U.S. Bancorp (USB) Earnings Call Transcript & Summary

Welcome to the U.S. Bancorp Third Quarter 2026 Earnings Conference Call. [Operator Instructions] This call will be recorded and available for replay beginning today at approximately 10 a.m. Central Time. I will now turn the conference call over to Brian Mauney, Director of Investor Relations for U.S. Bancorp.

Thank you operator, and good morning, everyone. Today, I'm joined by our Chairman and Chief Executive Officer, Gunjan Kedia; and Vice Chair and Chief Financial Officer, John Stern. In a moment, Gunjan and John will be referencing a slide presentation together with their prepared remarks. A copy of the presentation or press release and supplemental analyst schedules can be found on our website at ir.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 earnings presentation, our press release and reports on file with the SEC. Following our prepared remarks, Gunjan and John will be happy to take any questions that you have. I will now turn the call over to Gunjan.

Thank you, Brian. Good morning, everyone. Beginning on Slide 3. We delivered another strong quarter, highlighted by record net revenue of approximately $8 billion and diluted earnings per share of $1.34, up approximately 10% from a year ago. Results in the quarter reflect strong execution against our 3 strategic priorities. Net revenue grew 8.7% year-over-year; disciplined productivity drove 240 basis points of positive operating leverage; and in payments, our transformation efforts continued to gain traction with total payments revenue growing 6.5% year-over-year. Turning to Slide 4. Fees continued to grow nicely and contributed 44% of total revenue again this quarter. Our fee complex is diversified and deepens client relationships generates attractive returns and contributes to a more balanced earnings profile. While fee growth does come with higher expenses, productivity initiatives including from our AI programs helped improve our efficiency ratio and increased return on average assets year-over-year. On Slide 5, the Spotlight Global Capital Markets an attractive growth opportunity across a range of economic scenarios. We closed the BTIG acquisition in June, and it contributed $226 million of fee revenue in the third quarter. The combined businesses are off to a wonderful start and already working very closely together to broaden how we serve our clients. We expect capital markets to grow from 8% to 10% or more of total company revenue over the next 3 to 5 years by focusing on 3 strategies. One, continue to drive robust core organic growth across both franchises in line with their historical performance. Second, deepen wallet share with our clients where we deploy significant balance sheet resources. The addition of BTIG strengthens our ability to serve a broader range of needs and capture greater fee revenue over time. And third, by adding product capabilities across both platforms. We look forward to sharing more on our capital market strategy at a conference later this fall and are committed to providing more disclosures in due course as the business becomes a larger part of our revenue mix. With fees and expenses in a healthy place. This year, we have increasingly turned our attention to strengthening net interest income and margin. an important lever of this growth is expanding our consumer and small business franchise, which provides a highly attractive source of funding. Slide 6 is a busy chart. It captures our footprint and expansion strategies. We are densifying our branch presence and leveraging client centers that have long supported our national businesses. We are supporting this ground game with targeted brand investments including through our NFL partnership and new brand ambassadors, such as Fernando Mendoza, Christian McCaffrey and most recently, Jessica Alba, for our small business segment. Turning to Slide 7, we highlight small business banking. We serve more than 2 million small businesses through a scaled interconnected platform that contributes meaningfully to company revenue and is an invaluable source of stable, well-priced deposits. Over the past several years, we have built a unique foundation of banking, payments and cash management capabilities. This quarter, we launched several major initiatives to expand their reach with small businesses as we onboarded the Amazon co-brand partnership expanded the Business Essentials suite of products and establish new banking teams in expansion markets. We have a truly differentiated set of products and an enviable client footprint with small business, and this segment will be an important priority going into 2027. Finally, on Slide 8, I want to spend a moment on corporate payments and treasury management. which together represent approximately 6% of our company revenues. The corporate payments landscape has the potential to be transformed by the growing convergence of treasury management rails like ACH and wires, card rails and new stable coins and tokenized deposits. These businesses have delivered a strong quarter benefiting from market share gains as well as tailwinds from fuel price increases in our fleet and freight businesses. Earlier this quarter, we launched our first USB DC stable corn pilot. While these trends are emerging, we are uniquely positioned to succeed in corporate payments, and we are investing to create interoperability across these rails to deliver both the benefits of new technologies and the safety and soundness of the banking system. Let me now turn it over to John.

