U.S. Bancorp — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Comparisons are primarily with the corresponding 2022 periods; balance-sheet comparisons are with December 31, 2022. The results include MUFG Union Bank (MUB), acquired December 1, 2022, and reflect its merger into U.S. Bank on May 26, 2023. Unless noted otherwise, dollar amounts are in millions.
Financial performance and position
| Metric | Q2 2023 | Comparable change |
|---|---|---|
| Total net revenue | $7,175 | Up 19.3% year over year |
| Net interest income | $4,415 | Up 28.5%; taxable-equivalent net interest margin was 2.90%, versus 2.59% |
| Noninterest income | $2,726 | Up 7.0% |
| Noninterest expense | $4,569 | Up 22.7%; efficiency ratio was 63.7%, versus 62.1% |
| Provision for credit losses | $821 | Versus $311 in Q2 2022 |
| Net income attributable to U.S. Bancorp | $1,361 | Down 11.1% |
| Diluted earnings per common share | $0.84 | Down 15.2% from $0.99 |
| Return on average assets / common equity | 0.81% / 10.9% | Versus 1.06% / 13.9% |
For the first six months, net income attributable to U.S. Bancorp was $3,059 and diluted EPS was $1.87, compared with $3,088 and $1.97 in 2022. Revenue increased 23.6% to $14,350, while noninterest expense rose 26.3% to $9,124 and provision expense increased to $1,248 from $423.
- Balance sheet at June 30: Assets were $680.8 billion, up 0.9% from year-end; loans were $379.4 billion, down 2.3%; investment securities were $156.2 billion, down 3.4%.
- Funding and debt: Deposits were $521.6 billion, down 0.6% from year-end. Noninterest-bearing deposits declined 23.8% to $105.0 billion. Short-term borrowings were $32.3 billion and long-term debt was $45.3 billion, up 3.6% and 13.7%, respectively.
- Credit: Net charge-offs were $649 million in Q2, or 0.67% of average loans, versus $161 million and 0.20% a year earlier. The allowance for credit losses was $7.7 billion, 2.03% of period-end loans, versus $7.4 billion and 1.91% at year-end. Nonperforming assets were $1.085 billion, up 6.8% from year-end.
- Liquidity and capital: Reported total available liquidity was $316.3 billion. The company said liquidity equaled 120% of uninsured deposits and that it was compliant with LCR and NSFR requirements. CET1 was 9.1%; the fully implemented CECL CET1 measure was 8.9%. Regulatory capital ratios exceeded “well-capitalized” requirements.
- Cash flow, six months: Operating activities provided $4.2 billion, compared with $10.7 billion in 2022; investing activities provided $11.5 billion, versus $19.5 billion used; financing activities provided $1.5 billion, versus $19.0 billion. Cash and due from banks ended at $70.6 billion, up from $53.5 billion at year-end.
Changes, unusual items and management commentary
- Higher interest rates and the MUB acquisition drove most of the growth in net interest income and margin. Higher trust and investment management fees, commercial products revenue and payment-services revenue supported noninterest income; mortgage banking revenue was weaker over the first half.
- Management said Q2 results included $310 million of MUB merger and integration charges and $22 million of losses related to balance-sheet repositioning and capital-management actions. It also identified $243 million of provision expense associated with those actions; these items together reduced diluted EPS by $0.28. Total Q2 provision expense was $821 million.
- Credit costs rose amid balance-sheet repositioning, acquired MUB loans, normalizing credit losses and economic uncertainty. Excluding specified notable charge-offs, the annualized net charge-off ratio was 0.35% in Q2 and 0.32% for the first half. Credit-card delinquency and charge-offs increased, and commercial real estate deterioration contributed to higher nonperforming assets.
- The company reported $7.7 billion of unrealized losses on available-for-sale securities at June 30, down from $8.5 billion at year-end. It said it had no plans to sell securities in unrealized-loss positions and did not expect to be required to sell them before recovery of amortized cost.
- The FDIC proposed a special assessment related to failures of other banks. If finalized as proposed, U.S. Bancorp estimated about $650 million of additional pretax expense ($500 million after tax), potentially reducing CET1 by approximately 10 basis points. The proposal and accounting timing remained uncertain.
- No quantitative earnings guidance was provided in the supplied filing text. Management identified ongoing economic, interest-rate, credit, deposit-funding, regulatory, operational, cybersecurity, litigation and MUB integration risks. A proposed July 2023 bank-capital rule was expected to require higher capital if finalized.
Acquisition, contingencies and controls
MUB consideration included $5.5 billion cash and approximately 44 million U.S. Bancorp shares. The company also received $3.5 billion of additional MUB cash, repayable to MUFG by December 1, 2027. Subsequent to quarter-end, on August 3, U.S. Bancorp issued 24 million shares to an MUFG affiliate for $936 million and used the proceeds to reduce that obligation; $2.6 billion remained. The company also disclosed an OCC consent order inherited from MUB concerning technology and operational risk management.
The company described ongoing legal and regulatory matters, including residential mortgage-backed securities trustee litigation, an SEC record-retention inquiry and a CFPB and other-regulator investigation into administration of pandemic-era unemployment-benefit prepaid cards. It said the ultimate resolution of existing matters was not expected to materially affect financial condition, results or cash flows, while noting that an individual matter could materially affect results for a particular period. Management concluded disclosure controls were effective; the MUB conversion into internal financial-reporting processes was completed during the quarter.
Most important facts for investors to verify
- How much of revenue and earnings growth reflects recurring business performance versus MUB consolidation and higher rates, and whether integration savings and benefits are being realized.
- Whether credit deterioration—especially card, commercial real estate and other retail losses—continues, and how charge-offs compare after excluding repositioning and acquired-loan items.
- Deposit mix, pricing and outflows, including the sharp decline in noninterest-bearing deposits; confirm liquidity availability under stressed conditions and the stated uninsured-deposit coverage.
- Potential effects of the FDIC special assessment and proposed regulatory capital requirements on expense, CET1 and capital distributions.
- Progress on the remaining $2.6 billion MUFG repayment obligation, MUB integration, and the inherited OCC consent-order requirements.
- Underlying interest-rate sensitivity, the ability to hold securities with unrealized losses, and any material developments in disclosed legal or regulatory matters.