A letter to our
shareholders
Over the years, U.S. Bank has built a reputation for being a company that does the right thing, delivers consistent results, and drives value for and earns trust with our various stakeholders. We are keeping our focus on the long term, while managing the short term effectively. We are proud of our proven record of responding to the environment and ensuring that our actions keep us on the right track for long-term success.
That commitment to being both responsive and proactive was on full display throughout 2023.
Optimism and confidence were high heading into the new year, on the heels of regulatory approval for and the closing of our Union Bank transaction. Much of our early planning for 2023 focused on integration and conversion, and refining efforts we had introduced the prior year as we accelerated our growth efforts.
That focus shifted quickly, however, when the crisis of confidence in the banking industry that began with the failure of Silicon Valley Bank demanded our primary attention. The implications stemming from that catalyst drove refinements to our strategic priorities, focusing our attention on client needs, a heightened regulatory environment, and increased expectations within the industry around capital and liquidity requirements. More than ever, setting a clear direction for where, when and how we would grow profitability while strengthening our balance sheet and enabling and safeguarding our customers was important.
Our strategic priorities evolved to keep pace with the changes in the external environment. This kind of reflection always requires a certain level of give-and-take. We paused some efforts and accelerated others. We put more energy into areas of the business that provided near-term results given current customer needs, and we pulled back – temporarily – on others that were more capital-intensive or with a longer runway for return on investment. We pushed our teams for prudent expense management and optimization.
Leading us through this time was a strong management team, fortified by a succession plan that we enacted as it was needed. Early in 2023, for instance, we announced several leadership changes given the retirements of three of our Managing Committee members. This afforded us the opportunity to elevate new leaders to our executive leadership team, enhance the roles others have, and leverage the moment to create synergies within our structure.
As I look back on the year, there are four areas for which I am most proud of our efforts.
Integrating and converting Union Bank
One of our biggest initiatives this year was finalizing our Union Bank acquisition, which involved many people across the company as we migrated more than a million customers to our systems and welcomed new employees to our team. This was meaningful for the bank; it was a strategic investment in our future that greatly expanded our reach and scale, and it enhanced our ability to support clients and communities in important ways. We began to deliver the commitments of our multiyear, multibillion dollar Community Benefits Plan. Early indications of the potential to deepen relationships with legacy Union Bank’s loyal, affluent and diversified client base are promising. We expect to realize revenue opportunities in 2024 and beyond, and we remain on track to achieve about $900 million in cost synergies overall.
Demonstrating strength and stability
Like many financial institutions, we needed to demonstrate our strength and stability, the health of our balance sheet, and our ability to manage deposit flows in the wake of the industry stress of early 2023. We did all those things. At the end of 2023 our Common Equity Tier 1 capital ratio was 9.9% – up from 9.7% at the end of the third quarter and 8.4% at the end of last year. This 150 basis point increase demonstrates our ability to accrete capital when needed, and it brings our capital levels above where they were prior to our acquisition of Union Bank.
Consistent with this, the Federal Reserve notified us in October that they granted us full relief from an accelerated Category II commitment made in conjunction with the Union Bank acquisition given our ability to further enhance our balance sheet risk profile and achieve near-term capital actions. As a result, we are now subject to existing capital rules or, if adopted, the same transition rules as all other Category III banks related to enhanced capital requirements under the Basel III proposals.
Growing in capital-efficient ways
We also continued to strategically execute capital-efficient growth opportunities across each of our business lines. We are well positioned with our enhanced earnings profile and diversified business mix to further increase our capital levels, continue our disciplined lending activities, and further strengthen our balance sheet.
A great benefit of our diversified business model is the balance between our spread and fee income businesses that helps us reduce earnings volatility through a business cycle. As a result, we can reinvest in our operations to position us for the future. Within Payments Services, for example, we invested in our digital capabilities, expanded our payments ecosystem and optimized our distribution. This led to further technology-led growth across our merchant processing network.
We also continue to make targeted investments that leverage our scale and strategic marketing positioning across our corporate trust, mortgage banking and capital markets businesses, which should enhance our already strong annualized growth trajectories.
Building relationships and creating new opportunities
Through it all, our team served customers, built relationships and provided the products and services to meet the ever-changing needs of those who relied on us. That took extraordinary effort and a shared belief that we could do great things together. From investment in innovation and new capabilities, to the basics of doing business right, this cross-company focus helped us bring the best of the whole bank to clients to help them meet their financial needs. I would be remiss if I did not take this opportunity to thank our more than 70,000 employees for their dedication to supporting the needs of our clients, communities and shareholders.
Looking ahead into 2024, we expect near-term industry uncertainty, but we believe the groundwork we have laid will help us navigate it effectively. We have a strong business profile and position, which will enable us to be confident in the decisions we make and actions we will take. It is likely that there will be strong deposit competition. We anticipate new regulatory requirements related to increased capital to impact return profiles for us and other financial institutions, but we expect our approach to capital management and operating discipline will serve us well – and position us to be able to move quickly.
We will rely on our advantages to carry us forward. Our ready, willing and able team. Our diversified business mix. Our focus on leveraging our businesses holistically through the cycle for the benefit of our customers and to create value for our shareholders. Our ability to overcome challenging environments with strength and stability – and more.
We are proud of the position we are in, the trust we have earned, and the opportunity we have to move confidently into a future that is as dynamic as the environment in which we operate. Thank you for your investment in our company. We appreciate your belief and your support.
Sincerely,
Andy Cecere
U.S. Bancorp
