U.S. Bancorp — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are primarily with Q1 2017. Balance-sheet comparisons are with December 31, 2017. U.S. Bancorp is a diversified banking and financial services company.
Financial performance
- Profit: Net income attributable to U.S. Bancorp was $1.675 billion, up 13.7%; diluted EPS was $0.96, up 17.1%. Return on average assets was 1.50% and return on average common equity was 14.9%, versus 1.35% and 13.3% a year earlier.
- Revenue and margins: Net interest income was $3.168 billion, up 6.3% (5.5% to $3.197 billion on a taxable-equivalent basis). Taxable-equivalent net interest margin rose to 3.13% from 3.06%. Taxable-equivalent total net revenue was $5.469 billion, up 3.4%. Noninterest income was $2.272 billion, up 0.6%; payment services, trust and investment management fees, and deposit charges increased, while commercial products and mortgage banking revenue declined.
- Expenses and credit: Noninterest expense rose 5.0% to $3.055 billion, including compensation expense up 9.5%. The efficiency ratio increased to 55.9% from 55.3%. Provision for credit losses was $341 million, down 1.2%; net charge-offs were $341 million, or 0.49% of average loans, versus $335 million and 0.50% a year earlier.
- Taxes: Income tax expense was $362 million, with a 17.7% effective rate, compared with $499 million and 25.1%. The lower rate reflected tax reform, a favorable tax settlement, and tax benefits from equity awards.
- Cash flow: Net cash provided by operating activities was $1.434 billion, compared with $3.190 billion in Q1 2017. Investing activities provided $82 million, versus $1.721 billion used; financing activities used $1.775 billion, versus $3.145 billion provided. Cash and due from banks ended at $19.246 billion.
Balance sheet, liquidity and capital
- At March 31, total assets were $460.1 billion, loans $277.9 billion, deposits $344.5 billion, and U.S. Bancorp shareholders’ equity $49.2 billion. Versus year-end, assets declined 0.4%, loans 0.9%, and deposits 0.8%; equity increased 0.3%.
- Long-term debt was $33.2 billion, up 2.9% from year-end; short-term borrowings were $17.7 billion, up from $16.7 billion. Average short-term borrowings were 73.2% higher year over year, while average long-term debt was 4.6% lower.
- Unencumbered available-for-sale and held-to-maturity securities had a fair value of $102.6 billion; the company reported an additional $86.9 billion of potential FHLB and Federal Reserve borrowing capacity. It was compliant with the Liquidity Coverage Ratio requirement and reported parent-company liquidity above minimums.
- Basel III standardized common equity tier 1 was 9.0%, down from 9.3% at year-end; Tier 1 was 10.4%, total risk-based capital 12.5%, and leverage 8.8%. All regulatory capital ratios exceeded “well-capitalized” requirements.
Material changes and notable items
- Revenue growth was mainly supported by higher interest rates and loan growth. Average loans rose 2.3% year over year; average deposits rose 1.9%. Higher funding costs and changes in deposit mix partly offset the margin benefit.
- Q1 net unrealized losses on available-for-sale securities increased to $1.4 billion from $580 million at year-end, primarily reflecting higher interest rates. Management said it did not plan to sell the securities and did not expect to be required to sell before recovery of amortized cost.
- Nonperforming assets were approximately $1.204 billion, essentially unchanged from year-end. The allowance for credit losses was $4.417 billion, or 1.59% of period-end loans, versus 1.58% at year-end.
- The company transferred federally guaranteed student loans from its loan portfolio to loans held for sale at quarter-end; loans held for sale increased to $4.777 billion from $3.554 billion at year-end.
- Common dividends declared were $0.30 per share, up from $0.28. The company repurchased 10.7 million shares in Q1 for approximately $594 million; $674 million remained under the then-current authorization.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management cited rising rates and loan growth as Q1 drivers, while noting pressure from funding costs, expense growth, and weaker mortgage and commercial-products revenue.
- Interest-rate simulations estimated next-12-month net interest income would increase 1.50% for an immediate 50-basis-point rise and 2.09% for a gradual 200-basis-point rise; a 50-basis-point decline would reduce it 2.27%. Outcomes depend on balance-sheet growth, product mix, deposit behavior, and pricing assumptions.
- On February 13, 2018, the company entered a deferred prosecution agreement related to a legacy customer relationship and its legacy BSA/AML compliance program. It paid $613 million in penalties and settlements during Q1; the amounts had been accrued at year-end, so the payments were not newly recognized as Q1 expense. The agreement defers prosecution for two years, subject to compliance, and requires ongoing program efforts and reporting. The 2015 OCC consent order also remained open.
- The company disclosed ongoing regulatory examinations and investigations, including mortgage-related matters, and litigation including RMBS trustee lawsuits and Visa-related litigation. Management said existing legal and regulatory matters were not expected to materially affect overall financial condition, results, or cash flows, but acknowledged that an individual matter could materially affect a particular period and that estimates are uncertain.
- Other principal risks include credit deterioration, interest-rate and market movements, liquidity and funding conditions, operational and cybersecurity events, regulatory changes, competition, and adverse economic conditions. Adoption of the expected-credit-loss standard, required no later than 2020, was under evaluation; the company expected its allowance to increase, with the amount dependent on conditions and portfolio composition at adoption.
Important facts for investors to verify
- Whether higher rates continue to support net interest income as deposit pricing and funding costs rise.
- Whether expense growth moderates and the efficiency ratio improves from 55.9%.
- Trends in credit-card charge-offs, criticized loans, nonperforming commercial loans, and allowance coverage.
- Further changes in unrealized securities losses, capital ratios, and the company’s ability and intent to hold affected securities.
- Compliance with the deferred prosecution agreement and regulatory orders, and any additional consequences from litigation or investigations.
- Cash-flow trends and the effect of the student-loan transfer, deposit mix, and borrowings on liquidity and funding costs.