Thanks, Gunjan, and good morning, everyone. Third quarter results reflected another strong quarter and demonstrated continued execution against our strategic priorities, generating meaningful revenue growth and significant positive operating leverage. Results remain firmly within all of our medium-term target ranges. If you turn to Slide 9, we provide highlights for the third quarter. We reported earnings per common share of $1.34, with approximately $0.07 impact from reserve build this quarter. This equates to 10% year-over-year EPS growth or 16% excluding the reserve build. Revenue was a record $8 billion, up 8.7% from a year ago or up 6.4% adjusting for BTIG and securities losses. Meanwhile, expenses grew 7.1% year-over-year or 2.0% excluding BTIG, implying 440 basis points of positive operating leverage, excluding BTIG. Balance sheet trends remain constructive. Loans grew 1.0% and deposits grew 2.2% sequentially, while the net interest margin expanded 5 basis points to 2.84%. Credit quality metrics remained healthy across the board. Linked quarter nonperforming assets declined 1.6%, and net charge-offs declined 2 basis points to 51 basis points. CET1 ratio remained stable at 10.8% and tangible book value per share was up 5.4% year-over-year. Slide 10 provides our key performance metrics. Our profitability metrics continued to move up and to the right, while our efficiency ratio improved toward the better end of our medium-term target range. Slide 11 provides a summary of our loan and earning asset mix evolution. Average loans grew 8.0% year-over-year and 1.0% sequentially. Versus the prior year, growth continues to be driven by C&I, credit card and commercial real estate, categories that typically deepen relationships and deliver incremental fee opportunities. The Amazon small business credit card portfolio contributed approximately $900 million and $1.7 billion to the third quarter average and period end loans, respectively. Importantly, our focus in these loan growth areas is naturally positioning our balance sheet to become more asset sensitive. For example, floating rate loans comprised 36% of earning assets as of quarter end, up from 32% 4 years ago. Slide 12 provides a summary of our deposits and funding mix. Total average deposits grew 2.9% year-over-year and 2.2% sequentially. Growth was driven by another record quarter of consumer deposits, along with strong growth in relationship-based deposits in businesses like investment services. Importantly, we achieved growth while staying disciplined with respect to pricing. Deposit costs increased 7 basis points sequentially, with approximately 2 basis points of impact from the September Fed rate hike. Notably, our total funding costs are up just 1 basis point quarter-over-quarter as our funding mix continues to improve. Turning to Slide 13. Net interest income on a fully taxable equivalent basis increased 5.6% year-over-year and 2.3% linked quarter. The increase was driven by continued relationship-based loan and deposit growth and improving earning asset and funding mix and ongoing benefits from fixed asset repricing. Net interest margin improved 5 basis points sequentially to 2.84%, driven by improving loan yields and fixed asset repricing benefits. We currently expect net interest margin to increase by a similar amount in the fourth quarter. Slide 14 highlights fee revenue trend within noninterest income. Total fee income increased 14.9% year-over-year, with broad-based strength across most fee categories. Capital Markets growth of 69% year-over-year reflects a full quarter contribution from BTIG and approximately 10% growth across legacy capital markets. Moving to Slide 15. Noninterest expense increased 7.1% versus the prior year reflecting BTIG and continued investment in growth initiatives, marketing, technology as well as compensation associated with the strong revenue generation for this quarter. These increases were partially offset by ongoing expense discipline across the bank. Slide 16 highlights the broad-based favorable trends we are seeing in credit quality. On the right side of the page, we highlight the longer-term evolution of our credit card portfolio. Card balances have increased at a brisk pace in recent years as our payments transformation takes hold. At the same time, FICO bands have marginally improved and net charge-offs and delinquencies have trended lower. In short, we are growing the portfolio without compromising on underwriting standards. Turning to capital on Slide 17. As of September 30, our common equity Tier 1 capital ratio was 10.8%, stable compared to the prior quarter. Adjusting for AOCI, the CET1 ratio declined 30 basis points to 9.1%. On Slide 18, we break out the components that drove the sequential changes in the AOCI adjusted CET1 and tangible common equity ratios this quarter. As it pertains to the adjusted CET1 ratio, strong earnings generation, net of dividends, added approximately 30 basis points of capital. This is offset by $12 billion of risk-weighted asset growth associated with heavy loan demand in the quarter and impact from our recently onboarded strategic business partnership. Additionally, the significant increase in treasury rates and widening credit spreads during the third quarter impacted the ratio by an additional 40 basis points. Conversely, the tangible common equity ratio remained stable at 6.6% at quarter end. Strong earnings growth and lower ending assets offset the AOCI drag from higher rates. Despite a sharp move in rates this quarter, we maintained healthy capital levels and continue to have flexibility in how we manage the balance sheet. We expect our capital ratios to build from here, positioning us to resume share repurchases over the next quarter or 2. Turning to forward-looking guidance on Slide 19 for the fourth quarter and full year 2026. For the fourth quarter, on a year-over-year basis, we expect net interest income growth of 6% to 7% on a fully taxable equivalent basis. Total fee revenue growth in the range of 13% to 14% with roughly half of the growth coming from BTIG and noninterest expense growth of approximately 8% or closer to 4%, excluding BTIG. For the full year 2026, we now expect total net revenue growth of 8% to 9% compared to the prior year or 6% to 7%, excluding BTIG. This has improved from our prior guidance range of 5% to 7%. We now expect to deliver approximately 300 basis points of positive operating leverage for the full year or approximately 400 basis points, excluding the impact from BTIG. This is up from prior guidance of 200 and 300 basis points, respectively. Moving to Slide 20. This was another strong quarter for us, reflecting continued execution comfortably within all of our medium-term target ranges. We continue to see momentum across our business, which gives us confidence in our ability to build on these results and deliver consistent, sustainable returns over time. Let me now hand it back to Gunjan for closing remarks.

