U.S. Bancorp — Q1 2021 Form 10-Q
Business context and period: U.S. Bancorp is a diversified banking and financial-services company. This unaudited quarterly report covers the three months ended March 31, 2021; balance-sheet comparisons are primarily with December 31, 2020, and income-statement comparisons with Q1 2020. Amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q1 2021 / March 31, 2021 | Comparable period |
|---|---|---|
| Net interest income | $3.063 billion; $3.089 billion taxable-equivalent | $3.223 billion; $3.247 billion taxable-equivalent in Q1 2020 |
| Net interest margin | 2.50% taxable-equivalent | 2.91% in Q1 2020 |
| Noninterest income | $2.381 billion | $2.525 billion in Q1 2020 |
| Total net revenue | $5.470 billion | $5.772 billion in Q1 2020 |
| Noninterest expense | $3.379 billion; efficiency ratio 62.1% | $3.316 billion; efficiency ratio 58.0% in Q1 2020 |
| Provision for credit losses | $827 million benefit | $993 million expense in Q1 2020 |
| Net income attributable to U.S. Bancorp | $2.280 billion; diluted EPS $1.45 | $1.171 billion; diluted EPS $0.72 in Q1 2020 |
| Loans / deposits | $294.4 billion / $433.8 billion | $297.7 billion / $429.8 billion at Dec. 31, 2020 |
| Long-term debt | $37.4 billion | $41.3 billion at Dec. 31, 2020 |
| Allowance for credit losses | $6.96 billion; 2.36% of period-end loans | $8.01 billion; 2.69% at Dec. 31, 2020 |
| Capital | CET1 9.9%; Tier 1 11.5%; total risk-based 13.5% | CET1 9.7%; Tier 1 11.3%; total risk-based 13.4% at Dec. 31, 2020 |
Return on average assets was 1.69%, versus 0.95% a year earlier; return on average common equity was 19.0%, versus 9.7%. Net charge-offs were $223 million (0.31% of average loans), down from $393 million (0.53%) in Q1 2020. Nonperforming assets were $1.20 billion, down 7.4% from year-end.
Cash flows for the quarter were $937 million provided by operating activities, $19.466 billion used in investing activities and $550 million used in financing activities. Cash and due from banks declined $19.079 billion to $43.501 billion. These flows reflect substantial securities purchases and should be viewed in the context of bank balance-sheet and liquidity management.
Material changes and management commentary
- Net revenue declined 5.2% year over year as lower interest rates, higher securities premium amortization and lower mortgage banking revenue and deposit service charges outweighed growth in some fee businesses. Average earning assets increased 11.2%, including higher securities and cash balances, while average loans fell 1.2%.
- Net income rose 94.7%, principally because credit-loss provision swung from a $993 million expense to an $827 million benefit as economic expectations and credit conditions improved. The earnings increase therefore substantially reflects reserve releases, not revenue growth.
- Noninterest expense increased 1.9%, led by compensation and technology costs; lower marketing, occupancy and other expenses partly offset these increases. The efficiency ratio worsened to 62.1% from 58.0%.
- Deposits increased 0.9% from year-end; noninterest-bearing deposits rose while time deposits declined. Loans decreased 1.1%, with paydowns in residential mortgages, cards and commercial real estate partly offset by commercial and other retail growth.
- Available-for-sale securities increased to $156.0 billion. Net unrealized securities gains at year-end shifted to $172 million of net unrealized losses at quarter-end, largely from interest-rate-driven fair-value declines. The resulting $2.417 billion other comprehensive loss weighed on equity; management said it did not plan to sell loss-position securities and did not expect to be forced to sell before recovery.
- U.S. Bancorp repurchased about $650 million of common stock in Q1 under its $3.0 billion authorization; $2.35 billion remained available at quarter-end. The common dividend declared was $0.42 per share.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management expected credit quality to return toward more normalized levels during the remainder of 2021 as the economy recovered, while anticipating manageable elevated nonperforming assets in some pandemic-affected industries and loan categories.
- Management emphasized uncertainty around COVID-19, the effectiveness of stimulus, the pace of recovery and possible further credit losses. The allowance reflects forecast scenarios and judgment; worse-than-expected economic or health conditions could require reserve increases.
- Approximately 57,000 accounts representing $7.3 billion remained in active COVID-related payment-relief programs at March 31, 2021. Relief can delay delinquency and nonaccrual recognition. Separately, a substantial portion of GNMA-purchased mortgage balances in relief programs is insured or guaranteed by federal agencies.
- Key exposures include credit deterioration, interest-rate and market movements, liquidity and funding conditions, operational and cybersecurity incidents, compliance and regulatory matters, competition, and the transition away from LIBOR. The company reported compliance with its Liquidity Coverage Ratio requirement and $116.8 billion of fair-value unencumbered investment securities, plus $94.5 billion of additional secured borrowing capacity from the FHLB and Federal Reserve based on available collateral.
- Legal and regulatory matters include Visa-related antitrust litigation, residential mortgage-backed securities trustee litigation, and a CFPB investigation of certain consumer sales practices. Management said existing matters were not expected to materially affect financial condition, results or cash flows, but acknowledged that an individual matter could materially affect a particular period and that estimates remain uncertain.
- Merchant-processing exposure included $4.9 billion of airline tickets for future delivery, supported by $367 million of collateral and a $155 million liability. A failure by merchants to deliver could result in chargebacks and losses.
- Regulatory capital ratios exceeded “well-capitalized” requirements. Capital distributions remain subject to Federal Reserve restrictions and Board approval. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of the reported earnings increase came from credit-reserve releases, and whether revenue, margin and efficiency trends improve in subsequent quarters.
- Whether the lower allowance remains adequate if economic recovery, stimulus effects or borrower performance disappoint, including in pandemic-sensitive commercial sectors.
- Credit performance after payment-relief programs end, including delinquency and loss trends for consumer, commercial real estate and GNMA-related exposures.
- The sensitivity of net interest income to rates and deposit behavior; the filing estimates a 3.02% decline under an immediate 50-basis-point rate decrease and a 2.57% increase under an immediate 50-basis-point increase.
- Further changes in securities marks and accumulated other comprehensive income, and their effects on reported equity and capital measures.
- Progress and potential costs or outcomes of the CFPB inquiry, Visa litigation, mortgage-related litigation and other regulatory matters.
- Capital distributions under regulatory limits, including subsequent repurchases, dividends and the use of the remaining buyback authorization.