US BANCORP \DE\
10-Qs and 10-Ks
PROXIES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2023
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from (not applicable)
Commission file number 1-6880
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices, including zip code)
(Registrant’s telephone number, including area code)
(not applicable)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
Trading symbols |
Name of each exchange on which registered | ||
| |
||||
| |
||||
| |
||||
| |
||||
| |
||||
| |
||||
| |
||||
| 0.850% |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
☑ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☑ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Accelerated filer ☐ | ||
Non-accelerated filer ☐ |
Smaller reporting company Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ☐ NO ☑
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class | Outstanding as of April 30, 2023 | |
| Common Stock, $0.01 Par Value |
Table of Contents and Form 10-Q Cross Reference Index
Part I — Financial Information |
||||
| 4 | ||||
| 4 | ||||
| 5 | ||||
| 7 | ||||
| 31 | ||||
| 33 | ||||
| 33 | ||||
| 9 | ||||
| 9 | ||||
| 10 | ||||
| 21 | ||||
| 21 | ||||
| 21 | ||||
| 21 | ||||
| 23 | ||||
| 25 | ||||
| 27 | ||||
| 28 | ||||
| 34 | ||||
Part II — Other Information |
||||
| 75 | ||||
| 75 | ||||
| 75 | ||||
| 75 | ||||
| 76 | ||||
| 77 | ||||
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995.
This quarterly report on Form 10-Q contains forward-looking statements about U.S. Bancorp. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements and are based on the information available to, and assumptions and estimates made by, management as of the date hereof. These forward-looking statements cover, among other things, future economic conditions and the anticipated future revenue, expenses, financial condition, asset quality, capital and liquidity levels, plans, prospects and operations of U.S. Bancorp. Forward-looking statements often use words such as “anticipates,” “targets,” “expects,” “hopes,” “estimates,” “projects,” “forecasts,” “intends,” “plans,” “goals,” “believes,” “continue” and other similar expressions or future or conditional verbs such as “will,” “may,” “might,” “should,” “would” and “could.”
Forward-looking statements involve inherent risks and uncertainties that could cause actual results to differ materially from those set forth in forward-looking statements, including the following risks and uncertainties:
| • | Deterioration in general business and economic conditions or turbulence in domestic or global financial markets, which could adversely affect U.S. Bancorp’s revenues and the values of its assets and liabilities, reduce the availability of funding to certain financial institutions, lead to a tightening of credit, and increase stock price volatility; |
| • | Turmoil and volatility in the financial services industry, including failures or rumors of failures of other depository institutions, which could affect the ability of depository institutions, including U.S. Bank National Association and MUFG Union Bank, N.A. (“MUB”), to attract and retain depositors, and could affect the ability of financial services providers, including U.S. Bancorp, to borrow or raise capital; |
| • | Increases in Federal Deposit Insurance Corporation (“FDIC”) assessments due to bank failures; |
| • | Actions taken by governmental agencies to stabilize the financial system and the effectiveness of such actions; |
| • | Changes to regulatory capital, liquidity and resolution-related requirements applicable to large banking organizations in response to recent developments affecting the banking sector; |
| • | Changes to statutes, regulations, or regulatory policies or practices, including capital and liquidity requirements, and the enforcement and interpretation of such laws and regulations, and U.S. Bancorp’s ability to address or satisfy those requirements and other requirements or conditions imposed by regulatory entities; |
| • | Changes in interest rates; |
| • | Increases in unemployment rates; |
| U.S. Bancorp | 1 |
| • | Deterioration in the credit quality of its loan portfolios or in the value of the collateral securing those loans; |
| • | Risks related to originating and selling mortgages, including repurchase and indemnity demands, and related to U.S. Bancorp’s role as a loan servicer; |
| • | Impacts of current, pending or future litigation and governmental proceedings; |
| • | Increased competition from both banks and non-banks; |
| • | Effects of climate change and related physical and transition risks; |
| • | Changes in customer behavior and preferences and the ability to implement technological changes to respond to customer needs and meet competitive demands; |
| • | Breaches in data security; |
| • | Failures or disruptions in or breaches of U.S. Bancorp’s operational, technology or security systems or infrastructure, or those of third parties; |
| • | Failures to safeguard personal information; |
| • | Impacts of pandemics, including the COVID-19 pandemic, natural disasters, terrorist activities, civil unrest, international hostilities and geopolitical events; |
| • | Impacts of supply chain disruptions, rising inflation, slower growth or a recession; |
| • | Failure to execute on strategic or operational plans; |
| • | Effects of mergers and acquisitions and related integration; |
| • | Effects of critical accounting policies and judgments; |
| • | Effects of changes in or interpretations of tax laws and regulations; |
| • | Management’s ability to effectively manage credit risk, market risk, operational risk, compliance risk, strategic risk, interest rate risk, liquidity risk and reputation risk; and |
| • | The risks and uncertainties more fully discussed in the section entitled “Risk Factors” of U.S. Bancorp’s Form 10-K for the year ended December 31, 2022, and subsequent filings with the Securities and Exchange Commission. |
In addition, U.S. Bancorp’s acquisition of MUB presents risks and uncertainties, including, among others: the risk that the cost savings, any revenue synergies and other anticipated benefits of the acquisition may not be realized or may take longer than anticipated to be realized; and the possibility that the combination of MUB with U.S. Bancorp, including the integration of MUB, may be more costly or difficult to complete than anticipated or have unanticipated adverse results.
In addition, factors other than these risks also could adversely affect U.S. Bancorp’s results, and the reader should not consider these risks to be a complete set of all potential risks or uncertainties. Readers are cautioned not to place undue reliance on any forward-looking statements. Forward-looking statements speak only as of the date hereof, and U.S. Bancorp undertakes no obligation to update them in light of new information or future events.
2 |
U.S. Bancorp |
Table 1 |
Selected Financial Data |
| Three Months Ended March 31 | ||||||||||||
| (Dollars and Shares in Millions, Except Per Share Data) | 2023 | 2022 | Percent Change |
|||||||||
Condensed Income Statement |
||||||||||||
Net interest income |
$ | 4,634 | $ | 3,173 | 46.0 | % | ||||||
Taxable-equivalent adjustment (a) |
34 | 27 | 25.9 | |||||||||
Net interest income (taxable-equivalent basis) (b) |
4,668 | 3,200 | 45.9 | |||||||||
Noninterest income |
2,507 | 2,396 | 4.6 | |||||||||
Total net revenue |
7,175 | 5,596 | 28.2 | |||||||||
Noninterest expense |
4,555 | 3,502 | 30.1 | |||||||||
Provision for credit losses |
427 | 112 | * | |||||||||
Income before taxes |
2,193 | 1,982 | 10.6 | |||||||||
Income taxes and taxable-equivalent adjustment |
489 | 424 | 15.3 | |||||||||
Net income |
1,704 | 1,558 | 9.4 | |||||||||
Net (income) loss attributable to noncontrolling interests |
(6 | ) | (1 | ) | * | |||||||
Net income attributable to U.S. Bancorp |
$ | 1,698 | $ | 1,557 | 9.1 | |||||||
Net income applicable to U.S. Bancorp common shareholders |
$ | 1,592 | $ | 1,466 | 8.6 | |||||||
Per Common Share |
||||||||||||
Earnings per share |
$ | 1.04 | $ | .99 | 5.1 | % | ||||||
Diluted earnings per share |
1.04 | .99 | 5.1 | |||||||||
Dividends declared per share |
.48 | .46 | 4.3 | |||||||||
Book value per share (c) |
30.12 | 29.87 | .8 | |||||||||
Market value per share |
36.05 | 53.15 | (32.2 | ) | ||||||||
Average common shares outstanding |
1,532 | 1,485 | 3.2 | |||||||||
Average diluted common shares outstanding |
1,532 | 1,486 | 3.1 | |||||||||
Financial Ratios |
||||||||||||
Return on average assets |
1.03 | % | 1.09 | % | ||||||||
Return on average common equity |
14.1 | 12.7 | ||||||||||
Net interest margin (taxable-equivalent basis) (a) |
3.10 | 2.44 | ||||||||||
Efficiency ratio (b) |
63.2 | 62.8 | ||||||||||
Net charge-offs as a percent of average loans outstanding |
.39 | .21 | ||||||||||
Average Balances |
||||||||||||
Loans |
$ | 386,750 | $ | 312,966 | 23.6 | % | ||||||
Loans held for sale |
2,461 | 5,479 | (55.1 | ) | ||||||||
Investment securities (d) |
166,125 | 174,762 | (4.9 | ) | ||||||||
Earning assets |
607,614 | 529,837 | 14.7 | |||||||||
Assets |
665,447 | 577,402 | 15.2 | |||||||||
Noninterest-bearing deposits |
129,741 | 127,963 | 1.4 | |||||||||
Deposits |
510,324 | 454,176 | 12.4 | |||||||||
Short-term borrowings |
36,467 | 19,038 | 91.5 | |||||||||
Long-term debt |
41,024 | 32,972 | 24.4 | |||||||||
Total U.S. Bancorp shareholders’ equity |
52,667 | 53,466 | (1.5 | ) | ||||||||
| March 31, 2023 |
December 31, 2022 |
|||||||||||
Period End Balances |
||||||||||||
Loans |
$ | 387,866 | $ | 388,213 | (.1 | )% | ||||||
Investment securities |
153,953 | 161,650 | (4.8 | ) | ||||||||
Assets |
682,377 | 674,805 | 1.1 | |||||||||
Deposits |
505,339 | 524,976 | (3.7 | ) | ||||||||
Long-term debt |
42,045 | 39,829 | 5.6 | |||||||||
Total U.S. Bancorp shareholders’ equity |
52,989 | 50,766 | 4.4 | |||||||||
Asset Quality |
||||||||||||
Nonperforming assets |
$ | 1,181 | $ | 1,016 | 10.2 | % | ||||||
Allowance for credit losses |
7,523 | 7,404 | 1.6 | |||||||||
Allowance for credit losses as a percentage of period-end loans |
1.94 | % | 1.91 | % | ||||||||
Capital Ratios |
||||||||||||
Common equity tier 1 capital |
8.5 | % | 8.4 | % | ||||||||
Tier 1 capital |
10.0 | 9.8 | ||||||||||
Total risk-based capital |
12.1 | 11.9 | ||||||||||
Leverage |
7.5 | 7.9 | ||||||||||
Total leverage exposure |
6.1 | 6.4 | ||||||||||
Tangible common equity to tangible assets (b) |
4.8 | 4.5 | ||||||||||
Tangible common equity to risk-weighted assets (b) |
6.5 | 6.0 | ||||||||||
Common equity tier 1 capital to risk-weighted assets, reflecting the full implementation of the current expected credit losses methodology (b) |
8.3 | 8.1 | ||||||||||
* |
Not meaningful |
(a) |
Based on a federal income tax rate of 21 percent for those assets and liabilities whose income or expense is not included for federal income tax purposes. |
(b) |
See Non-GAAP Financial Measures beginning on page 31. |
(c) |
Calculated as U.S. Bancorp common shareholders’ equity divided by common shares outstanding at end of the period. |
(d) |
Excludes unrealized gains and losses on available-for-sale investment securities and any premiums or discounts recorded related to the transfer of investment securities at fair value from available-for-sale to held-to-maturity. |
| U.S. Bancorp | 3 |
Management’s Discussion and Analysis
OVERVIEW
Earnings Summary
U.S. Bancorp and its subsidiaries (the “Company”) reported net income attributable to U.S. Bancorp of $1.7 billion for the first quarter of 2023, or $1.04 per diluted common share, compared with $1.6 billion, or $0.99 per diluted common share, for the first quarter of 2022. Return on average assets and return on average common equity were 1.03 percent and 14.1 percent, respectively, for the first quarter of 2023, compared with 1.09 percent and 12.7 percent, respectively, for the first quarter of 2022. The results for the first quarter of 2023 included the impact of $244 million ($183 million net-of-tax) of merger and integration-related charges associated with the acquisition of MUFG Union Bank, N.A. (“MUB”), which decreased diluted earnings per common share by $0.12.
Total net revenue for the first quarter of 2023 was $1.6 billion (28.2 percent) higher than the first quarter of 2022, reflecting a 46.0 percent increase in net interest income (45.9 percent on a taxable-equivalent basis) and a 4.6 percent increase in noninterest income. The increase in net interest income from the first quarter of 2022 was due to the impact of rising interest rates on earning assets and the impacts of the MUB acquisition. The increase in noninterest income reflected higher payment services revenue, trust and investment management fees, and commercial products revenue, partially offset by lower mortgage banking revenue and losses on securities.
Noninterest expense in the first quarter of 2023 was $1.1 billion (30.1 percent) higher than the first quarter of 2022, reflecting merger and integration charges and operating expenses related to the MUB acquisition, including core deposit intangible amortization expense, as well as increases in legacy compensation and employee benefits expense to support business growth.
The provision for credit losses for the first quarter of 2023 of $427 million was $315 million higher than the first quarter of 2022, driven by the acquisition of MUB, normalizing credit losses and continued economic uncertainty. Net charge-offs in the first quarter of 2023 were $373 million, compared with $162 million in the first quarter of 2022. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.
Recent Industry Events
Disruption in the banking industry in early March of 2023 resulted in significant deposit run-off at certain banking institutions and reinforced the importance of maintaining a well-diversified business with an appropriate risk profile. The Company’s resilient and diversified deposit base, ample liquidity levels and strong credit quality, supported by disciplined underwriting standards, are all aspects of the Company’s approach to strong risk management. Key highlights included:
| • | From the beginning of the industry disruption on March 8, 2023, through the end of the first quarter, total deposit balances were relatively stable, decreasing only 0.6 percent. |
| • | Subsequent to March 31, 2023 and through April 30, 2023, total deposit balances decreased approximately $17 billion, of which $10 billion was related to seasonal corporate trust fluctuations, and $3 billion was related to transitional MUB deposits. |
| • | At March 31, 2023, the Company’s percent of insured deposits to total deposits was approximately 51 percent, with approximately 80 percent of uninsured deposits comprised of operational wholesale trust and retail deposits, which tend to be more stable as customers are contractually bound or tied to treasury management services and trust activities provided to corporate and institutional clients. |
| • | At March 31, 2023, the Company’s total available liquidity was approximately $315 billion, representing approximately 126 percent of uninsured deposits. |
| • | Over the last five quarters, and well ahead of the recent banking industry disruption, the Company reduced its investment securities portfolio from approximately 30 percent to 25 percent of total assets, while increasing cash levels. |
MUFG Union Bank Acquisition
On December 1, 2022, the Company acquired MUB’s core regional banking franchise from Mitsubishi UFJ Financial Group, Inc. Pursuant to the terms of the Share Purchase Agreement, the Company acquired all of the issued and outstanding shares of common stock of MUB for a purchase price consisting of $5.5 billion in cash and approximately 44 million shares of the Company’s common stock. The Company also received additional MUB cash of $3.5 billion upon completion of the acquisition. The additional cash received is held at the MUB subsidiary and required to be repaid to Mitsubishi UFJ Financial
4 |
U.S. Bancorp |
Group, Inc. on or prior to the fifth anniversary date of the completion of the purchase. As such, it is recognized as debt at the parent company. The transaction excluded the purchase of substantially all of MUB’s Global Corporate & Investment Bank (other than certain deposits), certain middle and back-office functions, and other assets. MUB operates approximately 300 branches in California, Washington and Oregon. The Company’s first quarter of 2023 results reflect the full benefit of the acquisition into the reported results. As of the date of acquisition, MUB is a wholly-owned subsidiary of the Company and an affiliate of U.S. Bank National Association (“USBNA”), the Company’s primary banking subsidiary. The Company expects to merge MUB into USBNA in connection with the conversion of MUB customers and systems to the USBNA platform over Memorial Day weekend in 2023.
STATEMENT OF INCOME ANALYSIS
Net Interest Income
Net interest income, on a taxable-equivalent basis, was $4.7 billion in the first quarter of 2023, representing an increase of $1.5 billion (45.9 percent) compared with the first quarter of 2022. The increase was primarily due to the impact of rising interest rates on earning assets and the acquisition of MUB. Average earning assets were $77.8 billion (14.7 percent) higher than the first quarter of 2022, reflecting increases in loans and interest-bearing deposits with banks, partially offset by a decrease in investment securities. The net interest margin, on a taxable-equivalent basis, in the first quarter of 2023 was 3.10 percent, compared with 2.44 percent in the first quarter of 2022. The increase in net interest margin from the first quarter of 2022 was primarily due to the impact of higher rates on earning assets and the acquisition of MUB. Refer to the “Consolidated Daily Average Balance Sheet and Related Yields and Rates” table for further information on net interest income.
Average total loans in the first quarter of 2023 were $73.8 billion (23.6 percent) higher than the first quarter of 2022. The increase was driven by growth in the Company’s legacy loan portfolio as well as $52.8 billion in average loan balances from the MUB acquisition. Increases in residential mortgages (50.1 percent), commercial loans (21.7 percent), commercial real estate loans (42.2 percent) and credit card loans (17.1 percent) were partially offset by lower other retail loans (13.2 percent). The increase in residential mortgages was driven by the impact related to the MUB acquisition, along with on-balance sheet loan activities and slower refinancing activity. The increase in commercial loans was due to higher utilization driven by working capital needs of corporate customers, slower payoffs given higher volatility in the capital markets, as well as core growth and the impact related to the MUB acquisition. The increase in commercial real estate loans was driven by the impact of the MUB acquisition, while the increase in credit cards loans was primarily driven by higher spend volumes, account growth and lower payment rates. The decrease in other retail loans was driven by lower auto and installment loans and lower retail leasing balances, partially offset by higher home equity and second mortgages.
Average investment securities in the first quarter of 2023 were $8.6 billion (4.9 percent) lower than the first quarter of 2022, driven by balance sheet repositioning and liquidity management in connection with the acquisition of MUB. The decrease from the first quarter of 2022 reflected sales of investments securities, partially offset by the impact of acquired MUB investment securities.
Average total deposits for the first quarter of 2023 were $56.1 billion (12.4 percent) higher than the first quarter of 2022. Average total savings deposits for the first quarter of 2023 were $43.5 billion (14.4 percent) higher than the first quarter of 2022, driven by the acquisition of MUB and increases in Corporate and Commercial Banking, and Wealth Management and Investment Services balances, partially offset by a decrease in Consumer and Business Banking balances. Average time deposits were $10.9 billion (44.1 percent) higher than the prior year, mainly due to the acquisition of MUB and an increase in Consumer and Business Banking balances. Changes in time deposits are primarily related to those deposits managed as an alternative to other funding sources, based largely on relative pricing and liquidity characteristics. Average noninterest-bearing deposits were $1.8 billion (1.4 percent) higher than the prior year, driven by the impact of the MUB acquisition, partially offset by a decrease across all legacy business lines.
Provision for Credit Losses
The provision for credit losses was $427 million in the first quarter of 2023, compared with $112 million in the first quarter of 2022. The increase of $315 million was driven by the acquisition of MUB, normalizing credit losses and continued economic uncertainty. Net charge-offs increased $211 million in the first quarter of 2023, compared with the first quarter of 2022, reflecting $91 million of charge-offs related to the uncollectible amount of acquired loans, which were considered purchased credit deteriorated as of the date of the MUB acquisition, as well as higher charge-offs in most loan categories consistent with normalizing credit conditions. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge- offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.
| U.S. Bancorp | 5 |
Table 2 |
Noninterest Income |
Three Months Ended March 31 |
||||||||||||
| (Dollars in Millions) | 2023 | 2022 | Percent Change |
|||||||||
Card revenue |
$ | 360 | $ | 338 | 6.5 | % | ||||||
Corporate payment products revenue |
189 | 158 | 19.6 | |||||||||
Merchant processing services |
387 | 363 | 6.6 | |||||||||
Trust and investment management fees |
590 | 500 | 18.0 | |||||||||
Service charges |
324 | 333 | (2.7 | ) | ||||||||
Commercial products revenue |
334 | 266 | 25.6 | |||||||||
Mortgage banking revenue |
128 | 200 | (36.0 | ) | ||||||||
Investment products fees |
68 | 62 | 9.7 | |||||||||
Securities gains (losses), net |
(32 | ) | 18 | * | ||||||||
Other |
159 | 158 | .6 | |||||||||
Total noninterest income |
$ | 2,507 | $ | 2,396 | 4.6 | % | ||||||
* |
Not meaningful |
Noninterest Income
Noninterest income was $2.5 billion in the first quarter of 2023, representing an increase of $111 million (4.6 percent) compared with the first quarter of 2022. The increase over the prior year reflected stronger trust and investment management fees, payment services revenue and commercial products revenue, partially offset by lower mortgage banking revenue and losses on the sale of securities. Trust and investment management fees increased $90 million (18.0 percent) driven by lower money market fee waivers and core business growth, partially offset by unfavorable market conditions. Payment services revenue increased $77 million (9.0 percent), as card revenue increased $22 million (6.5 percent) driven by higher sales volume and the acquisition of MUB, corporate payment products revenue increased $31 million (19.6 percent) due to higher business spending across all product groups and merchant processing services revenue increased $24 million (6.6 percent) driven by higher sales volume and merchant fees. Commercial products revenue increased $68 million (25.6 percent) driven by higher trading revenue and the acquisition of MUB. Mortgage banking revenue decreased $72 million (36.0 percent) reflecting lower application volume, given declining refinancing activities experienced in the mortgage industry, lower related gain on sale margins and fewer sales of performing loans, partially offset by increases in mortgage servicing rights (“MSRs”) valuations, net of hedging activities.
Noninterest Expense
Noninterest expense was $4.6 billion in the first quarter 2023, representing an increase of $1.1 billion (30.1 percent) over the first quarter of 2022. The increase from the prior year reflected the impact of $244 million of merger and integration charges, as well as operating expenses related to the MUB acquisition, higher compensation and employee benefits expense, higher other intangibles expense and higher other noninterest expense. Compensation and employee benefits expense increased $397 million (17.7 percent) primarily due to MUB expense as well as merit increases and hiring to support business growth and lower capitalized loan costs driven by lower mortgage production, partially offset by lower performance-based incentives. Other intangibles expense increased $113 million driven by the core deposit intangible created as a result of the MUB acquisition. Other noninterest expense increased $103 million (32.0 percent) due to lower prior year accruals related to future delivery exposures for merchant and airline processing and other liabilities, higher Federal Deposit Insurance Corporation (“FDIC”) insurance expense driven by an increase in the assessment base and rate, and MUB expense. Although the timing is unknown, the Company expects that FDIC insurance assessments in future periods may be elevated due to recent failures by other banking institutions.
Income Tax Expense
The provision for income taxes was $455 million (an effective rate of 21.1 percent) for the first quarter of 2023, compared with $397 million (an effective rate of 20.3 percent) for the first quarter of 2022. For further information on income taxes, refer to Note 12 of the Notes to Consolidated Financial Statements.
6 |
U.S. Bancorp |
Table 3 |
Noninterest Expense |
| Three Months Ended March 31 |
||||||||||||
| (Dollars in Millions) | 2023 | 2022 | Percent Change |
|||||||||
Compensation and employee benefits |
$ | 2,646 | $ | 2,249 | 17.7 | % | ||||||
Net occupancy and equipment |
321 | 269 | 19.3 | |||||||||
Professional services |
134 | 114 | 17.5 | |||||||||
Marketing and business development |
122 | 80 | 52.5 | |||||||||
Technology and communications |
503 | 421 | 19.5 | |||||||||
Other intangibles |
160 | 47 | * | |||||||||
Other |
425 | 322 | 32.0 | |||||||||
Total before merger and integration charges |
4,311 | 3,502 | 23.1 | |||||||||
Merger and integration charges |
244 | — | * | |||||||||
Total noninterest expense |
$ | 4,555 | $ | 3,502 | 30.1 | % | ||||||
Efficiency ratio (a) |
63.2 | % | 62.8 | % | ||||||||
* |
Not meaningful |
(a) |
See Non-GAAP Financial Measures beginning on page 31. |
BALANCE SHEET ANALYSIS
Loans
The Company’s loan portfolio was $387.9 billion at March 31, 2023, compared with $388.2 billion at December 31, 2022, a decrease of $347 million (0.1 percent). The decrease was driven by lower other retail loans, credit card loans and commercial real estate loans, partially offset by higher commercial loans and residential mortgages.
Other retail loans decreased $2.0 billion (3.6 percent) at March 31, 2023, compared with December 31, 2022, primarily due to decreases in auto loans, retail leasing balances, revolving credit balances and installment loans.
Credit card loans decreased $806 million (3.1 percent) at March 31, 2023, compared with December 31, 2022, primarily the result of customers seasonally paying down balances.
Commercial real estate loans decreased $329 million (0.6 percent) at March 31, 2023, compared with December 31, 2022, due to payoffs exceeding a reduced level of new originations.
Commercial loans increased $1.6 billion (1.2 percent) at March 31, 2023, compared with December 31, 2022, due to higher utilization driven by working capital needs of corporate customers and slower payoffs given higher volatility in the capital markets, as well as core growth.
Residential mortgages held in the loan portfolio increased $1.1 billion (1.0 percent) at March 31, 2023, compared with December 31, 2022, due to stronger on-balance sheet loan activities and slower refinance activity. Residential mortgages originated and placed in the Company’s loan portfolio include jumbo mortgages and branch-originated first lien home equity loans to borrowers with high credit quality.
The Company generally retains portfolio loans through maturity; however, the Company’s intent may change over time based upon various factors such as ongoing asset/liability management activities, assessment of product profitability, credit risk, liquidity needs, and capital implications. If the Company’s intent or ability to hold an existing portfolio loan changes, it is transferred to loans held for sale.
Loans Held for Sale
Loans held for sale, consisting primarily of residential mortgages to be sold in the secondary market, were $2.4 billion at March 31, 2023, compared with $2.2 billion at December 31, 2022. The increase in loans held for sale was principally due to a higher level of mortgage loan closings in the first quarter of 2023, compared with the fourth quarter of 2022. Almost all of the residential mortgage loans the Company originates or purchases for sale follow guidelines that allow the loans to be sold into existing, highly liquid secondary markets, in particular in government agency transactions and to government-sponsored enterprises (“GSEs”).
| U.S. Bancorp | 7 |
Table 4 |
Investment Securities |
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||
| (Dollars in Millions) | Amortized Cost |
Fair Value | Weighted- Average Maturity in Years |
Weighted- Average Yield (d) |
Amortized Cost |
Fair Value | Weighted- Average Maturity in Years |
Weighted- Average Yield (d) |
||||||||||||||||||||||||
Held-to-maturity |
||||||||||||||||||||||||||||||||
U.S. Treasury and agencies |
$ | 1,344 | $ | 1,307 | 3.0 | 2.85 | % | $ | 1,344 | $ | 1,293 | 3.3 | 2.85 | % | ||||||||||||||||||
Mortgage-backed securities (a) |
87,118 | 77,569 | 9.0 | 2.23 | 87,396 | 76,581 | 9.3 | 2.17 | ||||||||||||||||||||||||
Total held-to-maturity |
$ | 88,462 | $ | 78,876 | 8.9 | 2.24 | % | $ | 88,740 | $ | 77,874 | 9.2 | 2.18 | % | ||||||||||||||||||
Available-for-sale |
||||||||||||||||||||||||||||||||
U.S. Treasury and agencies |
$ | 20,421 | $ | 18,054 | 6.7 | 1.92 | % | $ | 24,801 | $ | 22,033 | 7.1 | 2.43 | % | ||||||||||||||||||
Mortgage-backed securities (a) |
37,201 | 33,452 | 6.5 | 2.83 | 40,803 | 36,423 | 6.6 | 2.83 | ||||||||||||||||||||||||
Asset-backed securities (a) |
3,836 | 3,807 | 1.2 | 4.72 | 4,356 | 4,323 | 1.3 | 4.59 | ||||||||||||||||||||||||
Obligations of state and political subdivisions (b) (c) |
11,234 | 10,174 | 10.8 | 3.74 | 11,484 | 10,125 | 13.6 | 3.76 | ||||||||||||||||||||||||
Other |
4 | 4 | 2.2 | 1.89 | 6 | 6 | .1 | 1.99 | ||||||||||||||||||||||||
Total available-for-sale |
$ | 72,696 | $ | 65,491 | 7.0 | 2.82 | % | $ | 81,450 | $ | 72,910 | 7.4 | 2.94 | % | ||||||||||||||||||
(a) |
Information related to asset and mortgage-backed securities included above is presented based upon weighted-average maturities that take into account anticipated future prepayments. |
(b) |
Information related to obligations of state and political subdivisions is presented based upon yield to first optional call date if the security is purchased at a premium, and yield to maturity if the security is purchased at par or a discount. |
(c) |
Maturity calculations for obligations of state and political subdivisions are based on the first optional call date for securities with a fair value above par and the contractual maturity date for securities with a fair value equal to or below par. |
(d) |
Weighted-average yields for obligations of state and political subdivisions are presented on a fully-taxable equivalent basis based on a federal income tax rate of 21 percent. Yields on investment securities are computed based on amortized cost balances, excluding any premiums or discounts recorded related to the transfer of investment securities at fair value from available-for-sale to held-to-maturity. |
Investment Securities
The Company’s available-for-sale investment securities are carried at fair value with changes in fair value reflected in other comprehensive income (loss) unless a portion of a security’s unrealized loss is related to credit and an allowance for credit losses is necessary. At March 31, 2023, the Company’s net unrealized losses on available-for-sale investment securities were $7.2 billion ($5.4 billion net-of-tax), compared with $8.5 billion ($6.4 billion net-of-tax) at December 31, 2022. The favorable change in net unrealized gains (losses) was primarily due to increases in the fair value of mortgage-backed, U.S. Treasury and state and political securities as a result of changes in interest rates. Gross unrealized losses on available-for-sale investment securities totaled $7.2 billion at March 31, 2023, compared with $8.6 billion at December 31, 2022. When evaluating credit losses, the Company considers various factors such as the nature of the investment security, the credit ratings or financial condition of the issuer, the extent of the unrealized loss, expected cash flows of the underlying collateral, the existence of any government or agency guarantees, and market conditions. At March 31, 2023, the Company had no plans to sell securities with unrealized losses, and believed it is more likely than not that it would not be required to sell such securities before recovery of their amortized cost.
Refer to Notes 4 and 15 in the Notes to Consolidated Financial Statements for further information on investment securities.
Deposits
Total deposits were $505.3 billion at March 31, 2023, compared with $525.0 billion at December 31, 2022. The first quarter of 2023 banking industry disruption, beginning on March 8, did not meaningfully impact the Company’s overall deposit balances or composition. The Company’s total deposits were approximately $508 billion on March 8, 2023, compared with $505 billion on March 31, 2023. The Company maintains a diverse and stable funding base that includes a mix of both consumer and operational wholesale deposits. Consumer deposits account for more than 50 percent of total deposits. A significant portion of the wholesale and trust deposits are collateralized, contractual or relationship based. At March 31, 2023, approximately 51 percent of deposits were insured through the FDIC insurance fund and an additional 3 percent of deposits were fully collateralized. Of the uninsured deposits, approximately 80 percent of these deposits were retail customers or operational in nature, creating greater stability to these deposits. In addition, at March 31, 2023 the Company had total available liquidity representing 126 percent of uninsured balances.
The $19.6 billion (3.7 percent) decrease in total deposits reflected decreases in noninterest-bearing deposits and total savings deposits, partially offset by an increase in time deposits. Noninterest-bearing deposits decreased $13.1 billion (9.5 percent) at March 31, 2023, compared with December 31, 2022, primarily due to lower Corporate and Commercial Banking, Wealth Management and
8 |
U.S. Bancorp |
Investment Services, and Consumer and Business Banking balances. Savings account balances decreased $6.8 billion (9.4 percent), driven by lower Consumer and Business Banking balances. Interest checking balances decreased $5.4 billion (4.0 percent), primarily due to lower Wealth Management and Investment Services, Consumer and Business Banking, and Corporate and Commercial Banking balances. Money market deposit balances increased $1.1 billion (0.7 percent), primarily due to higher Corporate and Commercial Banking balances, partially offset by lower Wealth Management and Investment Services balances. Time deposits increased $4.6 billion (13.9 percent) at March 31, 2023, compared with December 31, 2022, driven by higher Consumer and Business Banking balances, partially offset by lower Corporate and Commercial Banking balances. Changes in time deposits are primarily related to those deposits managed as an alternative to other funding sources, based largely on relative pricing and liquidity characteristics.
Borrowings
The Company utilizes both short-term and long-term borrowings as part of its asset/liability management and funding strategies. Short-term borrowings, which include federal funds purchased, commercial paper, repurchase agreements, borrowings secured by high-grade assets and other short-term borrowings, were $56.9 billion at March 31, 2023, compared with $31.2 billion at December 31, 2022. The $25.7 billion (82.2 percent) increase in short-term borrowings was primarily due to increases in short-term Federal Home Loan Bank (“FHLB”) advances. Long-term debt was $42.0 billion at March 31, 2023, compared with $39.8 billion at December 31, 2022. The $2.2 billion (5.6 percent) increase was primarily due to $3.7 billion of medium-term note issuances, partially offset by $1.6 billion of bank note repayments and maturities. Refer to the “Liquidity Risk Management” section for discussion of liquidity management of the Company.