Thank you, John. As we look to the end of 2026, we are executing well against the strategic priorities we outlined at the beginning of the year and seeing that progress translate into stronger performance across the bank. Our diversified business mix, customer-centric approach and disciplined execution position us to deliver attractive returns and long-term shareholder value. With that, we'll now open the call for your questions.

[Operator Instructions] Your first question comes from the line of John McDonald from Truist Securities.

Gunjan mentioned the increased focus on growing net interest income and strengthening the margin. John, could you unpack some of the drivers of your NII outlook from here, including what you see ahead for loan growth and deposit trends?

Sure. We're going to see similar themes in the fourth quarter that we just saw in the third quarter. Loans have been strong, and they remain strong from a pipeline standpoint. So we expect similar type growth there. Of course, as a reminder, included in that, we have the Amazon small card book that we get the full quarter impact as well. Deposits are performing well. We continue to see nice growth in our consumer franchise as well as small business, and we see new trends there. And then in terms of the net interest margin, we've made the comment that margins should increase by a similar amount this next quarter, and that's going to be just aided by the funding and asset mix that we have. that is improving as we've been talking about. So there's a lot of momentum that we have, and that's going to be -- that's reflected in our guide and what we discussed.

And just to follow up on that, in terms of the net interest margin drivers, could you give us a little feel for how rates -- rising rates impact it, maybe an update on fixed asset reprice and your deposit beta assumptions.

Sure. So we aim to be as neutral as we can be from an interest rate risk perspective. However, given this environment, we have been shifting more into asset sensitivity. And you're starting to see that come through. In terms of loans, we've been shifting more into C&I, commercial real estate and card, all predominantly floating rate assets, as you know. And then in the investment portfolio, that has been coming down and we've been doing more in cash. So we have been shifting there a bit. In terms of -- I think you asked about fixed asset repricing, I would say there that we continue to see about $10 billion or so of per quarter of fixed rate assets that reprice whether that's in the securities book or in the loan book, and that's coming on probably at about 125 basis point improvement or so that's improved a little bit just because of the backup in rates as we've seen. And then finally, you asked about deposit betas. We think that betas pick up right where they left off from the last rate hike. So we're assuming about a 50% or so deposit beta to start out with and likely to continue as we see a couple of hikes kind of coming up in our forecast. So those are kind of the main points.

