in their fee outlook. The speaker also mentions that there was one idiosyncratic commercial charge-off, but overall credit trends are strong and they expect net charge-offs to remain in the mid-50s range for the year. Non-performing assets have ticked up due to commercial real estate office space.

The speaker discusses the growth rate for the rest of the year, which is expected to moderate. They mention that the commercial real estate office space has been reserved for and will not have a significant impact on the P&L. The charge-off rate for credit cards is expected to increase in the second quarter but then decrease for the full year. The overall company is expected to have a charge-off rate of mid-50s to 60 basis points. The speaker also mentions the importance of looking at efficiencies in the current environment.

The company is focused on operational efficiencies and flexing where there are opportunities for improvement. They have centralized operations and are looking at ways to reduce spending. However, they are still investing in their products and services, which is helping with future efficiencies. There has been a shift in corporate deposits from NIB to IB, possibly due to clients optimizing their balance sheets in a higher-rate environment. This could potentially lead to an increase in fee lines for treasury services.

The mix-shift trend is slowing and compensating balances are being evaluated on a case-by-case basis. Treasury services may see a slight increase in growth due to changes in payment methods. Clients are staying on the balance sheet instead of going off to money market funds. The company is focused on serving clients and navigating the current rate environment. The organization is currently neutral in terms of asset sensitivity and has taken precautions to manage risk in an uncertain rate environment.

The speaker, Andrew Cecere, is responding to a question about the fee side of the business. He explains that the overall growth rate in payments was 4% and they are aiming for upper-single digits. Corporate was down year-over-year and the rate in merchants slowed, but they expect the trajectory to improve going forward.

In this paragraph, the speaker discusses the performance of various categories within the company. They note that travel was down, but other categories showed strong growth due to tech-led initiatives. The corporate payment side was negative due to lapping the previous year's freight weight, but they expect strong momentum in the future. The card side showed strong fee growth and good trends in payment rates and spend. The speaker also mentions that corporate services and mortgage did well, with gains on sale being sustainable despite a slower market.

In this paragraph, the speaker discusses the current state of net interest income and addresses questions about the decline in volumes and spreads. They clarify that the situation is temporary and expect it to improve in the second quarter and continue to grow in the second half of 2024. They also mention that they see potential for growth in 2025, but are not providing a specific guide due to the volatility of interest rates. The speaker also mentions the savings from the Union Bank acquisition and how it will impact expenses.

During a recent conference call, the CEO of Bancorp discussed the company's strong revenue growth in business banking and its efforts to control expenses. However, the company's efficiency ratio has increased and is now above 60%, which the CEO attributes to industry-wide headwinds on margin. He also mentioned the company's diverse fee categories, such as payments and corporate trust, which help drive fee revenue. The CEO expects to see continued deposit growth, but notes that the surge at the end of the quarter may have been influenced by seasonal factors. He also mentioned a shifting competitive landscape in terms of deposit mix and pricing.

John Stern, responding to a question about competitive dynamics in the loan market, explains that the bank is seeing more impact on the deposit side, particularly in terms of mix and rates. However, they are still experiencing growth on the commercial side and have been competitive in the retail market. He also mentions a surge in deposits at the end of the quarter, likely due to tax season, and clarifies that the bank's expense efforts are reflected in their updated expense outlook for the year.

In response to a question about the potential for a lower net interest income, Andrew Cecere, the CEO of the company, explains that their efforts are reflected in the guidance and they have brought it down to $200 million. He adds that they could pull additional levers but it is already factored in. When asked about his comment that net interest income is expected to increase in the second half of 2024, Cecere and John Stern, the CFO, mention that it will be driven by the stabilization of deposit flows, repricing of loans, and churn in the securities portfolio. They also mention that they have taken actions to enhance return on equity and are looking at capital-efficient ways to grow. They clarify that the hedge they did this quarter was an anomaly.

The speaker asks for clarification on a technical difficulty that occurred and its ongoing impact. The speaker then asks about changes made to maintain a neutral asset sensitivity and the increase in the CET1 ratio to 10%. The timing of the final proposal for Basel III is uncertain.

The speaker updates on the unrealized securities losses for Category II and III banks, which will be carried through regulatory capital. They are waiting for the Basel III endgame and CCAR results before making any declarations on capital ratios. They are currently focused on building capital and prioritizing dividends and investing in the company. They are pausing on share repurchases for now. The Union Bank acquisition is fully integrated and their focus has been on that. They are considering de novo expansion, including in the Charlotte area.

The company is focused on building its core customer base and deepening relationships with existing customers through various mechanisms such as the branch system and partnerships. They believe there is a significant profit differential between customers with only a loan relationship versus those with multiple products.

Matt O'Connor asks Andrew Cecere about the bank's net interest margin and if there are any medium-term targets. Cecere explains that the NIM will track net interest income and can be affected by factors such as asset churn, deposit costs, and liquidity mix. They do not have a specific target for NIM, but are focused on net interest income. O'Connor also asks about any potential impact from swaps, to which Cecere responds that they are actively hedging their investment portfolio and currently have over a third of their risk hedged.

The company has been adding receive fixed swaps to protect against downside risk as the curve has flattened and interest rates have risen. This has resulted in a neutral interest rate risk position. There is modest reacceleration of net interest income expected in the second half of the year, with a slow deposit beta and potential for further decreases in non-interest bearing deposits. The company will remain competitive in deposit rates, but overall, the low 50s is a reasonable estimate for the deposit beta going forward.

John Stern, speaking on behalf of the company, has provided some updates on the non-interest bearing deposits and the total liability or total deposits. He mentions that the non-interest bearing deposits are currently at around 17%, but could potentially decrease a couple of points in the future due to customers becoming more efficient. In terms of the deposit surge, Stern clarifies that the surge this quarter was about $20 billion, with $10 billion being above the normal surge seen in this quarter. When asked about the lowered guidance for NII, Stern explains that the company is neutral to shocks in interest rates, but the pace of rotation is slowing down more than expected.

In this paragraph, John Stern, a representative from a financial institution, discusses the current state of rate shocks and fixed asset repricing. He mentions that while they feel good from a neutral standpoint, there is a behavioral aspect at play. When asked about the amount of fixed assets that will be priced by the end of next year, Stern explains that about half of their loan book is fixed rate and the other half is floating rate, and they are seeing some improvement in the floating rate components. He also mentions that loan spreads are widening due to different market conditions and access to capital markets.

During the earnings call, John Stern answered a question from Ebrahim Poonawala about the surge deposits and their impact on non-interest bearing (NIB) balances. He clarified that the surge could be a mix of both money market and NIB deposits, but it is not expected to significantly affect the quarter. He also mentioned that while there may not be growth in demand deposit accounts (DDA), overall deposits are expected to remain stable. Ebrahim also asked about the conservatism in the NII outlook, to which Stern responded that the range provided is based on the uncertainty in the market. The call then ended with no further questions.

The paragraph states that if there are any additional questions, the Investor Relations department can be contacted. The operator then concludes the conference call and participants are free to disconnect.

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