CORPORATE RISK PROFILE
Overview
Managing risks is an essential part of successfully operating a financial services company. The Company’s Board of Directors has approved a risk management framework which establishes governance and risk management requirements for all risk-taking activities. This framework includes Company and business line risk appetite statements which set boundaries for the types and amount of risk that may be undertaken in pursuing business objectives and initiatives. The Board of Directors, primarily through its Risk Management Committee, oversees performance relative to the risk management framework, risk appetite statements, and other policy requirements.
The Executive Risk Committee (“ERC”), which is chaired by the Chief Risk Officer and includes the Chief Executive Officer and other members of the executive management team, oversees execution against the risk management framework and risk appetite statements. The ERC focuses on current and emerging risks, including strategic and reputation risks, by directing timely and comprehensive actions. Senior operating committees have also been established, each responsible for overseeing a specified category of risk.
Upon closing of the MUB acquisition, the Company’s risk management framework applies to the legal entities acquired from Mitsubishi UFJ Financial Group, Inc., including MUB. Prior to closing, the Company evaluated the frameworks, policies and procedures of the acquired entities as necessary. Updates were made to align the acquired entities with the Company’s risk appetite and connect the elements of their respective risk governance and reporting into the Company’s existing risk management framework. Connecting the existing MUB risk governance and reporting framework into the Company’s existing risk management framework allows separate risk profiles, governance, and reporting for the Company and the acquired entities, during the period from acquisition through bank merger, while also providing the ability to consolidate reporting for the Company. Upon completing the merger of MUB into USBNA, which is expected to occur in connection with the conversion of MUB customers and systems to the USBNA platform over Memorial Day weekend in 2023, the MUB risk governance and reporting framework will no longer be applicable.
The Company’s most prominent risk exposures are credit, interest rate, market, liquidity, operational, compliance, strategic, and reputation. Credit risk is the risk of loss associated with a change in the credit profile or the failure of a borrower or counterparty to meet its contractual obligations. Interest rate risk is the current or prospective risk to earnings and capital, or market valuations, arising from the impact of changes in interest rates. Market risk arises from fluctuations in interest rates, foreign exchange rates, and security prices that may result in changes in the values of financial instruments, such as trading and available-for-sale securities, mortgage loans held for sale (“MLHFS”), MSRs and derivatives that are accounted for on a fair value basis. Liquidity risk is the risk that financial condition or overall safety and soundness is adversely affected by the Company’s inability, or perceived inability, to meet its cash flow obligations in a timely and
| U.S. Bancorp | 9 |
complete manner in either normal or stressed conditions. Operational risk is the risk to current or projected financial condition and resilience arising from inadequate or failed internal processes or systems, people (including human errors or misconduct), or adverse external events, including the risk of loss resulting from breaches in data security. Operational risk can also include the risk of loss due to failures by third parties with which the Company does business. Compliance risk is the risk that the Company may suffer legal or regulatory sanctions, financial losses, and reputational damage if it fails to adhere to compliance requirements and the Company’s compliance policies. Strategic risk is the risk to current or projected financial condition and resilience arising from adverse business decisions, poor implementation of business decisions, or lack of responsiveness to changes in the banking industry and operating environment. Reputation risk is the risk to current or anticipated earnings, capital, or franchise or enterprise value arising from negative public opinion. This risk may impair the Company’s competitiveness by affecting its ability to establish new relationships or services, or continue serving existing relationships. In addition to the risks identified above, other risk factors exist that may impact the Company. Refer to “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, for a detailed discussion of these factors.
The Company’s Board and management-level governance committees are supported by a “three lines of defense” model for establishing effective checks and balances. The first line of defense, the business lines, manages risks in conformity with established limits and policy requirements. In turn, business line leaders and their risk officers establish programs to ensure conformity with these limits and policy requirements. The second line of defense, which includes the Chief Risk Officer’s organization as well as policy and oversight activities of corporate support functions, translates risk appetite and strategy into actionable risk limits and policies. The second line of defense monitors first line of defense conformity with limits and policies, and provides reporting and escalation of emerging risks and other concerns to senior management and the Risk Management Committee of the Board of Directors. The third line of defense, internal audit, is responsible for providing the Audit Committee of the Board of Directors and senior management with independent assessment and assurance regarding the effectiveness of the Company’s governance, risk management and control processes.
Management regularly provides reports to the Risk Management Committee of the Board of Directors. The Risk Management Committee discusses with management the Company’s risk management performance, and provides a summary of key risks to the entire Board of Directors, covering the status of existing matters, areas of potential future concern and specific information on certain types of loss events. The Risk Management Committee considers quarterly reports by management assessing the Company’s performance relative to the risk appetite statements and the associated risk limits, including:
| • | Macroeconomic environment and other qualitative considerations, such as regulatory and compliance changes, litigation developments, geopolitical events, and technology and cybersecurity; |
| • | Credit measures, including adversely rated and nonperforming loans, leveraged transactions, credit concentrations and lending limits; |
| • | Interest rate and market risk, including market value and net income simulation, and trading-related Value at Risk (“VaR”); |
| • | Liquidity risk, including funding projections under various stressed scenarios; |
| • | Operational and compliance risk, including losses stemming from events such as fraud, processing errors, control breaches, breaches in data security or adverse business decisions, as well as reporting on technology performance, and various legal and regulatory compliance measures; |
| • | Capital ratios and projections, including regulatory measures and stressed scenarios; and |
| • | Strategic and reputation risk considerations, impacts and responses. |
Credit Risk Management
The Company’s strategy for credit risk management includes well-defined, centralized credit policies, uniform underwriting criteria, and ongoing risk monitoring and review processes for all commercial and consumer credit exposures. The strategy also emphasizes diversification on a geographic, industry and customer level, regular credit examinations and management reviews of loans exhibiting deterioration of credit quality. In evaluating its credit risk, the Company considers changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), collateral values, trends in loan performance and macroeconomic factors, such as changes in unemployment rates, gross domestic product levels, inflation, interest rates and consumer bankruptcy filings. The Risk Management Committee oversees the Company’s credit risk management process.
In addition, credit quality ratings, as defined by the Company, are an important part of the Company’s overall credit risk management and evaluation of its
10 |
U.S. Bancorp |
allowance for credit losses. Loans with a pass rating represent those loans not classified on the Company’s rating scale for problem credits, as minimal credit risk has been identified. Loans with a special mention or classified rating, including consumer lending and small business loans that are 90 days or more past due and still accruing, nonaccrual loans and loans in a junior lien position that are current but are behind a first lien position on nonaccrual, encompass all loans held by the Company that it considers to have a potential or well-defined weakness that may put full collection of contractual cash flows at risk. The Company’s internal credit quality ratings for consumer loans are primarily based on delinquency and nonperforming status, except for a limited population of larger loans within those portfolios that are individually evaluated. For this limited population, the determination of the internal credit quality rating may also consider collateral value and customer cash flows. Refer to Note 5 in the Notes to Consolidated Financial Statements for further discussion of the Company’s loan portfolios including internal credit quality ratings. In addition, refer to “Management’s Discussion and Analysis — Credit Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, for a more detailed discussion on credit risk management processes.
The Company manages its credit risk, in part, through diversification of its loan portfolio which is achieved through limit setting by product type criteria, such as industry, and identification of credit concentrations. The Company categorizes its loan portfolio into two segments, which is the level at which it develops and documents a systematic methodology to determine the allowance for credit losses. The Company’s two loan portfolio segments are commercial lending and consumer lending.
The commercial lending segment includes loans and leases made to small business, middle market, large corporate, commercial real estate, financial institution, non-profit and public sector customers. Key risk characteristics relevant to commercial lending segment loans include the industry and geography of the borrower’s business, purpose of the loan, repayment source, borrower’s debt capacity and financial flexibility, loan covenants, and nature of pledged collateral, if any, as well as macroeconomic factors such as unemployment rates, gross domestic product levels, corporate bond spreads and long-term interest rates. These risk characteristics, among others, are considered in determining estimates about the likelihood of default by the borrowers and the severity of loss in the event of default. The Company considers these risk characteristics in assigning internal risk ratings to, or forecasting losses on, these loans, which are the significant factors in determining the allowance for credit losses for loans in the commercial lending segment.
The consumer lending segment represents loans and leases made to consumer customers, including residential mortgages, credit card loans, and other retail loans such as revolving consumer lines, auto loans and leases, home equity loans and lines, and student loans, a run-off portfolio. Home equity or second mortgage loans are junior lien closed-end accounts fully disbursed at origination. These loans typically are fixed rate loans, secured by residential real estate, with a 10- or 15-year fixed payment amortization schedule. Home equity lines are revolving accounts giving the borrower the ability to draw and repay balances repeatedly, up to a maximum commitment, and are secured by residential real estate. These include accounts in either a first or junior lien position. Typical terms on home equity lines in the portfolio are variable rates benchmarked to the prime rate, with a 10-year draw period during which a minimum payment is equivalent to the monthly interest, followed by a 20-year amortization period, respectively. At March 31, 2023, substantially all of the Company’s home equity lines were in the draw period. Key risk characteristics relevant to consumer lending segment loans primarily relate to the borrowers’ capacity and willingness to repay and include unemployment rates, consumer bankruptcy filings and other macroeconomic factors, customer payment history and credit scores, and in some cases, updated loan-to-value (“LTV”) information reflecting current market conditions on real estate-based loans. These and other risk characteristics are reflected in forecasts of delinquency levels, bankruptcies and losses which are the primary factors in determining the allowance for credit losses for the consumer lending segment.
The Company further disaggregates its loan portfolio segments into various classes based on their underlying risk characteristics. The two classes within the commercial lending segment are commercial loans and commercial real estate loans. The three classes within the consumer lending segment are residential mortgages, credit card loans and other retail loans.
The Company’s consumer lending segment utilizes several distinct business processes and channels to originate consumer credit, including traditional branch lending, mobile and on-line banking, indirect lending, alliance partnerships and correspondent banks. Each distinct underwriting and origination activity manages unique credit risk characteristics and prices its loan production commensurate with the differing risk profiles.
| U.S. Bancorp | 11 |
Residential mortgage originations are generally limited to prime borrowers and are performed through the Company’s branches, loan production offices, mobile and on-line services, and a wholesale network of originators. The Company may retain residential mortgage loans it originates on its balance sheet or sell the loans into the secondary market while retaining the servicing rights and customer relationships. Utilizing the secondary markets enables the Company to effectively reduce its credit and other asset/liability risks. For residential mortgages that are retained in the Company’s portfolio and for home equity and second mortgages, credit risk is managed by adherence to LTV and borrower credit criteria during the underwriting process.
The Company estimates updated LTV information on its outstanding residential mortgages quarterly, based on a method that combines automated valuation model updates and relevant home price indices. LTV is the ratio of the loan’s outstanding principal balance to the current estimate of property value. For home equity and second mortgages, combined loan-to-value (“CLTV”) is the combination of the first mortgage original principal balance and the second lien outstanding principal balance, relative to the current estimate of property value. Certain loans do not have an LTV or CLTV, primarily due to lack of availability of relevant automated valuation model and/or home price indices values, or lack of necessary valuation data on acquired loans.
The following tables provide summary information of residential mortgages and home equity and second mortgages by LTV at March 31, 2023:
Residential Mortgages (Dollars in Millions) |
Interest Only |
Amortizing | Total | Percent of Total |
||||||||||||
Loan-to-Value |
||||||||||||||||
Less than or equal to 80% |
$ | 14,674 | $ | 79,946 | $ | 94,620 | 80.9 | % | ||||||||
Over 80% through 90% |
772 | 10,873 | 11,645 | 10.0 | ||||||||||||
Over 90% through 100% |
116 | 2,063 | 2,179 | 1.9 | ||||||||||||
Over 100% |
177 | 1,112 | 1,289 | 1.1 | ||||||||||||
No LTV available |
— | 10 | 10 | — | ||||||||||||
Loans purchased from GNMA mortgage pools (a) |
— | 7,205 | 7,205 | 6.1 | ||||||||||||
Total |
$ | 15,739 | $ | 101,209 | $ | 116,948 | 100.0 | % | ||||||||
(a) |
Represents loans purchased and loans that could be purchased from Government National Mortgage Association (“GNMA”) mortgage pools under delinquent loan repurchase options whose payments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs. |
| Home Equity and Second Mortgages (Dollars in Millions) |
Lines | Loans | Total | Percent of Total |
||||||||||||
Loan-to-Value / Combined Loan-to-Value |
||||||||||||||||
Less than or equal to 80% |
$ | 10,156 | $ | 1,420 | $ | 11,576 | 91.0 | % | ||||||||
Over 80% through 90% |
796 | 114 | 910 | 7.2 | ||||||||||||
Over 90% through 100% |
108 | 18 | 126 | 1.0 | ||||||||||||
Over 100% |
50 | 13 | 63 | .5 | ||||||||||||
No LTV/CLTV available |
43 | 2 | 45 | .3 | ||||||||||||
Total |
$ | 11,153 | $ | 1,567 | $ | 12,720 | 100.0 | % | ||||||||
Home equity and second mortgages were $12.7 billion at March 31, 2023, compared with $12.9 billion at December 31, 2022, and included $2.6 billion of home equity lines in a first lien position and $10.1 billion of home equity and second mortgage loans and lines in a junior lien position. Loans and lines in a junior lien position at March 31, 2023, included approximately $3.3 billion of loans and lines for which the Company also serviced the related first lien loan, and approximately $6.8 billion where the Company did not service the related first lien loan. The Company was able to determine the status of the related first liens using information the Company has as the servicer of the first lien or information reported on customer credit bureau files. The Company also evaluates other indicators of credit risk for these junior lien loans and lines including delinquency, estimated average CLTV ratios and updated weighted-average credit scores in making its assessment of credit risk, related loss estimates and determining the allowance for credit losses.
The following table provides a summary of delinquency statistics and other credit quality indicators for the Company’s junior lien positions at March 31, 2023:
| Junior Liens Behind | ||||||||||||
| (Dollars in Millions) | Company Owned or Serviced` First Lien |
Third Party First Lien |
Total | |||||||||
Total |
$ | 3,305 | $ | 6,795 | $ | 10,100 | ||||||
Percent 30 — 89 days past due |
.50 | % | .44 | % | .46 | % | ||||||
Percent 90 days or more past due |
.02 | % | .07 | % | .05 | % | ||||||
Weighted-average CLTV |
70 | % | 68 | % | 69 | % | ||||||
Weighted-average credit score |
781 | 782 | 781 | |||||||||
See the “Analysis and Determination of the Allowance for Credit Losses” section for additional information on how the Company determines the allowance for credit losses for loans in a junior lien position.
Credit card and other retail loans are diversified across customer segments and geographies. Diversification in the credit card portfolio is achieved with broad customer relationship distribution through the Company’s and financial institution partners’ branches, retail and affinity partners, and digital channels.
The following table provides a summary of the Company’s credit card loan balances disaggregated based upon updated credit score at March 31, 2023:
| Percent of Total (a) |
||||
Credit score > 660 |
86 | % | ||
Credit score < 660 |
14 | |||
No credit score |
— | |||
(a) |
Credit score distribution excludes loans serviced by others. |
12 |
U.S. Bancorp |
Loan Delinquencies
Trends in delinquency ratios are an indicator, among other considerations, of credit risk within the Company’s loan portfolios. The entire balance of a loan account is considered delinquent if the minimum payment contractually required to be made is not received by the date specified on the billing statement. Delinquent loans purchased and loans that could be purchased from GNMA mortgage pools under delinquent loan repurchase options, whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs, are excluded from delinquency statistics.
Accruing loans 90 days or more past due totaled $494 million at March 31, 2023, compared with $491 million at December 31, 2022. Accruing loans 90 days or more past due are not included in nonperforming assets and continue to accrue interest because they are adequately secured by collateral, are in the process of collection and are reasonably expected to result in repayment or restoration to current status, or are managed in homogeneous portfolios with specified charge-off timeframes adhering to regulatory guidelines. The ratio of accruing loans 90 days or more past due to total loans was 0.13 percent at March 31, 2023 and December 31, 2022.
Table 5 |
Delinquent Loan Ratios as a Percent of Ending Loan Balances |
90 days or more past due |
March 31, 2023 |
December 31, 2022 |
||||||
Commercial |
||||||||
Commercial |
.05 | % | .07 | % | ||||
Lease financing |
— | — | ||||||
Total commercial |
.05 | .07 | ||||||
Commercial Real Estate |
||||||||
Commercial mortgages |
.01 | — | ||||||
Construction and development |
.01 | .03 | ||||||
Total commercial real estate |
.01 | .01 | ||||||
Residential Mortgages (a) |
.08 | .08 | ||||||
Credit Card |
1.00 | .88 | ||||||
Other Retail |
||||||||
Retail leasing |
.04 | .04 | ||||||
Home equity and second mortgages |
.29 | .28 | ||||||
Other |
.07 | .08 | ||||||
Total other retail |
.12 | .12 | ||||||
Total loans |
.13 | % | .13 | % | ||||
| 90 days or more past due and nonperforming loans | March 31, 2023 |
December 31, 2022 |
||||||
Commercial |
.18 | % | .19 | % | ||||
Commercial real estate |
.98 | .62 | ||||||
Residential mortgages (a) |
.33 | .36 | ||||||
Credit card |
1.01 | .88 | ||||||
Other retail |
.37 | .37 | ||||||
Total loans |
.42 | % | .38 | % | ||||
(a) |
Delinquent loan ratios exclude $2.2 billion at March 31, 2023, and at December 31, 2022, of loans purchased and loans that could be purchased from GNMA mortgage pools under delinquent loan repurchase options whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs. Including these loans, the ratio of residential mortgages 90 days or more past due and nonperforming to total residential mortgages was 2.24 percent at March 31, 2023, and 2.28 percent at December 31, 2022. |
| U.S. Bancorp | 13 |
The following table provides summary delinquency information for residential mortgages, credit card and other retail loans included in the consumer lending segment:
| Amount | As a Percent of Ending Loan Balances |
|||||||||||||||||||
| (Dollars in Millions) | March 31, 2023 |
December 31, 2022 |
March 31, 2023 |
December 31, 2022 |
||||||||||||||||
Residential Mortgages (a) |
||||||||||||||||||||
30-89 days |
$ | 148 | $ | 201 | .13 | % | .17 | % | ||||||||||||
90 days or more |
97 | 95 | .08 | .08 | ||||||||||||||||
Nonperforming |
292 | 325 | .25 | .28 | ||||||||||||||||
Total |
$ | 537 | $ | 621 | .46 | .54 | ||||||||||||||
Credit Card |
||||||||||||||||||||
30-89 days |
$ | 280 | $ | 283 | 1.10 | 1.08 | ||||||||||||||
90 days or more |
256 | 231 | 1.00 | .88 | ||||||||||||||||
Nonperforming |
1 | 1 | — | — | ||||||||||||||||
Total |
$ | 537 | $ | 515 | 2.11 | 1.96 | ||||||||||||||
Other Retail |
||||||||||||||||||||
Retail Leasing |
||||||||||||||||||||
30-89 days |
$ | 22 | $ | 27 | .44 | .49 | ||||||||||||||
90 days or more |
2 | 2 | .04 | .04 | ||||||||||||||||
Nonperforming |
8 | 8 | .16 | .14 | ||||||||||||||||
Total |
$ | 32 | $ | 37 | .64 | .67 | ||||||||||||||
Home Equity and Second Mortgages |
||||||||||||||||||||
30-89 days |
$ | 65 | $ | 65 | .51 | .51 | ||||||||||||||
90 days or more |
37 | 36 | .29 | .28 | ||||||||||||||||
Nonperforming |
105 | 110 | .83 | .86 | ||||||||||||||||
Total |
$ | 207 | $ | 211 | 1.63 | 1.64 | ||||||||||||||
Other (b) |
||||||||||||||||||||
30-89 days |
$ | 167 | $ | 217 | .47 | .59 | ||||||||||||||
90 days or more |
25 | 28 | .07 | .08 | ||||||||||||||||
Nonperforming |
20 | 21 | .06 | .06 | ||||||||||||||||
Total |
$ | 212 | $ | 266 | .60 | .73 | ||||||||||||||
(a) |
Excludes $542 million of loans 30-89 days past due and $2.2 billion of loans 90 days or more past due at March 31, 2023, purchased and that could be purchased from GNMA mortgage pools under delinquent loan repurchase options that continue to accrue interest, compared with $647 million and $2.2 billion at December 31, 2022, respectively. |
(b) |
Includes revolving credit, installment and automobile loans. |
Modified Loans
In certain circumstances, the Company may modify the terms of a loan to maximize the collection of amounts due when a borrower is experiencing financial difficulties or is expected to experience difficulties in the near-term. In most cases the modification is either a concessionary reduction in interest rate, extension of the maturity date or reduction in the principal balance that would otherwise not be considered.
Modified loans accrue interest if the borrower complies with the revised terms and conditions and has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles, which is generally six months or greater.
The Company continues to work with customers to modify loans for borrowers who are experiencing financial difficulties. Many of the Company’s loan modifications are determined on a case-by-case basis in connection with ongoing loan collection processes. The modifications vary within each of the Company’s loan classes. Commercial lending segment modifications generally include extensions of the maturity date and may be accompanied by an increase or decrease to the interest rate. The Company may also work with the borrower to make other changes to the loan to mitigate losses, such as obtaining additional collateral and/or guarantees to support the loan.
The Company has also implemented certain residential mortgage loan modification programs. The Company modifies residential mortgage loans under Federal Housing Administration, United States Department of Veterans Affairs, and its own internal programs. Under these programs, the Company offers qualifying homeowners the opportunity to permanently modify their loan and achieve more affordable monthly payments. These modifications may include adjustments to interest rates, conversion of adjustable rates to fixed rates, extensions of maturity dates or deferrals of payments, capitalization of accrued interest and/or outstanding advances, or in limited situations, partial forgiveness of loan principal. In most instances, participation in residential mortgage loan modification programs requires the customer to complete a short-term trial period. A permanent loan modification is contingent on the customer successfully completing the trial period arrangement, and the loan documents are not modified until that time.
Credit card and other retail loan modifications are generally part of distinct modification programs providing customers modification solutions over a
14 |
U.S. Bancorp |
specified time period, generally up to 60 months.
The Company also makes short-term modifications, in limited circumstances, to assist borrowers experiencing temporary hardships, including previously offering payment relief to borrowers that experienced financial hardship resulting directly from the effects of the COVID-19 pandemic. Short-term consumer lending modification programs include payment reductions, deferrals of up to three past due payments, and the ability to return to current status if the borrower makes required payments. The Company may also make short-term modifications to commercial lending loans, with the most common modification being an extension of the maturity date of three months or less. Such extensions generally are used when the maturity date is imminent and the borrower is experiencing some level of financial stress, but the Company believes the borrower will pay all contractual amounts owed.
Nonperforming Assets
The level of nonperforming assets represents another indicator of the potential for future credit losses. Nonperforming assets include nonaccrual loans, modified loans not performing in accordance with modified terms and not accruing interest, modified loans that have not met the performance period required to return to accrual status, other real estate owned (“OREO”) and other nonperforming assets owned by the Company. Interest payments collected from assets on nonaccrual status are generally applied against the principal balance and not recorded as income. However, interest income may be recognized for interest payments if the remaining carrying amount of the loan is believed to be collectible.
At March 31, 2023, total nonperforming assets were $1.2 billion, compared to $1.0 billion at December 31, 2022. The $165 million (16.2 percent) increase in nonperforming assets was primarily due to higher nonperforming commercial real estate loans resulting from an internal review of the acquired MUB loan portfolio, completed once closing was achieved and access to loan documents and customer files was available. The ratio of total nonperforming assets to total loans and other real estate was 0.30 percent at March 31, 2023, compared with 0.26 percent at December 31, 2022.
OREO was $23 million at March 31, 2023 and December 31, 2022, and was related to foreclosed properties that previously secured loan balances. These balances exclude foreclosed GNMA loans whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs.
| U.S. Bancorp | 15 |
Table 6 |
Nonperforming Assets (a) |
| (Dollars in Millions) | March 31, 2023 |
December 31, 2022 |
||||||
Commercial |
||||||||
Commercial |
$150 | $139 | ||||||
Lease financing |
28 | 30 | ||||||
Total commercial |
178 | 169 | ||||||
Commercial Real Estate |
||||||||
Commercial mortgages |
432 | 251 | ||||||
Construction and development |
103 | 87 | ||||||
Total commercial real estate |
535 | 338 | ||||||
Residential Mortgages (b) |
292 | 325 | ||||||
Credit Card |
1 | 1 | ||||||
Other Retail |
||||||||
Retail leasing |
8 | 8 | ||||||
Home equity and second mortgages |
105 | 110 | ||||||
Other |
20 | 21 | ||||||
Total other retail |
133 | 139 | ||||||
Total nonperforming loans (1) |
1,139 | 972 | ||||||
Other Real Estate (c) |
23 | 23 | ||||||
Other Assets |
19 | 21 | ||||||
Total nonperforming assets |
$1,181 | $1,016 | ||||||
Accruing loans 90 days or more past due (b) |
$494 | $491 | ||||||
Period-end loans (2) |
$387,866 | $388,213 | ||||||
Nonperforming loans to total loans (1)/(2) |
.29 | % | .25 | % | ||||
Nonperforming assets to total loans plus other real estate (c) |
.30 | % | .26 | % | ||||
Changes in Nonperforming Assets
| (Dollars in Millions) | Commercial and Commercial Real Estate |
Residential Mortgages, Credit Card and Other Retail |
Total | |||||||||
Balance December 31, 2022 |
$ | 509 | $ | 507 | $ | 1,016 | ||||||
Additions to nonperforming assets |
||||||||||||
New nonaccrual loans and foreclosed properties |
270 | 39 | 309 | |||||||||
Advances on loans |
6 | — | 6 | |||||||||
Total additions |
276 | 39 | 315 | |||||||||
Reductions in nonperforming assets |
||||||||||||
Paydowns, payoffs |
(30 | ) | (25 | ) | (55 | ) | ||||||
Net sales |
— | (7 | ) | (7 | ) | |||||||
Return to performing status |
(9 | ) | (45 | ) | (54 | ) | ||||||
Charge-offs (d) |
(32 | ) | (2 | ) | (34 | ) | ||||||
Total reductions |
(71 | ) | (79 | ) | (150 | ) | ||||||
Net additions to (reductions in) nonperforming assets |
205 | (40 | ) | 165 | ||||||||
Balance March 31, 2023 |
$ | 714 | $ | 467 | $ | 1,181 | ||||||
(a) |
Throughout this document, nonperforming assets and related ratios do not include accruing loans 90 days or more past due. |
(b) |
Excludes $2.2 billion at March 31, 2023, and at December 31, 2022, of loans purchased and loans that could be purchased from GNMA Mortgage pools under delinquent loan repurchase options that are 90 days or more past due that continue to accrue interest, as their repayments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs. |
(c) |
Foreclosed GNMA loans of $57 million at March 31, 2023, and $53 million at December 31, 2022, continue to accrue interest and are recorded as other assets and excluded from nonperforming assets because they are insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs. |
(d) |
Charge-offs exclude actions for certain card products and loan sales that were not classified as nonperforming at the time the charge-off occurred. |
16 |
U.S. Bancorp |
Table 7 |
Net Charge-offs as a Percent of Average Loans Outstanding |
| Three Months Ended March 31 | ||||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||||
| (Dollars in Millions) | Average Loan Balance |
Net Charge-offs |
Percent | Average Loan Balance |
Net Charge-offs |
Percent | ||||||||||||||||||||||
Commercial |
||||||||||||||||||||||||||||
Commercial |
$ | 131,227 | $ | 42 | .13 | % | $ | 107,819 | $ | 26 | .10 | % | ||||||||||||||||
Lease financing |
4,456 | 5 | .46 | 5,003 | 6 | .49 | ||||||||||||||||||||||
Total commercial |
135,683 | 47 | .14 | 112,822 | 32 | .12 | ||||||||||||||||||||||
Commercial real estate |
||||||||||||||||||||||||||||
Commercial mortgages |
43,627 | 115 | 1.07 | 28,826 | — | — | ||||||||||||||||||||||
Construction |
11,968 | 2 | .07 | 10,258 | (5 | ) | (.20 | ) | ||||||||||||||||||||
Total commercial real estate |
55,595 | 117 | .85 | 39,084 | (5 | ) | (.05 | ) | ||||||||||||||||||||
Residential mortgages |
116,287 | (1 | ) | — | 77,449 | (6 | ) | (.03 | ) | |||||||||||||||||||
Credit card |
25,569 | 175 | 2.78 | 21,842 | 112 | 2.08 | ||||||||||||||||||||||
Other retail |
||||||||||||||||||||||||||||
Retail leasing |
5,241 | 1 | .08 | 7,110 | 1 | .06 | ||||||||||||||||||||||
Home equity and second mortgages |
12,774 | (1 | ) | (.03 | ) | 10,394 | (2 | ) | (.08 | ) | ||||||||||||||||||
Other |
35,601 | 35 | .40 | 44,265 | 30 | .27 | ||||||||||||||||||||||
Total other retail |
53,616 | 35 | .26 | 61,769 | 29 | .19 | ||||||||||||||||||||||
Total loans |
$ | 386,750 | $ | 373 | .39 | % | $ | 312,966 | $ | 162 | .21 | % | ||||||||||||||||
Analysis of Loan Net Charge-offs
Total loan net charge-offs were $373 million for the first quarter of 2023, compared with $162 million for the first quarter of 2022. The $211 million increase reflected $91 million of charge-offs related to the uncollectible amount of acquired loans, which were considered purchased credit deteriorated as of the date of the MUB acquisition, as well as higher charge-offs in most loan categories consistent with normalizing credit conditions. The ratio of total loan net charge-offs to average loans outstanding on an annualized basis for the first quarter of 2023 was 0.39 percent (0.30 percent excluding the impact of the MUB acquisition-related charge-offs), compared with 0.21 percent for the first quarter of 2022.
Analysis and Determination of the Allowance for Credit Losses
The allowance for credit losses is established for current expected credit losses on the Company’s loan and lease portfolio, including unfunded credit commitments. The allowance considers expected losses for the remaining lives of the applicable assets, inclusive of expected recoveries. The allowance for credit losses is increased through provisions charged to earnings and reduced by net charge-offs.
Management evaluates the appropriateness of the allowance for credit losses on a quarterly basis. Multiple economic scenarios are considered over a three-year reasonable and supportable forecast period, which includes increasing consideration of historical loss experience over years two and three. These economic scenarios are constructed with interrelated projections of multiple economic variables, and loss estimates are produced that consider the historical correlation of those economic variables with credit losses. After the forecast period, the Company fully reverts to long-term historical loss experience, adjusted for prepayments and characteristics of the current loan and lease portfolio, to estimate losses over the remaining life of the portfolio. The economic scenarios are updated at least quarterly and are designed to provide a range of reasonable estimates from better to worse than current expectations. Scenarios are weighted based on the Company’s expectation of economic conditions for the foreseeable future and reflect significant judgment and consideration of economic forecast uncertainty. Final loss estimates also consider factors affecting credit losses not reflected in the scenarios, due to the unique aspects of current conditions and expectations. These factors may include, but are not limited to, loan servicing practices, regulatory guidance, and/or fiscal and monetary policy actions.
Because business processes and credit risks associated with unfunded credit commitments are essentially the same as for loans, the Company utilizes similar processes to estimate its liability for unfunded credit commitments, which is included in other liabilities in the Consolidated Balance Sheet. Both the allowance for loan losses and the liability for unfunded credit commitments are included in the Company’s analysis of credit losses and reported reserve ratios.
The allowance recorded for credit losses utilizes forward-looking expected loss models to consider a variety of factors affecting lifetime credit losses. These factors include, but are not limited to, macroeconomic variables such as unemployment rates, real estate prices, gross domestic product levels, inflation, interest rates, and corporate bond spreads, as well as loan and borrower characteristics, such as internal risk ratings on commercial loans and consumer credit scores,
| U.S. Bancorp | 17 |
delinquency status, collateral type and available valuation information, consideration of end-of-term losses on lease residuals, and the remaining term of the loan, adjusted for expected prepayments. For each loan portfolio, including those loans modified under various loan modification programs, model estimates are adjusted as necessary to consider any relevant changes in portfolio composition, lending policies, underwriting standards, risk management practices, economic conditions or other factors that may affect the accuracy of the model. Expected credit loss estimates also include consideration of expected cash recoveries on loans previously charged-off or expected recoveries on collateral-dependent loans where recovery is expected through sale of the collateral at fair value less selling costs. Where loans do not exhibit similar risk characteristics, an individual analysis is performed to consider expected credit losses.
The allowance recorded for individually evaluated loans greater than $5 million in the commercial lending segment is based on an analysis utilizing expected cash flows discounted using the original effective interest rate, the observable market price of the loan, or the fair value of the collateral, less selling costs, for collateral-dependent loans as appropriate.
When evaluating the appropriateness of the allowance for credit losses for any loans and lines in a junior lien position, the Company considers the delinquency and modification status of the first lien. At March 31, 2023, the Company serviced the first lien on 33 percent of the home equity loans and lines in a junior lien position. The Company also considers the status of first lien mortgage accounts reported on customer credit bureau files when the first lien is not serviced by the Company. Regardless of whether the Company services the first lien, an assessment is made of economic conditions, problem loans, recent loss experience and other factors in determining the allowance for credit losses. Based on the available information, the Company estimated $178 million or 1.4 percent of its total home equity portfolio at March 31, 2023, represented non-delinquent junior liens where the first lien was delinquent or modified.