Your next question comes from the line of Scott Siefers from TD Cowen.

As first one, just sort of a top level it's ended up being a much better year. I think we knew it was going to be a good year from the standpoint of positive operating leverage. It looks like it's coming in even better than expected. I guess as you think about things looking ahead, maybe just sort of top-level thoughts on balance between profitability improvement, investment, just sort of top level how you're thinking about those things?

Yes. Sure, Scott. Yes, I mean, from our seat, obviously, we had strong growth in revenue, and that has been increasing and gaining momentum as the years come on. And so that's going to be the fundamental driver for why the increase in operating leverage this year from that 200 basis points now up to 300 basis points. We obviously have been onboarding a lot of revenue with the Amazon card book. and BTIG coming online. That's north of $1 billion of revenue we've onboarded. And we signaled this at the beginning of the year, we said that operating leverage, we wanted to be more of a driver from revenue growth because we know we can manage the expense side. We have a lot of levers to do that. So as we look forward, and we're early in the budget process, so we're not giving any guidance, but we anticipate operating leverage next year just kind of given similar drivers that we're seeing this year.

And Scott, I would just add that we have runway on productivity initiatives. As you know, we have materially invested in our digital capabilities over 5 years. And that just delivers ongoing productivity, and we continue to be very intentional about how much we spend on technology investments. So all in all, I would say it's not a trade-off. We don't think about operating leverage for shareholders or investing into the business. The business model is capable of generating both of them in balance.

Perfect. Okay. And then, John, just maybe on the repurchase comment, there's been a lot of focus following just sort of the pause that you disclosed a month or so ago. It sounds like you'll restart either this quarter or next quarter. Maybe just thoughts on kind of the main factors you're thinking of -- thinking of as you anticipate returning to repurchase and maybe just sort of the balance between common equity Tier 1 build, TCE considerations, et cetera?

Sure. Yes. So maybe just to recap, the third quarter had a lot of unique events in it for us. We had strong loan growth. We obviously had the Amazon book that added some capital demands and then obviously, the large rate move, which we all saw, of course. But given our unique position and just our prudent nature, we decided to pause, but we have a high degree of confidence in our ability to generate capital. I mean this quarter, after dividend distribution, we generated 33 basis points of capital. So we know we can build that back very quickly. I would just say what we're looking for this quarter is we're looking at loan demand? Where does that actually end up shaking out? Obviously, we believe that there will be growth, as I have mentioned in a previous comment, but interest rates, we're watching that very closely. And then obviously, you have the added component of regulation. We anticipate some new rules coming down. So the combination of all that, we are watching that will be the driver of whether it's this quarter or next. But in the meantime, we obviously are very much committed to the 70% to 75% payout from a capital distribution standpoint.

Your next question comes from the line of Manan Gosalia from Morgan Stanley.

I wanted to ask on commercial loan balances. The average loan balances were essentially flat sequentially. And I think utilization rates declined slightly. Can you talk about what you're seeing in terms of underlying corporate borrowing demand given that rates are expected to go up, most of your clients are on the short end of the curve? Is there some reduction in demand overall or in terms of the slowed down this quarter, was any of that related to, I guess, capital levels and the ability to deploy capital given the shift in the long end of the curve?

Sure. Thanks, Manan. What I would say is that the underlying core C&I growth was very healthy and strong. We did have some runoff in some balances related to more in that NDFI space. And some of this is just new deals coming to market didn't hurdle areas, and we've been more thoughtful on that of late. And so that's really the reason that you see the C&I component being pretty flat on a linked quarter basis. We do anticipate that to increase as we look into the fourth quarter. So the pipelines remain robust. And it's in all the areas that we've talked about in terms of food and beverage and energy and technology. Those are obviously very strong demand for loans at this point. So those are kind of the core things I'd say on the C&I line.

