U.S. Bancorp — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Comparisons are primarily with the corresponding 2020 periods; balance-sheet comparisons are with December 31, 2020. Amounts are U.S. dollars unless stated otherwise.
Business context and results
U.S. Bancorp is a diversified bank holding company operating across commercial and consumer banking, wealth management, payment services, and treasury activities. Second-quarter results reflected economic recovery and improving credit conditions, alongside lower interest rates, reduced loan balances, and declining mortgage refinancing activity.
| Metric | Q2 2021 | Q2 2020 |
|---|---|---|
| Total net revenue | $5.783 billion | $5.838 billion |
| Net interest income | $3.137 billion | $3.200 billion |
| Noninterest income | $2.619 billion | $2.614 billion |
| Noninterest expense | $3.387 billion | $3.318 billion |
| Provision for credit losses | $170 million benefit | $1.737 billion expense |
| Net income attributable to U.S. Bancorp | $1.982 billion | $689 million |
| Diluted earnings per common share | $1.28 | $0.41 |
| Return on average assets / common equity | 1.44% / 16.3% | 0.51% / 5.3% |
| Taxable-equivalent net interest margin | 2.53% | 2.62% |
| Efficiency ratio | 59.0% | 57.6% |
Financial position, liquidity and capital
- Six-month performance: Net income attributable to U.S. Bancorp was $4.262 billion, or $2.73 diluted EPS, versus $1.860 billion and $1.12. Total net revenue fell 3.1% to $11.253 billion; the provision for credit losses was a $997 million benefit versus $2.730 billion of expense.
- Balance sheet at June 30: Assets were $558.9 billion, loans $296.9 billion, deposits $437.2 billion, and shareholders’ equity $53.0 billion. Versus year-end, assets rose 0.9%, deposits 1.7%, while loans were nearly flat and long-term debt declined 12.0% to $36.4 billion. Short-term borrowings were $13.4 billion.
- Funding and liquidity: Noninterest-bearing deposits increased 14.4% from year-end to $135.1 billion. The company reported $129.5 billion of fair-value unencumbered investment securities and $92.6 billion of additional potential FHLB/Federal Reserve borrowing capacity. It was compliant with the LCR and reported compliance with the NSFR requirement effective July 1, 2021.
- Capital: CET1 was 9.9%, Tier 1 capital 11.5%, total risk-based capital 13.4%, and leverage 8.5%; all regulatory ratios exceeded well-capitalized requirements. CET1 on a fully implemented CECL basis was 9.5%.
- Cash flows, six months: Operating activities provided $6.520 billion; investing used $25.356 billion; financing provided $829 million. Cash and due from banks fell $18.007 billion to $44.573 billion. Securities purchases were $54.911 billion, partly offset by maturities and sales.
Material changes versus comparable periods
- Q2 revenue declined 0.9% as lower net interest income largely offset modest noninterest-income growth. The six-month revenue decline was 3.1%.
- Net interest margin fell year over year, primarily due to lower rates, asset mix, and higher securities premium amortization. Average Q2 loans declined 7.5%, while average investment securities rose 32.9%.
- Credit costs improved sharply as economic and portfolio outlooks improved: Q2 provision was a benefit of $170 million, and net charge-offs were $180 million versus $437 million. The allowance declined to $6.610 billion, or 2.23% of period-end loans, from $8.010 billion and 2.69% at year-end.
- Noninterest expense rose 2.1% in Q2, with higher compensation, benefits, and technology costs. The efficiency ratio therefore worsened 1.4 percentage points.
- Payment-services activity strengthened: Q2 credit/debit card revenue rose 39.4% and merchant processing revenue 40.6%. Mortgage banking revenue fell 46.6% to $346 million as production and gain-on-sale margins declined.
- Available-for-sale securities increased 17.1% to $160.3 billion. Net unrealized gains fell to $980 million from $3.2 billion at year-end, and gross unrealized losses increased to $1.2 billion, principally reflecting interest-rate changes. The company said it did not plan to sell the securities with unrealized losses and did not expect to be required to sell them before recovery.
Outlook, commentary and risks
- Management said nonperforming assets were expected to continue declining over coming quarters, but could remain elevated longer in industries and loan categories most affected by the pandemic. It also expected charge-offs to normalize over time as the economy and consumer behavior recover.
- No specific earnings or revenue guidance was provided. The company said economic uncertainty, inflation concerns, diminishing support from stimulus and payment accommodations, and ongoing pandemic effects could increase credit losses and allowance needs.
- COVID-19 payment relief approved since March 2020 covered approximately 389,000 modifications totaling $24.5 billion; about 39,000 accounts totaling $5.4 billion remained active at June 30. Delinquency recognition may be delayed for enrolled borrowers.
- Key stated risks include interest-rate and securities-value changes, credit deterioration, competition, cybersecurity and operational failures, legal and regulatory developments, and LIBOR transition. The company had begun systems and contract transition work ahead of the cessation of most U.S. dollar LIBOR tenors after June 30, 2023.
- Legal and regulatory matters include Visa-related card litigation and a CFPB investigation into certain consumer sales practices. The company stated that aggregate reasonably possible losses above established reserves were not expected to be material to financial condition, results, or cash flows, while acknowledging a particular matter could materially affect results in a given period. The Visa member-bank indemnification has no specific maximum amount.
- Capital returns: the company repurchased about 15.0 million shares under its $3.0 billion authorization during Q2. It expected the board to approve a 9.5% increase in the Q3 dividend, payable in October 2021; approval remained subject to the board and regulatory requirements. The declared Q2 dividend was $0.42 per common share.
Most important facts for investors to verify
- Whether margin pressure from low rates, loan paydowns, and securities premium amortization persists, and how it affects earnings as deposit balances and mix evolve.
- Whether the substantial release of credit reserves is sustainable; monitor charge-offs, criticized loans, nonperforming assets, payment-relief exits, and pandemic-exposed commercial portfolios.
- Whether mortgage banking declines are offset by continued recovery in card, merchant, and other payment-services revenue.
- How interest-rate moves affect the large securities portfolio, accumulated other comprehensive income, and mortgage servicing rights valuations.
- Developments in CFPB inquiries, Visa litigation and indemnification, other legal contingencies, and the LIBOR transition.
- Execution of the repurchase and dividend plans, and maintenance of capital and liquidity above regulatory requirements.