U.S. Bancorp — Q2 2017 Form 10-Q
Business context and reporting period. U.S. Bancorp is a diversified banking and financial services company. This unaudited quarterly report covers the three and six months ended June 30, 2017; year-over-year comparisons are to 2016, and balance-sheet comparisons are generally to December 31, 2016.
Financial performance and position
| Metric | Q2 2017 | Prior-year comparison |
|---|---|---|
| Total net revenue | $5.487 billion | Up 0.7% |
| Net interest income | $3.017 billion; $3.068 billion taxable-equivalent | Up 6.0%; taxable-equivalent up 5.9% |
| Noninterest income | $2.419 billion | Down 5.2% |
| Noninterest expense | $3.023 billion | Up 1.0% |
| Provision for credit losses | $350 million | Up 7.0% |
| Net income attributable to U.S. Bancorp | $1.500 billion; diluted EPS $0.85 | Down 1.4%; diluted EPS up 2.4% |
| Return on average assets / common equity | 1.35% / 13.4% | 1.43% / 13.8% |
| Net interest margin / efficiency ratio | 3.04% / 55.2% | 3.02% / 54.9% |
- For the first six months, net income attributable to U.S. Bancorp was $2.973 billion, up 2.2%; diluted EPS was $1.66, up 4.4%. Revenue grew 3.1%, while noninterest expense rose 3.9% and provision expense rose 5.8%.
- At June 30, total assets were $463.8 billion, loans $277.3 billion, deposits $347.3 billion, long-term debt $37.8 billion and shareholders’ equity $48.3 billion. Since year-end, assets increased 4.0%, deposits 3.8%, loans 1.5%, and long-term debt 13.5%.
- Six-month cash flows: operating activities provided $4.779 billion; investing activities used $6.814 billion; financing activities provided $15.294 billion. Cash and due from banks ended at $28.964 billion. These banking cash-flow categories are not a measure of free cash flow.
- Liquidity included $99.9 billion of unencumbered investment securities and $88.2 billion of additional potential borrowing capacity at the FHLB and Federal Reserve, based on available collateral. The company reported compliance with the Liquidity Coverage Ratio requirement.
- Capital ratios under the transitional standardized approach were 9.5% CET1, 11.1% Tier 1 and 13.2% total risk-based capital; all regulatory ratios exceeded “well-capitalized” requirements. The estimated fully implemented standardized CET1 ratio was 9.3%.
Material changes and drivers
- Q2 net interest income growth was driven mainly by loan growth and higher rates. Average loans grew 3.4% year over year and average deposits 7.7%; taxable-equivalent net interest margin increased 2 basis points.
- Q2 noninterest income declined primarily because prior-year results included equity investment income tied to the Visa Europe sale. Payment services, trust and investment management, and treasury management revenues increased; mortgage banking revenue fell amid lower refinancing activity.
- Expense growth reflected compensation and staffing for business growth and compliance programs, merit increases, variable compensation and the FDIC insurance surcharge. The comparison also benefited from legal reserves and a charitable contribution recorded in Q2 2016.
- Credit costs increased: Q2 net charge-offs were $340 million versus $317 million, and the annualized charge-off ratio rose to 0.49% from 0.48%. The increase mainly reflected credit card and other retail loans. In contrast, nonperforming assets declined to $1.349 billion from $1.603 billion at year-end; the nonperforming-assets ratio fell to 0.49% from 0.59%.
- The allowance for credit losses was $4.377 billion, or 1.58% of period-end loans, versus $4.357 billion, or 1.59%, at year-end. Energy loans were 0.9% of loans; energy nonperforming assets and criticized commitments declined from year-end.
- Shareholders’ equity increased 2.2% from year-end, reflecting earnings, preferred issuance and improved unrealized securities marks, partly offset by repurchases, dividends and preferred-stock redemption. The company repurchased $1.282 billion of common stock in the first six months and authorized a new repurchase program of up to $2.6 billion for July 2017–June 2018. The declared quarterly common dividend was $0.28 per share, up from $0.255 a year earlier.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management attributes current revenue growth to loan growth and higher interest rates, while noting sensitivity to deposit behavior, loan mix, funding decisions and market rates.
- Management identifies economic downturns, interest-rate changes, credit deterioration, securities valuation changes, competition, litigation and regulation, data-security breaches, and operational, compliance, liquidity and reputational risks as potential sources of adverse results. Actual outcomes may differ materially from forward-looking statements.
- Legal and regulatory matters include Visa card-association litigation, mortgage-related matters, Bank Secrecy Act/anti-money-laundering and sanctions compliance reviews, and an investigation concerning the company’s banking relationship with Scott Tucker and related compliance. The company was in discussions to attempt to resolve certain matters. It estimated aggregate reasonably possible losses, in excess of reserves for probable matters, of up to $300 million; actual losses could differ, and some matters cannot yet be estimated.
- The company remained subject to an OCC consent order concerning its BSA/AML program and described ongoing regulatory examinations and investigations. Management stated that existing matters were not expected to materially harm overall financial condition, results or cash flows, but acknowledged a material effect on results for a particular period was possible.
- The FASB expected-loss credit standard, effective for the company no later than January 1, 2020, was expected to increase the allowance for credit losses upon adoption; the amount remained under evaluation. Management expected adoption of the revenue-recognition and lease standards to be immaterial.
- Visa-related litigation liability, net of escrow funding, was $19 million at June 30, 2017. The company also disclosed maximum potential future payments for certain guarantees, including standby letters of credit, merchant processing and asset-sale obligations; these maxima are not expected-loss estimates.
Most important facts for investors to verify
- Whether continued net interest income growth can offset rising deposit funding costs, expense growth and any further margin pressure.
- Trends in credit-card and other retail charge-offs, delinquency measures, allowance coverage and the quality of loan growth.
- Resolution, timing and potential financial impact of the Visa, BSA/AML, mortgage-related and other legal or regulatory matters, including the stated up-to-$300 million aggregate excess-loss estimate.
- How the $2.6 billion repurchase authorization, dividends, preferred-stock activity and higher long-term debt affect capital and shareholder returns.
- Whether liquidity and capital remain adequate under stress, and the eventual allowance impact of the expected-loss accounting standard.
- Reconcile headline metrics to the filing’s detailed statements: Q2 net income attributable to the company was $1.500 billion, while net income applicable to common shareholders was $1.430 billion; distinguish both from consolidated net income of $1.512 billion.