I would add that the only place we've seen a little slowdown is commercial real estate and residential mortgage continues to be very muted. But otherwise, C&I loan demand is quite robust and broad based.

Got it. And can you unpack those comments you just made on the capital side a little bit more. So you mentioned the potential for regulators to change the tethering rules and how that might give you some flexibility. So I guess, are you saying that if the 10-year kind of stays where it is, plus you get some more color from the regulators on which way they're taking it that you can stock buybacks as soon as the fourth quarter?

Yes. I mean that's a component. Obviously, we're going to -- we're all anxious for Basel III endgame. We've signaled that, that's about a 5% or so improvement to the RWA, but that's from the proposal. Things can change. So we need to see that. The [indiscernible] comments have been in the news. And so we're watching for that to see if anything comes online in that regard. So those are incremental pieces of information, but also it's going to be rates and RWA/loan growth. I mean those are the 3 main components. And we'll clearly update you. But it's clear. We're going to be -- we'll be starting that back up and we'll glide back up into that 70% to 75% as we just mentioned, we have a high degree of confidence in our capital build.

Your next question comes from the line of Ebrahim Poonawala from Bank of America.

I guess maybe is the first question, the Slide 6 where you have the national footprint. Just talk to us in terms of what the strategy around the client centers is, obviously, you've seen many of your peers announced significant branch expansion in new markets. Is this a precursor to adding a ton of branches? Or is this an indication that you don't see a ton of value adding hundreds of branches and the client centers allows you to achieve and reach the same outcomes? I would love just your strategic sort of thought process behind that?

So I'll just start by saying we do see value in branches, and we do see them as anchoring very high-quality customer relationships. Just to back up a little bit, we had been on a journey for really a decade to transform our branch network from what used to be a lot of small Tier 3 service outlets to more advice hubs with most of our products being represented there. That was the renovation strategy that is finishing up now, and we are beginning to lean into new branches. We have shared that our branch investment has increased from $200 million or thereabouts on average to $300 million, which is what we expect to do going forward. And those will be more new branches. Our first phase of that work is to densify within our own footprint. As you see from the blue dots, we are in a vast territory, and we have real meaningful opportunity to get to 8% to 10% branch share in those markets within our footprint that have high household formats. There, our brand, is already known. We are our operations already established and the return is very high. It is fully our expectation that over time, we will inch out from that footprint to other branches. The client centers on the other hand, are an interim answer that is faster for us to establish national presence. This is not a new strategy. Our commercial teams, our wealth teams, our mortgage teams and our commercial real estate teams have been operating out of our footprint. The Northeast is a big site for capital markets type of businesses as well. And what we have done more recently is to say, small business can also operate out of client centers. So the strategy is both and it's a matter of sequencing.

Got it. So I guess, safe to say over time, those red dots, which feel quite lonely will get accompanied by more blue dots. .

We hope to make them less loan, Ebrahim, yes.

Understood. And just one separate question on the broad-based C&I growth. Obviously, even in the last week, your -- markets are once again questioning the AI CapEx build-out. To the extent you have visibility, just talk to us when you think about broad-based C&I growth, how much of that are you able to see is the second, third derivative of the data center build-out versus just other industries we are seeing growth, which may be less connected to the AI CapEx cycle?

Thanks, Ebrahim. Yes, it's a topic that comes up frequently for us. We are looking to see if there's loose as to how much of growth and credit impact there is related to AI. I mean, obviously, you have adjacent sectors like energy and telecom and things like that, areas that are seeing benefit in loan growth. But then there's other other areas that are more broad-based that are beyond that in terms of retail and food and beverage and insurance and all these other sorts of things. So it is broad-based. And I would actually add on top of that small business with SBA loans and things like that. Just a lot of -- there's a lot of momentum in the business community to want to grow. And so, that is on our mindset right now. And so we're watching for that, but it is a topic we certainly look at.

Your next question comes from the line of John Pancari from Evercore ISI.