When a loan portfolio is purchased, the acquired loans are divided into those considered purchased with more than insignificant credit deterioration (“PCD”) and those not considered PCD. An allowance is established for each population and considers product mix, risk characteristics of the portfolio and delinquency status and refreshed LTV ratios when possible. PCD loans also consider whether the loan has experienced a charge-off, bankruptcy or significant deterioration since origination. The allowance established for purchased loans not considered PCD is recognized through provision expense upon acquisition, whereas the allowance established for loans considered PCD at acquisition is offset by an increase in the basis of the acquired loans. Any subsequent increases and decreases in the allowance related to purchased loans, regardless of PCD status, are recognized through provision expense, with charge-offs charged to the allowance. The Company had a total unpaid principal balance of $4.8 billion of PCD loans, primarily related to the MUB acquisition, included in its loan portfolio at March 31, 2023.
The Company’s methodology for determining the appropriate allowance for credit losses also considers the imprecision inherent in the methodologies used and allocated to the various loan portfolios. As a result, amounts determined under the methodologies described above are adjusted by management to consider the potential impact of other qualitative factors not captured in quantitative model adjustments which include, but are not limited to, the following: model imprecision, imprecision in economic scenario assumptions, and emerging risks related to either changes in the economic environment that are affecting specific portfolios, or changes in portfolio concentrations over time that may affect model performance. The consideration of these items results in adjustments to allowance amounts included in the Company’s allowance for credit losses for each loan portfolio.
Although the Company determined the amount of each element of the allowance separately and considers this process to be an important credit management tool, the entire allowance for credit losses is available for the entire loan portfolio. The actual amount of losses can vary significantly from the estimated amounts.
At March 31, 2023, the allowance for credit losses was $7.5 billion (1.94 percent of period-end loans), compared with an allowance of $7.4 billion (1.91 percent of period-end loans) at December 31, 2022. The allowance for credit losses at March 31, 2023 included a $62 million decrease due to a change in accounting principle related to discontinuing the separate recognition and measurement of troubled debt restructurings. The increase in the allowance for credit losses at March 31, 2023, compared with December 31, 2022, was primarily driven by increasing economic uncertainty and normalizing credit losses as well as adjustments made to the purchase accounting estimate for PCD loans. Economic uncertainty and recession risk have been increasing due to rising interest rates, inflationary concerns, market volatility and pressure on corporate earnings related to these factors. In addition to these broad economic factors, expected loss estimates consider various factors including customer specific information
18 |
U.S. Bancorp |
impacting changes in risk ratings, projected delinquencies and the impact of economic deterioration on selected borrowers’ liquidity and ability to repay.
The ratio of the allowance for credit losses to nonperforming loans was 660 percent at March 31, 2023, compared with 762 percent at December 31, 2022. The ratio of the allowance for credit losses to annualized loan net charge-offs was 497 percent at March 31, 2023, compared with 697 percent of full year 2022 net charge- offs at December 31, 2022.
Economic conditions considered in estimating the allowance for credit losses at March 31, 2023 included changes in projected gross domestic product and unemployment levels. These factors are evaluated through a combination of quantitative calculations using multiple economic scenarios and additional qualitative assessments that consider the high degree of economic uncertainty in the current environment. The projected unemployment rates for 2023 considered in the estimate range from 3.0 percent to 7.5 percent.
The following table summarizes the baseline forecast for key economic variables the Company used in its estimate of the allowance for credit losses at March 31, 2023 and December 31, 2022:
March 31, 2023 |
December 31, 2022 |
|||||||
United States unemployment rate for the three months ending (a) |
||||||||
March 31, 2023 |
3.4 | % | 3.8 | % | ||||
December 31, 2023 |
3.7 | 4.2 | ||||||
United States real gross domestic product for the three months ending (b) |
||||||||
March 31, 2023 |
1.3 | % | 1.8 | % | ||||
December 31, 2023 |
1.1 | 1.0 | ||||||
(a) |
Reflects quarterly average of forecasted reported United States unemployment rate. |
(b) |
Reflects year-over-year growth rates. |
The allowance for credit losses related to commercial lending segment loans increased $51 million during the first quarter of 2023, reflecting the impact of increasing economic uncertainty, normalizing credit conditions and select commercial real estate loan deterioration.
The allowance for credit losses related to consumer lending segment loans increased $68 million during the first quarter of 2023, due to the impact of economic uncertainty, normalizing credit performance and the effects of higher interest rates on the life of the residential mortgage portfolios, partially offset by a decrease related to a change in accounting principle.
| U.S. Bancorp | 19 |
Table 8 |
Summary of Allowance for Credit Losses |
| Three Months Ended | ||||||||
| March 31 | ||||||||
| (Dollars in Millions) | 2023 | 2022 | ||||||
Balance at beginning of period |
$ | 7,404 | $ | 6,155 | ||||
Change in accounting principle (a) |
(62 | ) | — | |||||
Allowance for acquired credit losses (b) |
127 | — | ||||||
Charge-Offs |
||||||||
Commercial |
||||||||
Commercial |
56 | 47 | ||||||
Lease financing |
7 | 8 | ||||||
Total commercial |
63 | 55 | ||||||
Commercial real estate |
||||||||
Commercial mortgages |
121 | — | ||||||
Construction and development |
2 | 1 | ||||||
Total commercial real estate |
123 | 1 | ||||||
Residential mortgages |
4 | 5 | ||||||
Credit card |
215 | 158 | ||||||
Other retail |
||||||||
Retail leasing |
5 | 5 | ||||||
Home equity and second mortgages |
2 | 3 | ||||||
Other |
57 | 53 | ||||||
Total other retail |
64 | 61 | ||||||
Total charge-offs |
469 | 280 | ||||||
Recoveries |
||||||||
Commercial |
||||||||
Commercial |
14 | 21 | ||||||
Lease financing |
2 | 2 | ||||||
Total commercial |
16 | 23 | ||||||
Commercial real estate |
||||||||
Commercial mortgages |
6 | — | ||||||
Construction and development |
— | 6 | ||||||
Total commercial real estate |
6 | 6 | ||||||
Residential mortgages |
5 | 11 | ||||||
Credit card |
40 | 46 | ||||||
Other retail |
||||||||
Retail leasing |
4 | 4 | ||||||
Home equity and second mortgages |
3 | 5 | ||||||
Other |
22 | 23 | ||||||
Total other retail |
29 | 32 | ||||||
Total recoveries |
96 | 118 | ||||||
Net Charge-Offs |
||||||||
Commercial |
||||||||
Commercial |
42 | 26 | ||||||
Lease financing |
5 | 6 | ||||||
Total commercial |
47 | 32 | ||||||
Commercial real estate |
||||||||
Commercial mortgages |
115 | — | ||||||
Construction and development |
2 | (5 | ) | |||||
Total commercial real estate |
117 | (5 | ) | |||||
Residential mortgages |
(1 | ) | (6 | ) | ||||
Credit card |
175 | 112 | ||||||
Other retail |
||||||||
Retail leasing |
1 | 1 | ||||||
Home equity and second mortgages |
(1 | ) | (2 | ) | ||||
Other |
35 | 30 | ||||||
Total other retail |
35 | 29 | ||||||
Total net charge-offs |
373 | 162 | ||||||
Provision for credit losses |
427 | 112 | ||||||
Balance at end of period |
$ | 7,523 | $ | 6,105 | ||||
Components |
||||||||
Allowance for loan losses |
$ | 7,020 | $ | 5,664 | ||||
Liability for unfunded credit commitments |
503 | 441 | ||||||
Total allowance for credit losses (1) |
$ | 7,523 | $ | 6,105 | ||||
Period-end loans (2) |
$ | 387,866 | $ | 318,934 | ||||
Nonperforming loans (3) |
1,139 | 765 | ||||||
Allowance for Credit Losses as a Percentage of |
||||||||
Period-end loans (1)/(2) |
1.94 | % | 1.91 | % | ||||
Nonperforming loans (1)/(3) |
660 | 798 | ||||||
Nonperforming and accruing loans 90 days or more past due |
461 | 502 | ||||||
Nonperforming assets |
637 | 753 | ||||||
Net charge-offs |
497 | 929 | ||||||
(a) |
Effective January 1, 2023, the Company adopted accounting guidance which removed the separate recognition and measurement of troubled debt restructurings. |
(b) |
Allowance for purchased credit deteriorated and charged-off loans acquired from MUB. |
20 |
U.S. Bancorp |
Residual Value Risk Management
The Company manages its risk to changes in the residual value of leased vehicles, office and business equipment, and other assets through disciplined residual valuation at the inception of a lease, diversification of its leased assets, regular residual asset valuation reviews and monitoring of residual value gains or losses upon the disposition of assets. As of March 31, 2023, no significant change in the amount of residual values or concentration of the portfolios had occurred since December 31, 2022. Refer to “Management’s Discussion and Analysis — Residual Value Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, for further discussion on residual value risk management.
Operational Risk Management
The Company operates in many different businesses in diverse markets and relies on the ability of its employees and systems to process a high number of transactions. Operational risk is inherent in all business activities, and the management of this risk is important to the achievement of the Company’s objectives. Business lines have direct and primary responsibility and accountability for identifying, controlling, and monitoring operational risks embedded in their business activities, including those additional or increased risks created by economic and financial disruptions. The Company maintains a system of controls with the objective of providing proper transaction authorization and execution, proper system operations, proper oversight of third parties with whom it does business, safeguarding of assets from misuse or theft, and ensuring the reliability and security of financial and other data. Refer to “Management’s Discussion and Analysis — Operational Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, for further discussion on operational risk management.
Compliance Risk Management
The Company may suffer legal or regulatory sanctions, material financial loss, or damage to its reputation through failure to comply with laws, regulations, rules, standards of good practice, and codes of conduct, including those related to compliance with Bank Secrecy Act/anti-money laundering requirements, sanctions compliance requirements as administered by the Office of Foreign Assets Control, consumer protection and other requirements. The Company has controls and processes in place for the assessment, identification, monitoring, management and reporting of compliance risks and issues, including those created or increased by economic and financial disruptions. Refer to “Management’s Discussion and Analysis — Compliance Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, for further discussion on compliance risk management.
Interest Rate Risk Management
In the banking industry, changes in interest rates are a significant risk that can impact earnings and the safety and soundness of an entity. The Company manages its exposure to changes in interest rates through asset and liability management activities within guidelines established by its Asset Liability Management Committee (“ALCO”) and approved by the Board of Directors. The ALCO has the responsibility for approving and overseeing compliance with the ALCO management policies, including interest rate risk exposure. One way the Company measures and analyzes its interest rate risk is through net interest income simulation analysis.
Simulation analysis incorporates substantially all of the Company’s assets and liabilities and off-balance sheet instruments, together with forecasted changes in the balance sheet and assumptions that reflect the current interest rate environment. Through this simulation, management estimates the impact on net interest income of various interest rate changes that differ in the direction, amount and speed of change over time, as well as the shape of the yield curve. This simulation includes assumptions about how the balance sheet is likely to be affected by changes in loan and deposit growth. Assumptions are made to project interest rates for new loans and deposits based on historical analysis, management’s outlook and re-pricing strategies. These assumptions are reviewed and validated on a periodic basis with sensitivity analysis being provided for key variables of the simulation. The results are reviewed monthly by the ALCO and are used to guide asset/liability management strategies.
The Company manages its interest rate risk position by holding assets with desired interest rate risk characteristics on its balance sheet, implementing certain pricing strategies for loans and deposits and selecting derivatives and various funding and investment portfolio strategies. The Company also manages interest rate sensitivity by utilizing market value of equity modeling, which measures the degree to which the market values of the Company’s assets and liabilities and off-balance sheet instruments will change given a change in interest rates. Management measures the impact of changes in market values due to interest rates under a number of scenarios, including immediate and sustained parallel shifts, and flattening or steepening of the yield curve.
The Company continues to actively monitor markets and proactively manage its balance sheet and heightened its focus on its interest rate risk management governance process during the first quarter of 2023 banking industry disruption. Over the last five quarters, in advance of the recent industry disruption and in connection with the preparation and completion of the MUB acquisition, the Company reduced its investment securities portfolio from
| U.S. Bancorp | 21 |
Table 9 |
Sensitivity of Net Interest Income |
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||
Down 50 bps Immediate |
Up 50 bps Immediate |
Down 200 bps Gradual |
Up 200 bps Gradual |
Down 50 bps Immediate |
Up 50 bps Immediate |
Down 200 bps Gradual |
Up 200 bps Gradual |
|||||||||||||||||||||||||
Net interest income |
(.83 | )% | 1.10 | % | (2.01 | )% | 2.54 | % | (.58 | )% | .95 | % | (2.02 | )% | 1.44 | % | ||||||||||||||||
30 percent to 25 percent of total assets, sold fixed rate loans, reduced outstanding borrowings, increased cash balances and entered into additional fair value hedges on available-for-sale investment securities in response to economic uncertainty, industry dynamics, rising interest rates and increased market volatility.
Table 9 summarizes the projected impact to net interest income over the next 12 months of various potential interest rate changes. The sensitivity of the projected impact to net interest income over the next 12 months is dependent on balance sheet growth, product mix, deposit behavior, pricing and funding decisions. While the Company utilizes models and assumptions based on historical information and expected behaviors, actual outcomes could vary significantly. Net interest income sensitivities reflect the impact of current market expectations for interest rates, driving an increase in baseline projected net interest income. As market expectations are reflected in projected results, incremental interest rate sensitivity declines on a percentage basis.
Use of Derivatives to Manage Interest Rate and Other Risks
To manage the sensitivity of earnings and capital to interest rate, prepayment, credit, price and foreign currency fluctuations (asset and liability management positions), the Company enters into derivative transactions. The Company uses derivatives for asset and liability management purposes primarily in the following ways:
| • | To convert fixed-rate debt and available-for-sale investment securities from fixed-rate payments to floating-rate payments; |
| • | To convert floating-rate loans and debt from floating-rate payments to fixed-rate payments; |
| • | To mitigate changes in value of the Company’s unfunded mortgage loan commitments, funded MLHFS and MSRs; |
| • | To mitigate remeasurement volatility of foreign currency denominated balances; and |
| • | To mitigate the volatility of the Company’s net investment in foreign operations driven by fluctuations in foreign currency exchange rates. |
In addition, the Company enters into interest rate and foreign exchange derivative contracts to support the business requirements of its customers (customer-related positions). The Company minimizes the market and liquidity risks of customer-related positions by either entering into similar offsetting positions with broker-dealers, or on a portfolio basis by entering into other derivative or non-derivative financial instruments that partially or fully offset the exposure from these customer-related positions. The Company may enter into derivative contracts that are either exchange-traded, centrally cleared through clearinghouses or over-the-counter. The Company does not utilize derivatives for speculative purposes.
The Company does not designate all of the derivatives that it enters into for risk management purposes as accounting hedges because of the inefficiency of applying the accounting requirements and may instead elect fair value accounting for the related hedged items. In particular, the Company enters into interest rate swaps, swaptions, forward commitments to buy to-be-announced securities (“TBAs”), U.S. Treasury and Eurodollar futures and options on U.S. Treasury futures to mitigate fluctuations in the value of its MSRs, but does not designate those derivatives as accounting hedges. Additionally, the Company uses forward commitments to sell TBAs and other commitments to sell residential mortgage loans at specified prices to economically hedge the interest rate risk in its residential mortgage loan production activities. The forward commitments to sell and the unfunded mortgage loan commitments on loans intended to be sold are considered derivatives under the accounting guidance related to accounting for derivative instruments and hedging activities. The Company has elected the fair value option for the MLHFS.
Derivatives are subject to credit risk associated with counterparties to the contracts. Credit risk associated with derivatives is measured by the Company based on the probability of counterparty default. The Company manages the credit risk of its derivative positions by diversifying its positions among various counterparties, by entering into master netting arrangements, and, where possible, by requiring collateral arrangements. The Company may also transfer counterparty credit risk related to interest rate swaps to third parties through the use of risk participation agreements. In addition, certain interest rate swaps, interest rate forwards and credit contracts are required to be centrally cleared through clearinghouses to further mitigate counterparty credit risk. The Company may mitigate credit risk on loans or lending portfolios through the use of credit contracts.
22 |
U.S. Bancorp |
For additional information on derivatives and hedging activities, refer to Notes 13 and 14 in the Notes to Consolidated Financial Statements.
LIBOR Transition
In July 2017, the United Kingdom’s Financial Conduct Authority (the “FCA”) announced that it would no longer require banks to submit rates for the London InterBank Offered Rate (“LIBOR”) after 2021. In March 2021, the FCA and the administrator of LIBOR announced that, with respect to the most commonly used tenors of United States Dollar LIBOR, LIBOR will no longer be published on a representative basis after June 30, 2023. The publication of all other tenors of United States Dollar LIBOR, as well as all non-United States Dollar LIBOR tenors, ceased to be provided or ceased to be representative after December 31, 2021. The Company holds financial instruments impacted by the discontinuance of LIBOR, including certain loans, investment securities, derivatives, borrowings and other financial instruments that use LIBOR as the benchmark rate. The Company also provides various services to customers in its capacities as trustee, servicer, and asset manager, which involve financial instruments that will be similarly impacted by the discontinuance of LIBOR.
In order to facilitate the transition process, the Company has instituted a LIBOR Transition Office and commenced an enterprise-wide project to (1) identify, assess, monitor and mitigate risks associated with the expected discontinuance or unavailability of LIBOR, (2) actively engage with industry working groups and regulators, (3) develop and implement training and education materials with respect to LIBOR and its discontinuance for the Company and for customers, (4) achieve operational readiness for the use of alternative reference rates (“ARRs”) in new financial instruments and transition existing LIBOR financial instruments to ARRs, (5) develop and implement customer notification programs across the Company and engage impacted customers to remediate and transition impacted instruments, and (6) develop reporting on remediation of LIBOR instruments across the Company for both internal and external stakeholders. The Company has also invested in updating its systems, models, procedures and internal infrastructure as part of the transition program.
The Company transitioned its financial instruments associated to LIBOR currencies and tenors that ceased or became nonrepresentative on December 31, 2021, to ARRs, with limited exceptions. Additionally, in alignment with guidance from United States banking agencies and the FCA, the Company has ceased the use of LIBOR as a reference rate in new contracts, with limited exceptions, and continues to increase the usage of ARRs such as the Secured Overnight Financing Rate (“SOFR”). The Company also anticipates that additional financial instruments associated with the remaining United States Dollar LIBOR tenors will require transition to a new reference rate by June 30, 2023. The Company has been undergoing an enterprise-wide effort to proactively reprice LIBOR loans and derivatives that mature after June 30, 2023, with customers to an ARR. The Company has also adopted industry best practice guidelines for fallback language for new transactions, converted its cleared interest rate swaps discounting to SOFR discounting, and distributed communications related to the transition to certain impacted parties, both inside and outside the Company.
The Company’s MUB acquisition impacts the execution of the Company’s LIBOR transition strategies and execution plans. The Company is currently assessing MUB’s LIBOR transition program, remediation strategies, and preparedness to execute on remediation strategies. In certain instances, the Company and MUB have different remediation strategies. As a result, the Company is updating its LIBOR transition plans to ensure that the Company can execute remediation plans across all products and business units, including with respect to MUB.
The Company is currently assessing the applicability and scope of the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”), which was enacted on March 15, 2022, and the Regulations Implementing the Adjustable Interest Rate (LIBOR) Act (Regulation ZZ) (the “Final Rules”), which were implemented on December 16, 2022. The LIBOR Act and Final Rules establish a process for replacing LIBOR in existing LIBOR contracts that do not provide for the use of a clearly defined or practicable replacement benchmark rate by providing that a benchmark replacement identified by the Federal Reserve Board that is based on SOFR will replace LIBOR as the benchmark for those contracts as a matter of law, without the need to be amended by the parties. The Company is currently assessing its outstanding LIBOR portfolio to determine the eligibility of certain financial instruments for the LIBOR Act and will incorporate the LIBOR Act as a remediation strategy where prudent. Refer to “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, for further discussion on potential risks that could adversely affect the Company’s financial results as a result of the LIBOR transition.
Market Risk Management
In addition to interest rate risk, the Company is exposed to other forms of market risk, principally related to trading activities which support customers’ strategies to manage their own foreign currency, interest rate risk and funding activities. For
| U.S. Bancorp | 23 |
purposes of its internal capital adequacy assessment process, the Company considers risk arising from its trading activities, as well as the remeasurement volatility of foreign currency denominated balances included on its Consolidated Balance Sheet (collectively, “Covered Positions”), employing methodologies consistent with the requirements of regulatory rules for market risk. The Company’s Market Risk Committee (“MRC”), within the framework of the ALCO, oversees market risk management. The MRC monitors and reviews the Company’s Covered Positions and establishes policies for market risk management, including exposure limits for each portfolio. The Company uses a VaR approach to measure general market risk. Theoretically, VaR represents the statistical risk of loss the Company has to adverse market movements over a one-day time horizon. The Company uses the Historical Simulation method to calculate VaR for its Covered Positions measured at the ninety-ninth percentile using a one-year look-back period for distributions derived from past market data. The market factors used in the calculations include those pertinent to market risks inherent in the underlying trading portfolios, principally those that affect the Company’s corporate bond trading business, foreign currency transaction business, client derivatives business, loan trading business and municipal securities business, as well as those inherent in the Company’s foreign denominated balances and the derivatives used to mitigate the related measurement volatility. On average, the Company expects the one-day VaR to be exceeded by actual losses two to three times per year related to these positions. The Company monitors the accuracy of internal VaR models and modeling processes by back-testing model performance, regularly updating the historical data used by the VaR models and regular model validations to assess the accuracy of the models’ input, processing, and reporting components. All models are required to be independently reviewed and approved prior to being placed in use. If the Company were to experience market losses in excess of the estimated VaR more often than expected, the VaR models and associated assumptions would be analyzed and adjusted. VaR amounts reflect MUB beginning December 1, 2022, the day the acquisition transaction closed.
The average, high, low and period-end one-day VaR amounts for the Company’s Covered Positions were as follows:
Three Months Ended March 31 (Dollars in Millions) |
2023 | 2022 | ||||||
Average |
$ | 5 | $ | 2 | ||||
High |
6 | 2 | ||||||
Low |
4 | 1 | ||||||
Period-end |
5 | 2 | ||||||
The Company did not experience any actual losses for its combined Covered Positions that exceeded VaR during the three months ended March 31, 2023 and 2022. The Company stress tests its market risk measurements to provide management with perspectives on market events that may not be captured by its VaR models, including worst case historical market movement combinations that have not necessarily occurred on the same date.
The Company calculates Stressed VaR using the same underlying methodology and model as VaR, except that a historical continuous one-year look-back period is utilized that reflects a period of significant financial stress appropriate to the Company’s Covered Positions. The period selected by the Company includes the significant market volatility of the last four months of 2008.
The average, high, low and period-end one-day Stressed VaR amounts for the Company’s Covered Positions were as follows:
Three Months Ended March 31 (Dollars in Millions) |
2023 | 2022 | ||||||
Average |
$ | 12 | $ | 7 | ||||
High |
16 | 8 | ||||||
Low |
10 | 6 | ||||||
Period-end |
14 | 7 | ||||||
Valuations of positions in client derivatives and foreign currency activities are based on discounted cash flow or other valuation techniques using market-based assumptions. These valuations are compared to third-party quotes or other market prices to determine if there are significant variances. Significant variances are approved by senior management in the Company’s corporate functions. Valuation of positions in the corporate bond trading, loan trading and municipal securities businesses are based on trader marks. These trader marks are evaluated against third-party prices, with significant variances approved by senior management in the Company’s corporate functions.
The Company also measures the market risk of its hedging activities related to residential MLHFS and MSRs using the Historical Simulation method. The VaRs are measured at the ninety-ninth percentile and employ factors pertinent to the market risks inherent in the
24 |
U.S. Bancorp |
valuation of the assets and hedges. A one-year look-back period is used to obtain past market data for the models.
The average, high and low VaR amounts for the residential MLHFS and related hedges and the MSRs and related hedges were as follows:
Three Months Ended March 31 (Dollars in Millions) |
2023 | 2022 | ||||||
Residential Mortgage Loans Held For Sale and Related Hedges |
||||||||
Average |
$ | 1 | $ | 2 | ||||
High |
1 | 5 | ||||||
Low |
— | 1 | ||||||
Mortgage Servicing Rights and Related Hedges |
||||||||
Average |
$ | 8 | $ | 6 | ||||
High |
12 | 13 | ||||||
Low |
4 | 3 | ||||||
Liquidity Risk Management
The Company’s liquidity risk management process is designed to identify, measure, and manage the Company’s funding and liquidity risk to meet its daily funding needs and to address expected and unexpected changes in its funding requirements. The Company engages in various activities to manage its liquidity risk. These activities include diversifying its funding sources, stress testing, and holding readily-marketable assets which can be used as a source of liquidity if needed. In addition, the Company’s profitable operations, sound credit quality and strong credit ratings and capital position have enabled it to develop a large and reliable base of core deposit funding within its market areas and in domestic and global capital markets.
The Company’s Board of Directors approves the Company’s liquidity policy. The Risk Management Committee of the Company’s Board of Directors oversees the Company’s liquidity risk management process and approves a contingency funding plan. The ALCO reviews the Company’s liquidity policy and limits, and regularly assesses the Company’s ability to meet funding requirements arising from adverse company-specific or market events.
The Company regularly projects its funding needs under various stress scenarios and maintains a contingency funding plan consistent with the Company’s access to diversified sources of contingent funding. The Company maintains a substantial level of total available liquidity in the form of on-balance sheet and off-balance sheet funding sources. These liquidity sources include cash at the Federal Reserve Bank and certain European central banks, unencumbered liquid assets, and capacity to borrow from the FHLB and at the Federal Reserve Bank’s Discount Window and new Bank Term Funding Program, created in 2023. Unencumbered liquid assets in the Company’s investment securities portfolio provides asset liquidity through the Company’s ability to sell the securities or pledge and borrow against them. At March 31, 2023, the fair value of unencumbered investment securities totaled $130.5 billion, compared with $135.5 billion at December 31, 2022. Refer to Note 4 of the Notes to Consolidated Financial Statements and “Balance Sheet Analysis” for further information on investment securities maturities and trends. Asset liquidity is further enhanced by the Company’s practice of pledging loans to access secured borrowing facilities through the FHLB and Federal Reserve Bank.
The following table summarizes the Company’s total available liquidity from on-balance sheet and off-balance sheet funding sources:
| (Dollars in millions) | March 31, 2023 |
December 31, 2022 |
||||||
Cash held at the Federal Reserve Bank and other central banks |
$ | 58,137 | $ | 45,171 | ||||
Available investment securities |
45,464 | 132,052 | ||||||
Borrowing capacity from the Federal Reserve Bank and FHLB |
211,399 | 125,682 | ||||||
Total available liquidity |
$ | 315,000 | $ | 302,905 | ||||
The Company’s diversified deposit base provides a sizeable source of relatively stable and low-cost funding, while reducing the Company’s reliance on the wholesale markets. Total deposits were $505.3 billion at March 31, 2023, compared with $525.0 billion at December 31, 2022. Refer to “Balance Sheet Analysis” for further information on the Company’s deposits.
Additional funding is provided by long-term debt and short-term borrowings. Long-term debt was $42.0 billion at March 31, 2023, and is an important funding source because of its multi-year borrowing structure. Short-term borrowings were $56.9 billion at March 31, 2023, and supplement the Company’s other funding sources. Depositors and investors often consider the credit rating of a Company. The Company receives various credit ratings from four separate credit rating agencies and has strong investment grade ratings from all agencies. After the first quarter of 2023, one credit rating agency, Moody’s Investors Service, downgraded its credit rating of the Company which is now in line with other large regional banks. Refer to “Balance Sheet Analysis” for further information on the Company’s long-term debt and short-term borrowings.
In addition to assessing liquidity risk on a consolidated basis, the Company monitors the parent company’s liquidity. The parent company’s routine funding requirements consist primarily of operating expenses, dividends paid to shareholders, debt service, repurchases of common stock and funds used for acquisitions. The parent company obtains funding to meet its obligations from dividends collected from its subsidiaries and the issuance of debt and capital securities. The Company establishes limits for the
| U.S. Bancorp | 25 |
minimal number of months into the future where the parent company can meet existing and forecasted obligations with cash and securities held that can be readily monetized. The Company measures and manages this limit in both normal and adverse conditions. The Company maintains sufficient funding to meet expected capital and debt service obligations for 24 months without the support of dividends from subsidiaries and assuming access to the wholesale markets is maintained. The Company maintains sufficient liquidity to meet its capital and debt service obligations for 12 months under adverse conditions without the support of dividends from subsidiaries or access to the wholesale markets. The parent company is currently in excess of required liquidity minimums.
At March 31, 2023, parent company long-term debt outstanding was $30.8 billion, compared with $27.0 billion at December 31, 2022. The increase was primarily due to $3.7 billion of medium-term note issuances. As of March 31, 2023, there was no parent company debt scheduled to mature in the remainder of 2023. Future debt maturities may be met through medium-term note and capital security issuances and dividends from subsidiaries, as well as from parent company cash and cash equivalents.
The Company is subject to a regulatory Liquidity Coverage Ratio (“LCR”) requirement which requires banks to maintain an adequate level of unencumbered high quality liquid assets to meet estimated liquidity needs over a 30-day stressed period. At March 31, 2023, the Company was compliant with this requirement.
The Company is also subject to a regulatory Net Stable Funding Ratio (“NSFR”) requirement which requires banks to maintain a minimum level of stable funding based on the liquidity characteristics of their assets, commitments, and derivative exposures over a one-year time horizon. At March 31, 2023, the Company was compliant with this requirement.
Refer to “Management’s Discussion and Analysis — Liquidity Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, for further discussion on liquidity risk management.
European Exposures
The Company provides merchant processing and corporate trust services in Europe either directly or through banking affiliations in Europe. Revenue generated from sources in Europe represented approximately 2 percent of the Company’s total net revenue for the three months ended March 31, 2023. Operating cash for these businesses is deposited on a short-term basis typically with certain European central banks. For deposits placed at other European banks, exposure is mitigated by the Company placing deposits at multiple banks and managing the amounts on deposit at any bank based on institution-specific deposit limits. At March 31, 2023, the Company had an aggregate amount on deposit with European banks of approximately $7.5 billion, predominately with the Central Bank of Ireland and Bank of England.
In addition, the Company provides financing to domestic multinational corporations that generate revenue from customers in European countries, transacts with various European banks as counterparties to certain derivative-related activities, and through a subsidiary, manages money market funds that hold certain investments in European sovereign debt. Any deterioration in economic conditions in Europe, including the impacts resulting from the Russia-Ukraine conflict, is not expected to have a significant effect on the Company related to these activities.
Commitments, Contingent Liabilities and Other Contractual Obligations
The Company participates in many different contractual arrangements which may or may not be recorded on its balance sheet, with unrelated or consolidated entities, under which the Company has an obligation to pay certain amounts, provide credit or liquidity enhancements or provide market risk support. These arrangements include commitments to extend credit, letters of credit and various forms of guarantees. Refer to Note 16 of the Notes to Consolidated Financial Statements for further information on guarantees and contingent liabilities. These arrangements also include any obligation related to a variable interest held in an unconsolidated entity that provides financing, liquidity, credit enhancement or market risk support. Refer to Note 6 of the Notes to Consolidated Financial Statements for further information related to the Company’s interests in variable interest entities.
26 |
U.S. Bancorp |
Table 10 |
Regulatory Capital Ratios |
| (Dollars in Millions) | March 31, 2023 |
December 31, 2022 |
||||||
Basel III standardized approach: |
||||||||
Common equity tier 1 capital |
$ | 42,027 | $ | 41,560 | ||||
Tier 1 capital |
49,278 | 48,813 | ||||||
Total risk-based capital |
59,920 | 59,015 | ||||||
Risk-weighted assets |
494,048 | 496,500 | ||||||
Common equity tier 1 capital as a percent of risk-weighted assets (a) |
8.5 | % | 8.4 | % | ||||
Tier 1 capital as a percent of risk-weighted assets |
10.0 | 9.8 | ||||||
Total risk-based capital as a percent of risk-weighted assets |
12.1 | 11.9 | ||||||
Tier 1 capital as a percent of adjusted quarterly average assets (leverage ratio) |
7.5 | 7.9 | ||||||
Tier 1 capital as a percent of total on- and off-balance sheet leverage exposure (total leverage exposure ratio) |
6.1 | 6.4 | ||||||
(a) |
The Company’s common equity tier 1 capital to risk-weighted assets ratio, reflecting the full implementation of the CECL methodology, was 8.3 percent at March 31, 2023, compared with 8.1 percent at December 31, 2022. |
Capital Management
The Company is committed to managing capital to maintain strong protection for depositors and creditors and for maximum shareholder benefit. The Company also manages its capital to exceed regulatory capital requirements for banking organizations. To achieve its capital goals, the Company employs a variety of capital management tools, including dividends, common share repurchases, and the issuance of subordinated debt, non-cumulative perpetual preferred stock, common stock and other capital instruments. The regulatory capital requirements effective for the Company follow Basel III, with the Company being subject to calculating its capital adequacy as a percentage of risk-weighted assets under the standardized approach. Beginning in 2022, the Company began to phase into its regulatory capital requirements the cumulative deferred impact of its 2020 adoption of the accounting guidance related to the impairment of financial instruments based on the current expected credit losses (“CECL”) methodology plus 25 percent of its quarterly credit reserve increases during 2020 and 2021. This cumulative deferred impact will continue to be phased into the Company’s regulatory capital over the next two years, culminating with a fully phased in regulatory capital calculation beginning in 2025. Table 10 provides a summary of statutory regulatory capital ratios in effect for the Company at March 31, 2023 and December 31, 2022. All regulatory ratios exceeded regulatory “well-capitalized” requirements.
