U.S. Bancorp — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. U.S. Bancorp is a diversified financial services company. Results include MUFG Union Bank (MUB), acquired December 1, 2022; MUB was merged into U.S. Bank in May 2023.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $4.24B | $3.83B | $13.29B | $10.44B |
| Noninterest income | $2.76B | $2.47B | $8.00B | $7.41B |
| Total net revenue | $7.03B | $6.33B | $21.38B | $17.93B |
| Noninterest expense | $4.53B | $3.64B | $13.65B | $10.86B |
| Provision for credit losses | $515M | $362M | $1.76B | $785M |
| Net income attributable to U.S. Bancorp | $1.52B | $1.81B | $4.58B | $4.90B |
| Diluted earnings per share | $0.91 | $1.16 | $2.79 | $3.13 |
| Net interest margin, taxable-equivalent | 2.81% | 2.83% | 2.94% | 2.62% |
| Efficiency ratio | 64.4% | 57.5% | 63.8% | 60.7% |
| Return on average assets / common equity | 0.91% / 11.9% | 1.22% / 15.8% | 0.92% / 12.3% | 1.13% / 14.1% |
Revenue growth reflected higher rates on earning assets, MUB, and stronger fee income. Expense growth outpaced revenue growth, reflecting MUB integration and operating costs, higher compensation, and intangible amortization. Q3 results included $284M of merger and integration charges, reducing diluted EPS by $0.14. For the first nine months, such charges were $838M; the filing says merger charges, specified credit-loss and repositioning items together reduced diluted EPS by $0.53.
Balance sheet, credit, liquidity and capital
- At September 30, assets were $668.0B, loans $375.2B, deposits $518.4B, long-term debt $43.1B, and shareholders’ equity $53.1B. Compared with December 31, 2022, loans fell 3.3%, deposits fell 1.3%, and long-term debt rose 8.1%.
- Deposit mix shifted: noninterest-bearing deposits were down $39.7B (28.8%) from year-end, while time deposits and money market balances increased. Management cited MUB account conversions and pricing pressure from rising rates.
- Available liquidity was reported at $310.4B, including $56.5B of cash at central banks, $32.9B of available securities and $221.0B of Federal Reserve and FHLB borrowing capacity. The company reported compliance with regulatory LCR and NSFR requirements.
- Regulatory capital ratios were 9.7% CET1, 11.2% Tier 1 and 13.4% total risk-based capital; all exceeded “well-capitalized” requirements. CET1 on a fully phased-in CECL basis was 9.5%.
- Credit indicators weakened: Q3 net charge-offs were $420M, or 0.44% of average loans, versus $162M and 0.19% a year earlier. Nonperforming assets rose 28.9% from year-end to $1.31B; nonperforming assets were 0.35% of loans and other real estate. The allowance for credit losses was $7.79B, or 2.08% of period-end loans.
- Cash flows for the first nine months: $8.0B provided by operating activities, $17.1B provided by investing activities and $14.3B used in financing activities. Cash and due from banks ended at $64.4B, versus $41.7B at September 30, 2022.
- The quarterly common dividend was $0.48 per share. Common stock repurchases remained suspended apart from purchases connected with employee stock plans.
Material changes and unusual items
- Q3 net income attributable to U.S. Bancorp fell 15.9% year over year, while revenue rose 11.2%. For the first nine months, revenue increased 19.2%, but net income declined 6.5%.
- Credit costs rose amid normalizing losses, commercial real estate deterioration and greater economic uncertainty. The nine-month provision also reflected balance-sheet repositioning and capital-management actions; net charge-offs included $309M from those actions and $91M related to acquired MUB loans.
- Unrealized losses on available-for-sale securities were $9.5B pretax ($7.1B after tax), versus $8.5B pretax at year-end, primarily due to interest-rate-driven fair-value declines. Management said it did not plan to sell the loss-position securities and did not expect to be required to sell them before recovery of amortized cost.
- The MUB acquisition included a $3.5B cash-related repayment obligation to MUFG. In August, U.S. Bancorp issued 24M shares to an MUFG affiliate for $936M and used the proceeds to reduce the obligation; $2.6B remained, due on or before December 2027.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management highlighted economic uncertainty, rising rates and inflation, recession risk, funding and deposit pricing pressures, and potential credit deterioration—particularly in commercial real estate. Interest-rate sensitivity modeling projected next-12-month net interest income changes of -0.40% for an immediate 50-basis-point decline and +0.70% for an immediate 50-basis-point increase; actual results may differ materially as deposit behavior, pricing and balance-sheet mix change.
- A proposed FDIC special assessment, if finalized as proposed, could result in approximately $650M of additional expense ($500M after tax) and an estimated 10-basis-point reduction in CET1. Amount and timing were not final.
- Proposed U.S. regulatory capital rules could increase required capital; the company was evaluating the impact. Separately, the Federal Reserve granted relief from acquisition-related commitments to meet Category II requirements, leaving the company subject to Category III requirements.
- The company disclosed ongoing litigation and regulatory matters, including residential mortgage-backed securities trustee litigation, an SEC/CFTC record-retention inquiry involving electronic communications, and investigations of its administration of pandemic-era unemployment-benefit prepaid debit cards. Outcomes and potential financial effects remain uncertain.
- Other stated risks include MUB integration and realization of expected benefits, changes in regulation and FDIC assessments, cybersecurity and operational disruptions, competition, litigation, and liquidity or market stress. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether deposit outflows, migration into higher-cost accounts and funding costs continue to pressure net interest margin and earnings.
- Whether commercial real estate and consumer credit deterioration persists, and how charge-offs, nonperforming assets and reserves develop.
- The final FDIC special-assessment amount and timing, and the resulting expense and capital effect.
- Progress and costs of MUB integration, realization of acquisition benefits, and repayment of the remaining $2.6B MUFG obligation.
- Potential effects of the proposed capital rules, securities unrealized losses, and the disclosed regulatory investigations and litigation.