If you can maybe unpack a little bit of the trends you're seeing within the fee income space, particularly around treasury management and processing and corporate payments. Just some of the business color that you're seeing in terms of demand as well as kind of as you look going into 2027, what's a good reasonable pace of growth as you continue to emphasize those businesses? And then maybe a similar color around the underlying pipeline that you're seeing in the capital markets side.

Sure. So yes, a couple of things there. So I'll start on the treasury management and corporate payments side. Obviously, you saw some very strong growth on that side of the equation. The -- there's -- obviously, on the corporate payment side, we saw about 19% year-on-year growth. Most of that is new business as well as the spending from corporates and government is up quite a bit from last year at this time. I recall this time last year, there was the impacts of tariffs and all that sort of things. So that -- we've lapped all that, and so there's good growth there. There's a little bit of fuel spend as well in there, but that's -- that's pretty nominal in terms of the growth rate. So we do expect continued growth in the or corporate payments side of the equation. And then the treasury management side is continuing to see nice growth in that mid-single-digit area. It's an important business. We've been making a lot of investments of late. And so we are doing a lot in terms of the payable and digital channels and capabilities. And so going forward, we have high hopes in these 2 areas for sure. On the capital markets side, we continue to see strong growth there into the next quarter. Obviously, we had a very strong growth of 69% or so this quarter. And on the -- and we -- BTIG will continue to be a strong component of that at about $200 million or so. But our core FICC or legacy capital markets led by commodities, foreign exchange and impact finance are really showing some nice growth, and that's going to help us get some more in the double-digit type of growth on a year-over-year basis. So we feel very good about those areas.

Okay. That's helpful. And then on the margin side, just looking for a little bit more color just what you're seeing in terms of competition. Like I heard you on the deposit beta commentary. What do you see there on deposit pricing in terms of market trends and how that's influencing your actions on the deposit side? And then similarly, on the loan side, I know you mentioned little earlier that within the C&I book, a couple of deals didn't hurdle, but you expect to pick up. What are you seeing, I guess, in terms of pressures on spreads and loan pricing on the lending side?

Sure. The answer is going to be pretty boring. We're not seeing a whole lot of change in both deposit and the loan side of the equation from a pricing standpoint. The post hike, the pricing that we are seeing is very consistent with what you would expect. There's nothing out of the ordinary. And I would say, similar on the loan side, there are loan spreads by and large, tend to be pretty stable, and it's competitive, of course, but it's completely -- it's manageable. On the C&I side of the equation, as I just mentioned, some of those things just didn't hurdle. And that -- some of that is a little bit more. We've been more prescriptive with the businesses in terms of making sure that things hurdle. And so it's a little bit of a dial turn for us that, that occurred. But we see broad-based growth in the C&I portfolio.

Your next question comes from the line of Ken Usdin from Autonomous Research.

John, can I just ask you to just walk through a couple of more things on fees. So obviously, the guide implies sequentially lower fees for the fourth quarter, and I know a lot of that is seasonal. Can you just kind of remind us what usually happens in the payment lines does capital markets hold up at the third quarter level? I know you're saying $200 million of BTIG versus $226 million and then can you size the amount of equity gain that were in the other line and what that line should usually look like?

Sure. Yes. So we are -- the fourth quarter from a year-over-year growth standpoint, is going to look a lot like the third quarter with a couple of exceptions, which explains the slightly down growth rate, although it's still very, very strong. Mortgage is going to be impacted by higher rates. And so we anticipate there to be more of a limited or low year-on-year growth, if any. And then other revenue, we did have some gains that were more unique to that this quarter. And so our other revenue tends to be in that $125 million to $150 million range. So we anticipate that to kind of normalize into that. . Other than that, I think things like Corporate Trust continues to be very strong. I talked about capital markets and many of the payments lines. We see strong growth in corporate as well as retail cards. Merchant will probably be still in that 0% area for the next couple of quarters, as we've talked about. And then all the other areas are about as expected. So it's shaping up to be a lot of momentum for us in the fee side of the equation.