U.S. Bancorp Reports Fourth Quarter and Full Year 2021 Results - Form 8-K

"The value of our diversified business model was evident in 2021 results. Credit quality continues to be particularly strong with our net charge-off ratio at a historical low of 17 basis points in the fourth quarter. We experienced solid loan growth from new business originations and increased line utilization. Deposit growth was very strong this quarter increasing $18.4 billion or 4.3% compared with the third quarter, which supported our loan growth and provided the opportunity for investment strategies that were both accretive to fourth quarter net interest income and maintains asset sensitivity for future growth in a rising rate environment. As we start a new year, we are encouraged by the momentum building in each of our lines of business. The investments we have made in our digital transformation and payments ecosystem initiatives will continue to enable customer and revenue growth and we expect continued momentum in customer spend activity and loan growth. In the fourth quarter we closed on the acquisition of TravelBank, providing tech-led expense and travel management solutions for mid-size companies, and the PFM acquisition, which increases assets under management. I want to thank our U.S. Bank employees for all they do, and we are looking forward to welcoming Union Bank employees to our team when we close on the acquisition later this year."

- Andy Cecere, Chairman, President and CEO, U.S. Bancorp

Investor contact: Jennifer Thompson, 612.303.0778 | Media contact: Jeff Shelman, 612.303.9933

Net income attributable to U.S. Bancorp was $1,673 million for the fourth quarter of 2021, which was $154 million higher than the $1,519 million for the fourth quarter of 2020, and $355 million lower than the $2,028 million for the third quarter of 2021. Diluted earnings per common share were $1.07 in the fourth quarter of 2021, compared with $0.95 in the fourth quarter of 2020 and $1.30 in the third quarter of 2021.

The increase in net income year-over-year was primarily due to lower provision for credit losses, partially offset by lower net interest income, lower noninterest income, and higher noninterest expense. Net interest income decreased 1.6 percent on a year-over-year taxable-equivalent basis due to lower loan spreads and mix of earning assets, partially offset by higher investment portfolio balances and the benefit of deposit and funding mix. The net interest margin declined from 2.57 percent a year ago to 2.40 percent in the fourth quarter of 2021 primarily due to the mix of loans, lower loan spreads and higher investment portfolio balances, partially offset by the net benefit of funding composition. Noninterest income decreased 0.6 percent compared with a year ago primarily reflecting lower mortgage banking revenue, other noninterest income, and securities gains, mostly offset by improvements in payments revenue, trust and investment management fees, deposit service charges, and commercial products revenue. Noninterest expense increased 5.0 percent reflecting increases in compensation expense, primarily related to performance-based incentive compensation, as well as higher employee benefits expense, professional services expense and marketing and business development expense, partially offset by lower other noninterest expense.

Net income decreased on a linked quarter basis primarily due to lower net interest income, mainly due to lower loan fees related to the SBA Paycheck Protection Program, and lower noninterest income, primarily due to seasonally lower payments and capital markets revenues and lower mortgage banking revenue as refinancing continued to decline. In addition, noninterest expense increased and the provision for credit losses was higher due to reductions in the allowance for credit losses in the third quarter of 2021. Net interest income on a taxable-equivalent basis decreased 1.5 percent primarily due to the impact of loan forgiveness related to the Paycheck Protection Program ("PPP"), earning asset mix and lower loan yields, partially offset by strong growth in average loan balances. The net interest margin declined 13 basis points from 2.53 percent on a linked quarter basis primarily reflecting lower PPP loan fees as well as the impact of strong deposit flows and related investment and cash balance strategies. Noninterest income decreased 5.9 percent compared with the third quarter of 2021 driven by seasonally lower payments and capital markets revenues and lower mortgage banking revenue, partially offset by improvements in trust and investment management fees. Noninterest expense increased 3.0 percent on a linked quarter basis reflecting higher employee benefits expense, professional services expense, marketing and business development expense and amortization of tax-advantaged investments.

