Earnings Call Transcript
US BANCORP DE (USB)
Earnings Call Transcript - USB Q4 2023
Operator, Operator
Hello, and welcome to the U.S. Bancorp Fourth Quarter 2023 Earnings Conference Call. After we go over the results, there will be a formal question-and-answer session. This call will be recorded and available for replay starting today at approximately 8 a.m. Central Time. I will now hand the call over to George Andersen, Senior Vice President and Director of Investor Relations for U.S. Bancorp. Please proceed.
George Andersen, Senior VP and Director of Investor Relations
Thank you, Sarah, and good morning, everyone. Today, I'm joined by our Chairman, President and Chief Executive Officer, Andy Cecere; our Vice Chair and Chief Administration Officer, Terry Dolan; and our Senior Executive Vice President and Chief Financial Officer, John Stern. With their prepared remarks, Andy and John will be referencing a slide presentation. A copy of the presentation as well as our earnings release and supplemental analyst schedules are available on our website at 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 presentation, our earnings release, our Form 10-K and its subsequent reports on file with the Securities and Exchange Commission. Following our prepared remarks, Andy, Terry and John will take any questions that you have. I will now turn the call over to Andy.
Andy Cecere, CEO
Thanks, George. Good morning, everyone, and thanks for joining our call. I'll begin on Slide 3. In the fourth quarter, we reported earnings per share of $0.49, which included $0.50 per share of notable items that John will discuss in more detail. Excluding these notable items, earnings per share totaled $0.99 in the fourth quarter. For the fourth quarter, on an adjusted basis, net revenue totaled $6.9 billion, and for the full year, we generated record net revenue of $28.3 billion. We demonstrated strength across our fee businesses, which helped to offset pressure on net interest income. Turning to Slide 4. Total loans were lower on a linked-quarter basis by 1.1%, reflecting slower demand, particularly in corporate lending and continued focus on lending opportunities that meet our return hurdles. Average deposits declined compared with the third quarter as our strong funding position allowed us to be more disciplined on deposit pricing while maintaining our liquidity profile. Credit quality continued to normalize towards pre-pandemic levels this quarter, and we further strengthened the balance sheet by adding $49 million to our loan loss reserve. As of December 31, tangible book value per share increased 14.7% from a year ago, and our common equity tier 1 capital ratio ended the year at 9.9%, an increase of 20 basis points this quarter. This ratio is 150 basis points higher than when we completed the acquisition of Union Bank in the fourth quarter of 2022. Supported by a strong capital accretion this year, the Board approved an increase to our quarterly common dividend in December to $0.49 per common share. Slide 5 provides key performance metrics. On an adjusted basis, we delivered 19.6% return on tangible common equity in the fourth quarter and 21.7% return on tangible common equity for the full year. Let me now turn the call over to John, who will provide more details on the quarter as well as forward-looking guidance.
