U.S. Bancorp in late May finished installing updated signage on the West Coast branches it inherited from Union Bank, but executives say their work to take full advantage of the acquisition is still under construction.
Improved cost savings and opportunities to meaningfully boost revenue should be evident in the third quarter, the first full one since U.S. Bank’s conversion of Union Bank, management said when reporting second-quarter results Wednesday.
“We are well positioned as a national bank with greater scale,” said U.S. Bank CEO Andy Cecere.
Revenue and net interest income were lower than expected in the second quarter, but strong fee income and lower expenses helped improve the Minneapolis bank’s bottom line. The quarter also reflected one-time conversion items.
“This was a noisy quarter, which reflected mixed trends,” David Rochester, director of research at Compass Point Research, wrote in a note.
The $680 billion-asset bank completed its conversion of the Union Bank system in the second quarter, marking one of the final steps in the $8 billion acquisition that yielded hundreds of new branches and millions of new customers. U.S. Bank said it would use the deal, in part, to expand its presence in key California markets including Los Angeles, San Diego and San Francisco, where Union Bank had a strong foothold.
U.S. Bank said it has seen more new customers than expected engage with the bank, making use of its app and other online banking services. The bank has boosted its advertising budget to get on the radar of new customers and potential new customers in target markets, executives said.
The deal should deliver as much as $900 million in cost savings delivered through, plus a breadth of opportunities for revenue growth, U.S. Bank said.
In the second quarter, U.S. Bank faced similar challenges to those of banks across the industry, whose net interest income generally shrank amid greater competition in deposit pricing. U.S. Bank said it expects lower net interest income in the third quarter.
U.S. Bank set aside $821 million for credit losses in the second quarter, up from $427 million in the first quarter. Large and small banks alike put aside substantial amounts of reserves early on in the pandemic in case the economic fallout prevented consumers and businesses from making payments on their bank loans.
“Credit quality metrics remained strong versus pre-pandemic levels but are normalizing as expected,” Cecere said on the company’s earnings call Wednesday. “This quarter, we strengthened our balance sheet by increasing the loan-loss reserve, reflective of our prudent approach to credit risk management.”
The bank cited growing credit card balances and continued economic uncertainty as reasons for boosting reserves. Average credit card loans increased 14.5% in the second quarter from the same quarter last year, while average total loans grew 19.9% in the second quarter.
“Consumers are now starting to rely more on credit card debt as a way of paying for their lifestyles,” said U.S. Bank Chief Financial Officer Terry Dolan.
Banks have likely seen the final positive impacts of higher interest rates, Dolan said. U.S. Bank’s noninterest income growth of 7% in the second quarter, driven by higher core fee income, exceeded analysts’ expectations.
U.S. Bank reported a profit of $1.8 billion in the second quarter, in line with expectations. Revenue totaled $7.2 billion, slightly above forecasts.
The bank said its common equity Tier 1 capital ratio increased to 9.1% in the second quarter, up from 8.5% in the first quarter. Capital ratios have been under the spotlight across the industry this year, and specifically at U.S. Bank. The bank’s capital level faced scrutiny this spring, when a research report argued the bank wasn’t holding enough capital for a bank of its size.
