U.S. Bancorp — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; comparisons are primarily with the corresponding 2021 periods. Amounts are in U.S. dollars.
Business context and results
U.S. Bancorp is a diversified bank and financial services company. It reported third-quarter net income attributable to U.S. Bancorp of $1.812 billion and diluted EPS of $1.16, down 10.7% and 10.8%, respectively, year over year. For the first nine months, net income was $4.900 billion and diluted EPS was $3.13, down 22.1% and 22.5%.
Key financial metrics
| Metric | Q3 2022 | Comparison |
|---|---|---|
| Net interest income | $3.827 billion | Up 20.7% year over year |
| Net interest margin, taxable-equivalent | 2.83% | 2.53% in Q3 2021 |
| Total net revenue, taxable-equivalent | $6.326 billion | Up 7.4% year over year |
| Noninterest income | $2.469 billion | Down 8.3%; mortgage banking was a principal drag |
| Noninterest expense | $3.637 billion | Up 6.1%, including $42 million of merger and integration charges |
| Provision for credit losses | $362 million | Compared with a $163 million benefit in Q3 2021 |
| Return on average assets / common equity | 1.22% / 15.8% | 1.45% / 15.9% in Q3 2021 |
| Efficiency ratio | 57.5% | 58.4% in Q3 2021 |
| Net charge-offs / average loans | 0.19% | 0.20% in Q3 2021 |
For the first nine months, net interest income rose 11.4% to $10.435 billion and total net revenue rose 4.6% to $17.934 billion. Noninterest income fell 3.6% to $7.413 billion; expenses rose 6.6% to $10.863 billion. The provision was $785 million, versus a $1.160 billion benefit in 2021. Net charge-offs were $485 million versus $550 million.
Balance sheet, liquidity and capital
- At September 30, loans were $342.7 billion, up 9.8% from year-end 2021; deposits were $471.1 billion, up 3.3%; and total assets were $601.0 billion, up 4.8%.
- Deposit mix shifted: noninterest-bearing deposits declined $19.7 billion (14.6%) from year-end, while time deposits increased $19.8 billion (87.3%). Average noninterest-bearing deposits were down 11.6% year over year in Q3.
- Short-term borrowings rose to $25.1 billion from $11.8 billion at year-end; long-term debt was $32.2 billion, essentially unchanged. Cash and due from banks totaled $41.7 billion.
- Management reported $128.4 billion of unencumbered investment securities and an additional $101.2 billion of borrowing capacity from the FHLB and Federal Reserve based on available collateral. The company was compliant with LCR and NSFR requirements and described parent-company liquidity as above minimums.
- Regulatory CET1 was 9.7%, down from 10.0% at year-end; Tier 1 was 11.2% and total risk-based capital was 13.3%. All regulatory ratios exceeded “well-capitalized” requirements. Total shareholders’ equity fell to $47.5 billion from $54.9 billion, primarily reflecting unrealized securities losses and dividends.
- Available-for-sale securities had $9.2 billion of net unrealized losses at quarter-end, versus $722 million of net unrealized gains at year-end 2021. The bank said it had no plans to sell the securities and did not expect to be forced to sell before recovery of amortized cost. It transferred $45.1 billion amortized cost of securities from available-for-sale to held-to-maturity during the first nine months.
- Cash flow for the first nine months: $14.2 billion provided by operating activities, $27.1 billion used in investing, and $25.6 billion provided by financing; cash and due from banks increased $12.7 billion.
Material changes and management commentary
Higher rates and growth in loans and securities drove stronger net interest income and margin, partly offset by higher deposit pricing, funding costs and changes in funding mix. Mortgage banking revenue fell 80.6% in Q3 as refinancing activity, application volume and gain-on-sale margins declined. Trust and investment management fees and payment services revenue increased. The prior-year period benefited from credit-reserve releases as economic conditions improved; the 2022 provision reflects loan growth and greater economic uncertainty.
Credit indicators included $677 million of nonperforming assets, down 22.9% from year-end, and an allowance for credit losses of $6.455 billion, or 1.88% of period-end loans. Management cited inflation, rising interest rates, supply-chain pressures, market volatility and geopolitical uncertainty in its credit assessment.
Outlook, transactions and risks
- MUFG Union Bank acquisition: The approximately $8.0 billion purchase is expected to add about $105 billion in assets, $58 billion in loans and $90 billion in deposits. Required regulatory approvals were received October 19, 2022; closing was expected December 1, subject to customary conditions. Q3 included $42 million of related charges; nine-month charges were $239 million.
- Management said it expected CET1 of approximately 8.3% at acquisition closing and a subsequent increase toward 9.0%. It did not expect to resume common-stock repurchases until after closing and when CET1 approximates 9.0%. These are capital expectations, not earnings guidance; the filing provides no specific earnings forecast.
- Other risks include economic deterioration, credit quality and collateral values, interest-rate and securities-market movements, deposit pricing and funding needs, operational and cybersecurity events, compliance matters, litigation, and acquisition timing, integration costs or failure to realize expected benefits.
- Legal and regulatory matters include Visa-related card litigation, residential mortgage-backed securities trustee lawsuits, and a CFPB investigation into administration of pandemic-era unemployment-insurance prepaid debit cards. The company said existing matters were not expected to materially affect its overall financial condition, but acknowledged a particular period could be materially affected.
- Disclosure controls were deemed effective; management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Union Bank acquisition closed on schedule, its final purchase accounting, integration costs, synergies and effect on capital.
- Whether net interest margin gains persist as deposit costs, deposit mix and short-term borrowing costs adjust to rates.
- Trends in mortgage banking, credit-card delinquencies and losses, commercial credit quality, provisions and the allowance under weaker economic scenarios.
- The duration and potential capital or liquidity implications of securities unrealized losses, including the held-to-maturity portfolio and accumulated other comprehensive loss.
- Progress toward the stated post-acquisition CET1 targets and conditions for resuming common-stock repurchases.
- Developments in the CFPB investigation, Visa and mortgage-backed securities litigation, and other contingencies; the filing does not quantify a clear potential loss for all matters.