John Stern, CFO
Thanks, Andy. Turning to Slide 6, we reported diluted earnings per share of $0.49 for the quarter, or $0.99 per share after adjusting for notable items. Notable items totaled $1.1 billion on a pre-tax basis or $780 million net of tax, representing a $0.50 reduction per diluted common share, including an FDIC special assessment charge of $734 million, offset by a benefit from tax settlements in the quarter. Other notable items this quarter included, merger and integration costs of $171 million, a charitable contribution to fund our community benefits plan of $110 million, and a balance sheet optimization charge of $118 million. This quarter, we opportunistically restructured a portion of our investment securities portfolio, which we expect will enhance our net interest income trajectory, while also strengthening our capital and liquidity positioning. Slide 7 provides a more detailed earnings summary for the quarter. Turning to Slide 8, we continue to manage the balance sheet prudently as we saw reduced loan demand this quarter and the competition for deposits remained heightened as system-wide liquidity declined. Total assets ended the year at $663 billion. Average loans declined 1.1% on a linked-quarter basis, as growth in credit card loans supported by consumer spending and low payment rates was more than offset by weaker commercial loan demand. Average deposits declined 1.9% linked quarter. Given our strong deposit balances in the third quarter, we moderated our deposit pricing somewhat in the fourth quarter even as we grew consumer deposits by 1%. During the quarter, we rebalanced a portion of our securities portfolio, which provided risk-weighted asset relief and improved our overall earnings trajectory. The average yield on total investment securities portfolio increased to 2.97% for the fourth quarter, a 55 basis point increase compared to a year earlier. As of December 31, the ending balance on the total investment securities portfolio was $161 billion. During the quarter, effective duration on the available for sale portfolio declined to less than three years as unrealized losses, net of tax, improved by approximately $2 billion given the movement in rates and repositioning. Turning to Slide 9, net interest income on a fully-taxable equivalent basis declined 3.0% linked quarter, driven by a modest decline in the net interest margin of 2.78%. The 3 basis point decline in the net interest margin reflected market dynamics including deposit pricing pressure and unfavorable shifts in the deposit mix, partially offset by better earning asset spreads and improved total funding mix. In the first quarter of 2024, we expect net interest income on a fully-taxable equivalent basis to be in the range of $4.0 billion to $4.1 billion. For the full year 2024, we expect net interest income on a fully-taxable equivalent basis to be consistent with our annualized fourth quarter 2023 net interest income level of approximately $4.14 billion to up slightly. Slide 10 highlights trends in noninterest income. Noninterest income, as adjusted, increased 12.1% on a year-over-year basis, driven by new account growth and deepening relationships across the business. Year-over-year payment service revenue benefited by continued strength in consumer and business spending activities, while increases in trust and investment management fees and commercial product revenue were driven by underlying market activity, a full fourth quarter with Union Bank, and core growth. Turning to Slide 11, noninterest expenses, as adjusted, decreased by 1.0% on a linked-quarter basis, driven by lower compensation-related expense that was partially offset by strategic investments in marketing and business development. Slide 12 highlights our credit quality performance. Asset quality metrics trended in-line with expectations, and key metrics continue to normalize toward pre-pandemic levels. Our ratio of non-performing assets to loans and other real estate was 0.40% at December 31 compared with 0.35% at September 30 and 0.26% a year ago. The fourth quarter net charge-off ratio of 0.49% increased 5 basis points from a third quarter level of 0.44% and was higher than a fourth quarter 2022 level of 0.23%, as adjusted. Turning to Slide 13, we increased our common equity tier 1 ratio to 9.9% as of December 31. The combination of earnings accretion, net of distributions, and balance sheet optimization actions resulted in a 20 basis point increase linked quarter. Balance sheet optimization activities continue to have a low to neutral impact on earnings and provided additional risk transfer benefits. As we move into 2024, we expect earnings to be the primary driver of capital accretion with limited reliance on balance sheet capital-related actions. As of December 31, 2023, our common equity tier 1 capital ratio remains above our regulatory capital minimum by 290 basis points. Let me now hand it back to Andy for closing remarks.
Andy Cecere, CEO
Thanks, John. I'll end my prepared comments on Slide 14. 2023 was a turbulent year for the industry. However, we achieved a great deal, including our successful conversion of Union Bank in late May and the realization of $900 million in run rate cost synergies related to Union Bank by year-end as we had targeted. Additionally, we accomplished our goal of accelerating the accretion of CET1 capital and received full relief from Category II commitments we made in conjunction with the Union Bank transaction. Entering 2024, we are positioned to continue to deliver industry-leading returns on tangible common equity, are appropriately reserved for macroeconomic uncertainties, and remain confident in our strategy for future growth and expansion. We are seeing positive momentum across our fee-based businesses as we deepen our most profitable client relationships and continue to target flat expense growth in 2024 even as we strategically invest in key areas and further execute on revenue growth opportunities with Union Bank. Let me close by thanking our employees for their continued dedication to supporting the needs of our clients, communities, and shareholders in what was a meaningful year for the company. We'll now open up the call for Q&A.