The Company believes certain other capital ratios are useful in evaluating its capital adequacy. The Company’s tangible common equity, as a percent of tangible assets and as a percent of risk-weighted assets determined in accordance with transitional regulatory capital requirements related to the CECL methodology under the standardized approach, was 4.8 percent and 6.5 percent, respectively, at March 31, 2023, compared with 4.5 percent and 6.0 percent, respectively, at December 31, 2022. In addition, the Company’s common equity tier 1 capital to risk-weighted assets ratio, reflecting the full implementation of the CECL methodology was 8.3 percent at March 31, 2023, compared with 8.1 percent at December 31, 2022. Refer to “Non-GAAP Financial Measures” beginning on page 31 for further information on these other capital ratios.
Total U.S. Bancorp shareholders’ equity was $53.0 billion at March 31, 2023, compared with $50.8 billion at December 31, 2022. The increase was primarily the result of corporate earnings and changes in unrealized gains and losses on available-for-sale investment securities included in other comprehensive income (loss), partially offset by dividends paid.
The Company announced on December 22, 2020 that its Board of Directors had approved an authorization to repurchase $3.0 billion of its common stock beginning January 1, 2021. The Company suspended all common stock repurchases at the beginning of the third quarter of 2021, except for those done exclusively in connection with its stock-based compensation programs, due to its acquisition of MUB. The Company does not expect to evaluate potential repurchases until its common equity tier 1 capital ratio is 9.0 percent, at which time the Company will evaluate the potential capital requirements given the regulatory landscape. Capital distributions, including dividends and stock repurchases, are subject to the approval of the Company’s Board of Directors and compliance with regulatory requirements.
| U.S. Bancorp | 27 |
The following table provides a detailed analysis of all shares of common stock of the Company purchased by the Company or any affiliated purchaser during the first quarter of 2023:
| Period | Total Number of Shares Purchased |
Average Price Paid Per Share |
Total Number of Shares Purchased as Part of Publicly Announced Program |
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (In Millions) |
||||||||||||
January |
159,106 | (a) | $ | 48.30 | 9,106 | $ | 1,375 | |||||||||
February |
372,464 | 48.76 | 372,464 | 1,357 | ||||||||||||
March |
1,462,568 | (b) | 40.31 | 552,568 | 1,331 | |||||||||||
Total |
1,994,138 | (c) | $ | 42.53 | 934,138 | $ | 1,331 | |||||||||
(a) |
Includes 150,000 shares of common stock purchased, at an average price per share of $48.35, in open-market transactions by U.S. Bank National Association, the Company’s primary banking subsidiary, in its capacity as trustee of the U.S. Bank 401(k) Savings Plan, which is the Company’s employee retirement savings plan. |
(b) |
Includes shares of common stock purchased, at an average price per share of $36.43, in open-market transactions by U.S. Bank National Association in its capacity as trustee of the U.S. Bank 401(k) Savings Plan. |
(c) |
Includes 1,060,000 shares of common stock purchased, at an average price per share of $38.12, in open-market transactions by U.S. Bank National Association in its capacity as trustee of the U.S. Bank 401(k) Savings Plan. |
Refer to “Management’s Discussion and Analysis — Capital Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, for further discussion on capital management.
LINE OF BUSINESS FINANCIAL REVIEW
The Company’s major lines of business are Corporate and Commercial Banking, Consumer and Business Banking, Wealth Management and Investment Services, Payment Services, and Treasury and Corporate Support. These operating segments are components of the Company about which financial information is prepared and is evaluated regularly by management in deciding how to allocate resources and assess performance.
Basis for Financial Presentation
Business line results are derived from the Company’s business unit profitability reporting systems by specifically attributing managed balance sheet assets, deposits and other liabilities and their related income or expense. Refer to Note 17 of the Notes to Consolidated Financial Statements for further information on the business lines’ basis for financial presentation.
Designations, assignments and allocations change from time to time as management systems are enhanced, methods of evaluating performance or product lines change or business segments are realigned to better respond to the Company’s diverse customer base. During 2023, certain organization and methodology changes were made and, accordingly, 2022 results were restated and presented on a comparable basis.
Corporate and Commercial Banking
Corporate and Commercial Banking offers lending, equipment finance and small-ticket leasing, depository services, treasury management, capital markets services, international trade services and other financial services to middle market, large corporate, commercial real estate, financial institution, non-profit and public sector clients. Corporate and Commercial Banking contributed $580 million of the Company’s net income in the first quarter of 2023, or an increase of $172 million (42.2 percent) compared with the first quarter of 2022.
Net revenue increased $397 million (40.0 percent) in the first quarter of 2023, compared with the first quarter of 2022. Net interest income, on a taxable-equivalent basis, increased $335 million (44.9 percent) in the first quarter of 2023, compared with the first quarter of 2022. The increase was primarily due to the impacts of the MUB acquisition, higher loan balances and the impact of higher rates on the margin benefit from deposits, partially offset by lower spreads on loans and lower noninterest-bearing deposits. Noninterest income increased $62 million (25.1 percent) in the first quarter of 2023, compared with the first quarter of 2022, primarily due to the MUB acquisition and higher commercial products revenue mainly due to higher trading revenue.
Noninterest expense increased $169 million (38.1 percent) in the first quarter of 2023, compared with the first quarter of 2022, primarily due to higher FDIC insurance expense, higher net shared services expense driven by investment in support of business growth and the impacts of the MUB acquisition, including intangible amortization driven by the core deposit intangible. The provision for credit losses decreased $2 million (40.0 percent) in the first quarter of 2023, compared with the first quarter of 2022, primarily due to slower ending loan balance growth in the current year.
28 |
U.S. Bancorp |
Table 11 |
Line of Business Financial Performance |
Corporate and Commercial Banking |
Consumer and Business Banking |
Wealth Management and Investment Services |
||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended March 31 (Dollars in Millions) |
2023 | 2022 | Percent Change |
2023 | 2022 | Percent Change |
2023 | 2022 | Percent Change |
|||||||||||||||||||||||||||||||||||||||
Condensed Income Statement |
||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income (taxable-equivalent basis) |
$ | 1,081 | $ | 746 | 44.9 | % | $ | 2,315 | $ | 1,500 | 54.3 | % | $ | 488 | $ | 276 | 76.8 | % | ||||||||||||||||||||||||||||||
Noninterest income |
309 | 247 | 25.1 | 397 | 454 | (12.6 | ) | 700 | 595 | 17.6 | ||||||||||||||||||||||||||||||||||||||
Total net revenue |
1,390 | 993 | 40.0 | 2,712 | 1,954 | 38.8 | 1,188 | 871 | 36.4 | |||||||||||||||||||||||||||||||||||||||
Noninterest expense |
613 | 444 | 38.1 | 1,776 | 1,398 | 27.0 | 668 | 558 | 19.7 | |||||||||||||||||||||||||||||||||||||||
Income (loss) before provision and income taxes |
777 | 549 | 41.5 | 936 | 556 | 68.3 | 520 | 313 | 66.1 | |||||||||||||||||||||||||||||||||||||||
Provision for credit losses |
3 | 5 | (40.0 | ) | 13 | 48 | (72.9 | ) | (12 | ) | 8 | * | ||||||||||||||||||||||||||||||||||||
Income (loss) before income taxes |
774 | 544 | 42.3 | 923 | 508 | 81.7 | 532 | 305 | 74.4 | |||||||||||||||||||||||||||||||||||||||
Income taxes and taxable-equivalent adjustment |
194 | 136 | 42.6 | 231 | 126 | 83.3 | 133 | 76 | 75.0 | |||||||||||||||||||||||||||||||||||||||
Net income (loss) |
580 | 408 | 42.2 | 692 | 382 | 81.2 | 399 | 229 | 74.2 | |||||||||||||||||||||||||||||||||||||||
Net (income) loss attributable to noncontrolling interests |
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Net income (loss) attributable to U.S. Bancorp |
$ | 580 | $ | 408 | 42.2 | $ | 692 | $ | 382 | 81.2 | $ | 399 | $ | 229 | 74.2 | |||||||||||||||||||||||||||||||||
Average Balance Sheet |
||||||||||||||||||||||||||||||||||||||||||||||||
Loans |
$ | 150,436 | $ | 115,867 | 29.8 | $ | 170,132 | $ | 140,429 | 21.2 | $ | 24,335 | $ | 20,707 | 17.5 | |||||||||||||||||||||||||||||||||
Goodwill |
2,824 | 1,912 | 47.7 | 4,491 | 3,261 | 37.7 | 1,787 | 1,761 | 1.5 | |||||||||||||||||||||||||||||||||||||||
Other intangible assets |
592 | 4 | * | 5,594 | 3,176 | 76.1 | 442 | 265 | 66.8 | |||||||||||||||||||||||||||||||||||||||
Assets |
170,976 | 127,891 | 33.7 | 187,860 | 156,953 | 19.7 | 28,625 | 24,421 | 17.2 | |||||||||||||||||||||||||||||||||||||||
Noninterest-bearing deposits |
58,447 | 63,010 | (7.2 | ) | 43,496 | 31,265 | 39.1 | 21,896 | 27,429 | (20.2 | ) | |||||||||||||||||||||||||||||||||||||
Interest-bearing deposits |
105,011 | 87,010 | 20.7 | 185,400 | 165,885 | 11.8 | 83,619 | 70,402 | 18.8 | |||||||||||||||||||||||||||||||||||||||
Total deposits |
163,458 | 150,020 | 9.0 | 228,896 | 197,150 | 16.1 | 105,515 | 97,831 | 7.9 | |||||||||||||||||||||||||||||||||||||||
Total U.S. Bancorp shareholders’ equity |
17,350 | 13,729 | 26.4 | 16,704 | 12,214 | 36.8 | 4,106 | 3,593 | 14.3 | |||||||||||||||||||||||||||||||||||||||
Payment Services |
Treasury and Corporate Support |
Consolidated Company |
||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended March 31 (Dollars in Millions) |
2023 | 2022 | Percent Change |
2023 | 2022 | Percent Change |
2023 | 2022 | Percent Change |
|||||||||||||||||||||||||||||||||||||||
Condensed Income Statement |
||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income (taxable-equivalent basis) |
$ | 651 | $ | 622 | 4.7 | % | $ | 133 | $ | 56 | * | % | $ | 4,668 | $ | 3,200 | 45.9 | % | ||||||||||||||||||||||||||||||
Noninterest income |
937 | 857 | 9.3 | 164 | 243 | (32.5 | ) | 2,507 | 2,396 | 4.6 | ||||||||||||||||||||||||||||||||||||||
Total net revenue |
1,588 | 1,479 | 7.4 | 297 | 299 | (.7 | ) | 7,175 | 5,596 | 28.2 | ||||||||||||||||||||||||||||||||||||||
Noninterest expense |
915 | 849 | 7.8 | 583 | 253 | * | 4,555 | 3,502 | 30.1 | |||||||||||||||||||||||||||||||||||||||
Income (loss) before provision and income taxes |
673 | 630 | 6.8 | (286 | ) | 46 | * | 2,620 | 2,094 | 25.1 | ||||||||||||||||||||||||||||||||||||||
Provision for credit losses |
226 | 130 | 73.8 | 197 | (79 | ) | * | 427 | 112 | * | ||||||||||||||||||||||||||||||||||||||
Income (loss) before income taxes |
447 | 500 | (10.6 | ) | (483 | ) | 125 | * | 2,193 | 1,982 | 10.6 | |||||||||||||||||||||||||||||||||||||
Income taxes and taxable-equivalent adjustment |
112 | 125 | (10.4 | ) | (181 | ) | (39 | ) | * | 489 | 424 | 15.3 | ||||||||||||||||||||||||||||||||||||
Net income (loss) |
335 | 375 | (10.7 | ) | (302 | ) | 164 | * | 1,704 | 1,558 | 9.4 | |||||||||||||||||||||||||||||||||||||
Net (income) loss attributable to noncontrolling interests |
— | — | — | (6 | ) | (1 | ) | * | (6 | ) | (1 | ) | * | |||||||||||||||||||||||||||||||||||
Net income (loss) attributable to U.S. Bancorp |
$ | 335 | $ | 375 | (10.7 | ) | $ | (308 | ) | $ | 163 | * | $ | 1,698 | $ | 1,557 | 9.1 | |||||||||||||||||||||||||||||||
Average Balance Sheet |
||||||||||||||||||||||||||||||||||||||||||||||||
Loans |
$ | 36,935 | $ | 31,740 | 16.4 | $ | 4,912 | $ | 4,223 | 16.3 | $ | 386,750 | $ | 312,966 | 23.6 | |||||||||||||||||||||||||||||||||
Goodwill |
3,320 | 3,325 | (.2 | ) | — | — | — | 12,422 | 10,259 | 21.1 | ||||||||||||||||||||||||||||||||||||||
Other intangible assets |
385 | 464 | (17.0 | ) | 36 | — | * | 7,049 | 3,909 | 80.3 | ||||||||||||||||||||||||||||||||||||||
Assets |
42,860 | 38,499 | 11.3 | 235,126 | 229,638 | 2.4 | 665,447 | 577,402 | 15.2 | |||||||||||||||||||||||||||||||||||||||
Noninterest-bearing deposits |
3,184 | 3,673 | (13.3 | ) | 2,718 | 2,586 | 5.1 | 129,741 | 127,963 | 1.4 | ||||||||||||||||||||||||||||||||||||||
Interest-bearing deposits |
108 | 160 | (32.5 | ) | 6,445 | 2,756 | * | 380,583 | 326,213 | 16.7 | ||||||||||||||||||||||||||||||||||||||
Total deposits |
3,292 | 3,833 | (14.1 | ) | 9,163 | 5,342 | 71.5 | 510,324 | 454,176 | 12.4 | ||||||||||||||||||||||||||||||||||||||
Total U.S. Bancorp shareholders’ equity |
8,968 | 8,017 | 11.9 | 5,539 | 15,913 | (65.2 | ) | 52,667 | 53,466 | (1.5 | ) | |||||||||||||||||||||||||||||||||||||
* |
Not meaningful |
| U.S. Bancorp | 29 |
Consumer and Business Banking
Net revenue increased $758 million (38.8 percent) in the first quarter of 2023, compared with the first quarter of 2022. Net interest income, on a taxable-equivalent basis, increased $815 million (54.3 percent) in the first quarter of 2023, compared with the first quarter of 2022, due to the impacts of the MUB acquisition and the favorable impact of higher rates on the margin benefit from deposits, partially offset by lower spreads on loans and lower loan fees. Noninterest income decreased $57 million (12.6 percent) in the first quarter of 2023, compared with the first quarter of 2022, primarily due to lower mortgage banking revenue reflecting lower application volume, lower related gain on sale margins and fewer performing loan sales, partially offset by an increase in the fair value of MSRs, net of hedging activities. Noninterest income further decreased due to lower residual gains on vehicle sales and the impact of pricing changes on deposit service charges, partially offset by the impact of the MUB acquisition.
Noninterest expense increased $378 million (27.0 percent) in the first quarter of 2023, compared with the first quarter of 2022, primarily due to increases in net shared services expense due to investments in digital capabilities and the impact of the MUB acquisition, including intangible amortization driven by the core deposit intangible, as well as lower capitalized loan costs driven by lower mortgage production. The provision for credit losses decreased $35 million (72.9 percent) in the first quarter of 2023, compared with the first quarter of 2022, due to a more favorable product mix in the current year.
Wealth Management and Investment Services
Wealth Management and Investment Services provides private banking, financial advisory services, investment management, retail brokerage services, insurance, trust, custody and fund servicing through four businesses: Wealth Management, Global Corporate Trust & Custody, U.S. Bancorp Asset Management and Fund Services. Wealth Management and Investment Services contributed $399 million of the Company’s net income in the first quarter of 2023, or an increase of $170 million (74.2 percent) compared with the first quarter of 2022.
Net revenue increased $317 million (36.4 percent) in the first quarter of 2023, compared with the first quarter of 2022. Net interest income, on a taxable-equivalent basis, increased $212 million (76.8 percent) in the first quarter of 2023, compared with the first quarter of 2022, primarily due to the favorable impact of higher rates on the margin benefit from deposits. Noninterest income increased $105 million (17.6 percent) in the first quarter of 2023, compared with the first quarter of 2022, primarily driven by higher trust and investment management fees reflecting lower money market fund fee waivers and the impacts of the MUB acquisition, partially offset by the impact of unfavorable market conditions.
Noninterest expense increased $110 million (19.7 percent) in the first quarter of 2023, compared with the first quarter of 2022, reflecting higher compensation and employee benefits expense as a result of merit increases and core business growth, higher net shared services expense driven by investment in support of business growth and the impact of the MUB acquisition. The provision for credit losses decreased $20 million in the first quarter of 2023, compared with the first quarter of 2022, primarily due to slower ending loan balance growth in the current year.
Payment Services
Payment Services includes consumer and business credit cards, stored-value cards, debit cards, corporate, government and purchasing card services and merchant processing. Payment Services contributed $335 million of the Company’s net income in the first quarter of 2023, or a decrease of $40 million (10.7 percent) compared with the first quarter of 2022.
Net revenue increased $109 million (7.4 percent) in the first quarter of 2023, compared with the first quarter of 2022. Net interest income, on a taxable-equivalent basis, increased $29 million (4.7 percent) in the first quarter of 2023, compared with the first quarter of 2022, primarily due to higher loan yields driven by higher interest rates and customer revolve rates, higher loan balances and higher loan fees, mostly offset by higher funding costs. Noninterest income increased $80 million (9.3 percent) in the first quarter of 2023, compared with the first quarter of 2022, mainly due to continued strengthening of consumer and business spending across most sectors. As a result, there was strong growth in corporate payment products revenue driven by improving business spending across all product groups. In addition, merchant processing services revenue increased due to higher sales volume and higher merchant fees, partially offset by the impact of foreign currency rate changes in Europe.
30 |
U.S. Bancorp |
Noninterest expense increased $66 million (7.8 percent) in the first quarter of 2023, compared with the first quarter of 2022, reflecting higher net shared services expense driven by investment in infrastructure and technology development, in addition to higher compensation and employee benefits expense due to merit increases and core business growth. The provision for credit losses increased $96 million (73.8 percent) in the first quarter of 2023, compared with the first quarter of 2022, primarily due to the impacts of increasing delinquency rates and lower consumer liquidity.
Treasury and Corporate Support
Treasury and Corporate Support includes the Company’s investment portfolios, funding, capital management, interest rate risk management, income taxes not allocated to the business lines, including most investments in tax-advantaged projects, and the residual aggregate of those expenses associated with corporate activities that are managed on a consolidated basis. Treasury and Corporate Support recorded a net loss of $308 million in the first quarter of 2023, compared with net income of $163 million in the first quarter of 2022.
Net revenue decreased $2 million (0.7 percent) in the first quarter of 2023, compared with the first quarter of 2022. Noninterest income decreased $79 million (32.5 percent) in the first quarter of 2023, compared with the first quarter of 2022, primarily due to lower tax-advantaged investment syndication revenue and securities losses. Net interest income, on a taxable-equivalent basis, increased $77 million in the first quarter of 2023, compared with the first quarter of 2022, primarily due to the acquisition of MUB, partially offset by higher funding costs.
Noninterest expense increased $330 million in the first quarter of 2023, compared with the first quarter of 2022, primarily due to merger and integration charges and operating expenses related to the acquisition of MUB, higher compensation and employee benefits expense reflecting merit increases, hiring to support business growth, core business growth and higher production incentives, partially offset by lower net shared services expense. The provision for credit losses increased $276 million in the first quarter of 2023, compared with the first quarter of 2022, primarily due to increased economic uncertainty in the current year compared to the reduction in the allowance for credit losses associated with improving economic conditions in the first quarter of 2022.
Income taxes are assessed to each line of business at a managerial tax rate of 25.0 percent with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Treasury and Corporate Support.
NON-GAAP FINANCIAL MEASURES
In addition to capital ratios defined by banking regulators, the Company considers various other measures when evaluating capital utilization and adequacy, including:
| • | Tangible common equity to tangible assets, |
| • | Tangible common equity to risk-weighted assets, and |
| • | Common equity tier 1 capital to risk-weighted assets, reflecting the full implementation of the CECL methodology. |
These capital measures are viewed by management as useful additional methods of evaluating the Company’s utilization of its capital held and the level of capital available to withstand unexpected negative market or economic conditions. Additionally, presentation of these measures allows investors, analysts and banking regulators to assess the Company’s capital position relative to other financial services companies. These capital measures are not defined in generally accepted accounting principles (“GAAP”), or are not currently effective or defined in banking regulations. In addition, certain of these measures differ from currently effective capital ratios defined by banking regulations principally in that the currently effective ratios, which are subject to certain transitional provisions, temporarily exclude the impact of the 2020 adoption of accounting guidance related to impairment of financial instruments based on the CECL methodology. As a result, these capital measures disclosed by the Company may be considered non-GAAP financial measures. Management believes this information helps investors assess trends in the Company’s capital adequacy.
The Company also discloses net interest income and related ratios and analysis on a taxable-equivalent basis, which may also be considered non-GAAP financial measures. The Company believes this presentation to be the preferred industry measurement of net interest income as it provides a relevant comparison of net interest income arising from taxable and tax-exempt sources. In addition, certain performance measures, including the efficiency ratio and net interest margin utilize net interest income on a taxable-equivalent basis.
There may be limits in the usefulness of these measures to investors. As a result, the Company encourages readers to consider the consolidated financial statements and other financial information contained in this report in their entirety, and not to rely on any single financial measure.
| U.S. Bancorp | 31 |
The following table shows the Company’s calculation of these non-GAAP financial measures:
| (Dollars in Millions) | March 31, 2023 |
December 31, 2022 |
||||||
Total equity |
$ | 53,454 | $ | 51,232 | ||||
Preferred stock |
(6,808 | ) | (6,808 | ) | ||||
Noncontrolling interests |
(465 | ) | (466 | ) | ||||
Goodwill (net of deferred tax liability) (1) |
(11,575 | ) | (11,395 | ) | ||||
Intangible assets (net of deferred tax liability), other than mortgage servicing rights |
(2,611 | ) | (2,792 | ) | ||||
Tangible common equity (a) |
31,995 | 29,771 | ||||||
Common equity tier 1 capital, determined in accordance with transitional regulatory capital requirements related to the CECL methodology implementation |
42,027 | 41,560 | ||||||
Adjustments (2) |
(866 | ) | (1,299 | ) | ||||
Common equity tier 1 capital, reflecting the full implementation of the CECL methodology (b) |
41,161 | 40,261 | ||||||
Total assets |
682,377 | 674,805 | ||||||
Goodwill (net of deferred tax liability) (1) |
(11,575 | ) | (11,395 | ) | ||||
Intangible assets (net of deferred tax liability), other than mortgage servicing rights |
(2,611 | ) | (2,792 | ) | ||||
Tangible assets (c) |
668,191 | 660,618 | ||||||
Risk-weighted assets, determined in accordance with prescribed regulatory capital requirements effective for the Company (d) |
494,048 | 496,500 | ||||||
Adjustments (3) |
(735 | ) | (620 | ) | ||||
Risk-weighted assets, reflecting the full implementation of the CECL methodology (e) |
493,313 | 495,880 | ||||||
Ratios |
||||||||
Tangible common equity to tangible assets (a)/(c) |
4.8 | % | 4.5 | % | ||||
Tangible common equity to risk-weighted assets (a)/(d) |
6.5 | 6.0 | ||||||
Common equity tier 1 capital to risk-weighted assets, reflecting the full implementation of the CECL methodology (b)/(e) |
8.3 | 8.1 | ||||||
| Three Months Ended March 31 |
||||||||
| 2023 | 2022 | |||||||
Net interest income |
$ | 4,634 | $ | 3,173 | ||||
Taxable-equivalent adjustment (4) |
34 | 27 | ||||||
Net interest income, on a taxable-equivalent basis |
4,668 | 3,200 | ||||||
Net interest income, on a taxable-equivalent basis (as calculated above) |
4,668 | 3,200 | ||||||
Noninterest income |
2,507 | 2,396 | ||||||
Less: Securities gains (losses), net |
(32 | ) | 18 | |||||
Total net revenue, excluding net securities gains (losses) (f) |
7,207 | 5,578 | ||||||
Noninterest expense (g) |
4,555 | 3,502 | ||||||
Efficiency ratio (g)/(f) |
63.2 | % | 62.8 | % | ||||
Net charge-offs |
$ | 373 | ||||||
Less: Notable items (5) |
91 | |||||||
Net charge-offs, excluding notable items |
282 | |||||||
Annualized net charge-offs, excluding notable items (h) |
1,144 | |||||||
Average loan balances (i) |
386,750 | |||||||
Net charge-off ratio, excluding notable items (h)/(i) |
.30 | % | ||||||
(1) |
Includes goodwill related to certain investments in unconsolidated financial institutions per prescribed regulatory requirements. |
(2) |
Includes the estimated increase in the allowance for credit losses related to the adoption of the CECL methodology net of deferred taxes. |
(3) |
Includes the impact of the estimated increase in the allowance for credit losses related to the adoption of the CECL methodology. |
(4) |
Based on a federal income tax rate of 21 percent for those assets and liabilities whose income or expense is not included for federal income tax purposes. |
(5) |
Notable items for the three months ended March 31, 2023 included $91 million of net charge-offs related to the uncollectible amount of acquired MUB loans, which were considered purchased credit deteriorated as of the date of acquisition. |
32 |
U.S. Bancorp |
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Company comply with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. The Company’s financial position and results of operations can be affected by these estimates and assumptions, which are integral to understanding the Company’s financial statements. Critical accounting policies are those policies management believes are the most important to the portrayal of the Company’s financial condition and results, and require management to make estimates that are difficult, subjective or complex. Most accounting policies are not considered by management to be critical accounting policies. Management has discussed the development and the selection of critical accounting policies with the Company’s Audit Committee. Those policies considered to be critical accounting policies relate to the allowance for credit losses, fair value estimates, MSRs, and income taxes. These accounting policies are discussed in detail in “Management’s Discussion and Analysis — Critical Accounting Policies” and the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon this evaluation, the principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.
The Company continues to integrate MUB into its overall internal control over financial reporting processes. During the most recently completed fiscal quarter, there were no other changes made in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
| U.S. Bancorp | 33 |
U.S. Bancorp
Consolidated Balance Sheet
| (Dollars in Millions) | March 31, 2023 |
December 31, 2022 |
||||||
| (Unaudited) | ||||||||
| Assets |
||||||||
| Cash and due from banks |
$ | $ | ||||||
| Investment securities |
||||||||
| Held-to-maturity (fair value $ |
||||||||
| Available-for-sale ($ |
||||||||
| Loans held for sale (including $ |
||||||||
| Loans |
||||||||
| Commercial |
||||||||
| Commercial real estate |
||||||||
| Residential mortgages |
||||||||
| Credit card |
||||||||
| Other retail |
||||||||
| Total loans |
||||||||
| Less allowance for loan losses |
( |
) | ( |
) | ||||
| Net loans |
||||||||
| Premises and equipment |
||||||||
| Goodwill |
||||||||
| Other intangible assets |
||||||||
| Other assets (including $ |
||||||||
| Total assets |
$ | $ | ||||||
| Liabilities and Shareholders’ Equity |
||||||||
| Deposits |
||||||||
| Noninterest-bearing |
$ | $ | ||||||
| Interest-bearing |
||||||||
| Total deposits |
||||||||
| Short-term borrowings |
||||||||
| Long-term debt |
||||||||
| Other liabilities |
||||||||
| Total liabilities |
||||||||
| Shareholders’ equity |
||||||||
| Preferred stock |
||||||||
| Common stock, par value $ and 12/31/22— |
||||||||
| Capital surplus |
||||||||
| Retained earnings |
||||||||
| Less cost of common stock in treasury: 3/31/23— — |
( |
) | ( |
) | ||||
| Accumulated other comprehensive income (loss) |
( |
) | ( |
) | ||||
| Total U.S. Bancorp shareholders’ equity |
||||||||
| Noncontrolling interests |
||||||||
| Total equity |
||||||||
| Total liabilities and equity |
$ | $ | ||||||
(a) |
Includes only collateral pledged by the Company where counterparties have the right to sell or pledge the collateral. |
See Notes to Consolidated Financial Statements.
34 |
U.S. Bancorp |
U.S. Bancorp
Consolidated Statement of Income
| (Dollars and Shares in Millions, Except Per Share Data) (Unaudited) |
Three Months Ended March 31 |
|||||||
| 2023 | 2022 | |||||||
| Interest Income |
||||||||
| Loans |
$ | $ | ||||||
| Loans held for sale |
||||||||
| Investment securities |
||||||||
| Other interest income |
||||||||
| Total interest income |
||||||||
| Interest Expense |
||||||||
| Deposits |
||||||||
| Short-term borrowings |
||||||||
| Long-term debt |
||||||||
| Total interest expense |
||||||||
| Net interest income |
||||||||
| Provision for credit losses |
||||||||
| Net interest income after provision for credit losses |
||||||||
| Noninterest Income |
||||||||
| Card revenue |
||||||||
| Corporate payment products revenue |
||||||||
| Merchant processing services |
||||||||
| Trust and investment management fees |
||||||||
| Service charges |
||||||||
| Commercial products revenue |
||||||||
| Mortgage banking revenue |
||||||||
| Investment products fees |
||||||||
| Securities gains (losses), net |
( |
) | ||||||
| Other |
||||||||
| Total noninterest income |
||||||||
| Noninterest Expense |
||||||||
| Compensation and employee benefits |
||||||||
| Net occupancy and equipment |
||||||||
| Professional services |
||||||||
| Marketing and business development |
||||||||
| Technology and communications |
||||||||
| Other intangibles |
||||||||
| Merger and integration charges |
— | |||||||
| Other |
||||||||
| Total noninterest expense |
||||||||
| Income before income taxes |
||||||||
| Applicable income taxes |
||||||||
| Net income |
||||||||
| Net (income) loss attributable to noncontrolling interests |
( |
) | ( |
) | ||||
| Net income attributable to U.S. Bancorp |
$ | $ | ||||||
| Net income applicable to U.S. Bancorp common shareholders |
$ | $ | ||||||
| Earnings per common share |
$ | $ | ||||||
| Diluted earnings per common share |
$ | $ | ||||||
| Average common shares outstanding |
||||||||
| Average diluted common shares outstanding |
||||||||
See Notes to Consolidated Financial Statements.
| U.S. Bancorp | 35 |
U.S. Bancorp
Consolidated Statement of Comprehensive Income
| (Dollars in Millions) (Unaudited) |
Three Months Ended March 31 |
|||||||
| 2023 | 2022 | |||||||
| Net income |
$ | $ | ||||||
| Other Comprehensive Income (Loss) |
||||||||
| Changes in unrealized gains (losses) on investment securities available-for-sale |
( |
) | ||||||
| Changes in unrealized gains (losses) on derivative hedges |
— | |||||||
| Foreign currency translation |
( |
) | — | |||||
| Changes in unrealized gains (losses) on retirement plans |
— | |||||||
| Reclassification to earnings of realized (gains) losses |
||||||||
| Income taxes related to other comprehensive income (loss) |
( |
) | ||||||
| Total other comprehensive income (loss) |
( |
) | ||||||
| Comprehensive income (loss) |
( |
) | ||||||
| Comprehensive (income) loss attributable to noncontrolling interests |
( |
) | ( |
) | ||||
| Comprehensive income (loss) attributable to U.S. Bancorp |
$ | $ | ( |
) | ||||
See Notes to Consolidated Financial Statements.
