U.S. Bancorp 2026 Q3 Earnings Call

Bancorp. Thank you, operator, and good morning, everyone.

Today I am 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, our 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 three strategic priorities. Net revenue grew 8.7% year over year. Disciplined productivity drove 240 basis points of positive operating leverage. 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, we 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. Our 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%-10% or more of total company revenue over the next three to five years by focusing on three 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. 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 our reach with small businesses as we onboarded the Amazon co-brand partnership, expanded the Business Essentials suite of products, and established 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 stablecoins 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 USBDC stablecoin 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 remained 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 five basis points to 2.84%.

Credit quality metrics remained healthy across the board. Linked quarter non-performing assets declined 1.6% and net charge-offs declined two basis points to 51 basis points. CET1 ratio remains 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 comprise 36% of earning assets as of quarter end, up from 32% four 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 seven basis points sequentially, with approximately two basis points of impact from the September Fed rate hike. Notably, our total funding costs are up just one 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, an improving earning asset and funding mix, and ongoing benefits from fixed asset repricing. Net interest margin improved five 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 trends within non-interest 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. Non-interest 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 30th, our common equity Tier 1 capital ratio was 10.8%, stable compared to the prior quarter.