U.S. Bank gets boost from lower expenses, keeps a lid on credit issues

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Minneapolis-based U.S. Bancorp reported second-quarter net income totaling $1.62 billion, an 18% increase over the same period in 2023, driven largely by slimmed-down operating expenses.

Chairman and CEO Andy Cecere told analysts Wednesday that the quarter was characterized by "an increase in net interest income, continued fee income growth, prudent expense management, credit quality stabilization and strong capital accretion."

The biggest headwind was a familiar one: the continued migration of noninterest deposits into interest-bearing accounts, a trend that has bedeviled U.S. Bancorp and the banking industry generally over the past year.

At U.S. Bancorp, the noninterest-bearing deposit portfolio shrank by about $1.4 billion during the second quarter. That decline, combined with a 2.2% linked-quarter increase in total deposits, resulted in a $183 million linked-quarter increase in interest expenses.

Chief Financial Officer John Stern said he is hopeful the impact of deposit repricing will be limited in future quarters. "We'll see some more deposit migration going forward, but it should be modest," Stern said Wednesday during a call with analysts.

U.S. Bancorp put its bigger deposit base to work in the quarter that ended June 30, investing funds in "high-quality, shorter-duration securities," which helped lift the overall yield of its bond portfolio by 19 basis points, to 3.15%, Stern said. Income generated by the company's investment securities portfolio totaled $1.3 billion for the second quarter, up about $120 million from the quarter that ended on March 31.

"We had a lot of good growth in deposits, both on the consumer side and the wholesale side," Stern said Wednesday in an interview. "That's just a reflection of operating as a national bank where we have a lot of distribution. Bankers are working hard to ensure deposit growth."

U.S. Bancorp reported a more muted increase in loans. They ended the quarter up $3.6 billion, or 1%, from their March 31 level. Stern attributed the uptick to more credit-card spending by consumers, as well as growth in commercial lending.

Operating expenses, which were the biggest factor in the bank's improved profitability, fell nearly 6% from the end of the first quarter to $4.2 billion. Cecere attributed the expense reduction to a focus on operating efficiency as well as ongoing synergies from the $5.5 billion acquisition of San Francisco-based MUFG Union Bank in December 2022.

The $680.1 billion-asset parent company of U.S. Bank also reported quarterly net charge-offs of $538 million, up slightly on a linked-quarter basis, but down 17% from June 30, 2023.

An increase in troubled office loans pushed nonperforming assets to $1.85 billion, or 0.49% of total loans and leases. A year ago, nonperforming assets totaled $1.1 billion, or 0.29% of loans.

The slow, steady increase in nonperforming loans reflects a normalization of credit quality from pandemic-era lows, according to Stern.

"I would describe the credit environment as stable, it's as expected, and it;s normalized," Stern said in the interview. "We've started to increase losses a little … but it's been at a modest pace. I'll call it stabilized. That's kind of our expectation of losses between here and the end of the year."

On the analyst call, Stern reiterated the bank's previous guidance for net interest income and operating costs, forecasting full-year spread income of $16.1 billion to $16.4 billion, along with noninterest expenses of $16.8 billion or lower. Fee income is expected to end the year up by mid single-digit percentage points, Stern added.

"The quarter looks solid," Scott Siefers, an analyst who covers U.S. Bancorp for Piper Sandler, wrote Wednesday in a research note. "Net interest income inflection was solid, as was stronger-than-peer loan growth."

Alexander Yokum, an analyst at CFRA Research, called U.S. Bancorp's second quarter earnings "a step in the right direction," although he maintained his "hold" rating on shares.

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Investors appeared to embrace Wednesday's report, sending U.S. Bancorp's shares up by more than 4% to $45.22 in mid-afternoon trading. That outcome mirrored the aftermath of second-quarter results earlier this week at Bank of America and PNC Financial Services Group, where investors rewarded those companies for meeting or exceeding their profitability targets.

"I think there's a little bit of an overhang in the banking industry … from last year's events," Stern said in the interview, referring to the demise of three regional banks last spring. "What this quarter has done is put that further in the rearview mirror."

"It's really a reflection of the economy," Stern added. "The economy has been constructive. Spending levels have been high. Losses have been low. The economy has been very resilient.