U.S. Bancorp (NYSE: USB) — Q1 2023 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2023. U.S. Bancorp is a diversified banking and financial services company. Results include the full-quarter effects of its December 1, 2022 acquisition of MUFG Union Bank’s core regional banking franchise (MUB), making year-over-year comparisons materially acquisition-affected.
Financial and operating highlights
| Metric | Q1 2023 | Comparison |
|---|---|---|
| Net interest income | $4.634 billion | Up 46.0% year over year; taxable-equivalent net interest margin was 3.10%, versus 2.44% |
| Total net revenue | $7.175 billion | Up 28.2% year over year |
| Net income attributable to U.S. Bancorp | $1.698 billion | Up 9.1% year over year |
| Diluted earnings per share | $1.04 | Up from $0.99 |
| Noninterest expense | $4.555 billion | Up 30.1%; includes $244 million of merger and integration charges |
| Efficiency ratio | 63.2% | 62.8% in Q1 2022 |
| Provision for credit losses | $427 million | Up from $112 million |
| Net charge-offs | $373 million; 0.39% of average loans | Up from $162 million and 0.21%; excluding $91 million of MUB-acquisition-related charge-offs, the ratio was 0.30% |
| Period-end loans | $387.9 billion | Down 0.1% from December 31, 2022; average loans rose 23.6% year over year, including MUB |
| Period-end deposits | $505.3 billion | Down 3.7% from year-end; average deposits were up 12.4% year over year |
| Borrowings | $56.9 billion short-term; $42.0 billion long-term | Short-term borrowings rose 82.2% and long-term debt rose 5.6% from year-end |
| Liquidity and capital | $315 billion available liquidity; CET1 ratio 8.5% | Liquidity was about 126% of uninsured deposits; CET1 was 8.4% at year-end |
| Cash flows | $842 million operating; $4.943 billion investing; $6.901 billion financing | Cash and due from banks increased $12.686 billion during the quarter |
Return on average assets was 1.03% versus 1.09% a year earlier; return on average common equity was 14.1% versus 12.7%. The company declared a $0.48 common dividend per share, up from $0.46.
Material changes versus comparable periods
- Net interest income growth reflected higher interest rates on earning assets and MUB. Deposit and borrowing interest expense rose sharply as funding costs repriced.
- Noninterest income increased 4.6%, supported by trust and investment fees, payment services, and commercial products. Mortgage banking revenue fell 36.0%, and securities results shifted to a $32 million net loss from an $18 million gain.
- Expense growth reflected MUB operating costs and integration charges, higher compensation, and amortization of the acquired core deposit intangible. The efficiency ratio worsened modestly.
- Credit costs increased amid acquired-loan impacts, normalizing losses, and economic uncertainty. Nonperforming assets rose 16.2% from year-end to $1.181 billion, primarily due to commercial real estate loans identified in a post-acquisition MUB portfolio review.
- Unrealized losses on available-for-sale securities narrowed to $7.2 billion from $8.5 billion at year-end. Shareholders’ equity increased to $53.0 billion from $50.8 billion.
Outlook, commentary, risks, and unusual items
- Management described deposits as relatively stable during the March banking-sector disruption: balances decreased 0.6% from March 8 through quarter-end. From March 31 through April 30, deposits fell approximately $17 billion, including $10 billion of seasonal corporate trust fluctuations and $3 billion of transitional MUB deposits.
- At quarter-end, about 51% of deposits were FDIC-insured; approximately 80% of uninsured deposits were operational wholesale trust or retail balances. Management reported ample liquidity and said the bank was compliant with regulatory liquidity requirements.
- The company recorded $244 million of MUB merger and integration charges in Q1, reducing diluted EPS by $0.12 after tax. The MUB customer and systems conversion and bank merger were expected over Memorial Day weekend 2023. MUB’s fair-value purchase accounting remained subject to adjustment during the one-year measurement period.
- Management did not provide specific forward earnings guidance in the supplied filing text. It cited continuing economic uncertainty, recession risk, inflation, higher rates, market volatility, and possible pressure on corporate earnings. FDIC assessments may rise following bank failures.
- Credit exposures warrant attention, especially commercial real estate: the allowance for credit losses was $7.523 billion, or 1.94% of period-end loans. Commercial real estate nonperforming loans rose to $535 million from $338 million at year-end.
- Other notable risks include interest-rate and securities valuation risk, deposit competition and funding costs, MUB integration and its inherited OCC consent order concerning technology and operational risk, LIBOR transition, cybersecurity and operational risks, and ongoing litigation and regulatory investigations. After quarter-end, Moody’s downgraded the company’s credit rating to a level in line with other large regional banks.
- The company had $7.2 billion of net unrealized available-for-sale securities losses and reported no plans or expectation that it would need to sell those securities before recovery of amortized cost. This assessment depends on funding needs and market conditions.
- Common-stock repurchases remained suspended apart from purchases associated with stock-based compensation; management said it did not expect to evaluate repurchases until CET1 reached 9.0%.
Important facts for investors to verify
- Track deposit balances, uninsured-deposit mix, pricing and retention after April 30, including whether seasonal and transitional MUB outflows normalize.
- Assess the increased reliance on short-term borrowings and confirm liquidity access and collateral availability under stress.
- Monitor commercial real estate criticized loans, nonperforming assets, charge-offs, and allowance adequacy as the acquired MUB portfolio is integrated.
- Separate underlying earnings and costs from acquisition impacts, and evaluate progress against MUB integration plans and expected benefits.
- Review securities unrealized losses, interest-rate sensitivity, and capital measures alongside any need to sell or pledge securities.
- Follow the MUB OCC consent-order requirements, the CFPB prepaid-card investigation, electronic-communications recordkeeping inquiry, and Visa litigation developments.