U.S. Bancorp — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Comparisons are primarily with Q1 2021; balance-sheet comparisons are with December 31, 2021. Amounts are in U.S. dollars.
Business context and results
U.S. Bancorp operates consumer and business banking, commercial banking, wealth management, payment services, and treasury and corporate support businesses. It reported net income attributable to U.S. Bancorp of $1.557 billion, or $0.99 diluted EPS, down from $2.280 billion, or $1.45, in Q1 2021.
Key financial metrics
| Metric | Q1 2022 | Comparable / change |
|---|---|---|
| Total net revenue | $5.596 billion | Up 2.3% from Q1 2021 |
| Net interest income, taxable-equivalent | $3.200 billion | Up 3.6%; net interest margin 2.44%, down from 2.50% |
| Noninterest income | $2.396 billion | Up 0.6% |
| Noninterest expense | $3.502 billion | Up 3.6%; efficiency ratio 62.8%, versus 62.1% |
| Provision for credit losses | $112 million expense | Versus an $827 million benefit in Q1 2021 |
| Return on average assets / common equity | 1.09% / 12.7% | Versus 1.69% / 19.0% |
| Net charge-offs | $162 million; 0.21% of average loans | Versus $223 million; 0.31% |
| Period-end loans / deposits | $318.9 billion / $461.5 billion | Loans up 2.2%; deposits up 1.2% from year-end |
| Period-end assets | $586.5 billion | Up 2.3% from year-end |
| Short-term borrowings / long-term debt | $21.0 billion / $32.9 billion | Short-term borrowings up from $11.8 billion at year-end; long-term debt up 2.5% |
| Common equity tier 1 / total risk-based capital | 9.8% / 13.4% | Versus 10.0% / 13.4% at year-end |
| Cash and due from banks | $44.3 billion | Up from $28.9 billion at year-end |
Cash flow statement amounts for the quarter were $8.477 billion provided by operating activities, $7.364 billion used in investing activities, and $14.285 billion provided by financing activities; cash and due from banks increased $15.398 billion. These cash-flow figures reflect bank balance-sheet activity and should be read in that context.
Material changes and management commentary
- Revenue grew mainly on higher loan and securities balances, favorable funding mix, and stronger payment services and trust fees. Loan growth and higher investment balances supported net interest income, but lower loan yields and a less favorable loan mix weighed on margin.
- Noninterest income was nearly flat overall: payment services, trust and investment management, deposit charges, and treasury fees improved, while mortgage banking revenue fell 33.1% as refinancing activity declined.
- Expense growth reflected compensation, professional services, and marketing. The provision comparison was particularly significant: Q1 2021 included a substantial reserve release as economic conditions improved; Q1 2022 provision reflected loan growth and heightened uncertainty, despite improving credit quality.
- Credit indicators improved overall: nonperforming assets fell to $811 million from $878 million at year-end, and the allowance for credit losses was $6.105 billion, or 1.91% of period-end loans, versus 1.97% at year-end.
- Rising rates reduced available-for-sale securities’ fair values. The portfolio had $6.0 billion of net unrealized losses at quarter-end, compared with $722 million of net unrealized gains at year-end. Accumulated other comprehensive loss widened to $6.938 billion, and U.S. Bancorp shareholders’ equity declined 6.8% sequentially to $51.2 billion. Management said it did not plan to sell the securities and did not expect it would be required to sell them before recovery of amortized cost.
- Liquidity disclosures report $143.2 billion of unencumbered investment securities and $96.3 billion of additional potential FHLB and Federal Reserve borrowing capacity. The company said it complied with regulatory LCR and NSFR requirements and was above its parent-company liquidity minimums.
Outlook, transaction, and risks
- The proposed acquisition of MUFG Union Bank’s core regional banking franchise was expected to cost approximately $8.0 billion, including $5.5 billion cash and about 44 million U.S. Bancorp shares. It was expected to add roughly $105 billion in assets, $58 billion in loans, and $90 billion in deposits. Closing remained subject to regulatory approvals; the company expected to close about 45 days after approvals but said first-half 2022 timing was uncertain.
- Common stock repurchases were suspended, except purchases connected with stock-based compensation programs, pending the acquisition. Management said it did not expect to resume repurchases until after closing and when CET1 approximated 9.0%; it described a post-close target range of 8.5% to 9.0%. The declared common dividend was $0.46 per share, up from $0.42.
- Management cited uncertainty from inflation, supply-chain issues, market volatility, higher oil prices and the Russia-Ukraine conflict, and possible new virus variants. Interest-rate changes, credit deterioration, operational and cybersecurity events, regulation, litigation, and acquisition execution and integration are also risks. The filing gives no broader earnings or revenue guidance.
- The CFPB was investigating certain consumer sales practices and considering a potential enforcement action. U.S. Bancorp said it did not believe an action was warranted, but no resolution was assured. The filing also describes Visa-related litigation and other legal and regulatory matters; management said existing matters were not expected to materially affect financial condition, results, or cash flows, while noting outcomes could adversely affect results in a particular period.
Important facts for investors to verify
- Progress and timing of MUFG Union Bank regulatory approvals, purchase financing, expected benefits, and integration costs.
- Whether securities-related unrealized losses remain unrealized, and their potential implications for tangible equity and capital as rates and deposit behavior evolve.
- Whether revenue growth can outpace expense growth and sustain margins as rates rise and mortgage refinancing declines.
- Credit performance and reserve adequacy if inflation, geopolitical conditions, or economic growth worsen.
- Developments in the CFPB matter, Visa litigation, and other legal or regulatory contingencies, including any changes to reserves or business practices.