Operator, Operator
Thank you. Your first question comes from Scott Siefers with Piper Sandler. Please go ahead.
Scott Siefers, Analyst
Thanks, everybody. Good morning.
Andy Cecere, CEO
Good morning, Scott.
John Stern, CFO
Good morning.
Scott Siefers, Analyst
Hey. John, I was hoping you could maybe provide a little more context around the NII thoughts for the full year. It sounds like if I did the math correctly, we're expecting somewhere between $16.5 billion and $16.6 billion for the full year. Maybe just some thoughts on how the margin and NII should trajectory. I would presume maybe a little more downward pressure on NII given day count in the first quarter, but does it trough there and then sort of grow throughout the year, or would there be other factors that would cause NII maybe to bleed through, say, middle of the year and then start to inflect back up or maybe just any thoughts there?
John Stern, CFO
Sure. Good morning, Scott. Thank you. To reiterate what was mentioned, in the first quarter, we expect net interest income to be between $4.0 billion and $4.1 billion. For the full year in 2024, we anticipate it will align closely with the annualized fourth quarter figure of $4.14 billion, with a slight increase. We're using the fourth quarter actuals as a starting point since our balance sheet has completed all capital actions that occurred during the 2023 calendar year. We believe that the transition from demand deposits and low-cost deposits to higher-cost deposits will ease over time. By the end of this quarter, we will be nine months past the last Fed hike. We're also seeing improvements in loan spreads across various categories, particularly in commercial lending. Our loan and investment portfolio is experiencing asset churn, and our loan pipelines have strengthened this quarter, performing better than the previous couple of quarters. We expect that loan demand will improve as the Fed may enter a cutting mode over time. Conversely, deposit pricing will remain competitive, especially with quantitative tightening occurring in the background. While our first quarter net interest income projection may be slightly lower than the fourth quarter, these broader factors should support net interest income growth, particularly in the second half of the year.
Scott Siefers, Analyst
Okay. Perfect. Thank you. And then maybe just a quick question on capital. Glad to hear that some of those balance sheet optimization efforts are beginning to sunset. Maybe one, do you have what you all estimate the sort of fully loaded common equity tier 1 ratio to be now and maybe the balance between just building and potentially returning capital going forward?
John Stern, CFO
Yeah. So I mean, right now, as you know, we're at 9.9% on CET1. With the improvement in rates, the impact of the AOCI on the investment portfolio securities is about 2.2 percentage points, and so, you're at 7.7%. As we think about that on a fully-loaded basis. So, if you think about it on a go-forward basis, we're going to create capital in the area of 20 to 25 basis points per quarter. We will have burned down on the securities book of about 30% or so relative to where it is by the end of 2025, just to give you some context. So, all that kind of adds up to building our capital to where we think it needs to be for the appropriate time given regulation and the timing of that.
Scott Siefers, Analyst
Okay. Perfect. All right. Thank you very much.
John Stern, CFO
You bet.
Operator, Operator
Your next question comes from the line of Ebrahim Poonawala of Bank of America. Your line is open.
Ebrahim Poonawala, Analyst
Good morning.
John Stern, CFO
Good morning.
Ebrahim Poonawala, Analyst
John, I wanted to follow up on the NII question. First, can you clarify the rate cut assumptions you have in your NII outlook? Additionally, could you discuss the sensitivity aspect? Are three cuts worse than six cuts? Given that market expectations are likely to change weekly, I'm trying to assess the resilience of your NII outlook in light of potential more or fewer rate cuts.
John Stern, CFO
Sure. Absolutely. In terms of our current projections, we anticipate four interest rate cuts by the Fed starting in the second quarter of this year. However, whether there are two cuts or six cuts will not significantly impact our outlook. We have worked diligently to ensure our net interest income sensitivity is fairly neutral. Therefore, we believe that the number or timing of the rate cuts will not materially affect our outlook.