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Net interest income on a taxable-equivalent basis in the fourth quarter of 2021 was $3,150 million, a decrease of $51 million (1.6 percent) compared with the fourth quarter of 2020. The decrease was primarily due to lower loan spreads and mix of earning assets, partially offset by higher investment portfolio balances and the benefit of deposit and funding mix. Average earning assets were $25.1 billion (5.0 percent) higher than the fourth quarter of 2020, reflecting an increase of $27.4 billion (20.5 percent) in average investment securities and an increase of $447 million (0.1 percent) in average total loans while average other earning assets decreased $673 million (1.3 percent) due to lower cash balances.

Net interest income on a taxable-equivalent basis decreased $47 million (1.5 percent) on a linked quarter basis primarily due to lower interest and loan fees of approximately $82 million related to the SBA Paycheck Protection Program. Average earning assets were $19.2 billion (3.8 percent) higher on a linked quarter basis, reflecting increases of $9.0 billion (5.9 percent) in average investment securities, $6.0 billion (2.0 percent) in average loans and $4.8 billion (10.0 percent) in average other earning assets, driven by higher average cash balances.

The net interest margin in the fourth quarter of 2021 was 2.40 percent, compared with 2.57 percent in the fourth quarter of 2020 and 2.53 percent in the third quarter of 2021. The decrease in the net interest margin from the prior year was primarily due to the mix of loans, lower loan spreads and higher investment portfolio balances, partially offset by the net benefit of funding composition. The decrease in interest margin on a linked quarter basis reflected lower loan fees related to the SBA Paycheck Protection Program, as well as the impact of strong deposit flows and related investment and cash balances strategies.

The increase in average investment securities year-over-year was due to purchases of mortgage-backed, U.S. Treasury and state and political securities, net of prepayments and maturities, while the increase on a linked quarter basis was primarily driven by purchases of U.S. Treasury securities.

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Average total loans for the fourth quarter of 2021 were $447 million (0.1 percent) higher than the fourth quarter of 2020. The increase was primarily due to growth in credit card balances (2.1 percent) and other retail loans (20.3 percent) offset by lower total commercial loans (1.8 percent) and total commercial real estate (3.1 percent) and residential mortgages (1.2 percent). The strong growth in other retail was driven by auto and recreational vehicle lending, offset by declining home equity and second mortgages (17.5 percent). The decrease in total commercial loans (1.8 percent) was driven by expected forgiveness of SBA Paycheck Protection Program loans and lower total commercial real estate loans (3.1 percent) was a result of paydowns.

Average total loans were $6.0 billion (2.0 percent) higher than the third quarter of 2021 primarily due to higher total commercial loans (2.6 percent) driven by strong new business and higher utilization, higher credit card balances (2.3 percent), growth in residential mortgages (2.4 percent) due to increased loan portfolio production and slower payoffs in the mortgage portfolio, and higher other retail loans (4.4 percent) driven by growth in installment loans.

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Average total deposits for the fourth quarter of 2021 were $27.4 billion (6.5 percent) higher than the fourth quarter of 2020. Average noninterest-bearing deposits increased $20.8 billion (18.1 percent) primarily within Corporate and Commercial Banking and Wealth Management and Investment Services, partially offset by a decrease in Payments Services. Average total savings deposits were $16.6 billion (6.1 percent) higher year-over-year driven by Consumer and Business Banking, partially offset by a decrease in Wealth Management and Investment Services. Average time deposits were $10.0 billion (30.4 percent) lower than the prior year within Corporate and Commercial Banking, Consumer and Business Banking and Wealth Management and Investment Services. 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 total deposits experienced strong growth of $18.4 billion (4.3 percent) from the third quarter of 2021. On a linked quarter basis, average noninterest-bearing deposits increased $6.9 billion (5.4 percent) driven by Wealth Management and Investment Services and Corporate and Commercial Banking. Average total savings deposits increased $12.1 billion (4.4 percent) compared with the third quarter of 2021 driven by increases in Corporate and Commercial Banking, Consumer and Business Banking and Wealth Management and Investment Services. Average time deposits, which are managed based on funding needs, relative pricing and liquidity characteristics, were $715 million (3.0 percent) lower on a linked quarter basis, with decreases across most business lines.