36 |
U.S. Bancorp |
U.S. Bancorp
Consolidated Statement of Shareholders’ Equity
| U.S. Bancorp Shareholders | ||||||||||||||||||||||||||||||||||||||||
(Dollars and Shares in Millions, Except Per Share Data) (Unaudited) |
Common Shares Outstanding |
Preferred Stock |
Common Stock |
Capital Surplus |
Retained Earnings |
Treasury Stock |
Accumulated Other Comprehensive Income (Loss) |
Total U.S. Bancorp Shareholders’ Equity |
Noncontrolling Interests |
Total Equity |
||||||||||||||||||||||||||||||
Balance December 31, 2021 |
$ | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||
Net income (loss) |
||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||||
Preferred stock dividends (a) |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||||
Common stock dividends ($ |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||||
Issuance of preferred stock |
||||||||||||||||||||||||||||||||||||||||
Issuance of common and treasury stock |
( |
) | ||||||||||||||||||||||||||||||||||||||
Purchase of treasury stock |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests |
— | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||
Stock option and restricted stock grants |
||||||||||||||||||||||||||||||||||||||||
Balance March 31, 2022 |
$ | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||
Balance December 31, 2022 |
$ | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||
Change in accounting principle (b) |
||||||||||||||||||||||||||||||||||||||||
Net income (loss) |
||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) |
||||||||||||||||||||||||||||||||||||||||
Preferred stock dividends (c) |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||||
Common stock dividends ($ |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||||
Issuance of common and treasury stock |
( |
) | ||||||||||||||||||||||||||||||||||||||
Purchase of treasury stock |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests |
— | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||
Stock option and restricted stock grants |
||||||||||||||||||||||||||||||||||||||||
Balance March 31, 2023 |
$ | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||
(a) |
Reflects dividends declared per share on the Company’s Series A, Series B, Series J, Series K, Series L, Series M, Series N and Series O Non-Cumulative Perpetual Preferred Stock of $ |
(b) |
Effective January 1, 2023, the Company adopted accounting guidance which removed the separate recognition and measurement of troubled debt restructurings. Upon adoption, the Company reduced its allowance for credit losses and increased retained earnings net of deferred taxes through a cumulative-effect adjustment. |
(c) |
Reflects dividends declared per share on the Company’s Series A, Series B, Series J, Series K, Series L, Series M, Series N and Series O Non-Cumulative Perpetual Preferred Stock of $ |
See Notes to Consolidated Financial Statements.
| U.S. Bancorp | 37 |
U.S. Bancorp
Consolidated Statement of Cash Flows
| (Dollars in Millions) (Unaudited) |
Three Months Ended March 31 |
|||||||
| 2023 | 2022 | |||||||
| Operating Activities |
||||||||
| Net income attributable to U.S. Bancorp |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities |
||||||||
| Provision for credit losses |
||||||||
| Depreciation and amortization of premises and equipment |
||||||||
| Amortization of intangibles |
||||||||
| (Gain) loss on sale of loans held for sale |
||||||||
| (Gain) loss on sale of securities and other assets |
( |
) | ||||||
| Loans originated for sale, net of repayments |
( |
) | ( |
) | ||||
| Proceeds from sales of loans held for sale |
||||||||
| Other, net |
( |
) | ||||||
| Net cash provided by operating activities |
||||||||
| Investing Activities |
||||||||
| Proceeds from sales of available-for-sale investment securities |
||||||||
| Proceeds from maturities of held-to-maturity investment securities |
||||||||
| Proceeds from maturities of available-for-sale investment securities |
||||||||
| Purchases of held-to-maturity investment securities |
( |
) | ( |
) | ||||
| Purchases of available-for-sale investment securities |
( |
) | ( |
) | ||||
| Net decrease (increase) in loans outstanding |
( |
) | ||||||
| Proceeds from sales of loans |
||||||||
| Purchases of loans |
( |
) | ( |
) | ||||
| Net increase in securities purchased under agreements to resell |
( |
) | ( |
) | ||||
| Other, net |
( |
) | ( |
) | ||||
| Net cash provided by (used in) investing activities |
( |
) | ||||||
| Financing Activities |
||||||||
| Net (decrease) increase in deposits |
( |
) | ||||||
| Net increase in short-term borrowings |
||||||||
| Proceeds from issuance of long-term debt |
||||||||
| Principal payments or redemption of long-term debt |
( |
) | ( |
) | ||||
| Proceeds from issuance of preferred stock |
— | |||||||
| Proceeds from issuance of common stock |
||||||||
| Repurchase of preferred stock |
— | ( |
) | |||||
| Repurchase of common stock |
( |
) | ( |
) | ||||
| Cash dividends paid on preferred stock |
( |
) | ( |
) | ||||
| Cash dividends paid on common stock |
( |
) | ( |
) | ||||
| Net cash provided by financing activities |
||||||||
| Change in cash and due from banks |
||||||||
| Cash and due from banks at beginning of period |
||||||||
| Cash and due from banks at end of period (a) |
$ | $ | ||||||
(a) |
Excludes a $ |
See Notes to Consolidated Financial Statements.
38 |
U.S. Bancorp |
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 |
Basis of Presentation |
The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flow activity required
in
accordance with accounting principles generally accepted in the United States. In the opinion of management of U.S. Bancorp (the “Company”), all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of results for the interim periods have been made. These financial statements and notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Certain amounts in prior periods have been reclassified to conform to the current period presentation. Note 2 |
Accounting Changes |
Reference Interest Rate Transition
Fair Value Hedging – Portfolio Layer Method
Effective January 1, 2023, the Company adopted accounting guidance, issued by the FASB in March 2022, related to fair value hedge accounting of portfolios of financial assets. This guidance permits a company to designate multiple hedging relationships on a single closed portfolio, resulting in a larger portion of the interest rate risk associated with such a portfolio being eligible to be hedged. The guidance also expands the scope of the method to include non-prepayable financial assets and clarifies other technical questions from the original accounting guidance. The adoption of this guidance was not material to the Company’s financial statements.
Financial Instruments – Troubled Debt Restructurings and Vintage Disclosures
Effective January 1, 2023, the Company adopted accounting guidance on a modified retrospective basis, issued by the FASB in March 2022, related to the recognition and measurement of troubled debt restructurings (“TDRs”) by creditors. This guidance removes the separate recognition and measurement requirements for TDRs by replacing them with a requirement for a company to apply existing accounting guidance to determine whether a modification results in a new loan or a continuation of an existing loan. This guidance also replaces existing TDR disclosures with similar but more expansive disclosures for certain modifications of receivables made to borrowers experiencing financial difficulty. Further, this guidance also requires companies to disclose current-period gross write-offs by year of origination for financing receivables. The adoption of this guidance was not material to the Company’s financial statements.
Accounting for Tax Credit Investments Using the Proportional Amortization Method
Effective January 1, 2023, the Company adopted accounting guidance on a modified retrospective basis, issued by the FASB in March 2023, related to the accounting for tax credit investments. This guidance allows the Company to elect to account for tax credit investments using the proportional amortization method on a program-by-program basis if certain conditions are met, regardless of the program from which the income tax credits are received. The adoption of this guidance was not material to the Company’s financial statements.
| U.S. Bancorp | 39 |
Note 3 |
Business Combinations |
MUFG Union Bank Acquisition
On December 1, 2022, the Company acquired MUB’s core regional banking franchise from Mitsubishi UFJ Financial Group, Inc. (“MUFG”). Pursuant to the terms of 5.5 billion in cash and approximately 44 million shares of common stock of the Company. Under the terms of the Share Purchase Agreement, the purchase price was based on MUB having a tangible book value of $6.25 billion at the closing of the acquisition. At the closing of the acquisition, MUB had $3.5
the
Share Purchase Agreement, the Company acquired all of the issued and outstanding shares of common stock of MUB for a purchase price consisting of $billion of tangible book value over the $
billion target, consisting of additional cash. The additional cash received is held at the MUB subsidiary and is required to be repaid to MUFG on or prior to the fifth anniversary date of the completion of the purchase, in accordance with the terms of the Share Purchase Agreement. As such, it is recognized as debt at the parent company. The transaction excludes the purchase of substantially all of MUB’s Global Corporate & Investment Bank (other than certain deposits), certain middle and back office functions, and other assets that were transferred by MUB to MUFG prior to the acquisition. This transaction has been accounted for as a business combination. Accordingly, the assets acquired and liabilities assumed from MUB were recorded at fair value as of the acquisition date. The determination of fair value requires management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change. Fair value estimates related to the assets and liabilities from MUB are subject to adjustment for up to one year after the closing date of the acquisition as additional information becomes available. Valuations subject to adjustment include, but are not limited to, loans, certain deposits, certain other assets, customer relationships and the core deposit benefits intangible.
In connection with the transaction, the Company incurred $244 million of nonrecurring merger and integration charges during the three months ended March 31, 2023 recorded within noninterest expense. These expenses are primarily comprised of personnel, legal, advisory and technology related costs.
The following table includes the fair value of consideration transferred and the preliminary fair value of the identifiable tangible and intangible assets and liabilities from MUB:
December 1, 2022 (Dollars in Millions) |
||||
Acquisition consideration |
||||
Cash |
$ | |||
Market value of shares of common stock |
||||
Total consideration transferred at acquisition close date |
||||
Discounted liability to MUFG (a) |
||||
Total |
$ | |||
Fair Value of MUB assets and liabilities |
||||
Assets |
||||
Cash and due from banks |
$ | |||
Investment securities |
||||
Loans held for sale |
||||
Loans |
||||
Less allowance for loan losses |
( |
) | ||
Net loans |
||||
Premises and equipment |
||||
Other intangible assets (excluding goodwill) |
||||
Other assets |
||||
Total assets |
$ | |||
Liabilities |
||||
Deposits |
$ | |||
Short-term borrowings |
||||
Long-term debt |
||||
Other liabilities |
||||
Total liabilities |
||||
Less: Net assets |
$ | |||
Goodwill |
$ | |||
(a) |
Represents $ cash held by MUB upon close of the acquisition to be delivered to MUFG on or prior to December 1, 2027, discounted at the Company’s 5-year unsecured borrowing rate as of the acquisition date, per authoritative accounting guidance. |
40 |
U.S. Bancorp |
Preliminary goodwill of $2.4 billion recorded in connection with the transaction resulted from the reputation, operating model and expertise of MUB. The amount of goodwill recorded reflects the increased market share and related synergies that are expected to result from the acquisition, and represents the excess purchase price over the estimated fair value of the net assets from MUB. The goodwill was allocated to the Company’s business segments on a preliminary basis and is not deductible for income tax purposes. Refer to Note 11 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, for the amount of goodwill allocated to each business segment in connection with the transaction.
For further information on the fair value and unpaid principal balance of loans from the MUB acquisition, as well as the methods used to determine the fair values of the significant assets acquired and liabilities assumed, refer to Note 3 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
During the first quarter of 2023, the Company completed the divestiture of three MUB branches to HomeStreet Bank, a wholly owned subsidiary of HomeStreet, Inc., to satisfy regulatory requirements related to the acquisition. There were approximately $400 million in deposits and $22 million in loans divested as part of this transaction.
Note 4 |
Investment Securities |
The Company’s held-to-maturity investment securities are carried at historical cost, adjusted for amortization of premiums and accretion of discounts. The Company’s available-for-sale investment securities are carried at fair value with unrealized net gains or losses reported within accumulated other comprehensive income (loss) in shareholders’ equity.
The amortized cost, gross unrealized holding gains and losses, and fair value of held-to-maturity and available-for-sale investment securities were as follows:
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||
| (Dollars in Millions) | Amortized Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value | Amortized Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value | ||||||||||||||||||||||||
| Held-to-maturity |
||||||||||||||||||||||||||||||||
| U.S. Treasury and agencies |
$ | $ | — | $ | ( |
) | $ | $ | $ | — | $ | ( |
) | $ | ||||||||||||||||||
| Mortgage-backed securities |
||||||||||||||||||||||||||||||||
| Residential agency |
( |
) | ( |
) | ||||||||||||||||||||||||||||
| Commercial agency |
( |
) | ( |
) | ||||||||||||||||||||||||||||
| Total held-to-maturity |
$ | $ | $ | ( |
) | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||
| Available-for-sale |
||||||||||||||||||||||||||||||||
| U.S. Treasury and agencies |
$ | $ | $ | ( |
) | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||
| Mortgage-backed securities |
||||||||||||||||||||||||||||||||
| Residential agency |
( |
) | ( |
) | ||||||||||||||||||||||||||||
| Commercial |
||||||||||||||||||||||||||||||||
| Agency |
— | ( |
) | — | ( |
) | ||||||||||||||||||||||||||
| Non-agency |
— | — | — | — | ||||||||||||||||||||||||||||
| Asset-backed securities |
( |
) | ( |
) | ||||||||||||||||||||||||||||
| Obligations of state and political subdivisions |
( |
) | ( |
) | ||||||||||||||||||||||||||||
| Other |
— | — | — | — | ||||||||||||||||||||||||||||
| Total available-for-sale |
$ | $ | $ | ( |
) | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||
Investment securities with a fair value of $13.9 billion at March 31, 2023, and $15.3 billion at December 31, 2022, were pledged to secure public, private and trust deposits, repurchase agreements and for other purposes required by contractual obligation or law. Included in these amounts were securities where the Company and certain counterparties have agreements granting the counterparties the right to sell or pledge the securities. Investment securities securing these types of arrangements had a fair value of $600 million at March 31, 2023, and $858 million at December 31, 2022.
The following table provides information about the amount of interest income from taxable and non-taxable investment securities:
| Three Months Ended March 31 |
||||||||
| (Dollars in Millions) | 2023 | 2022 | ||||||
| Taxable |
$ | $ | ||||||
| Non-taxable |
||||||||
| Total interest income from investment securities |
$ | $ | ||||||
| U.S. Bancorp | 41 |
The following table provides information about the amount of gross gains and losses realized through the sales of available-for-sale investment securities:
| Three Months Ended March 31 |
||||||||
| (Dollars in Millions) | 2023 | 2022 | ||||||
| Realized gains |
$ | $ | ||||||
| Realized losses |
( |
) | ( |
) | ||||
| Net realized gains (losses) |
$ | ( |
) | $ | ||||
| Income tax on net realized gains (losses) |
$ | ( |
) | $ | ||||
The Company conducts a regular assessment of its available-for-sale investment securities with unrealized losses to determine whether all or some portion of a security’s unrealized loss is related to credit and an allowance for credit losses is necessary. If the Company intends to sell or it is more likely than not the Company will be required to sell an investment security, the amortized cost of the security is written down to fair value. When evaluating credit losses, the Company considers various factors such as the nature of the investment security, the credit ratings or financial condition of the issuer, the extent of the unrealized loss, expected cash flows of underlying collateral, the existence of any government or agency guarantees, and market conditions. The Company measures the allowance for credit losses using market information where available and discounting the cash flows at the original effective rate of the investment security. The allowance for credit losses is adjusted each period through earnings and can be subsequently recovered. The allowance for credit losses on the Company’s available-for-sale investment securities was immaterial at March 31, 2023 and December 31, 2022.
At March 31, 2023, certain investment securities had a fair value below amortized cost. The following table shows the gross unrealized losses and fair value of the Company’s available-for-sale investment securities with unrealized losses, aggregated by investment category and length of time the individual investment securities have been in continuous unrealized loss positions, at March 31, 2023:
| Less Than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
| (Dollars in Millions) | Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
||||||||||||||||||
| U.S. Treasury and agencies |
$ | $ | ( |
) | $ | $ | ( |
) | $ | $ | ( |
) | ||||||||||||
| Mortgage-backed securities |
||||||||||||||||||||||||
| Residential agency |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Commercial |
||||||||||||||||||||||||
| Agency |
— | — | ( |
) | ( |
) | ||||||||||||||||||
| Non-agency |
— | — | — | — | ||||||||||||||||||||
| Asset-backed securities |
( |
) | — | — | ( |
) | ||||||||||||||||||
| Obligations of state and political subdivisions |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Other |
— | — | — | — | ||||||||||||||||||||
| Total investment securities |
$ | $ | ( |
) | $ | $ | ( |
) | $ | $ | ( |
) | ||||||||||||
These unrealized losses primarily relate to changes in interest rates and market spreads subsequent to purchase of these available-for-sale investment securities. U.S. Treasury and agencies securities and agency mortgage-backed securities are issued, guaranteed or otherwise supported by the United States government. The Company’s obligations of state and political subdivisions are generally high grade. Accordingly, the Company does not consider these unrealized losses to be credit-related and an allowance for credit losses is not necessary. In general, the issuers of the investment securities are contractually prohibited from prepayment at less than par, and the Company did not pay significant purchase premiums for these investment securities. At March 31, 2023, the Company had no plans to sell investment securities with unrealized losses, and believes it is more likely than not it would not be required to sell such investment securities before recovery of their amortized cost.
During the three months ended March 31, 2023 and 2022, the Company did not purchase any investment securities that had more-than-insignificant credit deterioration.
All of the Company’s held-to-maturity investment securities are U.S. Treasury and agencies securities and highly rated agency mortgage-backed securities that are guaranteed or otherwise supported by the United States government and have no history of credit losses. Accordingly the Company does not expect to incur any credit losses on held-to-maturity investment securities and has no allowance for credit losses recorded for these securities.
42 |
U.S. Bancorp |
The following table provides information about the amortized cost, fair value and yield by maturity date of the investment securities outstanding at March 31, 2023:
| (Dollars in Millions) | Amortized Cost |
Fair Value |
Weighted- Average Maturity in Years |
Weighted- Average Yield (e) |
||||||||||||
| Held-to-maturity |
||||||||||||||||
| U.S. Treasury and Agencies |
||||||||||||||||
| Maturing in one year or less |
$ | — | $ | — | — | — | % | |||||||||
| Maturing after one year through five years |
||||||||||||||||
| Maturing after five years through ten years |
— | — | — | — | ||||||||||||
| Maturing after ten years |
— | — | — | — | ||||||||||||
| Total |
$ | $ | % | |||||||||||||
| Mortgage-Backed Securities (a) |
||||||||||||||||
| Maturing in one year or less |
$ | $ | % | |||||||||||||
| Maturing after one year through five years |
||||||||||||||||
| Maturing after five years through ten years |
||||||||||||||||
| Maturing after ten years |
||||||||||||||||
| Total |
$ | $ | % | |||||||||||||
| Total held-to-maturity (b) |
$ | $ | % | |||||||||||||
| Available-for-sale |
||||||||||||||||
| U.S. Treasury and Agencies |
||||||||||||||||
| Maturing in one year or less |
$ | $ | % | |||||||||||||
| Maturing after one year through five years |
||||||||||||||||
| Maturing after five years through ten years |
||||||||||||||||
| Maturing after ten years |
||||||||||||||||
| Total |
$ | $ | % | |||||||||||||
| Mortgage-Backed Securities (a) |
||||||||||||||||
| Maturing in one year or less |
$ | $ | % | |||||||||||||
| Maturing after one year through five years |
||||||||||||||||
| Maturing after five years through ten years |
||||||||||||||||
| Maturing after ten years |
||||||||||||||||
| Total |
$ | $ | % | |||||||||||||
| Asset-Backed Securities |
||||||||||||||||
| Maturing in one year or less |
$ | $ | % | |||||||||||||
| Maturing after one year through five years |
||||||||||||||||
| Maturing after five years through ten years |
||||||||||||||||
| Maturing after ten years |
— | — | — | — | ||||||||||||
| Total |
$ | $ | % | |||||||||||||
| Obligations of State and Political |
||||||||||||||||
| Subdivisions (c) (d) |
||||||||||||||||
| Maturing in one year or less |
$ | $ | % | |||||||||||||
| Maturing after one year through five years |
||||||||||||||||
| Maturing after five years through ten years |
||||||||||||||||
| Maturing after ten years |
||||||||||||||||
| Total |
$ | $ | % | |||||||||||||
| Other |
||||||||||||||||
| Maturing in one year or less |
$ | — | $ | — | — | — | % | |||||||||
| Maturing after one year through five years |
||||||||||||||||
| Maturing after five years through ten years |
— | — | — | — | ||||||||||||
| Maturing after ten years |
— | — | — | — | ||||||||||||
| Total |
$ | $ | % | |||||||||||||
| Total available-for-sale (b) |
$ | $ | % | |||||||||||||
(a) |
Information related to asset and mortgage-backed securities included above is presented based upon weighted-average maturities that take into account anticipated future prepayments. |
(b) |
The weighted-average maturity of total held-to-maturity investment securities was |
(c) |
Information related to obligations of state and political subdivisions is presented based upon yield to first optional call date if the security is purchased at a premium, and yield to maturity if the security is purchased at par or a discount. |
(d) |
Maturity calculations for obligations of state and political subdivisions are based on the first optional call date for securities with a fair value above par and the contractual maturity date for securities with a fair value equal to or below par. |
(e) |
Weighted-average yields for obligations of state and political subdivisions are presented on a fully-taxable equivalent basis based on a federal income tax rate of |
| U.S. Bancorp | 43 |
Note 5 |
Loans and Allowance for Credit Losses |
The composition of the loan portfolio, by class and underlying specific portfolio type, was as follows:
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||
| (Dollars in Millions) | Amount | Percent of Total |
Amount | Percent of Total |
||||||||||||||||
| Commercial |
||||||||||||||||||||
| Commercial |
$ | % | $ | % | ||||||||||||||||
| Lease financing |
||||||||||||||||||||
| Total commercial |
||||||||||||||||||||
| Commercial Real Estate |
||||||||||||||||||||
| Commercial mortgages |
||||||||||||||||||||
| Construction and development |
||||||||||||||||||||
| Total commercial real estate |
||||||||||||||||||||
| Residential Mortgages |
||||||||||||||||||||
| Residential mortgages |
||||||||||||||||||||
| Home equity loans, first liens |
||||||||||||||||||||
| Total residential mortgages |
||||||||||||||||||||
| Credit Card |
||||||||||||||||||||
| Other Retail |
||||||||||||||||||||
| Retail leasing |
||||||||||||||||||||
| Home equity and second mortgages |
||||||||||||||||||||
| Revolving credit |
||||||||||||||||||||
| Installment |
||||||||||||||||||||
| Automobile |
||||||||||||||||||||
| Total other retail |
||||||||||||||||||||
| Total loans |
$ | % | $ | % | ||||||||||||||||
The Company had loans of $134.8 billion at March 31, 2023, and $134.6 billion at December 31, 2022, pledged at the Federal Home Loan Bank, and loans of $81.2 billion at March 31, 2023, and $85.8 billion at December 31, 2022, pledged at the Federal Reserve Bank.
Originated loans are reported at the principal amount outstanding, net of unearned interest and deferred fees and costs, and any partial charge-offs recorded. Purchased loans are recorded at fair value at the date of purchase. Net unearned interest and deferred fees and costs on originated loans and unamortized premiums and discounts on purchased loans amounted to $2.5 billion at March 31, 2023 and $3.1 billion at December 31, 2022. The Company evaluates purchased loans for more-than-insignificant deterioration at the date of purchase in accordance with applicable authoritative accounting guidance. Purchased loans that have experienced more-than-insignificant deterioration from origination are considered purchased credit deteriorated loans. All other purchased loans are considered non-purchased credit deteriorated loans.
Allowance for Credit Losses
The allowance for credit losses is established for current expected credit losses on the Company’s loan and lease portfolio, including unfunded credit commitments. The allowance considers expected losses for the remaining lives of the applicable assets, inclusive of expected recoveries. The allowance for credit losses is increased through provisions charged to earnings and reduced by net charge-offs. Management evaluates the appropriateness of the allowance for credit losses on a quarterly basis.
Multiple economic scenarios are considered over a three-year reasonable and supportable forecast period, which includes increasing consideration of historical loss experience over years two and three. These economic scenarios are constructed with interrelated projections of multiple economic variables, and loss estimates are produced that consider the historical correlation of those economic variables with credit losses. After the forecast period, the Company fully reverts to long-term historical loss experience, adjusted for prepayments and characteristics of the current loan and lease portfolio, to estimate losses over the remaining life of the portfolio. The economic scenarios are updated at least quarterly and are designed to provide a range of reasonable estimates, from better to worse than current expectations. Scenarios are weighted based on the Company’s expectation of economic conditions for the foreseeable future and reflect significant judgment and consideration of economic forecast uncertainty. Final loss estimates also consider factors affecting credit losses not reflected in the scenarios, due to the unique aspects of current conditions and expectations. These factors may include, but are not limited to, loan servicing practices, regulatory guidance, and/or fiscal and monetary policy actions.
44 |
U.S. Bancorp |
The allowance recorded for credit losses utilizes forward-looking expected loss models to consider a variety of factors affecting lifetime credit losses. These factors include, but are not limited to, macroeconomic variables such as unemployment rates, real estate prices, gross domestic product levels, inflation, interest rates and corporate bonds spreads, as well as loan and borrower characteristics, such as internal risk ratings on commercial loans and consumer credit scores, delinquency status, collateral type and available valuation information, consideration of end-of-term losses on lease residuals, and the remaining term of the loan, adjusted for expected prepayments. For each loan portfolio, including those loans modified under various loan modification programs, model estimates are adjusted as necessary to consider any relevant changes in portfolio composition, lending policies, underwriting standards, risk management practices, economic conditions or other factors that would affect the accuracy of the model. Expected credit loss estimates also include consideration of expected cash recoveries on loans previously charged-off or expected recoveries on collateral dependent loans where recovery is expected through sale of the collateral at fair value less selling costs. Where loans do not exhibit similar risk characteristics, an individual analysis is performed to consider expected credit losses. The allowance recorded for individually evaluated loans greater than $
million in the commercial lending segment is based on an analysis utilizing expected cash flows discounted using the original effective interest rate, the observable market price of the loan, or the fair value of the collateral, less selling costs, for collateral-dependent loans as appropriate. For smaller commercial loans collectively evaluated for impairment, historical loss experience is also incorporated into the allowance methodology applied to this category of loans.
The Company’s methodology for determining the appropriate allowance for credit losses also considers the imprecision inherent in the methodologies used and allocated to the various loan portfolios. As a result, amounts determined under the methodologies described above, are adjusted by management to consider the potential impact of other qualitative factors not captured in the quantitative model adjustments which include, but are not limited to the following: model imprecision, imprecision in economic scenario assumptions, and emerging risks related to either changes in the environment that are affecting specific portfolios, or changes in portfolio concentrations over time that may affect model performance. The consideration of these items results in adjustments to allowance amounts included in the Company’s allowance for credit losses for each loan portfolio.
The Company also assesses the credit risk associated with off-balance sheet loan commitments, letters of credit, investment securities and derivatives. Credit risk associated with derivatives is reflected in the fair values recorded for those positions. The liability for off-balance sheet credit exposure related to loan commitments and other credit guarantees is included in other liabilities. Because business processes and credit risks associated with unfunded credit commitments are essentially the same as for loans, the Company utilizes similar processes to estimate its liability for unfunded credit commitments.
The results of the analysis are evaluated quarterly to confirm the estimates are appropriate for each specific loan portfolio, as well as the entire loan portfolio, as the entire allowance for credit losses is available for the entire loan portfolio.
Activity in the allowance for credit losses by portfolio class was as follows:
| (Dollars in Millions) | Commercial | Commercial Real Estate |
Residential Mortgages |
Credit Card |
Other Retail |
Total Loans |
||||||||||||||||||
Balance at December 31, 2022 |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||
Add |
||||||||||||||||||||||||
Change in accounting principle (a) |
— | — | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||
Allowance for acquired credit losses (b) |
— | — | — | — | ||||||||||||||||||||
Provision for credit losses |
( |
) | ||||||||||||||||||||||
Deduct |
||||||||||||||||||||||||
Loans charged-off |
||||||||||||||||||||||||
Less recoveries of loans charged-off |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||
Net loan charge-offs (recoveries) |
( |
) | ||||||||||||||||||||||
Balance at March 31, 2023 |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||
Balance at December 31, 2021 |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||
Add |
||||||||||||||||||||||||
Provision for credit losses |
( |
) | ||||||||||||||||||||||
Deduct |
||||||||||||||||||||||||
Loans charged-off |
||||||||||||||||||||||||
Less recoveries of loans charged-off |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||
Net loan charge-offs (recoveries) |
( |
) | ( |
) | ||||||||||||||||||||
Balance at March 31, 2022 |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||
(a) |
Effective January 1, 2023, the Company adopted accounting guidance which removed the separate recognition and measurement of troubled debt restructurings. |
(b) |
Represents allowance for credit deteriorated and charged-off loans acquired from MUB. |
| U.S. Bancorp | 45 |
The increase in the allowance for credit losses at March 31, 2023, compared with December 31, 2022, was primarily driven by increasing economic uncertainty and normalizing credit losses.
The following table provides a summary of loans charged-off by portfolio class and year of origination:
Three Months Ended March 31, 2023 (Dollars in Millions) |
Commercial |
Commercial Real Estate (a) |
Residential Mortgages |
Credit Card |
Other Retail |
Total Loans |
||||||||||||||||||
Originated in 2023 |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||
Originated in 2022 |
— |
— |
||||||||||||||||||||||
Originated in 2021 |
— | — | — | |||||||||||||||||||||
Originated in 2020 |
— | — | — | |||||||||||||||||||||
Originated in 2019 |
— | |||||||||||||||||||||||
Originated prior to 2019 |
— | |||||||||||||||||||||||
Revolving |
— | — | ||||||||||||||||||||||
Total charge-offs |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Note: Year of origination is based on the origination date of a loan, or for existing loans the date when the maturity date, pricing or commitment amount is
amended.
(a) |
Primarily related to uncollectible amounts on acquired loans. |
Credit Quality
The credit quality of the Company’s loan portfolios is assessed as a function of net credit losses, levels of nonperforming assets and delinquencies, and credit quality ratings as defined by the Company
.
For all loan portfolio classes, loans are considered past due based on the number of days delinquent except for monthly amortizing loans which are classified delinquent based upon the number of contractually required payments not made (for example, two missed payments is considered 30 days delinquent). When a loan is placed on nonaccrual status, unpaid accrued interest is reversed, reducing interest income in the current period.
Commercial lending segment loans are generally placed on nonaccrual status when the collection of principal and interest has become 90 days past due or is otherwise considered doubtful. Commercial lending segment loans are generally fully charged down if unsecured by collateral or partially charged down to the fair value of the collateral securing the loan, less costs to sell, when the loan is placed on nonaccrual.
Consumer lending segment loans are generally charged-off at a specific number of days or payments past due. Residential mortgages and other retail loans secured by 1-4 family properties are generally charged down to the fair value of the collateral securing the loan, less costs to sell, at 180 days past due. Residential mortgage loans and lines in a first lien position are placed on nonaccrual status in instances where a partial charge-off occurs unless the loan is well secured and in the process of collection. Residential mortgage loans and lines in a junior lien position secured by 1-4 family properties are placed on nonaccrual status at 120 days past due or when they are behind a first lien that has become 180 days or greater past due or placed on nonaccrual status. Any secured consumer lending segment loan whose borrower has had debt discharged through bankruptcy, for which the loan amount exceeds the fair value of the collateral, is charged down to the fair value of the related collateral and the remaining balance is placed on nonaccrual status. Credit card loans continue to accrue interest until the account is charged-off. Credit cards are charged-off at 180 days past due. Other retail loans not secured by 1-4 family properties are charged-off at 120 days past due; and revolving consumer lines are charged-off at 180 days past due. Similar to credit cards, other retail loans are generally not placed on nonaccrual status because of the relative short period of time to charge-off. Certain retail customers having financial difficulties may have the terms of their credit card and other loan agreements modified to require only principal payments and, as such, are reported as nonaccrual.
For all loan classes, interest payments received on nonaccrual loans are generally recorded as a reduction to a loan’s carrying amount while a loan is on nonaccrual and are recognized as interest income upon payoff of the loan. However, interest income may be recognized for interest payments if the remaining carrying amount of the loan is believed to be collectible. In certain circumstances, loans in any class may be restored to accrual status, such as when a loan has demonstrated sustained repayment performance or no amounts are past due and prospects for future payment are no longer in doubt; or when the loan becomes well secured and is in the process of collection. Loans where there has been a partial charge-off may be returned to accrual status if all principal and interest (including amounts previously charged-off) is expected to be collected and the loan is current.
46 |
U.S. Bancorp |
The following table provides a summary of loans by portfolio class, including the delinquency status of those that continue to accrue interest, and those that are nonperforming:
| Accruing | ||||||||||||||||||||
| (Dollars in Millions) | Current | 30-89 Days Past Due |
90 Days or More Past Due |
Nonperforming (b) | Total | |||||||||||||||
March 31, 2023 |
||||||||||||||||||||
Commercial |
$ | $ |
$ |
$ |
$ |
|||||||||||||||
Commercial real estate |
||||||||||||||||||||
Residential mortgages (a) |
||||||||||||||||||||
Credit card |
||||||||||||||||||||
Other retail |
||||||||||||||||||||
Total loans |
$ | $ |
$ |
$ |
$ |
|||||||||||||||
December 31, 2022 |
||||||||||||||||||||
Commercial |
$ | $ |
$ |
$ |
$ |
|||||||||||||||
Commercial real estate |
||||||||||||||||||||
Residential mortgages (a) |
||||||||||||||||||||
Credit card |
||||||||||||||||||||
Other retail |
||||||||||||||||||||
Total loans |
$ | $ |
$ |
$ |
$ |
|||||||||||||||
(a) |
At March 31, 2023, $ |
(b) |
Substantially all nonperforming loans at March 31, 2023 and December 31, 2022, had an associated allowance for credit losses. The Company recognized interest income on nonperforming loans of $ |
At March 31, 2023 and December 31, 2022, the amount of foreclosed residential real estate held by the Company, and included in other real estate owned (“OREO”), was $23 57 million and $54 million at March 31, 2023 and December 31, 2022, respectively, of foreclosed residential real estate related to mortgage loans whose payments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs. In addition, the amount of residential mortgage loans secured by residential real estate in the process of foreclosure at March 31, 2023 and December 31, 2022, was $1.1 861 million and $830 million, respectively, related to loans purchased and that could be purchased from Government National Mortgage Association (“GNMA”) mortgage pools under delinquent loan repurchase options whose repayments are insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs.