Ebrahim Poonawala, Analyst
That's helpful. And I have a second question. I'm wondering if you have provided any outlook for fee revenue growth for the year, specifically regarding overall expectations for fee revenues. Additionally, could you share your projections for payments and what you anticipate for the year in that area? Thank you.
John Stern, CFO
Sure. I'll highlight a few points regarding payments and some other fee categories. In terms of merchant processing, we've made significant investments and technological advancements, as well as benefitting from synergies with MUB. We anticipate high-single digit revenue growth in this area. The same expectation applies to corporate payments, driven by growth in travel and entertainment spending and new client acquisitions. On the card side, we have observed substantial margin expansion, fueled in part by MUB and a boost from holiday sales, leading us to expect mid-single digit growth. I also want to mention that we've seen impressive growth in our commercial products, particularly throughout 2023. We forecast high-single digits in that sector, supported by strong performance in foreign exchange, derivatives, fixed income, capital markets, and loan syndication. Additionally, our trust investment management fees should grow due to our institutional service businesses and offerings in Corporate Trust and Fund Services, alongside growth in wealth management fees. However, I should note that we have exited our ATM cash servicing business due to the high capital requirements associated with it. This exit will have an impact of approximately $30 million to $35 million per quarter, starting in the first quarter.
Ebrahim Poonawala, Analyst
Thank you so much.
Operator, Operator
Your next question comes from the line of John Pancari with Evercore ISI. Your line is open.
John Pancari, Analyst
Good morning.
John Stern, CFO
Good morning.
John Pancari, Analyst
Thank you for the guidance you've provided so far. Could you please explain your expectations for loan growth this year, including how you believe it will develop? I'm aware that you're seeing a decrease in demand. Additionally, could you share your thoughts on overall deposit growth and how the mix of noninterest-bearing deposits might evolve from here? Thank you.
John Stern, CFO
Sure. So, a couple of things there. So, I'll start on the loan growth side. I do believe our expectation is that we will see growth in the commercial side. Of course, that was a little bit weaker this last quarter as we experienced pay downs, particularly as clients were accessing capital markets and things of that nature. But we've seen really a good pipeline build in that. We expect utilization to pick up and things of that variety. So, we feel like that, along with credit cards, will be good sources of growth for us, as we think about loan growth going forward. On the deposit side, as a reminder, we'll probably be lower in the first quarter. We seasonally lose deposits just as we kind of go through the year-end process and just given the mix of our businesses, deposits end up being a little bit lower in the first quarter, but then we see more or less stabilization. But there might be some headwind there, particularly depending on QT and how the Fed draining of liquidity out of the system will impact the numbers there. And then, going into your NIB comment, we've seen, of course, rotation out of NIB into other interest-bearing products. That continues but starts to wane as we go throughout the year. And again, as I mentioned, we're going to be nine months by the end of this quarter past the last Fed hike, and that gives us some signal that that will begin to abate.
John Pancari, Analyst
Great. Okay. Thank you for that. And then, I guess, if you could help us just think about how we should think about the magnitude of operating leverage that's reasonable as you look at next year? I know we do have some color on how you're thinking about NII and fees and then put that against your efforts to keep expenses stable, but I guess, could you just maybe frame it the range of operating leverage that you think is reasonable as we look at the next year?
Andy Cecere, CEO
Good morning, John. This is Andy. Let me begin by saying that, as I mentioned in my prepared remarks, we will benefit from the cost efficiencies of the Union deal amounting to $900 million, which is fully accounted for in our run rate starting this quarter. We're realizing these benefits due to the technology, digital, and operational investments we've made, as well as our risk platform. Consequently, these investments are advantageous, and we plan to continue investing in the business, particularly in capabilities related to payments and technology modernization. We are also very focused on managing our expenses. There are still opportunities for greater efficiency in personnel, operations, and technology efforts that will enable us to deliver our services more effectively. As we move toward the second half of the year, I expect to see the margin growth that John discussed, along with fee normalization, which should provide us with opportunities for positive operating leverage. This remains our long-term objective, and we have strategies in place to achieve it.