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Fourth quarter noninterest income of $2,534 million was $16 million (0.6 percent) lower than the fourth quarter of 2020 reflecting strong growth in payments revenue, trust and investment management fees, deposit service charges, and commercial products revenue that was more than offset by lower mortgage banking revenue, other noninterest income and securities gains. Mortgage banking revenue decreased $170 million (36.3 percent) compared with the fourth quarter of 2020 due to lower mortgage production volume, given declining refinancing activity, and related gain on sale margins, partially offset by the favorable net impact of the change in fair value of mortgage servicing rights, net of hedging activities. Other noninterest income decreased $47 million (22.3 percent) driven by lower tax-advantaged investment syndication revenue in the fourth quarter of 2021 and the impact of favorable asset gains and the transition services agreement revenue associated with the sale of the Company's ATM third-party servicing business in the fourth quarter of 2020. Several fee categories had strong growth from a year ago. Payment services revenue increased $103 million (12.9 percent) compared with the fourth quarter of 2020 as credit and debit card revenue increased $20 million (5.5 percent) due to higher net interchange revenue related to sales volumes as well as stronger fee activity. Corporate payment products revenue increased $29 million (23.0 percent) primarily due to higher sales volume. Merchant processing services revenue increased $54 million (17.4 percent) driven by higher sales volumes and merchant fees. Trust and investment management fees increased $42 million (9.5 percent) driven by business growth, favorable market conditions and activity related to the acquisition of PFM Asset Management LLC ("PFM"), partially offset by higher fee waivers. Deposit service charges increased $28 million (17.0 percent) primarily due to the impact of customer remediations in 2020 as well as higher customer activity in the fourth quarter of 2021. Commercial products revenue increased $26 million (10.9 percent) primarily due to higher capital markets and foreign currency customer activity as well as higher trading revenue, partially offset by lower commercial leasing fees.

Noninterest income was $159 million (5.9 percent) lower in the fourth quarter of 2021 compared with the third quarter of 2021 reflecting seasonally lower payments and capital markets revenues and declining mortgage banking revenue. Payment services revenue decreased $39 million (4.1 percent) compared with the third quarter of 2021 as credit and debit card revenue decreased $11 million (2.8 percent) due to lower net interchange rate, net of higher volume and merchant processing services decreased $27 million (6.9 percent) primarily driven by lower rate and sales volume in sectors that continue to be negatively impacted by the pandemic. Mortgage banking revenue decreased $120 million (28.7 percent) driven by lower production volume and related gain on sale margins and the slightly unfavorable net impact of the change in fair value of mortgage servicing rights, net of hedging activities. Partially offsetting these decreases, trust and investment management fees increased $24 million (5.2 percent) driven by favorable market conditions, business growth and activity related to the acquisition of PFM.

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Fourth quarter noninterest expense of $3,533 million was $169 million (5.0 percent) higher than the fourth quarter of 2020 reflecting increases in compensation expense, employee benefits expense, professional services expense, and marketing and business development, partially offset by lower other noninterest expense. Compensation expense increased $208 million (12.7 percent) compared with the fourth quarter of 2020 primarily due to performance-based incentives, revenue related commissions, merit, and hiring to support business growth. Employee benefits increased $70 million (23.2 percent) driven by higher medical claims expense and compensation related payroll taxes in the fourth quarter of 2021. Professional services expense increased $37 million (30.1 percent) primarily due to an increase in business investment and related initiatives. Marketing and business development expense increased $24 million (22.9 percent) due to the timing of marketing campaigns and increased travel and entertainment. These increases were partially offset by lower other noninterest expense of $169 million (38.5 percent) due to COVID-19 related accruals in the fourth quarter of 2020, including recognizing liabilities related to future delivery exposures for merchant and airline processing and other accruals.

Noninterest expense increased $104 million (3.0 percent) on a linked quarter basis reflecting increases in employee benefits expense, professional services expense and marketing and business development, partially offset by lower other noninterest expense. Employee benefits expense increased $36 million (10.7 percent) driven by higher medical claims expense. Professional services expense increased $34 million (27.0 percent) primarily due to an increase in business investment and related initiatives. Marketing and business development expense increased $30 million (30.3 percent) due to the timing of marketing campaigns. Partially offsetting these increases, other noninterest expense decreased $21 million (7.2 percent) primarily due to lower accruals related to future delivery exposures for merchant and airline processing and other accruals, partially offset by seasonally higher amortization of tax-advantaged investments, which were scaled back in 2020 due to the economic environment driven by the pandemic conditions.