The Company classifies its loan portfolio classes using internal credit quality ratings on a quarterly basis. These ratings include pass, special mention and classified, and are an important part of the Company’s overall credit risk management process and evaluation of the allowance for credit losses. Loans with a pass rating represent those loans not classified on the Company’s rating scale for problem credits, as minimal credit risk has been identified. Special mention loans are those loans that have a potential weakness deserving management’s close attention. Classified loans are those loans where a well-defined weakness has been identified that may put full collection of contractual cash flows at risk. It is possible that others, given the same information, may reach different reasonable conclusions regarding the credit quality rating classification of specific loans.
| U.S. Bancorp | 47 |
The following table provides a summary of the Company’s internal credit quality rating of loans by portfolio class and year of origination:
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||
| Criticized | Criticized | |||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Millions) | Pass | Special Mention |
Classified (a) | Total Criticized |
Total | Pass | Special Mention |
Classified (a) | Total Criticized |
Total | ||||||||||||||||||||||||||||||||||
Commercial |
||||||||||||||||||||||||||||||||||||||||||||
Originated in 2023 |
$ |
$ |
$ |
$ |
$ |
$ — | $ — | $ — | $ — | $ — | ||||||||||||||||||||||||||||||||||
Originated in 2022 |
|
|||||||||||||||||||||||||||||||||||||||||||
Originated in 2021 |
||||||||||||||||||||||||||||||||||||||||||||
Originated in 2020 |
||||||||||||||||||||||||||||||||||||||||||||
Originated in 2019 |
||||||||||||||||||||||||||||||||||||||||||||
Originated prior to 2019 |
||||||||||||||||||||||||||||||||||||||||||||
Revolving (b) |
||||||||||||||||||||||||||||||||||||||||||||
Total commercial |
||||||||||||||||||||||||||||||||||||||||||||
Commercial real estate |
||||||||||||||||||||||||||||||||||||||||||||
Originated in 2023 |
— | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Originated in 2022 |
||||||||||||||||||||||||||||||||||||||||||||
Originated in 2021 |
||||||||||||||||||||||||||||||||||||||||||||
Originated in 2020 |
||||||||||||||||||||||||||||||||||||||||||||
Originated in 2019 |
||||||||||||||||||||||||||||||||||||||||||||
Originated prior to 2019 |
||||||||||||||||||||||||||||||||||||||||||||
Revolving |
— | |||||||||||||||||||||||||||||||||||||||||||
Total commercial real estate |
||||||||||||||||||||||||||||||||||||||||||||
Residential mortgages (c) |
||||||||||||||||||||||||||||||||||||||||||||
Originated in 2023 |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Originated in 2022 |
— | — | ||||||||||||||||||||||||||||||||||||||||||
Originated in 2021 |
— | — | ||||||||||||||||||||||||||||||||||||||||||
Originated in 2020 |
— | — | ||||||||||||||||||||||||||||||||||||||||||
Originated in 2019 |
— | — | ||||||||||||||||||||||||||||||||||||||||||
Originated prior to 2019 |
— | — | ||||||||||||||||||||||||||||||||||||||||||
Total residential mortgages |
— | — | ||||||||||||||||||||||||||||||||||||||||||
Credit card (d) |
— | — | ||||||||||||||||||||||||||||||||||||||||||
Other retail |
||||||||||||||||||||||||||||||||||||||||||||
Originated in 2023 |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Originated in 2022 |
— | — | ||||||||||||||||||||||||||||||||||||||||||
Originated in 2021 |
— | — | ||||||||||||||||||||||||||||||||||||||||||
Originated in 2020 |
— | — | ||||||||||||||||||||||||||||||||||||||||||
Originated in 2019 |
— | — | ||||||||||||||||||||||||||||||||||||||||||
Originated prior to 2019 |
— | — | ||||||||||||||||||||||||||||||||||||||||||
Revolving |
— | — | ||||||||||||||||||||||||||||||||||||||||||
Revolving converted to term |
— | — | ||||||||||||||||||||||||||||||||||||||||||
Total other retail |
— | — | ||||||||||||||||||||||||||||||||||||||||||
Total loans |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||||||||||||||||||
Total outstanding commitments |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||||||||||||||||||
Note: Year of origination is based on the origination date of a loan, or for existing loans the date when the maturity date, pricing or commitment amount is amended.
(a) |
Classified rating on consumer loans primarily based on delinquency status. |
(b) |
Includes an immaterial amount of revolving converted to term loans. |
(c) |
At March 31, 2023, $ million of modified GNMA loans whose repayments are insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs were classified with a pass rating, compared with $ |
(d) |
Predominately all credit card loans are considered revolving loans. Includes an immaterial amount of revolving converted to term loans. |
Loan Modifications
In certain circumstances, the Company may modify the terms of a loan to maximize the collection of amounts due when a borrower is experiencing financial difficulties or is expected to experience difficulties in the near-term. The Company recognizes interest on modified loans if full collection of contractual principal and interest is expected. The effects of modifications on credit loss expectations, such as improved payment capacity, longer expected lives and other factors, are considered when measuring the allowance for credit losses. Modification performance, including redefault rates and how these compare to historical losses, are also considered. Modifications generally do not result in significant changes to the Company’s allowance for credit losses.
48 |
U.S. Bancorp |
The following table provides a summary of loan balances at March 31, 2023, which were modified during the three months ended March 31, 2023, by portfolio class and modification granted:
(Dollars in Millions) |
Interest Rate Reduction |
Payment Delay |
Term Extension |
Multiple Modifications (a) |
Total Modifications |
Percent of Class Total |
||||||||||||||||||||||||||||||||||
| Commercial |
$ |
$ |
— |
$ |
$ |
— |
$ |
% | ||||||||||||||||||||||||||||||||
| Commercial real estate |
— |
— |
||||||||||||||||||||||||||||||||||||||
| Residential mortgages (b) |
— |
|||||||||||||||||||||||||||||||||||||||
| Credit card |
— |
— |
— |
|||||||||||||||||||||||||||||||||||||
| Other retail |
||||||||||||||||||||||||||||||||||||||||
| Total loans, excluding loans purchased from GNMA mortgage pools |
||||||||||||||||||||||||||||||||||||||||
| Loans purchased from GNMA mortgage pools (b) |
— |
|||||||||||||||||||||||||||||||||||||||
| Total loans |
$ |
$ |
$ |
$ |
$ |
% | ||||||||||||||||||||||||||||||||||
(a) |
Includes $ |
(b) |
Percent of class total amounts expressed as a percent of total residential mortgage loan balances. |
Loan modifications included in the table above exclude trial period arrangements offered to customers and secured loans to consumer borrowers that have had debt discharged through bankruptcy where the borrower has not reaffirmed the debt during the periods presented. At March 31, 2023, the balance of loans modified in trial period arrangements during the three months ended March 31, 2023, was $183 million, while the balance of secured loans to consumer borrowers that have had debt discharged through bankruptcy during this same period was not material.
The following table summarizes the effects of loan modifications made to borrowers on loans modified during the three months ended March 31, 2023:
(Dollars in Millions) |
Weighted-Average Interest Rate Reduction |
Weighted-Average Months of Term Extension |
||||||
| Commercial |
% |
|||||||
| Commercial real estate |
||||||||
| Residential mortgages |
||||||||
| Credit card |
— | |||||||
| Other retail |
||||||||
| Loans purchased from GNMA mortgage pools |
||||||||
Note: The weighted-average payment deferral for all portfolio classes was less than $1 million.
Forbearance payments are required to be paid at the end of the original term loan.
For the commercial lending segment, modifications generally result in the Company working with borrowers on a case-by-case basis. Commercial and commercial real estate modifications generally include extensions of the maturity date and may be accompanied by an increase or decrease to the interest rate. In addition, the Company may work with the borrower in identifying other changes that mitigate loss to the Company, which may include additional collateral or guarantees to support the loan. To a lesser extent, the Company may provide an interest rate reduction.
Modifications for the consumer lending segment are generally part of programs the Company has initiated. The Company modifies residential mortgage loans under Federal Housing Administration, United States Department of Veterans Affairs, or its own internal programs. Under these programs, the Company offers qualifying homeowners the opportunity to permanently modify their loan and achieve more affordable monthly payments. These modifications may include adjustments to interest rates, conversion of adjustable rates to fixed rates, extension of maturity dates or deferrals of payments, capitalization of accrued interest and/or outstanding advances, or in limited situations, partial forgiveness of loan principal. In most instances, participation in residential mortgage loan modification programs requires the customer to complete a short-term trial period. A permanent loan modification is contingent on the customer successfully completing the trial period arrangement, and the loan documents are not modified until that time.
Credit card and other retail loan modifications are generally part of distinct modification programs providing customers experiencing financial difficulty with modifications whereby balances may be amortized up to 60 months, and generally include waiver of fees and reduced interest rates.
| U.S. Bancorp | 49 |
Loans that receive a forbearance plan generally remain in default until they are no longer delinquent as the result of the payment of all past due amounts
or the borrower receiving a term extension or modification. Therefore, loans only receiving forbearance plans are not included in the table below.
The following table provides a summary of loan balances at March 31, 2023, which were modified during the three months ended March 31, 2023, by portfolio class and delinquency status:
| (Dollars in Millions) | Current | 30-89 Days Past Due |
90 Days or More Past Due |
Total | ||||||||||||
| Commercial |
$ | $ | $ | $ | ||||||||||||
| Commercial real estate |
— | |||||||||||||||
| Residential mortgages (a) |
||||||||||||||||
| Credit card |
||||||||||||||||
| Other retail |
||||||||||||||||
| Total loans |
$ | $ | $ | $ | ||||||||||||
(a) |
At March 31, 2023, $ mi llion of loans 90 days or more past due purchased and that could be purchased from GNMA mortgage pools under delinquent loan repurchase options whose payments are insured by the Federal Housing administration or guaranteed by the United States Department of Veterans Affairs, were classified as current. |
As of March 31, 2023 there were no loans that defaulted (fully or partially charged-off or became 90 days or more past due) that were modified within the first three months of 2023.
As of March 31, 2023, the Company had $133 million of commitments to lend additional funds to borrowers whose terms of their outstanding owed balances have been modified.
Prior Period Troubled Debt Restructuring Information
The following table provides a summary of loans modified as troubled debt restructurings for the period presented by portfolio class:
| Three Months Ended March 31, 2022 (Dollars in Millions) |
Number of Loans |
Pre-Modification Outstanding Loan Balance |
Post-Modification Outstanding Loan Balance |
|||||||||
| Commercial |
$ | $ | ||||||||||
| Commercial real estate |
||||||||||||
| Residential mortgages |
||||||||||||
| Credit card |
||||||||||||
| Other retail |
||||||||||||
| Total loans, excluding loans purchased from GNMA mortgage pools |
||||||||||||
| Loans purchased from GNMA mortgage pools |
||||||||||||
| Total loans |
$ | $ | ||||||||||
The following table provides a summary of troubled debt restructured loans that defaulted (fully or partially charged-off or became 90 days or more past due) for the period presented, that were modified as troubled debt restructurings within 12 months previous to default:
| Three Months Ended March 31, 2022 (Dollars in Millions) |
Number of Loans |
Amount Defaulted |
||||||
| Commercial |
$ | |||||||
| Commercial real estate |
||||||||
| Residential mortgages |
||||||||
| Credit card |
||||||||
| Other retail |
||||||||
| Total loans, excluding loans purchased from GNMA mortgage pools |
||||||||
| Loans purchased from GNMA mortgage pools |
||||||||
| Total loans |
$ | |||||||
Note 6 |
Accounting for Transfers and Servicing of Financial Assets and Variable Interest Entities |
The Company transfers financial assets in the normal course of business. The majority of the Company’s financial asset transfers are residential mortgage loan sales primarily to government-sponsored enterprises (“GSEs”), transfers of tax-advantaged investments, commercial loan sales through participation agreements, and other individual or portfolio loan and securities sales. In accordance with the accounting guidance for asset transfers, the Company considers any
50 |
U.S. Bancorp |
ongoing involvement with transferred assets in determining whether the assets can be derecognized from the balance sheet. Guarantees provided to certain third parties in connection with the transfer of assets are further discussed in Note 16.
For loans sold under participation agreements, the Company also considers whether the terms of the loan participation agreement meet the accounting definition of a participating interest. With the exception of servicing and certain performance-based guarantees, the Company’s continuing involvement with financial assets sold is minimal and generally limited to market customary representation and warranty clauses. Any gain or loss on sale depends on the previous carrying amount of the transferred financial assets, the consideration received, and any liabilities incurred in exchange for the transferred assets. Upon transfer, any servicing assets and other interests that continue to be held by the Company are initially recognized at fair value. For further information on mortgage servicing rights (“MSRs”), refer to Note 7. On a limited basis, the Company may acquire and package high-grade corporate bonds for select corporate customers, in which the Company generally has no continuing involvement with these transactions. Additionally, the Company is an authorized GNMA issuer and issues GNMA securities on a regular basis. The Company has no other asset securitizations or similar asset-backed financing arrangements that are off-balance sheet.
The Company previously provided financial support primarily through the use of waivers of trust and investment management fees associated with various unconsolidated registered money market funds it manages. The Company discontinued providing this support beginning in the third quarter of 2022 due to rising interest rates. The Company provided
$
million of support to the funds during the three months ended March 31, 2022.
The Company is involved in various entities that are considered to be variable interest entities (“VIEs”). The Company’s investments in VIEs are primarily related to investments promoting affordable housing, community development and renewable energy sources. Some of these tax-advantaged investments support the Company’s regulatory compliance with the Community Reinvestment Act. The Company’s investments in these entities generate a return primarily through the realization of federal and state income tax credits, and other tax benefits, such as tax deductions from operating losses of the investments, over specified time periods. These tax credits are recognized as a reduction of tax expense or, for investments qualifying as investment tax credits, as a reduction to the related investment asset. The Company recognized federal and state income tax credits related to its affordable housing and other tax-advantaged investments in tax expense of $138 million and $113 million for the three months ended March 31, 2023 and 2022, respectively. The Company also recognized $164 million and $13 million of investment tax credits for the three months ended March 31, 2023 and 2022, respectively. The Company recognized $130 million and $102 million of expenses related to all of these investments for the three months ended March 31, 2023 and 2022, respectively, which were primarily included in tax expense.
The Company is not required to consolidate VIEs in which it has concluded it does not have a controlling financial interest, and thus is not the primary beneficiary. In such cases, the Company does not have both the power to direct the entities’ most significant activities and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIEs.
The Company’s investments in these unconsolidated VIEs are carried in other assets on the Consolidated Balance Sheet. The Company’s unfunded capital and other commitments related to these unconsolidated VIEs are generally carried in other liabilities on the Consolidated Balance Sheet. The Company’s maximum exposure to loss from these unconsolidated VIEs include the investment recorded on the Company’s Consolidated Balance Sheet, net of unfunded capital commitments, and previously recorded tax credits which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level. While the Company believes potential losses from these investments are remote, the maximum exposure was determined by assuming a scenario where the community-based business and housing projects completely fail and do not meet certain government compliance requirements resulting in recapture of the related tax credits.
The following table provides a summary of investments in community development and tax-advantaged VIEs that the Company has not consolidated:
| (Dollars in Millions) | March 31, 2023 |
December 31, 2022 |
||||||
Investment carrying amount |
$ | $ | ||||||
Unfunded capital and other commitments |
||||||||
Maximum exposure to loss |
||||||||
The Company also has noncontrolling financial investments in private investment funds and partnerships considered to be VIEs, which are not consolidated. The Company’s recorded investment in these entities, carried
in
| U.S. Bancorp | 51 |
other
amounts.
The
The Company’s individual net investments in unconsolidated VIEs, which exclude any unfunded capital commitments, ranged from less than $1 million to $96 million at March 31, 2023, compared with less than $1 million to $116 million at December 31, 2022.
The Company is required to consolidate VIEs in which it has concluded it has a controlling financial interest. The Company sponsors entities to which it transfers its interests in tax-advantaged investments to third parties. At March 31, 2023, approximately $6.0 billion of the Company’s assets and $4.4 billion of its liabilities included on the Consolidated Balance Sheet were related to community development and tax-advantaged investment VIEs which the Company has consolidated, primarily related to these transfers. These amounts compared to $5.9 billion and $4.2 billion, respectively, at December 31, 2022. The majority of the assets of these consolidated VIEs are reported in other assets, and the liabilities are reported in long-term debt and other liabilities. The assets of a particular VIE are the primary source of funds to settle its obligations. The creditors of the VIEs do not have recourse to the general credit of the Company. The Company’s exposure to the consolidated VIEs is generally limited to the carrying value of its variable interests plus any related tax credits previously recognized or transferred to others with a guarantee.
In addition, the Company sponsors a municipal bond securities tender option bond program. The Company controls the activities of the program’s entities, is entitled to the residual returns and provides liquidity and remarketing arrangements to the program. As a result, the Company has consolidated the program’s entities. At March 31, 2023, $1.3 billion of available-for-sale investment securities and $1.0 billion of short-term borrowings on the Consolidated Balance Sheet were related to the tender option bond program, compared with $1.5 billion of available-for-sale investment securities and $1.0 billion of short-term borrowings at December 31, 2022.
Note 7 |
Mortgage Servicing Rights |
The Company 245.6 billion of residential mortgage loans for others at March 31, 2023, and $243.6 billion at December 31, 2022, including subserviced mortgages with no corresponding MSR asset. Included in mortgage banking revenue are the MSR fair value changes arising from market rate and model assumption changes, net of the value change in derivatives used to economically hedge MSRs. These changes resulted in net losses of $11 million and $29 million for the three months ended March 31, 2023 and 2022, respectively. Loan servicing and ancillary fees, not including included in mortgage banking revenue were $190 million and $185 million for the three months ended March 31, 2023 and 2022, respectively.
capitalizes
MSRs as separate assets when loans are sold and servicing is retained. MSRs may also be purchased from others. The Company carries MSRs at fair value, with changes in the fair value recorded in earnings during the period in which they occur. The Company serviced $valuation
changes,Changes in fair value of capitalized MSRs are summarized as follows:
| Three Months Ended March 31 |
||||||||
| (Dollars in Millions) | 2023 | 2022 | ||||||
Balance at beginning of period |
$ | $ | ||||||
Rights purchased |
||||||||
Rights capitalized |
||||||||
Rights sold (a) |
||||||||
Changes in fair value of MSRs |
||||||||
Due to fluctuations in market interest rates (b) |
( |
) | ||||||
Due to revised assumptions or models (c) |
( |
) | ||||||
in fair value (d) |
( |
) | ( |
) | ||||
Balance at end of period |
$ | $ | ||||||
(a) |
MSRs sold include those having a negative fair value, resulting from the loans being severely delinquent. |
(b) |
Includes changes in MSR value associated with changes in market interest rates, including estimated prepayment rates and anticipated earnings on escrow deposits. |
(c) |
Includes changes in MSR value not caused by changes in market interest rates, such as changes in assumed cost to service, ancillary income and option adjusted spread, as well as the impact of any model changes. |
(d) |
Primarily the change in MSR value from passage of time and cash flows realized (decay), but also includes the impact of changes to expected cash flows not associated with changes in market interest rates, such as the impact of delinquencies. |
52 |
U.S. Bancorp |
The estimated sensitivity to changes in interest rates of the fair value of the MSR portfolio and the related derivative instruments was as follows:
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Millions) | Down 100 bps |
Down 50 bps |
Down 25 bps |
Up 25 bps |
Up 50 bps |
Up 100 bps |
Down 100 bps |
Down 50 bps |
Down 25 bps |
Up 25 bps |
Up 50 bps |
Up 100 bps |
||||||||||||||||||||||||||||||||||||||||
| MSR portfolio |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | $ | $ | ||||||||||||||||||||||||||||
| Derivative instrument hedges |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||||||||||
| Net sensitivity |
$ | $ | $ | — | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | $ | — | $ | — | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||||||||||||||||||
The fair value of MSRs and their sensitivity to changes in interest rates is influenced by the mix of the servicing portfolio and characteristics of each segment of the portfolio. The Company’s servicing portfolio consists of the distinct portfolios of government-insured mortgages, conventional mortgages and Housing Finance Agency (“HFA”) mortgages. The servicing portfolios are predominantly comprised of fixed-rate agency loans with limited adjustable-rate or jumbo mortgage loans. The HFA servicing portfolio is comprised of loans originated under state and local housing authority program guidelines which assist purchases by first-time or low- to moderate-income homebuyers through a favorable rate subsidy, down payment and/or closing cost assistance on government- and conventional-insured mortgages.
The following table provides a summary of the Company’s MSRs and related characteristics by portfolio:
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||||
| (Dollars in Millions) | HFA | Government | Conventional (d) | Total | HFA | Government | Conventional (d) | Total | ||||||||||||||||||||||||||||
| Servicing portfolio (a) |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Fair value |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Value (bps) (b) |
||||||||||||||||||||||||||||||||||||
| Weighted-average servicing fees (bps) |
||||||||||||||||||||||||||||||||||||
| Multiple (value/servicing fees) |
||||||||||||||||||||||||||||||||||||
| Weighted-average note rate |
% | % | % | % | % | % | % | % | ||||||||||||||||||||||||||||
| Weighted-average age (in years) |
||||||||||||||||||||||||||||||||||||
| Weighted-average expected prepayment (constant prepayment rate) |
% | % | % | % | % | % | % | % | ||||||||||||||||||||||||||||
| Weighted-average expected life (in years) |
||||||||||||||||||||||||||||||||||||
| Weighted-average option adjusted spread (c) |
% | % | % | % | % | % | % | % | ||||||||||||||||||||||||||||
(a) |
Represents principal balance of mortgages having corresponding MSR asset. |
(b) |
Calculated as fair value divided by the servicing portfolio. |
(c) |
Option adjusted spread is the incremental spread added to the risk-free rate to reflect optionality and other risk inherent in the MSRs. |
(d) |
Represents loans sold primarily to GSEs. |
Note 8 |
Preferred Stock |
At March 31, 2023 and December 31, 2022, the Company had authority to issue 50
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||||
| (Dollars in Millions) | Shares Issued and Outstanding |
Liquidation Preference |
Discount | Carrying Amount |
Shares Issued and Outstanding |
Liquidation Preference |
Discount | Carrying Amount |
||||||||||||||||||||||||||||
| Series A |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Series B |
— | — | ||||||||||||||||||||||||||||||||||
| Series J |
||||||||||||||||||||||||||||||||||||
| Series K |
||||||||||||||||||||||||||||||||||||
| Series L |
||||||||||||||||||||||||||||||||||||
| Series M |
||||||||||||||||||||||||||||||||||||
| Series N |
||||||||||||||||||||||||||||||||||||
| Series O |
||||||||||||||||||||||||||||||||||||
| Total preferred stock (a) |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
(a) |
The par value of all shares issued and outstanding at March 31, 2023 and December 31, 2022, was $ |
| U.S. Bancorp | 53 |
Note 9 |
Accumulated Other Comprehensive Income (Loss) |
Shareholders’ equity is affected by transactions and valuations of asset and liability positions that require adjustments to accumulated other comprehensive income (loss). The reconciliation of the transactions affecting accumulated other comprehensive income (loss) included in shareholders’ equity for the three months ended March 31, is as follows:
| (Dollars in Millions) | Unrealized Gains (Losses) on Investment Securities Available-For- Sale |
Unrealized Gains (Losses) on Investment Securities Transferred From Available- For-Sale to Held-To-Maturity |
Unrealized Gains (Losses) on Derivative Hedges |
Unrealized Gains (Losses) on Retirement Plans |
Foreign Currency Translation |
Total | ||||||||||||||||||
| 2023 |
||||||||||||||||||||||||
| Balance at beginning of period |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||
| Changes in unrealized gains (losses) |
— | — | ||||||||||||||||||||||
| Foreign currency translation adjustment (a) |
— | — | — | — | ( |
) | ( |
) | ||||||||||||||||
| Reclassification to earnings of realized (gains) losses |
( |
) | — | |||||||||||||||||||||
| Applicable income taxes |
( |
) | ( |
) | ( |
) | — | — | ( |
) | ||||||||||||||
| Balance at end of period |
$ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||
| 2022 |
||||||||||||||||||||||||
| Balance at beginning of period |
$ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||
| Changes in unrealized gains (losses) |
( |
) | — | — | — | — | ( |
) | ||||||||||||||||
| Foreign currency translation adjustment (a) |
— | — | — | — | — | — | ||||||||||||||||||
| Reclassification to earnings of realized (gains) losses |
( |
) | — | |||||||||||||||||||||
| Applicable income taxes |
( |
) | ( |
) | ( |
) | — | |||||||||||||||||
| Balance at end of period |
$ | ( |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||
(a) |
Represents the impact of changes in foreign currency exchange rates on the Company’s investment in foreign operations and related hedges. |
Additional detail about the impact to net income for items reclassified out of accumulated other comprehensive income (loss) and into earnings for the three months ended March 31, is as follows:
| Impact to Net Income | Affected Line Item in the | |||||||||
| (Dollars in Millions) | 2023 | 2022 | Consolidated Statement of Income | |||||||
| Unrealized gains (losses) on investment securities available-for-sale |
||||||||||
| Realized gains (losses) on sale of investment securities |
$ | ( |
) | $ | Securities gains (losses), net | |||||
| ( |
Applicable income taxes | |||||||||
| ( |
Net-of-tax | |||||||||
| Unrealized gains (losses) on investment securities transferred from available-for-sale to held-to-maturity |
||||||||||
| Amortization of unrealized gains (losses) |
( |
) | ( |
) | Interest income | |||||
| Applicable income taxes | ||||||||||
| ( |
( |
Net-of-tax | ||||||||
| Unrealized gains (losses) on derivative hedges |
||||||||||
| Realized gains (losses) on derivative hedges |
( |
) | ( |
) | Interest expense | |||||
| Applicable income taxes | ||||||||||
| ( |
( |
Net-of-tax | ||||||||
| Unrealized gains (losses) on retirement plans |
||||||||||
| Actuarial gains (losses) and prior service cost (credit) amortization |
( |
) | Other noninterest expense | |||||||
| — | Applicable income taxes | |||||||||
| ( |
Net-of-tax | |||||||||
| Total impact to net income |
$ | ( |
) | $ | ( |
) | ||||
54 |
U.S. Bancorp |
Note 10 |
Earnings Per Share |
The components of earnings per share were:
| Three Months Ended March 31 |
||||||||
| (Dollars and Shares in Millions, Except Per Share Data) | 2023 | 2022 | ||||||
Net income attributable to U.S. Bancorp |
$ | $ | ||||||
Preferred dividends |
( |
) | ( |
) | ||||
Earnings allocated to participating stock awards |
( |
) | ( |
) | ||||
Net income applicable to U.S. Bancorp common shareholders |
$ | $ | ||||||
Average common shares outstanding |
||||||||
Net effect of the exercise and assumed purchase of stock awards |
— | |||||||
Average diluted common shares outstanding |
||||||||
Earnings per common share |
$ | $ | ||||||
Diluted earnings per common share |
$ | $ | ||||||
| Options outstanding at March 31, 2023 to purchase million common shares were not included in the computation of diluted earnings per share for the three months ended March 31, 2023 because they were antidilutive. |
Note 11 |
Employee Benefits |
The components of net periodic benefit cost for the Company’s retirement plans were:
| Three Months Ended March 31 | ||||||||||||||||||||
| Pension Plans | Postretirement Welfare Plans |
|||||||||||||||||||
| (Dollars in Millions) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||
Service cost |
$ | $ | $ | — | $ | — | ||||||||||||||
Interest cost |
— | |||||||||||||||||||
Expected return on plan assets |
( |
) | ( |
) | ( |
) | — | |||||||||||||
Prior service cost (credit) amortization |
— | ( |
) | ( |
) | — | ||||||||||||||
Actuarial loss (gain) amortization |
( |
) | ( |
) | ||||||||||||||||
Net periodic benefit cost (a) |
$ | $ | $ | ( |
) | $ | ( |
) | ||||||||||||
(a) |
Service cost is included in compensation and employee benefits expense on the Consolidated Statement of Income. All other components are included in other noninterest expense on the Consolidated Statement of Income. |
Note 12 |
Income Taxes |
The components of income tax expense were:
| Three Months Ended March 31 |
||||||||
| (Dollars in Millions) | 2023 | 2022 | ||||||
Federal |
||||||||
Current |
$ | $ | ||||||
Deferred |
( |
) | ( |
) | ||||
Federal income tax |
||||||||
State |
||||||||
Current |
||||||||
Deferred |
( |
) | ||||||
State income tax |
||||||||
Total income tax provision |
$ | $ | ||||||
| U.S. Bancorp | 55 |
A reconciliation of expected income tax expense at the federal statutory rate of 21
| Three Months Ended March 31 |
||||||||
| (Dollars in Millions) | 2023 | 2022 | ||||||
Tax at statutory rate |
$ | $ | ||||||
State income tax, at statutory rates, net of federal tax benefit |
||||||||
Tax effect of |
||||||||
Tax credits and benefits, net of related expenses |
( |
) | ( |
) | ||||
Tax-exempt income |
( |
) | ( |
) | ||||
Other items |
||||||||
Applicable income taxes |
$ | $ | ||||||
The Company’s income tax returns are subject to review and examination by federal, state, local and foreign government authorities. On an ongoing basis, numerous federal, state, local and foreign examinations are in progress and cover multiple tax years. As of March 31, 2023, federal tax examinations for all years ending through December 31, 2014 are completed and resolved. The Company’s tax returns for the years ended December 31, 2015 through December 31, 2020 are under examination by the Internal Revenue Service. The years open to examination by foreign, state and local government authorities vary by jurisdiction.
The Company’s net deferred tax asset was $6.0 billion at March 31, 2023 and $6.3 billion at December 31, 2022.
Note 13 |
Derivative Instruments |
In the ordinary course of business, the Company enters into derivative transactions to manage various risks and to accommodate the business requirements of its customers. The Company recognizes all derivatives on the Consolidated Balance Sheet at fair value in other assets or in other liabilities. On the date the Company enters into a derivative contract, the derivative is designated as either a fair value hedge, cash flow hedge, net investment hedge, or a designation is not made as it is a customer-related transaction, an economic hedge for asset/liability risk management purposes or another stand-alone derivative created through the Company’s operations (“free-standing derivative”). When a derivative is designated as a fair value, cash flow or net investment hedge, the Company performs an assessment, at inception and, at a minimum, quarterly thereafter, to determine the effectiveness of the derivative in offsetting changes in the value or cash flows of the hedged item(s).
Fair Value Hedges
These derivatives are interest rate swaps the Company uses to hedge the change in fair value related to interest rate changes of its underlying available-for-sale investment securities and fixed-rate debt. Changes in the fair value of derivatives designated as fair value hedges, and changes in the fair value of the hedged items, are recorded in earnings.