John Pancari, Analyst
Great. Thanks, Andy.
Andy Cecere, CEO
You bet.
Operator, Operator
Your next question comes from the line of John McDonald with Autonomous Research. Your line is open.
John McDonald, Analyst
Hi, good morning. I was wondering if you could give a little color on what you saw this quarter in credit quality, on the NPA movement, particularly in commercial. And then, also, John, maybe just some thoughts on the potential charge-off trajectory as you see things migrate from NPA into charge-offs this year, what we should be thinking about? Thank you.
Terry Dolan, CAO
Good morning, John. This is Terry Dolan. I'll address your question regarding credit quality, specifically about non-performing assets and observations from the fourth quarter. Overall, the portfolio remains quite stable. We did encounter a couple of unique loans that became non-performing, both of which were related to Union’s legacy credits, and we are continuing to address those. However, I want to emphasize that both loans are well collateralized, so we don’t anticipate significant charge-off risks associated with these unique credits. Looking at net charge-offs and their trend, we expect normalization to persist. The credit card segment is approaching pre-pandemic levels and is likely to increase slightly. For the full year 2024, we expect the net charge-off rate to settle around the mid-50s.
John McDonald, Analyst
Okay. Thanks, Terry. And then, John or Andy, just on the fee revenues, John ticked off on the fee revenues, a number of high-single digit kind of potential growers in '24. How do we think about kind of the ability to grow total fee revenues and what kind of base should we use for that? It looks like maybe the adjusted base for '23 was about $10.8 billion of fee revenues. Is that something you can grow off of that? Just trying to contextualize. Total revenue last year was around $28 billion. How should we think about the ability to grow revenues on fees and maybe total revenues this year?
John Stern, CFO
We had some fee numbers, and we expect growth from a core fee perspective. I've highlighted areas such as payments, commercial products, trust services, and various service charges. However, we anticipate that mortgage fees will remain relatively flat. Additionally, we experienced a spike in the fourth quarter due to tax credit impacts, finance-related syndication fees, and similar factors. Taking all these into account, we expect mid-single-digit growth in fee components for this year.
John McDonald, Analyst
Okay. Kind of a mid-single from that 10.8 adjusted base?
John Stern, CFO
Hmm.
John McDonald, Analyst
Okay. Thank you.
Operator, Operator
Your next question comes from the line of Erika Najarian of UBS. Your line is open.
Erika Najarian, Analyst
Hi, good morning.
Andy Cecere, CEO
Good morning, Erika.
Erika Najarian, Analyst
Good morning. My first question is for you, Andy. Clearly, you went through it in terms of some capital consternation in 2023. And now you're sitting here with 9.9% CET1. No longer have to be a Category II bank early, and all the color that we're getting from Washington is that Basel III endgame will be at least delayed, if not soften significantly. As you think about maybe just one more hurdle ahead over the near term in terms of the DFAST, how are you thinking about where U.S.-based proper CET1 ratio is in terms of the minimum looking forward to a future where maybe capital is a little bit tighter, but you're also growing? And do you feel like you're now on offense and all the sort of the balance sheet management that was designed to optimize capital is fully behind you?
Andy Cecere, CEO
Yeah, Erika, as John mentioned, I think our balance sheet optimization efforts are behind us. Our focus on capital accretion will be from earnings as we go into 2024 and forward. As we talked about, we are at a 9.9% CET1 ratio today. A couple of years ago, our target was between 8.5% and 9%. So, we're above that target. But we're also cognizant of the rules that are coming, both from the perspective of Basel III endgame, which is still uncertain, as you talked about, as well as CCAR and how that will evolve over time. So, we will continue to accrete the 20 to 25. We'll continue to burn down the AOCI. When we get clarity on the capital rules, both Basel III and CCAR, we'll then determine what the proper capital target will be. My expectation is we'll be above the 9% that we were a few years ago. But we'll define that, refine that, and then we'll get into what the math is around buybacks at that time.