Provision for Income Taxes

The provision for income taxes for the fourth quarter of 2021 resulted in a tax rate of 22.5 percent on a taxable-equivalent basis (effective tax rate of 21.5 percent), compared with 21.6 percent on a taxable-equivalent basis (effective tax rate of 20.6 percent) in the fourth quarter of 2020, and a tax rate of 22.5 percent on a taxable-equivalent basis (effective tax rate of 21.7 percent) in the third quarter of 2021.

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The Company's provision for credit losses for the fourth quarter of 2021 was a benefit of $13 million, which was $150 million higher than the prior quarter and $454 million lower than the fourth quarter of 2020. During 2021, factors affecting economic conditions, including passing of additional government stimulus and widespread vaccine availability in the U.S., have contributed to economic improvement. However, economic uncertainty remains associated with supply chain concerns, rising inflationary concerns and additional virus variants. In addition to these factors, expected loss estimates consider various factors including customer specific information impacting changes in risk ratings, projected delinquencies and potential effects of diminishing liquidity without the support of mortgage forbearance and direct federal stimulus. Currently, consumer credit trends continue to perform better than expected, while select wholesale portfolios continue to be monitored for pandemic related impacts.

Total net charge-offs in the fourth quarter of 2021 were $132 million, compared with $147 million in the third quarter of 2021 and $441 million in the fourth quarter of 2020. The net charge-off ratio was 0.17 percent in the fourth quarter of 2021, compared with 0.20 percent in the third quarter of 2021 and 0.58 percent in the fourth quarter of 2020. Net charge-offs decreased $15 million (10.2 percent) compared with the third quarter of 2021 associated with borrower liquidity and strong asset prices in the market that support repayment and recovery on problem loans. Net charge-offs decreased $309 million (70.1 percent) compared with the fourth quarter of 2020 reflecting improvement across all loan categories.

The allowance for credit losses was $6,155 million at December 31, 2021, compared with $6,300 million at September 30, 2021, and $8,010 million at December 31, 2020. The decrease on a linked quarter basis was driven by continued strong credit quality and collateral performance, partially offset by loan growth. Economic re-openings associated with vaccine availability improved performance and contributed to lower reserve levels. The ratio of the allowance for credit losses to period-end loans was 1.97 percent at December 31, 2021, compared with 2.12 percent at September 30, 2021, and 2.69 percent at December 31, 2020. The ratio of the allowance for credit losses to nonperforming loans was 738 percent at December 31, 2021, compared with 695 percent at September 30, 2021, and 654 percent at December 31, 2020.

Nonperforming assets were $878 million at December 31, 2021, compared with $944 million at September 30, 2021, and $1,298 million at December 31, 2020. The ratio of nonperforming assets to loans and other real estate was 0.28 percent at December 31, 2021, compared with 0.32 percent at September 30, 2021, and 0.44 percent at December 31, 2020. The year-over-year and linked quarter decrease in nonperforming assets was primarily due to decreases in total commercial nonperforming loans and commercial mortgage nonperforming loans. Accruing loans 90 days or more past due were $472 million at December 31, 2021, compared with $385 million at September 30, 2021, and $477 million at December 31, 2020. The Company expects credit quality to return to more normalized levels over time. However, some manageable levels of elevated nonperforming assets in certain industries and loan categories impacted by the pandemic may experience longer recovery periods.

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Total U.S. Bancorp shareholders' equity was $54.9 billion at December 31, 2021, compared with $53.7 billion at September 30, 2021, and $53.1 billion at December 31, 2020. 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 recently announced acquisition of MUFG Union Bank's core regional banking franchise. The Company does not expect to commence repurchasing its common stock again until after the acquisition closes in order to build capital prior to the acquisition. The Company expects to operate at a CET1 capital ratio between our target ratio and 9.0 percent after closing of the acquisition.

All regulatory ratios continue to be in excess of "well-capitalized" requirements. The common equity tier 1 capital to risk-weighted assets ratio using the Basel III standardized approach was 10.0 percent at December 31, 2021, compared with 10.2 percent at September 30, 2021, and 9.7 percent at December 31, 2020. The Company's common equity tier 1 capital to risk-weighted assets ratio, reflecting the full implementation of the current expected credit losses methodology was 9.6 percent at December 31, 2021, compared with 9.7 percent at September 30, 2021, and 9.3 percent at December 31, 2020.