Cash Flow Hedges
These derivatives are interest rate swaps the Company uses to hedge the forecasted cash flows from its underlying variable-rate loans and debt. Changes in the fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss) until the cash flows of the hedged items are realized. If a derivative designated as a cash flow hedge is terminated or ceases to be highly effective, the gain or loss in other comprehensive income (loss) is amortized to earnings over the period the forecasted hedged transactions impact earnings. If a hedged forecasted transaction is no longer probable, hedge accounting is ceased and any gain or loss included in other comprehensive income (loss) is reported in earnings immediately, unless the forecasted transaction is at least reasonably possible of occurring, whereby the amounts remain within other comprehensive income (loss). At March 31, 2023, the Company had $43 million (net-of-tax) of realized and unrealized gains on derivatives classified as cash flow hedges recorded in other comprehensive income (loss), compared with $114 million (net-of-tax) of realized and unrealized losses at December 31, 2022. The estimated amount to be reclassified from other comprehensive income (loss) into earnings during the next 12 months is a 31 million (net-of-tax). All cash flow hedges were highly effective for the three months ended March 31, 2023.
gain
of $Net Investment Hedges
The Company uses forward commitments to sell specified amounts of certain foreign currencies, and non-derivative debt instruments, to hedge the volatility of its net investment in foreign operations driven by fluctuations in foreign currency exchange rates. The carrying amount of non-derivative debt instruments designated as net investment hedges was $1.3
56 |
U.S. Bancorp |
Other Derivative Positions
The following table summarizes the asset and liability management derivative positions of the Company:
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||
| Notional Value |
Fair Value | Notional Value |
Fair Value | |||||||||||||||||||||||||
| (Dollars in Millions) | Assets | Liabilities | Assets | Liabilities | ||||||||||||||||||||||||
| Fair value hedges |
||||||||||||||||||||||||||||
| Interest rate contracts |
||||||||||||||||||||||||||||
| Receive fixed/pay floating swaps |
$ | $ | — | $ | — | $ | $ | — | $ | |||||||||||||||||||
| Pay fixed/receive floating swaps |
— | — | — | — | ||||||||||||||||||||||||
| Cash flow hedges |
||||||||||||||||||||||||||||
| Interest rate contracts |
||||||||||||||||||||||||||||
| Receive fixed/pay floating swaps |
— | — | — | — | ||||||||||||||||||||||||
| Net investment hedges |
||||||||||||||||||||||||||||
| Foreign exchange forward contracts |
— | — | — | |||||||||||||||||||||||||
| Other economic hedges |
||||||||||||||||||||||||||||
| Interest rate contracts |
||||||||||||||||||||||||||||
| Futures and forwards |
||||||||||||||||||||||||||||
| Buy |
||||||||||||||||||||||||||||
| Sell |
||||||||||||||||||||||||||||
| Options |
||||||||||||||||||||||||||||
| Purchased |
— | — | ||||||||||||||||||||||||||
| Written |
||||||||||||||||||||||||||||
| Receive fixed/pay floating swaps |
— | — | ||||||||||||||||||||||||||
| Pay fixed/receive floating swaps |
— | — | — | — | ||||||||||||||||||||||||
| Foreign exchange forward contracts |
||||||||||||||||||||||||||||
| Equity contracts |
— | |||||||||||||||||||||||||||
| Credit contracts |
— | — | — | |||||||||||||||||||||||||
| Other (a) |
||||||||||||||||||||||||||||
| Total |
$ | |
$ | |
$ | |
$ | $ | |
$ | ||||||||||||||||||
(a) |
Includes derivative liability swap agreements related to the sale of a portion of the Company’s Class B common and preferred shares of Visa Inc. The Visa swap agreements had a total notional value and fair value of $ |
| U.S. Bancorp | 57 |
The following table summarizes the customer-related derivative positions of the Company:
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||
| Notional Value |
Fair Value | Notional Value |
Fair Value | |||||||||||||||||||||||||
| (Dollars in Millions) | Assets | Liabilities | Assets | Liabilities | ||||||||||||||||||||||||
| Interest rate contracts |
||||||||||||||||||||||||||||
| Receive fixed/pay floating swaps |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| Pay fixed/receive floating swaps |
||||||||||||||||||||||||||||
| Other (a) |
||||||||||||||||||||||||||||
| Options |
||||||||||||||||||||||||||||
| Purchased |
||||||||||||||||||||||||||||
| Written |
||||||||||||||||||||||||||||
| Futures |
||||||||||||||||||||||||||||
| Buy |
— | — | — | |||||||||||||||||||||||||
| Sell |
— | — | — | — | ||||||||||||||||||||||||
| Foreign exchange rate contracts |
||||||||||||||||||||||||||||
| Forwards, spots and swaps |
||||||||||||||||||||||||||||
| Options |
||||||||||||||||||||||||||||
| Purchased |
— | — | ||||||||||||||||||||||||||
| Written |
— | — | ||||||||||||||||||||||||||
| Credit contracts |
||||||||||||||||||||||||||||
| Total |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
(a) |
Primarily represents floating rate interest rate swaps that pay based on differentials between specified interest rate indexes. |
The table below shows the effective portion of the gains (losses) recognized in other comprehensive income (loss) and the gains (losses) reclassified from other comprehensive income (loss) into earnings (net-of-tax) for the three months ended March 31:
| Gains (Losses) Recognized in Other Comprehensive Income (Loss) |
Gains (Losses) Reclassified from Other Comprehensive Income (Loss) into Earnings |
|||||||||||||||||||
| (Dollars in Millions) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||
| Asset and Liability Management Positions |
||||||||||||||||||||
| Cash flow hedges |
||||||||||||||||||||
| Interest rate contracts |
$ | $ | — | $ | ( |
) | $ | ( |
) | |||||||||||
| Net investment hedges |
||||||||||||||||||||
| Foreign exchange forward contracts |
( |
) | ( |
) | — | — | ||||||||||||||
| Non-derivative debt instruments |
( |
) | — | — | ||||||||||||||||
Note: |
The Company does not exclude components from effectiveness testing for cash flow and net investment hedges. |
The table below shows the effect of fair value and cash flow hedge accounting on the Consolidated Statement of Income for the three months ended March 31:
| Interest Income | Interest Expense | |||||||||||||||||||
| (Dollars in Millions) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||
| Total amount of income and expense line items presented in the Consolidated Statement of Income in which the effects of fair value or cash flow hedges are recorded |
$ | $ | $ | $ | ||||||||||||||||
| Asset and Liability Management Positions |
||||||||||||||||||||
| Fair value hedges |
||||||||||||||||||||
| Interest rate contract derivatives |
( |
) | ( |
) | ||||||||||||||||
| Hedged items |
( |
) | ( |
) | ||||||||||||||||
| Cash flow hedges |
||||||||||||||||||||
| Interest rate contract derivatives |
— | — | ||||||||||||||||||
Note: |
The Company does not exclude components from effectiveness testing for value and flow hedges. The Company reclassified losses of $ |
58 |
U.S. Bancorp |
The table below shows cumulative hedging adjustments and the carrying amount of assets and liabilities designated in fair value hedges:
| Carrying Amount of the Hedged Assets and Liabilities |
Cumulative Hedging Adjustment (a) | |||||||||||||||||||
| (Dollars in Millions) | March 31, 2023 | December 31, 2022 | March 31, 2023 | December 31, 2022 | ||||||||||||||||
Line Item in the Consolidated Balance Sheet |
||||||||||||||||||||
Available-for-sale investment securities |
$ | $ | $ | ( |
) | $ | ( |
) | ||||||||||||
Long-term debt |
( |
) | ( |
) | ||||||||||||||||
(a) |
The cumulative hedging adjustment related to discontinued hedging relationships on available-for-sale investment securities and long-term debt was $( ) million and $ |
The table below shows the gains (losses) recognized in earnings for other economic hedges and the customer-related positions for the three months ended March 31:
Location of Gains (Losses) Recognized in Earnings |
||||||||||||
| (Dollars in Millions) | 2023 | 2022 | ||||||||||
Asset and Liability Management Positions |
||||||||||||
Other economic hedges |
||||||||||||
Interest rate contracts |
||||||||||||
s and |
Mortgage banking revenue | $ | $ | |||||||||
Purchased and written options |
Mortgage banking revenue | ( |
) | ( |
) | |||||||
Swaps |
Mortgage banking revenue | ( |
) | |||||||||
Foreign exchange forward contracts |
Other noninterest income | ( |
) | ( |
) | |||||||
Equity contracts |
Compensation expense | ( |
) | ( |
) | |||||||
Other |
Other noninterest income | ( |
) | ( |
) | |||||||
Customer-Related Positions |
||||||||||||
Interest rate contracts |
||||||||||||
Swaps |
Commercial products revenue | |||||||||||
Purchased and written options |
Commercial products revenue | — | ||||||||||
Futures |
Commercial products revenue | ( |
) | |||||||||
Foreign exchange rate contracts |
||||||||||||
Forwards, spots and swaps |
Commercial products revenue | |||||||||||
Credit contracts |
Commercial products revenue | — | ||||||||||
Derivatives are subject to credit risk associated with counterparties to the derivative contracts. The Company measures that credit risk using a credit valuation adjustment and includes it within the fair value of the derivative. The Company manages counterparty credit risk through diversification of its derivative positions among various counterparties, by entering into derivative positions that are centrally cleared through clearinghouses, by entering into master netting arrangements and, where possible, by requiring collateral arrangements. A master netting arrangement allows two counterparties, who have multiple derivative contracts with each other, the ability to net settle amounts under all contracts, including any related collateral, through a single payment and in a single currency. Collateral arrangements generally require the counterparty to deliver collateral (typically cash or U.S. Treasury and agency securities) equal to the Company’s net derivative receivable, subject to minimum transfer and credit rating requirements.
The Company’s collateral arrangements are predominately bilateral and, therefore, contain provisions that require collateralization of the Company’s net liability derivative positions. Required collateral coverage is based on net liability thresholds and may be contingent upon the Company’s credit rating from two of the nationally recognized statistical rating organizations. If the Company’s credit rating were to fall below credit ratings thresholds established in the collateral arrangements, the counterparties to the derivatives could request immediate additional collateral coverage up to and including full collateral coverage for derivatives in a net liability position. The aggregate fair value of all derivatives under collateral arrangements that were in a net liability position at March 31, 2023, was $2.2 billion. At March 31, 2023, the Company had $1.8 billion of cash posted as collateral against this net liability position.
Note 14 |
Netting Arrangements for Certain Financial Instruments and Securities Financing Activities | |
The Company’s derivative portfolio consists of bilateral over-the-counter trades, certain interest rate derivatives and credit contracts required to be centrally cleared through clearinghouses per current regulations, and exchange-traded positions which may include U.S. Treasury and Eurodollar futures or options on U.S. Treasury futures. Of the
| U.S. Bancorp | 59 |
Company’s $
trillion total notional amount of derivative positions at March 31, 2023, $
billion related to bilateral over-the-counter trades, $
billion related to those centrally cleared through clearinghouses and $
billion related to those that were exchange-traded. The Company’s derivative contracts typically include offsetting rights (referred to as netting arrangements), and depending on expected volume, credit risk, and counterparty preference, collateral maintenance may be required. For all derivatives under collateral support arrangements, fair value is determined daily and, depending on the collateral maintenance requirements, the Company and a counterparty may receive or deliver collateral, based upon the net fair value of all derivative positions between the Company and the counterparty. Collateral is typically cash, but securities may be allowed under collateral arrangements with certain counterparties. Receivables and payables related to cash collateral are included in other assets and other liabilities on the Consolidated Balance Sheet, along with the related derivative asset and liability fair values. Any securities pledged to counterparties as collateral remain on the Consolidated Balance Sheet. Securities received from counterparties as collateral are not recognized on the Consolidated Balance Sheet, unless the counterparty defaults. In general, securities used as collateral can be sold, repledged or otherwise used by the party in possession. No restrictions exist on the use of cash collateral by either party. Refer to Note 13 for further discussion of the Company’s derivatives, including collateral arrangements.
As part of the Company’s treasury and broker-dealer operations, the Company executes transactions that are treated as securities sold under agreements to repurchase or securities purchased under agreements to resell, both of which are accounted for as collateralized financings. Securities sold under agreements to repurchase include repurchase agreements and securities loaned transactions. Securities purchased under agreements to resell include reverse repurchase agreements and securities borrowed transactions. For securities sold under agreements to repurchase, the Company records a liability for the cash received, which is included in short-term borrowings on the Consolidated Balance Sheet. For securities purchased under agreements to resell, the Company records a receivable for the cash paid, which is included in other assets on the Consolidated Balance Sheet.
Securities transferred to counterparties under repurchase agreements and securities loaned transactions continue to be recognized on the Consolidated Balance Sheet, are measured at fair value, and are included in investment securities or other assets. Securities received from counterparties under reverse repurchase agreements and securities borrowed transactions are not recognized on the Consolidated Balance Sheet unless the counterparty defaults. The securities transferred under repurchase and reverse repurchase transactions typically are U.S. Treasury and agency securities, residential agency mortgage-backed securities or corporate debt securities. The securities loaned or borrowed typically are corporate debt securities traded by the Company’s broker-dealer subsidiary. In general, the securities transferred can be sold, repledged or otherwise used by the party in possession. No restrictions exist on the use of cash collateral by either party. Repurchase/reverse repurchase and securities loaned/borrowed transactions expose the Company to counterparty risk. The Company manages this risk by performing assessments, independent of business line managers, and establishing concentration limits on each counterparty. Additionally, these transactions include collateral arrangements that require the fair values of the underlying securities to be determined daily, resulting in cash being obtained or refunded to counterparties to maintain specified collateral
levels.
60 |
U.S. Bancorp |
The following table summarizes the maturities by category of collateral pledged for repurchase agreements and securities loaned transactions:
| (Dollars in Millions) | Overnight and Continuous |
Less Than 30 Days |
30-89 Days |
Greater Than 90 Days |
Total | |||||||||||||||
March 31, 2023 |
||||||||||||||||||||
Repurchase agreements |
||||||||||||||||||||
U.S. Treasury and agencies |
$ |
$— | $— | $— | $ | |||||||||||||||
Residential agency mortgage-backed securities |
— | — | — | |||||||||||||||||
Corporate debt securities |
— | — | — | |||||||||||||||||
Total repurchase agreements |
— | — | — | |||||||||||||||||
Securities loaned |
||||||||||||||||||||
Corporate debt securities |
— | — | — | |||||||||||||||||
Total securities loaned |
— | — | — | |||||||||||||||||
Gross amount of recognized liabilities |
$ | $— | $ | — | $— | $ | ||||||||||||||
December 31, 2022 |
||||||||||||||||||||
Repurchase agreements |
||||||||||||||||||||
U.S. Treasury and agencies |
$ | $— | $ — | $— | $ | |||||||||||||||
Residential agency mortgage-backed securities |
— | — | — | |||||||||||||||||
Corporate debt securities |
— | — | — | |||||||||||||||||
Total repurchase agreements |
— | — | — | |||||||||||||||||
Securities loaned |
||||||||||||||||||||
Corporate debt securities |
— | — | — | |||||||||||||||||
Total securities loaned |
— | — | — | |||||||||||||||||
Gross amount of recognized liabilities |
$ | $— | $— | $— | $ | |||||||||||||||
The Company executes its derivative, repurchase/reverse repurchase and securities loaned/borrowed transactions under the respective industry standard agreements. These agreements include master netting arrangements that allow for multiple contracts executed with the same counterparty to be viewed as a single arrangement. This allows for net settlement of a single amount on a daily basis. In the event of default, the master netting arrangement provides for close-out netting, which allows all of these positions with the defaulting counterparty to be terminated and net settled with a single payment amount.
The Company has elected to offset the assets and liabilities under netting arrangements for the balance sheet presentation of the majority of its derivative counterparties. The netting occurs at the counterparty level, and includes all assets and liabilities related to the derivative contracts, including those associated with cash collateral received or delivered. The Company has not elected to offset the assets and liabilities under netting arrangements for the balance sheet presentation of repurchase/reverse repurchase and securities loaned/borrowed transactions.
The following tables provide information on the Company’s netting adjustments, and items not offset on the Consolidated Balance Sheet but available for offset in the event of default:
| (Dollars in Millions) | Gross Recognized Assets |
Gross Amounts Offset on the Consolidated Balance Sheet (a) |
Net Amounts Presented on the Consolidated Balance Sheet |
Gross Amounts Not Offset on the Consolidated Balance Sheet |
Net Amount | |||||||||||||||||||
| Financial Instruments (b) |
Collateral Received (c) |
|||||||||||||||||||||||
March 31, 2023 |
||||||||||||||||||||||||
Derivative assets (d) |
$ | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||
Reverse repurchase agreements |
— | ( |
) | ( |
) | — | ||||||||||||||||||
Securities borrowed |
— | — | ( |
) | ||||||||||||||||||||
Total |
$ | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||
December 31, 2022 |
||||||||||||||||||||||||
Derivative assets (d) |
$ | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||
Reverse repurchase agreements |
— | ( |
) | ( |
) | — | ||||||||||||||||||
Securities borrowed |
— | — | ( |
) | ||||||||||||||||||||
Total |
$ | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||
(a) |
Includes $ |
(b) |
For derivative assets this includes any derivative liability fair values that could be offset in the event of counterparty default; for reverse repurchase agreements this includes any repurchase agreement payables that could be offset in the event of counterparty default; for securities borrowed this includes any securities loaned payables that could be offset in the event of counterparty default. |
(c) |
Includes the fair value of securities received by the Company from the counterparty. These securities are not included on the Consolidated Balance Sheet unless the counterparty defaults. |
(d) |
Excludes $ |
| U.S. Bancorp | 61 |
| (Dollars in Millions) | Gross Recognized Liabilities |
Gross Amounts Offset on the Consolidated Balance Sheet (a) |
Net Amounts Presented on the Consolidated Balance Sheet |
Gross Amounts Not Offset on the Consolidated Balance Sheet |
Net Amount | |||||||||||||||||||
| Financial Instruments (b) |
Collateral Pledged (c) |
|||||||||||||||||||||||
March 31, 2023 |
||||||||||||||||||||||||
Derivative liabilities (d) |
$ | $ | ( |
) | $ | $ | ( |
) | $ | — | $ | |||||||||||||
Repurchase agreements |
— | ( |
) | ( |
) | — | ||||||||||||||||||
Securities loaned |
— | — | ( |
) | ||||||||||||||||||||
Total |
$ | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||
December 31, 2022 |
||||||||||||||||||||||||
Derivative liabilities (d) |
$ | $ | ( |
) | $ | $ | ( |
) | $ | — | $ | |||||||||||||
Repurchase agreements |
— | ( |
) | ( |
) | |||||||||||||||||||
Securities loaned |
— | — | ( |
) | ||||||||||||||||||||
Total |
$ | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||
(a) |
Includes $ |
(b) |
For derivative liabilities this includes any derivative asset fair values that could be offset in the event of counterparty default; for repurchase agreements this includes any reverse repurchase agreement receivables that could be offset in the event of counterparty default; for securities loaned this includes any securities borrowed receivables that could be offset in the event of counterparty default. |
(c) |
Includes the fair value of securities pledged by the Company to the counterparty. These securities are included on the Consolidated Balance Sheet unless the Company defaults. |
(d) |
Excludes $ |
Note 15 |
Fair Values of Assets and Liabilities |
The Company uses fair value measurements for the initial recording of certain assets and liabilities, periodic remeasurement of certain assets and liabilities, and disclosures. Derivatives, trading and available-for-sale investment securities, MSRs and substantially all MLHFS are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-fair value accounting or impairment write-downs of individual assets. Other financial instruments, such as held-to-maturity investment securities, loans, time deposits, short-term borrowings and long-term debt, are accounted for at amortized cost. See “Fair Value of Financial Instruments” in this Note for further information on the estimated fair value of these other financial instruments. In accordance with disclosure guidance, certain financial instruments, such as deposits with no defined or contractual maturity, receivables and payables due in one year or less, insurance contracts and equity investments not accounted for at fair value, are excluded from this Note.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value measurement reflects all of the assumptions that market participants would use in pricing the asset or liability, including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance.
The Company groups its assets and liabilities measured at fair value into a three-level hierarchy for valuation techniques used to measure financial assets and financial liabilities at fair value. This hierarchy is based on whether the valuation inputs are observable or unobservable. These levels are:
| • | Level 1 — Quoted prices in active markets for identical assets or liabilities. Level 1 includes U.S. Treasury securities, as well as exchange-traded instruments. |
| • | Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 includes debt securities that are traded less frequently than exchange-traded instruments and which are typically valued using third party pricing services; derivative contracts and other assets and liabilities, including securities, whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data; and MLHFS whose values are determined using quoted prices for similar assets or pricing models with inputs that are observable in the market or can be corroborated by observable market data. |
| • | Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category includes MSRs and certain derivative contracts. |
62 |
U.S. Bancorp |
Valuation Methodologies
The valuation methodologies used by the Company to measure financial assets and liabilities at fair value are described below. In addition, the following section includes an indication of the level of the fair value hierarchy in which the assets or liabilities are classified. Where appropriate, the descriptions include information about the valuation models and key inputs to those models. During the three months ended March 31, 2023 and 2022, there were no significant changes to the valuation techniques used by the Company to measure fair value.
Available-For-Sale Investment Securities
When quoted market prices for identical securities are available in an active market, these prices are used to determine fair value and these securities are classified within Level 1 of the fair value hierarchy. Level 1 investment securities include U.S. Treasury and exchange-traded securities.
For other securities, quoted market prices may not be readily available for the specific securities. When possible, the Company determines fair value based on market observable information, including quoted market prices for similar securities, inactive transaction prices, and broker quotes. These securities are classified within Level 2 of the fair value hierarchy. Level 2 valuations are generally provided by a third-party pricing service. Level 2 investment securities are predominantly agency mortgage-backed securities, certain other asset-backed securities, obligations of state and political subdivisions and agency debt securities.
Mortgage Loans Held For Sale
MLHFS measured at fair value, for which an active secondary market and readily available market prices exist, are initially valued at the transaction price and are subsequently valued by comparison to instruments with similar collateral and risk profiles. MLHFS are classified within Level 2. Included in mortgage banking revenue were net losses of $3 million and $234 million for the three months ended March 31, 2023 and 2022, respectively, from the changes to fair value of these MLHFS under fair value option accounting guidance. Changes in fair value due to instrument specific credit risk were immaterial. Interest income for MLHFS is measured based on contractual interest rates and reported as interest income on the Consolidated Statement of Income. Electing to measure MLHFS at fair value reduces certain timing differences and better matches changes in fair value of these assets with changes in the value of the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting.
Mortgage Servicing Rights
MSRs are valued using a discounted cash flow methodology, and are classified within Level 3. The Company determines fair value of the MSRs by projecting future cash flows for different interest rate scenarios using prepayment rates and other assumptions, and discounts these cash flows using a risk adjusted rate based on option adjusted spread levels. There is minimal observable market activity for MSRs on comparable portfolios and, therefore, the determination of fair value requires significant management judgment. Refer to Note 7 for further information on MSR valuation assumptions.
Derivatives
The majority of derivatives held by the Company are executed over-the-counter or centrally cleared through clearinghouses and are valued using market standard cash flow valuation techniques. The models incorporate inputs, depending on the type of derivative, including interest rate curves, foreign exchange rates and volatility. All derivative values incorporate an assessment of the risk of counterparty nonperformance, measured based on the Company’s evaluation of credit risk including external assessments of credit risk. The Company monitors and manages its nonperformance risk by considering its ability to net derivative positions under master netting arrangements, as well as collateral received or provided under collateral arrangements. Accordingly, the Company has elected to measure the fair value of derivatives, at a counterparty level, on a net basis. The majority of the derivatives are classified within Level 2 of the fair value hierarchy, as the significant inputs to the models, including nonperformance risk, are observable. However, certain derivative transactions are with counterparties where risk of nonperformance cannot be observed in the market and, therefore, the credit valuation adjustments result in these derivatives being classified within Level 3 of the fair value hierarchy.
The Company also has other derivative contracts that are created through its operations, including commitments to purchase and originate mortgage loans and swap agreements executed in conjunction with the sale of a portion of its Class B common and preferred shares of Visa Inc. (the “Visa swaps”). The mortgage loan commitments are valued by pricing models that include market observable and unobservable inputs, which result in the commitments being classified within Level 3 of the fair value hierarchy. The unobservable inputs include assumptions about the percentage of commitments that actually become a closed loan and the MSR value that is inherent in the underlying loan value.
| U.S. Bancorp | 63 |
The Visa swaps require payments by either the Company or the purchaser of the Visa Inc. Class B common and preferred shares when there are changes in the conversion rate of the Visa Inc. Class B common and preferred shares to Visa Inc. Class A common and preferred shares, respectively, as well as quarterly payments to the purchaser based on specified terms of the agreements. Management reviews and updates the Visa swaps fair value in conjunction with its review of Visa Inc. related litigation contingencies, and the associated escrow funding. The expected litigation resolution impacts the Visa Inc. Class B common share to Visa Inc. Class A common share conversion rate, as well as the ultimate termination date for the Visa swaps. Accordingly, the Visa swaps are classified within Level
3. Refer to Note
16 for further information on the Visa Inc. restructuring and related card association litigation.
Significant Unobservable Inputs of Level 3 Assets and Liabilities
The following section provides information to facilitate an understanding of the uncertainty in the fair value measurements for the Company’s Level 3 assets and liabilities recorded at fair value on the Consolidated Balance Sheet. This section includes a description of the significant inputs used by the Company and a description of any interrelationships between these inputs. The discussion below excludes nonrecurring fair value measurements of collateral value used for impairment measures for loans and OREO. These valuations utilize third party appraisal or broker price opinions, and are classified as Level 3 due to the significant judgment involved.
Mortgage Servicing Rights
The significant unobservable inputs used in the fair value measurement of the Company’s MSRs are expected prepayments and the option adjusted spread that is added to the risk-free rate to discount projected cash flows. Significant increases in either of these inputs in isolation would have resulted in a significantly lower fair value measurement. Significant decreases in either of these inputs in isolation would have resulted in a significantly higher fair value measurement. There is no direct interrelationship between prepayments and option adjusted spread. Prepayment rates generally move in the opposite direction of market interest rates. Option adjusted spread is generally impacted by changes in market return requirements.
The following table shows the significant valuation assumption ranges for MSRs at March 31, 2023:
| Minimum | Maximum | Weighted- Average (a) |
||||||||||
Expected prepayment |
% | % | % | |||||||||
Option adjusted spread |
||||||||||||
(a) |
Determined based on the relative fair value of the related mortgage loans serviced. |
Derivatives
The Company has two distinct Level 3 derivative portfolios: (i) the Company’s commitments to purchase and originate mortgage loans that meet the requirements of a derivative and (ii) the Company’s asset/liability and customer-related derivatives that are Level 3 due to unobservable inputs related to measurement of risk of nonperformance by the counterparty. In addition, the Company’s Visa swaps are classified within Level 3.
The significant unobservable inputs used in the fair value measurement of the Company’s derivative commitments to purchase and originate mortgage loans are the percentage of commitments that actually become a closed loan and the MSR value that is inherent in the underlying loan value. A significant increase in the rate of loans that close would have resulted in a larger derivative asset or liability. A significant increase in the inherent MSR value would have resulted in an increase in the derivative asset or a reduction in the derivative liability. Expected loan close rates and the inherent MSR values are directly impacted by changes in market rates and will generally move in the same direction as interest rates.
The following table shows the significant valuation assumption ranges for the Company’s derivative commitments to purchase and originate mortgage loans at March 31, 2023:
| Minimum | Maximum | Weighted- Average (a) |
||||||||||
Expected loan close rate |
% | % | % | |||||||||
Inherent MSR value (basis points per loan) |
||||||||||||
(a) |
The significant unobservable input used in the fair value measurement of certain of the Company’s asset/liability and customer-related derivatives is the credit valuation adjustment related to the risk of counterparty nonperformance.
64 |
U.S. Bancorp |
A significant increase in the credit valuation adjustment would have resulted in a lower fair value measurement. A significant decrease in the credit valuation adjustment would have resulted in a higher fair value measurement. The credit valuation adjustment is impacted by changes in market rates, volatility, market implied credit spreads, and loss recovery rates, as well as the Company’s assessment of the counterparty’s credit position. At March 31, 2023, the minimum, maximum and weighted-average credit valuation adjustment as a percentage of the net fair value of the counterparty’s derivative contracts prior to adjustment was 0 percent, 1,210 percent and 2 percent, respectively.
The significant unobservable inputs used in the fair value measurement of the Visa swaps are management’s estimate of the probability of certain litigation scenarios occurring, and the timing of the resolution of the related litigation loss estimates in excess, or shortfall, of the Company’s proportional share of escrow funds. An increase in the loss estimate or a delay in the resolution of the related litigation would have resulted in an increase in the derivative liability. A decrease in the loss estimate or an acceleration of the resolution of the related litigation would have resulted in a decrease in the derivative liability.
The following table summarizes the balances of assets and liabilities measured at fair value on a recurring basis:
| (Dollars in Millions) | Level 1 | Level 2 | Level 3 | Netting | Total | |||||||||||||||
March 31, 2023 |
||||||||||||||||||||
Available-for-sale securities |
||||||||||||||||||||
U.S. Treasury and agencies |
$ | $ | $ |
$ | $ | |||||||||||||||
Mortgage-backed securities |
||||||||||||||||||||
Residential agency |
||||||||||||||||||||
Commercial |
||||||||||||||||||||
Agency |
||||||||||||||||||||
Non-agency |
||||||||||||||||||||
Asset-backed securities |
||||||||||||||||||||
Obligations of state and political subdivisions |
||||||||||||||||||||
Other |
||||||||||||||||||||
Total available-for-sale |
||||||||||||||||||||
Mortgage loans held for sale |
||||||||||||||||||||
Mortgage servicing rights |
||||||||||||||||||||
Derivative assets |
( |
) | ||||||||||||||||||
Other assets |
||||||||||||||||||||
Total |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||
Derivative liabilities |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||
Short-term borrowings and other liabilities (a) |
||||||||||||||||||||
Total |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||
December 31, 2022 |
||||||||||||||||||||
Available-for-sale securities |
||||||||||||||||||||
U.S. Treasury and agencies |
$ | $ | $ | $ | $ | |||||||||||||||
Mortgage-backed securities |
||||||||||||||||||||
Residential agency |
||||||||||||||||||||
Commercial |
||||||||||||||||||||
Agency |
||||||||||||||||||||
Non-agency |
||||||||||||||||||||
Asset-backed securities |
||||||||||||||||||||
Obligations of state and political subdivisions |
||||||||||||||||||||
Other |
||||||||||||||||||||
Total available-for-sale |
||||||||||||||||||||
Mortgage loans held for sale |
||||||||||||||||||||
Mortgage servicing rights |
||||||||||||||||||||
Derivative assets |
( |
) | ||||||||||||||||||
Other assets |
||||||||||||||||||||
Total |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||
Derivative liabilities |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||
Short-term borrowings and other liabilities (a) |
||||||||||||||||||||
Total |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||
Note: |
Excluded from the table above are equity investments without readily determinable fair values. The Company has elected to carry these investments at historical cost, adjusted for impairment and any changes resulting from observable price changes for identical or similar investments of the issuer. The aggregate carrying amount of these equity investments was $ |
(a) |
Primarily represents the Company’s obligation on securities sold short required to be accounted for at fair value per applicable accounting guidance. |
| U.S. Bancorp | 65 |
The following table presents the changes in fair value for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31:
(Dollars in Millions) |
Beginning of Period Balance |
Net Gains (Losses) Included in Net Income |
Purchases |
Sales |
Issuances |
Settlements |
End of Period Balance |
Net Change in Unrealized Gains (Losses) Relating to Assets and Liabilities Held at End of Period |
||||||||||||||||||||||||
2023 |
||||||||||||||||||||||||||||||||
Available-for-sale securities |
||||||||||||||||||||||||||||||||
Obligations of state and cal divisions |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||||||||
able-for-sale |
||||||||||||||||||||||||||||||||
Mgage servicing rights |
( |
) (a) |
(c) |
( |
) (a) | |||||||||||||||||||||||||||
Net derivative assets and liabilities |
( |
) |
( |
) (b) |
( |
) |
( |
) |
(d) | |||||||||||||||||||||||
2022 |
||||||||||||||||||||||||||||||||
Available-for-sale securities |
||||||||||||||||||||||||||||||||
Asset-backed securities |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||||||||
Obligations of state and political subdivisions |
||||||||||||||||||||||||||||||||
avlale-r-sl |
||||||||||||||||||||||||||||||||
Mortgage servicing rights |
(a) |
(c) |
(a) | |||||||||||||||||||||||||||||
Net derivative assets and liabilities |
( |
) (e) |
( |
) |
( |
) |
( |
) (f) | ||||||||||||||||||||||||
(a) |
Included in mortgage banking revenue. |
(b) |
Approximately $ ( million and $( million included in mortgage ing revenue, commercial products rue and otheinterst inme, rectively. |
(c) |
Represents MSRs capitalized during the period. |
(d) |
Approximately $ m illion and $( million included in , and , respectively. |
(e) |
Approximately $( |
(f) |
Approximately $( |
The Company is also required periodically to measure certain other financial assets at fair value on a nonrecurring basis. These measurements of fair value usually result from the application of lower-of-cost-or-fair value accounting or write-downs of individual assets.
The following table summarizes the balances as of the measurement date of assets measured at fair value on a nonrecurring basis, and still held as of the reporting date:
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||
| (Dollars in Millions) | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||
Loans (a) |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Other assets (b) |
||||||||||||||||||||||||||||||||
(a) |
Represents the carrying value of loans for which adjustments were based on the fair value of the collateral, excluding loans fully charged-off. |
(b) |
Primarily represents the fair value of foreclosed properties that were measured at fair value based on an appraisal or broker price opinion of the collateral subsequent to their initial acquisition. |
The following table summarizes losses recognized related to nonrecurring fair value measurements of individual assets or portfolios for the three months ended March 31:
| (Dollars in Millions) | 2023 | 2022 | ||||||
Loans (a) |
$ | $ | ||||||
Other assets (b) |
||||||||
(a) |
Represents write-downs of loans which were based on the fair value of the collateral, excluding loans fully charged-off. |
(b) |
Primarily represents related losses of foreclosed properties that were measured at fair value subsequent to their initial acquisition. |
66 |
U.S. Bancorp |
Fair Value Option
The following table summarizes the differences between the aggregate fair value carrying amount of MLHFS for which the fair value option has been elected and the aggregate unpaid principal amount that the Company is contractually obligated to receive at maturity:
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||
| (Dollars in Millions) | Fair Value Carrying Amount |
Aggregate Unpaid Principal |
Carrying Amount Over (Under) Unpaid Principal |
Fair Value Carrying Amount |
Aggregate Unpaid Principal |
Carrying Amount Over (Under) Unpaid Principal |
||||||||||||||||||||||
| Total loans |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| Nonaccrual loans |
||||||||||||||||||||||||||||
| Loans 90 days or more past due |
||||||||||||||||||||||||||||
Fair Value of Financial Instruments
The following section summarizes the estimated fair value for financial instruments accounted for at amortized cost as of March 31, 2023 and December 31, 2022. In accordance with disclosure guidance related to fair values of financial instruments, the Company did not include assets and liabilities that are not financial instruments, such as the value of goodwill, long-term relationships with deposit, credit card, merchant processing and trust customers, other purchased intangibles, premises and equipment, deferred taxes and other liabilities. Additionally, in accordance with the disclosure guidance, receivables and payables due in one year or less, insurance contracts, equity investments not accounted for at fair value, and deposits with no defined or contractual maturities are excluded.