Erika Najarian, Analyst
Got it. And one follow-up question for you, John. Thank you for sharing some of the components of the net interest income. I'm just curious, as you mentioned quantitative tightening, are you generally expecting total deposits to decrease even if the shift in the demand deposit account mix lessens? And how quickly do you think the deposit betas on the way down can respond to each Fed rate cut?
John Stern, CFO
Sure. Regarding the first part of your question about quantitative tightening, we expect it to continue throughout the year. This will likely exert pressure on deposit balances for the year, and we don't foresee significant overall growth in deposits. However, we have strategies in place to navigate this situation. While there are discussions on various ways to adjust QT, the outcomes remain uncertain. As for deposit performance, I expect commercial and wholesale balances to decline as quickly as they rose. On the retail side, the decline will be more gradual and will take longer to reverse. These are our expectations.
Erika Najarian, Analyst
Thank you.
Operator, Operator
Your next question comes from the line of Mike Mayo with Wells Fargo. Your line is open.
John Stern, CFO
Hey, good morning, Mike.
Mike Mayo, Analyst
Hi. So, I wasn't clear, are you guiding for flat, positive or negative operating leverage or none of the above for 2024? And more generally, I mean, the real question is, when do you get back to your historical efficiency ratio? I think you talked about this at a presentation in December. I mean, 61% core efficiency in the fourth quarter isn't exactly like legacy U.S. Bancorp, and that's up 300 basis points year-over-year. And earlier last decade, you were 55%. Going back further, you were the low 50%s. Is that just the aspirational target now? Or is that a real target over the next two years or so? And along those lines, I guess, you have all the savings you're going to get from Union Bank. So, where does the risk come from here?
Andy Cecere, CEO
Yeah, Mike, it's probably more likely a positive operating leverage in the second half of '24 versus the first half given some of the margin pressures that we talked about. That is still our objective. My expectation is, once we get more to our normalized revenue level, that we will continue to manage expenses below revenue growth and continue to take down that efficiency ratios into the 50%s. That's the way we're planning.
Mike Mayo, Analyst
When you mention reaching the 50% efficiency ratio, are you considering the possibility of getting back to 55% in your future planning? Additionally, it seems the payments business is regaining its momentum. I noticed there was no longer a slide about the payments business in relation to small business banking. You're aiming for a growth in small business relationships of 15% to 20% and an increase in revenues by 25% to 30%, but I didn't see that information presented. I understand you had the Union Bank deal and faced challenges last March and April. Now that your capital is restored and the deal is finalized, things seem to be back to normal for U.S. Bancorp. I'm looking for more clarity on whether you're aiming to become the "Square of banking" and how that potential revenue growth might enhance your efficiency.
Andy Cecere, CEO
Sure, Mike. And it is still a goal. We do think this combination of payments and business banking and providing that comprehensive product set and capabilities to help people run their business is a key strategic priority, it continues to be. And I think the B categories that John mentioned are also a key driver of revenue, including payments, commercial products, trust and investment, and those are all areas that we expect continued growth on. The immediate pressure on net interest income is what's causing us not to get positive operating leverage in the short term. But it is something that I believe, and as John mentioned, will abate and start to grow into the second half of 2024. And so, I think we're going to get to the positive operating leverage. We are planning on it. And we will continue to drive that efficiency ratio down certainly into the 50% high 50%s at the beginning and continue to deliver positive operating leverage to get it even lower. That's our objective.
Mike Mayo, Analyst
All right. Thank you.
Operator, Operator
Your next question comes from the line of Matt O'Connor with Deutsche Bank. Your line is open.