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On Wednesday, January 19, 2022 at 8 a.m. CT, Chairman, President and Chief Executive Officer Andy Cecere and Vice Chair and Chief Financial Officer Terry Dolan will host a conference call to review the financial results. The conference call will be available online or by telephone. To access the webcast and presentation, visit U.S. Bancorp's website at usbank.com and click on "About Us," "Investor Relations" and "Webcasts & Presentations." To access the conference call from locations within the United States and Canada, please dial 866.316.1409. Participants calling from outside the United States and Canada, please dial 706.634.9086. The conference ID number for all participants is 7876125. For those unable to participate during the live call, a recording will be available at approximately 11 a.m. CT on Wednesday, January 19, 2022 and will be accessible until Wednesday, January 26,2022 at 10:59 p.m. CT. To access the recorded message within the United States and Canada, please dial 855.859.2056. If calling from outside the United States and Canada, please dial 404.537.3406 to access the recording. The conference ID is 7876125.

U.S. Bancorp, with nearly 70,000 employees and $573 billion in assets as of December 31, 2021, is the parent company of U.S. Bank National Association. The Minneapolis-based company serves millions of customers locally, nationally and globally through a diversified mix of businesses: Consumer and Business Banking; Payment Services; Corporate & Commercial Banking; and Wealth Management and Investment Services. The company has been recognized for its approach to digital innovation, social responsibility, and customer service, including being named one of the 2021 World's Most Ethical Companies and Fortune's most admired superregional bank. Learn more at usbank.com/about.

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995:

This press release 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, anticipated future revenue and expenses and the future plans and prospects of U.S. Bancorp. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated. The COVID-19 pandemic is adversely affecting U.S. Bancorp, its customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on its business, financial position, results of operations, liquidity, and prospects is uncertain. Continued deterioration in general business and economic conditions or turbulence in domestic or global financial markets 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. In addition, changes to statutes, regulations, or regulatory policies or practices could affect U.S. Bancorp in substantial and unpredictable ways. U.S. Bancorp's results could also be adversely affected by changes in interest rates; further increases in unemployment rates; deterioration in the credit quality of its loan portfolios or in the value of the collateral securing those loans; deterioration in the value of its investment securities; legal and regulatory developments; litigation; increased competition from both banks and non-banks; civil unrest; changes in customer behavior and preferences; breaches in data security, including as a result of work-from-home arrangements; failures to safeguard personal information; effects of mergers and acquisitions and related integration; effects of critical accounting policies and judgments; and management's ability to effectively manage credit risk, market risk, operational risk, compliance risk, strategic risk, interest rate risk, liquidity risk and reputation risk. In addition, U.S. Bancorp's proposed acquisition of MUFG Union Bank presents risks and uncertainties, including, among others: the risk that the cost savings, any revenue synergies and other anticipated benefits of the proposed acquisition may not be realized or may take longer than anticipated to be realized; the risk that U.S. Bancorp's business could be disrupted as a result of the announcement and pendency of the proposed acquisition and diversion of management's attention from ongoing business operations and opportunities; the possibility that the proposed acquisition, including the integration of MUFG Union Bank, may be more costly or difficult to complete than anticipated; delays in closing the proposed acquisition; and the failure of required governmental approvals to be obtained or any other closing conditions in the definitive purchase agreement to be satisfied.

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For discussion of these and other risks that may cause actual results to differ from expectations, refer to U.S. Bancorp's Annual Report on Form 10-K for the year ended December 31, 2020, on file with the Securities and Exchange Commission, including the sections entitled "Corporate Risk Profile" and "Risk Factors" contained in Exhibit 13, and all subsequent filings with the Securities and Exchange Commission under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934. 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. 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.

In addition to capital ratios defined by banking regulators, the Company considers various other measures when evaluating capital utilization and adequacy, including:

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 current expected credit losses 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 press release in their entirety, and not to rely on any single financial measure. A table follows that shows the Company's calculation of these non-GAAP financial measures.

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