U.S. Bancorp — Q3 2021 Form 10-Q
Business context and reporting period
U.S. Bancorp is a diversified U.S. financial services company. This unaudited quarterly report covers the three and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods unless otherwise noted. Balance-sheet comparisons are generally against December 31, 2020.
Financial performance and condition
| Metric | Q3 2021 | Q3 2020 | Change |
|---|---|---|---|
| Total net revenue | $5.890 billion | $5.964 billion | (1.2%) |
| Net income attributable to U.S. Bancorp | $2.028 billion | $1.580 billion | +28.4% |
| Diluted EPS | $1.30 | $0.99 | +31.3% |
| Net interest margin, taxable-equivalent | 2.53% | 2.67% | Down 14 bps |
| Efficiency ratio | 58.4% | 56.6% | Up 1.8 percentage points |
| Net charge-offs / average loans | 0.20% | 0.66% | Down 46 bps |
- Quarterly net interest income was $3.171 billion, down 1.7%; noninterest income was $2.693 billion, down 0.7%. Noninterest expense rose 1.7% to $3.429 billion.
- Provision for credit losses was a benefit of $163 million, versus expense of $635 million a year earlier. Net charge-offs were $147 million, down from $515 million.
- For the first nine months, revenue was $17.143 billion, down 2.5%; net income attributable to U.S. Bancorp was $6.290 billion, up 82.8%; diluted EPS was $4.04, versus $2.11. The improvement largely reflected a $1.160 billion provision benefit versus $3.365 billion of provision expense in 2020.
- Q3 return on average assets was 1.45% and return on average common equity was 15.9%, compared with 1.17% and 12.8%, respectively, in Q3 2020.
- Cash and due from banks was $63.9 billion at September 30. For the first nine months, operating cash flow was $9.167 billion, investing cash outflow was $15.769 billion, financing cash inflow was $7.926 billion, and cash increased by $1.324 billion.
- Period-end assets were $567.5 billion; loans were $297.6 billion, essentially unchanged from year-end 2020. Deposits were $442.9 billion, up 3.1%. Noninterest-bearing deposits increased 14.8% to $135.5 billion.
- Long-term debt was $35.7 billion, down 13.6% from year-end; short-term borrowings were $16.1 billion, up 36.7%. Shareholders’ equity was $53.7 billion.
- Allowance for credit losses was $6.3 billion, or 2.12% of period-end loans, down from $8.0 billion and 2.69% at year-end 2020. Nonperforming assets were $944 million, down 27.3%.
- Common equity Tier 1 capital ratio was 10.2%; Tier 1 was 11.7%; total risk-based capital was 13.4%. The company reported that all regulatory capital ratios exceeded “well-capitalized” requirements.
- Available-for-sale securities totaled $149.4 billion. Net unrealized gains declined to $138 million from $3.2 billion at year-end, with $1.7 billion of gross unrealized losses, primarily attributed to interest-rate changes. The company said it did not plan to sell loss-position securities and did not expect to be required to sell them before recovery.
Material changes versus prior periods
- Earnings rose substantially despite lower revenue, mainly because credit-loss provisions shifted from expense in 2020 to a benefit in 2021, alongside lower charge-offs and improved credit performance.
- Net interest margin declined as lower rates weighed on loan yields and investment reinvestment yields; average loans fell 4.6% in Q3 while average investment securities rose 18.0%.
- Mortgage banking revenue fell 24.4% in Q3, reflecting lower production and gain-on-sale margins. Payment-related and wealth-management fee revenues generally improved as spending and markets recovered.
- Expenses increased, led by compensation, technology, professional services, and marketing. The efficiency ratio worsened year over year.
- Rate-related changes in securities fair values reduced accumulated other comprehensive income; total other comprehensive loss was $2.114 billion for the first nine months of 2021.
Outlook, commentary, risks, and unusual items
- MUFG Union Bank acquisition: In September 2021, U.S. Bancorp agreed to acquire MUFG Union Bank’s core regional banking franchise for approximately $8.0 billion: $5.5 billion cash and about 44 million U.S. Bancorp shares. The deal was expected to close in the first half of 2022, subject to customary conditions and regulatory approvals. It was expected to add approximately $105 billion of assets, $58 billion of loans, and $90 billion of deposits. MUFG would own about 2.9% of U.S. Bancorp after closing. The company suspended common-stock repurchases, other than those related to employee stock plans, and did not expect to resume them until after the acquisition closes in 2022.
- Management cited economic recovery, government stimulus, vaccine availability, strong collateral values, and better-than-expected consumer credit as factors supporting the reserve reduction. It also warned of uncertainty from inflation, virus variants, diminishing stimulus and borrower liquidity, and vulnerable pandemic-affected industries. Management expected charge-offs to return to more normalized levels over time.
- The filing provides no specific earnings or revenue guidance. It states that COVID-19’s ultimate effects remain uncertain and identifies risks including economic or market deterioration, interest-rate changes, credit quality, litigation and regulation, competition, cybersecurity, operational risk, and acquisition execution and integration.
- COVID-19 payment relief remained active for approximately 19,000 accounts representing $3.0 billion at September 30. The filing cautions that payment-relief arrangements may delay delinquency and nonaccrual recognition.
- Legal and regulatory matters include Visa-related card litigation, residential mortgage-backed securities trustee lawsuits, and a CFPB investigation into certain consumer sales practices. The company said it could not estimate some potential losses; it believed reasonably possible losses in excess of reserves would not be material in aggregate to financial condition, results, or cash flows, while acknowledging outcomes could adversely affect a particular period.
- Other notable exposures include $7.2 billion of airline tickets processed for future delivery and a $155 million liability primarily related to airline processing arrangements. The filing says existing litigation and regulatory matters are subject to significant uncertainty.
Important facts for investors to verify
- Whether MUFG Union Bank approvals, closing timing, purchase economics, expected synergies, integration costs, and resulting capital and share dilution develop as anticipated.
- Whether credit quality remains strong as stimulus and payment-relief programs expire, and whether reserves and charge-offs stabilize or rise.
- Whether net interest margin and revenue recover despite lower loan balances, rate sensitivity, mortgage slowdown, and securities reinvestment yields.
- How rising rates and market spreads affect the large available-for-sale securities portfolio, accumulated other comprehensive income, and capital.
- Developments in the CFPB investigation, Visa and mortgage-related litigation, and merchant-processing contingent liabilities.