Andy Cecere, CEO
Good morning, Matt.
Matt O'Connor, Analyst
Hi, good morning. Just to clarify, the flat expense guidance for '24 is also the adjusted level of '23 of 17.0?
Andy Cecere, CEO
That's correct.
Matt O'Connor, Analyst
Okay. And I assume that includes any expense benefit from the exit of the ATM cash business that you referenced earlier?
Andy Cecere, CEO
Correct.
John Stern, CFO
Yes.
Matt O'Connor, Analyst
Okay. And then just stepping back, like any other kind of small businesses or segments that you're kind of reevaluating for, not so much kind of the regulatory proposals, which we'll see how they may finalize, but just other areas that you're stepping back and whether it's in mortgage, given the smaller market there, or other parts of the business portfolio that you're looking either to exit or to potentially lean into, that's a bit different than you were thinking, say, six months ago?
John Stern, CFO
Well, I can start and Andy can chime in. I think we commented on the ATM business. I mean, you're constantly evaluating certain things, particularly in the light of regulatory change. Clearly, a lot of common letters have been submitted in terms of the Basel III endgame. At the end of the day, it's not going to materially drive whether we exit businesses or enter new businesses, that sort of thing. It's just going to be a combination of a continual investment, as Andy mentioned, in terms of what we need to do toward achieving positive operating leverage and managing around regulatory actions. Those are some of the comments I'd throw out there.
Andy Cecere, CEO
I think I agree, John. And the only thing I'd add is that the environment and the competitive dynamic is something that causes us to be more aggressive or less aggressive in certain categories. And maybe the example I'll give you is auto lending, which is, for us is not growing right now. And that's because of the spreads and the returns are just not at our levels that we want to put on the books. So, those are areas that we're going to not get out of or close down, but just not emphasize in terms of growth at the levels of returns that we're seeing right now.
Matt O'Connor, Analyst
Okay. And then, specifically in credit card, we're obviously seeing a normalization of losses with you guys and throughout the industry and also very strong growth. So, if we adjust losses kind of on a lag basis, they are above a few years ago. At what point do you tighten up credit card and say we should slow growth at this point in the cycle, or do you think there's still quite a bit of runway of, call it, good growth or healthy growth?
Terry Dolan, CAO
We believe that there is still significant growth potential in this area. However, we have observed economic uncertainties and the pressure on consumers due to inflation. As a result, we make necessary adjustments to our underwriting criteria. Despite these challenges, we remain confident in the overall performance of our credit card business, which primarily targets prime and super prime customers. We expect it to perform well throughout this cycle.
Matt O'Connor, Analyst
Okay. Thank you.
Operator, Operator
Your next question comes from the line of Gerard Cassidy with RBC Capital Markets. Your line is open.
Andy Cecere, CEO
Good morning, Andy, and good morning, John.
Gerard Cassidy, Analyst
John, you mentioned earlier in response to a question about commercial loan growth that some customers are turning to capital markets. Can you provide insights on whether you've noticed increased competition from the private credit markets, which seem to be actively making loans to corporate and commercial clients? Has this competition changed compared to previous years, or has it become more intense? Additionally, are any of these private firms, like Apollo or Blackstone, your clients? If so, how do you manage the balance between competing with them and meeting their needs?
John Stern, CFO
Sure. This is John, Gerard. Regarding the commercial side, when I refer to capital markets, I'm specifically talking about the public investment-grade market and bond issuance. We generally do not engage in or compete in the private credit sector; that type of loan structure doesn't align with our client base. Therefore, I can't definitively say whether our activity has increased or decreased in that area, as we typically do not encounter those names. We compete with our peer banks primarily in the commercial space within that specific segment. As for client interaction, we maintain strong relationships with various entities involved in investment services, capital markets activities, and other categories. So, we have excellent connections with those institutions.