The estimated fair values of the Company’s financial instruments are shown in the table below:
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Carrying Amount |
Fair Value | Carrying Amount |
Fair Value | |||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Millions) | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||||||||||||||||||||
| Financial Assets |
||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash and due from banks |
$ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Federal funds sold and securities purchased under resale agreements |
||||||||||||||||||||||||||||||||||||||||||||||||||||
| Investment securities held-to-maturity |
||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loans held for sale (a) |
||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loans |
||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other (b) |
||||||||||||||||||||||||||||||||||||||||||||||||||||
| Financial Liabilities |
||||||||||||||||||||||||||||||||||||||||||||||||||||
| Time deposits |
||||||||||||||||||||||||||||||||||||||||||||||||||||
| Short-term borrowings (c) |
||||||||||||||||||||||||||||||||||||||||||||||||||||
| Long-term debt |
||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other (d) |
||||||||||||||||||||||||||||||||||||||||||||||||||||
(a) |
Excludes mortgages held for sale for which the fair value option under applicable accounting guidance was elected. |
(b) |
Includes investments in Federal Reserve Bank and Federal Home Loan Bank stock and tax-advantaged investments. |
(c) |
Excludes the Company’s obligation on securities sold short required to be accounted for at fair value per applicable accounting guidance. |
(d) |
Includes operating lease liabilities and liabilities related to tax-advantaged investments. |
The fair value of unfunded commitments, deferred non-yield related loan fees, standby letters of credit and other guarantees is approximately equal to their carrying value. The carrying value of unfunded commitments, deferred non-yield related loan fees and standby letters of credit was $536 million and $498 million at March 31, 2023 and December 31, 2022, respectively. The carrying value of other guarantees was $255 million and $241 million at March 31, 2023 and December 31, 2022, respectively.
| U.S. Bancorp | 67 |
Note 16 |
Guarantees and Contingent Liabilities |
Visa Restructuring and Card Association Litigation
The Company’s Payment Services business issues credit and debit cards and acquires credit and debit card transactions through the Visa U.S.A. Inc. card association or its affiliates (collectively “Visa”). In 2007, Visa completed a restructuring and issued shares of Visa Inc. common stock to its financial institution members in contemplation of its initial public offering (“IPO”) completed in the first quarter of 2008 (the “Visa Reorganization”). As a part of the Visa Reorganization, the Company received its proportionate number of shares of Visa Inc. common stock, which were subsequently converted to Class B shares of Visa Inc. (“Class B shares”).
Visa U.S.A. Inc. (“Visa U.S.A.”) and MasterCard International (collectively, the “Card Brands”) are defendants in antitrust lawsuits challenging the practices of the Card Brands (the “Visa Litigation”). Visa U.S.A. member banks have a contingent obligation to indemnify Visa Inc. under the Visa U.S.A. bylaws (which were modified at the time of the restructuring in October 2007) for potential losses arising from the Visa Litigation. The indemnification by the Visa U.S.A. member banks has no specific maximum amount. Using proceeds from its IPO and through reductions to the conversion ratio applicable to the Class B shares held by Visa U.S.A. member banks, Visa Inc. has funded an escrow account for the benefit of member financial institutions to fund their indemnification obligations associated with the Visa Litigation. The receivable related to the escrow account is classified in other liabilities as a direct offset to the related Visa Litigation contingent liability.
In October 2012, Visa signed a settlement agreement to resolve class action claims associated with the multidistrict interchange litigation pending in the United States District Court for the Eastern District of New York (the “Multi-District Litigation”). The U.S. Court of Appeals for the Second Circuit reversed the approval of that settlement and remanded the matter to the district court. Thereafter, the case was split into two putative class actions, one seeking damages (the “Damages Action”) and a separate class action seeking injunctive relief only (the “Injunctive Action”). In September 2018, Visa signed a new settlement agreement, superseding the original settlement agreement, to resolve the Damages Action. The Damages Action settlement was approved by the United States District Court for the Eastern District of New York, but is now on appeal. The Injunctive Action, which generally seeks changes to Visa rules, is still pending.
Other Guarantees and Contingent Liabilities
The following table is a summary of other guarantees and contingent liabilities of the Company at March 31, 2023:
| (Dollars in Millions) | Collateral Held |
Carrying Amount |
Maximum Potential Future Payments |
|||||||||
| Standby letters of credit |
$ | $ | $ | |||||||||
| Third party borrowing arrangements |
||||||||||||
| Securities lending indemnifications |
||||||||||||
| Asset sales |
(a) | |||||||||||
| Merchant processing |
||||||||||||
| Tender option bond program guarantee |
||||||||||||
| Other |
||||||||||||
(a) |
The maximum potential future payments do not include loan sales where the Company provides standard representation and warranties to the buyer against losses related to loan underwriting documentation defects that may have existed at the time of sale that generally are identified after the occurrence of a triggering event such as delinquency. For these types of loan sales, the maximum potential future payments is generally the unpaid principal balance of loans sold measured at the end of the current reporting period. Actual losses will be significantly less than the maximum exposure, as only a fraction of loans sold will have a representation and warranty breach, and any losses on repurchase would generally be mitigated by any collateral held against the loans. |
Merchant Processing
The Company, through its subsidiaries, provides merchant processing services. Under the rules of credit card associations, a merchant processor retains a contingent liability for credit card transactions processed. This contingent liability arises in the event of a billing dispute between the merchant and a cardholder that is ultimately resolved in the cardholder’s favor. In this situation, the transaction is “charged-back” to the merchant and the disputed amount is credited or otherwise refunded to the cardholder. If the Company is unable to collect this amount from the merchant, it bears the loss for the amount of the refund paid to the cardholder.
The Company currently processes card transactions in the United States, Canada and Europe through wholly-owned subsidiaries. In the event a merchant was unable to fulfill product or services subject to future delivery, such as airline tickets, the Company could become financially liable for refunding the purchase price of such products or services purchased through the credit card associations under the charge-back provisions. Charge-back risk related to these merchants is evaluated in a manner similar to credit risk assessments and, as such, merchant processing contracts contain various provisions to protect the Company in the event of default. At March 31, 2023, the value of airline
68 |
U.S. Bancorp |
tickets purchased to be delivered at a future date through card transactions processed by the Company was $11.2 billion. The Company held collateral of $777 million in escrow deposits, letters of credit and indemnities from financial institutions, and liens on various assets. In addition to specific collateral or other credit enhancements, the Company maintains a liability for its implied guarantees associated with future delivery. At March 31, 2023, the liability was $116 million primarily related to these airline processing arrangements.
Asset Sales
The Company regularly sells loans to GSEs as part of its mortgage banking activities. The Company provides customary representations and warranties to GSEs in conjunction with these sales. These representations and warranties generally require the Company to repurchase assets if it is subsequently determined that a loan did not meet specified criteria, such as a documentation deficiency or rescission of mortgage insurance. If the Company is unable to cure or refute a repurchase request, the Company is generally obligated to repurchase the loan or otherwise reimburse the GSE for losses. At March 31, 2023, the Company had reserved $16 million for potential losses from representation and warranty obligations, compared with $17 million at December 31, 2022. The Company’s reserve reflects management’s best estimate of losses for representation and warranty obligations. The Company’s repurchase reserve is modeled at the loan level, taking into consideration the individual credit quality and borrower activity that has transpired since origination. The model applies credit quality and economic risk factors to derive a probability of default and potential repurchase that are based on the Company’s historical loss experience, and estimates loss severity based on expected collateral value. The Company also considers qualitative factors that may result in anticipated losses differing from historical loss trends.
As of March 31, 2023 and December 31, 2022, the Company had $36 million and $39 million, respectively, of unresolved representation and warranty claims from GSEs. The Company does not have a significant amount of unresolved claims from investors other than GSEs.
Litigation and Regulatory Matters
The Company is subject to various litigation and regulatory matters that arise in the ordinary course of its business. The Company establishes reserves for such matters when potential losses become probable and can be reasonably estimated. The Company believes the ultimate resolution of existing legal and regulatory matters will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company. However, in light of the uncertainties inherent in these matters, it is possible that the ultimate resolution of one or more of these matters may have a material adverse effect on the Company’s results from operations for a particular period, and future changes in circumstances or additional information could result in additional accruals or resolution in excess of established accruals, which could adversely affect the Company’s results from operations, potentially materially.
Residential Mortgage-Backed Securities Litigatio
n
Starting in 2011, the Company and other large financial institutions have been sued in their capacity as trustee for residential mortgage–backed securities trusts for losses arising out of the 2008 financial crisis. In the lawsuits brought against the Company, the investors and a monoline insurer allege that the Company’s primary banking subsidiary, U.S. Bank National Association (“USBNA”), as trustee caused them to incur substantial losses by failing to enforce loan repurchase obligations and failing to abide by appropriate standards of care after events of default allegedly occurred. The plaintiffs in these matters seek monetary damages in unspecified amounts and most also seek equitable relief.
Regulatory Matters
The Company is continually subject to examinations, inquiries and investigations in areas of heightened regulatory scrutiny, such as compliance, risk management, third-party risk management and consumer protection. For example, as part of an industry-wide inquiry, the Company’s broker-dealer and registered investment advisor subsidiaries received from the Securities and Exchange Commission a request for information concerning compliance with record retention requirements relating to electronic business communications. Also, the Consumer Financial Protection Bureau (“CFPB”) has been investigating the Company’s administration of unemployment insurance benefit prepaid debit cards during the pandemic timeframe and is considering a potential enforcement action. The Company is cooperating fully with all pending examinations, inquiries and investigations, any of which could lead to administrative or legal proceedings or settlements. Remedies in these proceedings or settlements may include fines, penalties, restitution or alterations in the Company’s business practices (which may increase the Company’s operating expenses and decrease its revenue).
| U.S. Bancorp | 69 |
MUFG Union Bank Consent Order
The Company acquired MUB on December 1, 2022. Prior to the acquisition, on September 20, 2021, MUB entered into a consent order with the Office of the Comptroller of the Currency (the “OCC”) relating to deficiencies in MUB’s technology and operational risk management (the “MUB Consent Order”). Under the MUB Consent Order, the OCC found MUB to be in noncompliance with the Interagency Guidelines Establishing Information Security Standards and to have engaged in unsafe and unsound practices regarding technology and operational risk management.
The OCC’s conditional approval to merge MUB with and into USBNA (the “Bank Merger”) requires USBNA to succeed to the terms and obligations of the MUB Consent Order and comply with the other conditions described therein. The Bank Merger is expected to occur in connection with the conversion of MUB customers and systems to the USBNA platform over Memorial Day weekend in 2023. The Company’s losses, costs, expenses and damages relating to or resulting from the MUB Consent Order are indemnifiable by the seller, subject to the terms of the Share Purchase Agreement for the MUB acquisition.
Outlook
Due to their complex nature, it can be years before litigation and regulatory matters are resolved. The Company may be unable to develop an estimate or range of loss where matters are in early stages, there are significant factual or legal issues to be resolved, damages are unspecified or uncertain, or there is uncertainty as to a litigation class being certified or the outcome of pending motions, appeals or proceedings. For those litigation and regulatory matters where the Company has information to develop an estimate or range of loss, the Company believes the upper end of the range of reasonably possible losses in aggregate, in excess of any reserves established for matters where a loss is considered probable, will not be material to its financial condition, results of operations or cash flows. The Company’s estimates are subject to significant judgment and uncertainties, and the matters underlying the estimates will change from time to time. Actual results may vary significantly from the current estimates.
Note 17 |
Business Segments |
Within the Company, financial performance is measured by major lines of business based on the products and services provided to customers through its distribution channels. These operating segments are components of the Company about which financial information is prepared and is evaluated regularly by management in deciding how to allocate resources and assess performance. The Company has five reportable operating segments:
Corporate and Commercial Banking
Corporate and Commercial Banking offers lending, equipment finance and small-ticket leasing, depository services, treasury management, capital markets services, international trade services and other financial services to middle market, large corporate, commercial real estate, financial institution, non-profit and public sector clients.
Consumer and Business Banking
Consumer and Business Banking comprises consumer banking, small business banking and consumer lending. Products and services are delivered through banking offices, telephone servicing and sales, on-line services, direct mail, ATM processing, mobile devices, distributed mortgage loan officers, and intermediary relationships including auto dealerships, mortgage banks, and strategic business partners.
Wealth Management and Investment Services
Wealth Management and Investment Services provides private banking, financial advisory services, investment management, retail brokerage services, insurance, trust, custody and fund servicing through four businesses: Wealth Management, Global Corporate Trust & Custody, U.S. Bancorp Asset Management and Fund Services.
Payment Services
Payment Services includes consumer and business credit cards, stored-value cards, debit cards, corporate, government and purchasing card services and merchant processing.
Treasury and Corporate Support
Treasury and Corporate Support includes the Company’s investment portfolios, funding, capital management, interest rate risk management, income taxes not allocated to business segments, including most investments in tax-advantaged projects, and the residual aggregate of those expenses associated with corporate activities that are managed on a consolidated basis.
Basis of Presentation
Business segment results are derived from the Company’s business unit profitability reporting systems by specifically attributing managed balance sheet assets, deposits and other liabilities and their related income or expense. The allowance for credit losses and related provision expense are allocated to the business segments according to the volume and credit quality of the loan balances managed, but with the impact of changes in economic forecasts recorded in Treasury and Corporate Support. Goodwill and other intangible assets are assigned to the business segments based on the mix of
70 |
U.S. Bancorp |
business of an entity acquired by the Company. Within the Company, capital levels are evaluated and managed centrally; however, capital is allocated to the business segments to support evaluation of business performance. Business segments are allocated capital on a risk-adjusted basis considering economic and regulatory capital requirements. Generally, the determination of the amount of capital allocated to each business segment includes credit allocations following a Basel III regulatory framework. Interest income and expense is determined based on the assets and liabilities managed by the business segment. Because funding and asset/liability management is a central function, funds transfer-pricing methodologies are utilized to allocate a cost of funds used or credit for funds provided to all business segment assets and liabilities, respectively, using a matched funding concept. Also, each business unit is allocated the taxable-equivalent benefit of tax-exempt products. The residual effect on net interest income of asset/liability management activities is included in Treasury and Corporate Support. Noninterest income and expenses directly managed by each business segment, including fees, service charges, salaries and benefits, and other direct revenues and costs are accounted for within each segment’s financial results in a manner similar to the consolidated financial statements. Occupancy costs are allocated based on utilization of facilities by the business segments. Generally, operating losses are charged to the business segment when the loss event is realized in a manner similar to a loan charge-off. Noninterest expenses incurred by centrally managed operations or business segments that directly support another business segment’s operations are charged to the applicable business segment based on its utilization of those services, primarily measured by the volume of customer activities, number of employees or other relevant factors. These allocated expenses are reported as net shared services expense within noninterest expense. Certain activities that do not directly support the operations of the business segments or for which the business segments are not considered financially accountable in evaluating their performance are not charged to the business segments. The income or expenses associated with these corporate activities, including merger and integration charges, are reported within the Treasury and Corporate Support business segment. Income taxes are assessed to each business segment at a standard tax rate with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Treasury and Corporate Support.
Designations, assignments and allocations change from time to time as management systems are enhanced, methods of evaluating performance or product lines change or business segments are realigned to better respond to the Company’s diverse customer base. During 2023, certain organization and methodology changes were made and, accordingly, 2022 results were restated and presented on a comparable basis.
| U.S. Bancorp | 71 |
Business segment results for the three months ended March 31 were as follows:
| Corporate and Commercial Banking |
Consumer and Business Banking |
Wealth Management and Investment Services |
||||||||||||||||||||||||||||||
| (Dollars in Millions) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||
| Condensed Income Statement |
||||||||||||||||||||||||||||||||
| Net interest income (taxable-equivalent basis) |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||
| Noninterest income |
||||||||||||||||||||||||||||||||
| Total net revenue |
||||||||||||||||||||||||||||||||
| Noninterest expense |
||||||||||||||||||||||||||||||||
| Income (loss) before provision and income taxes |
||||||||||||||||||||||||||||||||
| Provision for credit losses |
( |
) | ||||||||||||||||||||||||||||||
| Income (loss) before income taxes |
||||||||||||||||||||||||||||||||
| Income taxes and taxable-equivalent adjustment |
||||||||||||||||||||||||||||||||
| Net income (loss) |
||||||||||||||||||||||||||||||||
| Net (income) loss attributable to noncontrolling interests |
||||||||||||||||||||||||||||||||
| Net income (loss) attributable to U.S. Bancorp |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||
| Average Balance Sheet |
||||||||||||||||||||||||||||||||
| Loans |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||
| Other earning assets |
||||||||||||||||||||||||||||||||
| Goodwill |
||||||||||||||||||||||||||||||||
| Other intangible assets |
||||||||||||||||||||||||||||||||
| Assets |
||||||||||||||||||||||||||||||||
| Noninterest-bearing deposits |
||||||||||||||||||||||||||||||||
| Interest-bearing deposits |
||||||||||||||||||||||||||||||||
| Total deposits |
||||||||||||||||||||||||||||||||
| Total U.S. Bancorp shareholders’ equity |
||||||||||||||||||||||||||||||||
| Payment Services |
Treasury and Corporate Support |
Consolidated Company |
||||||||||||||||||||||||||||||
| (Dollars in Millions) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||
| Condensed Income Statement |
||||||||||||||||||||||||||||||||
| Net interest income (taxable-equivalent basis) |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||
| Noninterest income |
(a) | (a) | (b) | (b) | ||||||||||||||||||||||||||||
| Total net revenue |
(c) | (c) | ||||||||||||||||||||||||||||||
| Noninterest expense |
||||||||||||||||||||||||||||||||
| Income (loss) before provision and income taxes |
( |
) | ||||||||||||||||||||||||||||||
| Provision for credit losses |
( |
) | ||||||||||||||||||||||||||||||
| Income (loss) before income taxes |
( |
) | ||||||||||||||||||||||||||||||
| Income taxes and taxable-equivalent adjustment |
( |
) | ( |
) | ||||||||||||||||||||||||||||
| Net income (loss) |
( |
) | ||||||||||||||||||||||||||||||
| Net (income) loss attributable to noncontrolling interests |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||
| Net income (loss) attributable to U.S. Bancorp |
$ | $ | $ | ( |
) | $ | $ | $ | ||||||||||||||||||||||||
| Average Balance Sheet |
||||||||||||||||||||||||||||||||
| Loans |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||
| Other earning assets |
||||||||||||||||||||||||||||||||
| Goodwill |
||||||||||||||||||||||||||||||||
| Other intangible assets |
||||||||||||||||||||||||||||||||
| Assets |
||||||||||||||||||||||||||||||||
| Noninterest-bearing deposits |
||||||||||||||||||||||||||||||||
| Interest-bearing deposits |
||||||||||||||||||||||||||||||||
| Total deposits |
||||||||||||||||||||||||||||||||
| Total U.S. Bancorp shareholders’ equity |
||||||||||||||||||||||||||||||||
(a) |
Presented net of related rewards and rebate costs and certain partner payments of $ |
(b) |
Includes revenue generated from certain contracts with customers of $ |
(c) |
The Company, as a lessor, originates retail and commercial leases either directly to the consumer or indirectly through dealer networks. Under these arrangements, the Company recorded $ $ |
72 |
U.S. Bancorp |
Note 18 |
Subsequent Events |
The Company has evaluated the impact of events that have occurred subsequent to March 31, 2023 through the date the consolidated financial statements were filed with the United States Securities and Exchange Commission. Based on this evaluation, the Company has determined none of these events were required to be recognized or disclosed in the consolidated financial statements and related notes.
| U.S. Bancorp | 73 |
U.S. Bancorp
Consolidated Daily Average Balance Sheet and Related Yields and Rates (a)
For the Three Months Ended March 31 |
||||||||||||||||||||||||||||||||||||||||||||||||||||
2023 |
2022 |
2023 v 2022 |
||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in Millions) (Unaudited) |
Average Balances |
Interest |
Yields and Rates |
Average Balances |
Interest |
Yields and Rates |
% Change Average Balances |
|||||||||||||||||||||||||||||||||||||||||||||
| Assets |
||||||||||||||||||||||||||||||||||||||||||||||||||||
| Investment securities |
$ |
166,125 |
$ |
1,094 |
2.64 |
% |
$ |
174,762 |
$ |
736 |
1.68 |
% |
(4.9 |
)% | ||||||||||||||||||||||||||||||||||||||
| Loans held for sale |
2,461 |
31 |
5.10 |
5,479 |
60 |
4.40 |
(55.1 |
) | ||||||||||||||||||||||||||||||||||||||||||||
| Loans (b) |
||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial |
135,683 |
1,997 |
5.96 |
112,822 |
629 |
2.26 |
20.3 |
|||||||||||||||||||||||||||||||||||||||||||||
| Commercial real estate |
55,595 |
803 |
5.86 |
39,084 |
295 |
3.06 |
42.2 |
|||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgages |
116,287 |
1,050 |
3.62 |
77,449 |
612 |
3.17 |
50.1 |
|||||||||||||||||||||||||||||||||||||||||||||
| Credit card |
25,569 |
800 |
12.69 |
21,842 |
562 |
10.44 |
17.1 |
|||||||||||||||||||||||||||||||||||||||||||||
| Other retail |
53,616 |
642 |
4.86 |
61,769 |
509 |
3.34 |
(13.2 |
) | ||||||||||||||||||||||||||||||||||||||||||||
| Total loans |
386,750 |
5,292 |
5.53 |
312,966 |
2,607 |
3.37 |
23.6 |
|||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing deposits with banks |
43,305 |
488 |
4.57 |
29,851 |
14 |
.19 |
45.1 |
|||||||||||||||||||||||||||||||||||||||||||||
| Other earning assets |
8,973 |
94 |
4.23 |
6,779 |
28 |
1.68 |
32.4 |
|||||||||||||||||||||||||||||||||||||||||||||
| Total earning assets |
607,614 |
6,999 |
4.65 |
529,837 |
3,445 |
2.62 |
14.7 |
|||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan losses |
(6,944 |
) |
(5,701 |
) |
(21.8 |
) | ||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized gain (loss) on investment securities |
(7,519 |
) |
(2,551 |
) |
* |
|||||||||||||||||||||||||||||||||||||||||||||||
| Other assets |
72,296 |
55,817 |
29.5 |
|||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets |
$ |
665,447 |
$ |
577,402 |
15.2 |
|||||||||||||||||||||||||||||||||||||||||||||||
| Liabilities and Shareholders’ Equity |
||||||||||||||||||||||||||||||||||||||||||||||||||||
| Noninterest-bearing deposits |
$ |
129,741 |
$ |
127,963 |
1.4 |
% | ||||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing deposits |
||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest checking |
129,350 |
283 |
.89 |
115,062 |
9 |
.03 |
12.4 |
|||||||||||||||||||||||||||||||||||||||||||||
| Money market savings |
146,970 |
979 |
2.70 |
119,588 |
52 |
.18 |
22.9 |
|||||||||||||||||||||||||||||||||||||||||||||
| Savings accounts |
68,827 |
13 |
.07 |
66,978 |
2 |
.01 |
2.8 |
|||||||||||||||||||||||||||||||||||||||||||||
| Time deposits |
35,436 |
230 |
2.64 |
24,585 |
17 |
.28 |
44.1 |
|||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing deposits |
380,583 |
1,505 |
1.60 |
326,213 |
80 |
.10 |
16.7 |
|||||||||||||||||||||||||||||||||||||||||||||
| Short-term borrowings |
||||||||||||||||||||||||||||||||||||||||||||||||||||
| Federal funds purchased |
904 |
10 |
4.44 |
1,236 |
— |
.04 |
(26.9 |
) | ||||||||||||||||||||||||||||||||||||||||||||
| Securities sold under agreements to repurchase |
2,481 |
19 |
3.11 |
1,895 |
1 |
.03 |
30.9 |
|||||||||||||||||||||||||||||||||||||||||||||
| Commercial paper |
8,251 |
54 |
2.67 |
6,473 |
— |
.01 |
27.5 |
|||||||||||||||||||||||||||||||||||||||||||||
| Other short-term borrowings |
24,831 |
367 |
6.00 |
9,434 |
20 |
.21 |
* |
|||||||||||||||||||||||||||||||||||||||||||||
| Total short-term borrowings |
36,467 |
450 |
5.01 |
19,038 |
21 |
.46 |
91.5 |
|||||||||||||||||||||||||||||||||||||||||||||
| Long-term debt |
41,024 |
376 |
3.71 |
32,972 |
144 |
1.77 |
24.4 |
|||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing liabilities |
458,074 |
2,331 |
2.06 |
378,223 |
245 |
.26 |
21.1 |
|||||||||||||||||||||||||||||||||||||||||||||
| Other liabilities |
24,500 |
17,282 |
41.8 |
|||||||||||||||||||||||||||||||||||||||||||||||||
| Shareholders’ equity |
||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred equity |
6,808 |
6,619 |
2.9 |
|||||||||||||||||||||||||||||||||||||||||||||||||
| Common equity |
45,859 |
46,847 |
(2.1 |
) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total U.S. Bancorp shareholders’ equity |
52,667 |
53,466 |
(1.5 |
) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interests |
465 |
468 |
(.6 |
) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total equity |
53,132 |
53,934 |
(1.5 |
) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities and equity |
$ |
665,447 |
$ |
577,402 |
15.2 |
|||||||||||||||||||||||||||||||||||||||||||||||
| Net interest income |
$ |
4,668 |
$ |
3,200 |
||||||||||||||||||||||||||||||||||||||||||||||||
| Gross interest margin |
2.59 |
% |
2.36 |
% |
||||||||||||||||||||||||||||||||||||||||||||||||
| Gross interest margin without taxable-equivalent increments |
2.57 |
% |
2.34 |
% |
||||||||||||||||||||||||||||||||||||||||||||||||
| Percent of Earning Assets |
||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest income |
4.65 |
% |
2.62 |
% |
||||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense |
1.55 |
.18 |
||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest margin |
3.10 |
% |
2.44 |
% |
||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest margin without taxable-equivalent increments |
3.08 |
% |
2.42 |
% |
||||||||||||||||||||||||||||||||||||||||||||||||
* |
Not meaningful |
(a) |
Interest and rates are presented on a fully taxable-equivalent basis based on a federal income tax rate of 21 percent. |
(b) |
Interest income and rates on loans include loan fees. Nonaccrual loans are included in average loan balances. |
74 |
U.S. Bancorp |
Part II — Other Information
Item 1. Legal Proceedings
— See the information set forth in “Litigation and Regulatory Matters” in Note 16 in the Notes to Consolidated Financial Statements on page 69 of this Report, which is incorporated herein by reference.
Item 1A. Risk Factors
— There are a number of factors that may adversely affect the Company’s business, financial results or stock price. Refer to “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, for discussion of these risks.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
— See the information se
t forth in the “Capital Management” section on
page 28 of this Report for information regarding shares repurchased by the Company duri
ng the first quarter of 2023, which is incorporated herein by reference.
Item 6. Exhibits
| U.S. Bancorp | 75 |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| U.S. BANCORP | ||||||
| By: | /s/ L ISA R. STARK | |||||
| Dated: May 8, 2023 | Lisa R. Stark Controller (Principal Accounting Officer and Duly Authorized Officer) | |||||
76 |
U.S. Bancorp |
EXHIBIT 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Andrew Cecere, certify that:
| (1) | I have reviewed this Quarterly Report on Form 10-Q of U.S. Bancorp; |
| (2) | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| (3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| (4) | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| (5) | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| / S / ANDREW CECERE |
| Andrew Cecere |
Chief Executive Officer |
Dated: May 8, 2023
| U.S. Bancorp | 77 |
EXHIBIT 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Terrance R. Dolan, certify that:
| (1) | I have reviewed this Quarterly Report on Form 10-Q of U.S. Bancorp; |
| (2) | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| (3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| (4) | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| (5) | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| /s/ T ERRANCE R. DOLAN |
Terrance R. Dolan Chief Financial Officer |
Dated: May 8, 2023
78 |
U.S. Bancorp |
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Chief Executive Officer and Chief Financial Officer of U.S. Bancorp, a Delaware corporation (the “Company”), do hereby certify that:
| (1) | The Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| /s/ A NDREW CECERE |
/s/ T ERRANCE R. DOLAN | |||
Andrew Cecere Chief Executive Officer Dated: May 8, 2023 |
Terrance R. Dolan Chief Financial Officer | |||
| U.S. Bancorp | 79 |
Corporate Information
Executive Offices
U.S. Bancorp
800 Nicollet Mall
Minneapolis, MN 55402
Common Stock Transfer Agent and Registrar
Computershare acts as our transfer agent and registrar, dividend paying agent and dividend reinvestment plan administrator, and maintains all shareholder records for the Company. Inquiries related to shareholder records, stock transfers, changes of ownership, lost stock certificates, changes of address and dividend payment should be directed to the transfer agent at:
Computershare
P.O. Box 505000
Louisville, KY 40233
Phone: 888-778-1311 or 201-680-6578 (international calls)
computershare.com/investor
Registered or Certified Mail:
Computershare
462 South 4th Street, Suite 1600
Louisville, KY 40202
Telephone representatives are available weekdays from 8 a.m. to 6 p.m., Central Time, and automated support is available 24 hours a day, seven days a week. Specific information about your account is available on Computershare’s Investor Center website.
Independent Auditor
Ernst & Young LLP serves as the independent auditor for U.S. Bancorp’s financial statements.
Common Stock Listing and Trading
U.S. Bancorp common stock is listed and traded on the New York Stock Exchange under the ticker symbol USB.
Dividends and Reinvestment Plan
U.S. Bancorp currently pays quarterly dividends on our common stock on or about the 15th day of January, April, July and October, subject to approval by our Board of Directors. U.S. Bancorp shareholders can choose to participate in a plan that provides automatic reinvestment of dividends and/or optional cash purchase of additional shares of U.S. Bancorp common stock. For more information, please contact our transfer agent, Computershare.
Investor Relations Contact
George Andersen
Senior Vice President, Director of Investor Relations
george.andersen@usbank.com
Phone: 612-303-3620
Financial Information
U.S. Bancorp news and financial results are available through our website and by mail.
Website
About Us
Mail
U.S. Bancorp Investor Relations
800 Nicollet Mall
Minneapolis, MN 55402
investorrelations@usbank.com
Phone: 866-775-9668
Media Requests
David R. Palombi
Global Chief Communications Officer
Public Affairs and Communications
david.palombi@usbank.com
Phone: 612-303-3167
Privacy
U.S. Bancorp is committed to respecting the privacy of our customers and safeguarding the financial and personal information provided to us. To learn more about the U.S. Bancorp commitment to protecting privacy, visit usbank.com and click on
Privacy
.
Ethics
At U.S. Bancorp, our commitment to high ethical standards guides everything we do. Demonstrating this commitment through our words and actions is how each of us does the right thing every day for our customers, shareholders, communities and each other. Our ethical culture has been recognized by the Ethisphere Institute, which again named us to its World’s Most Ethical Companies
®
list. For details about our Code of Ethics and Business Conduct, visit usbank.com and click on and thenthen, and then .
About Us
Investor Relations
Corporate Governance
Governance Documents
Diversity, Equity and Inclusion
At U.S. Bancorp, embracing diversity, championing equity and fostering inclusion are business imperatives. We view everything we do through a diversity, equity and inclusion lens to deepen our relationships with our stakeholders: our employees, customers, shareholders and communities.
Our employees bring their whole selves to work. We respect and value each other’s differences, strengths and perspectives, and we strive to reflect the communities we serve. This makes us stronger, more innovative and more responsive to our diverse customers’ needs.
Equal Opportunity and Affirmative Action
U.S. Bancorp and our subsidiaries are committed to providing Equal Employment Opportunity to all employees and applicants for employment. In keeping with this commitment, employment decisions are made based on abilities, not race, color, religion, creed, citizenship, national origin or ancestry, gender, age, disability, veteran status, sexual orientation, marital status, gender identity or expression, genetic information or any other factors protected by law. The Company complies with municipal, state and federal fair employment laws, including regulations applying to federal contractors.
U.S. Bancorp, including each of our subsidiaries, is an equal opportunity employer committed to creating a diverse workforce.
Accessibility
U.S. Bancorp is committed to providing ready access to our products and services so all of our customers, including people with disabilities, can succeed financially. To learn more, visit usbank.com and click on .
Accessibility
 |
This report has been produced on recycled paper.  |
TABLE OF CONTENTS
Note 1 Basis Of PresentationprintNote 2 Accounting ChangesprintNote 3 Business CombinationsprintNote 4 Investment SecuritiesprintNote 5 Loans and Allowance For Credit LossesprintNote 6 Accounting For Transfers and Servicing Of Financial Assets and Variable Interest EntitiesprintNote 7 Mortgage Servicing RightsprintNote 8 Preferred StockprintNote 9 Accumulated Other Comprehensive Income (loss)printNote 10 Earnings Per ShareprintNote 11 Employee BenefitsprintNote 12 Income TaxesprintNote 13 Derivative InstrumentsprintNote 14 Netting Arrangements For Certain Financial Instruments and Securities Financing ActivitiesprintNote 15 Fair Values Of Assets and LiabilitiesprintNote 16 Guarantees and Contingent LiabilitiesprintNote 17 Business SegmentsprintNote 18 Subsequent EventsprintPart II Other InformationprintItem 1. Legal ProceedingsprintItem 1A. Risk FactorsprintItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 6. Exhibitsprint