Andy Cecere, CEO
Yeah. Our Corporate Trust and Global Fund Services, Gerard, as John mentioned, businesses, they support a number of large private credit funds in the industry and, well, they are customers and clients of ours that we continue to serve.
Terry Dolan, CAO
I would like to point out that depending on the final outcome of the capital regulations and the emphasis placed on them, we might see a shift towards private capital markets. These markets typically offer more structural flexibility and are willing to take on greater risks. While this may not be our direct area of competition, private credit remains a significant focus within the industry.
Gerard Cassidy, Analyst
Thank you, Terry. Just if we step back for a moment and look at beyond Basel III endgame, maybe we do get the final proposal in the middle of this year or later this year. We get through the next DFAST. U.S. Bancorp has always had a hallmark of having one of the highest ROTCEs among the regional banks. Obviously, you're probably going to maintain that. But you also were very disciplined in giving back the excess capital every year to shareholders in buybacks and dividends. Generally, if I recall correctly, around 75% to 80% of total earnings in a combination of both. Andy, do you see that coming on the horizon, maybe 2025, once we get all the rules that we know where you see CET1 ratio needs to be? What's your outlook there?
Andy Cecere, CEO
Yeah, Gerard, we do achieve a high return on tangible common. I mentioned 19% to 20% fourth quarter versus full year '24. And as we think about going forward, I would expect us to continue to lead the pack in terms of that return, which is key to generating capital, key to returning capital. And again, once we get clarity on the rules, as I mentioned earlier, in both the Basel III endgame as well as the CCAR process, and determine our target capital levels, we will return the difference either through dividends or buybacks as has been in our history.
Gerard Cassidy, Analyst
Very good. Appreciate it. Thank you.
Andy Cecere, CEO
Thank you.
Operator, Operator
Your next question comes from the line of Ken Usdin with Jefferies. Your line is open.
Ken Usdin, Analyst
Hey, thanks. Good morning. Just to follow-up on the deposit side, you mentioned in your prepared remarks about starting to moderate pricing a little bit, and you also talked about roll-off of higher-cost deposits. Just wondering if you can amplify both of those comments. So, what types of products or tweaks are you already being able to make on the deposit pricing front? And then, where did those higher-cost deposits flow out of from a business perspective? Thanks.
John Stern, CFO
Sure, thanks, Ken. My comment was primarily about the fourth quarter and our observations from that period. If we take a step back, in the third quarter, we saw a significant increase in deposits, partly due to the Union Bank acquisition. We aimed to maintain strong relationships with all our clients during that transition. Moving into the fourth quarter, as loan demand changed and we had some excess deposits, we made tactical decisions to shift away from non-relationship-based deposits, particularly time deposits that were declining. This will continue to be a dynamic process as we manage our strategy based on loan growth, our profile, and client relationships. That was the essence of my comment.
Andy Cecere, CEO
And importantly, John, on our core consumer deposits, we are continuing to see growth there, as you mentioned, as we had in the slide.
John Stern, CFO
We continue to expect growth in core deposits on the consumer side, and the team has been focused on this, resulting in significant success.
Ken Usdin, Analyst
Got it. And as a follow-up to the UB point, is everything from UB now fully baked, whether it's the cost actions and structure, and also that's kind of making sure you're buttoned up as a starting point, and have that base of loans and deposits gotten to a steady state as well?
John Stern, CFO
Yes.
Ken Usdin, Analyst
Okay. So, we just move forward with everything and listen to the guide comments that you gave earlier. Okay. Got it. Thank you.
John Stern, CFO
Exactly. It's all in the core now, yeah.
Operator, Operator
There are no further questions at this time. Mr. Andersen, I turn the call back over to you.
George Andersen, Senior VP and Director of Investor Relations
Thanks, Sarah, and thank you for listening to our earnings call. Please contact the Investor Relations department if you have any follow-up questions.
Operator, Operator
This concludes today's conference call. We thank you for joining. You may now disconnect.