U.S. Bancorp — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods unless otherwise stated. Balance-sheet comparisons are with December 31, 2011. Dollar amounts are in millions unless noted.
Business context and results
U.S. Bancorp is a diversified banking and financial services company. It reported higher earnings, supported by revenue growth and lower credit costs. Growth in mortgage banking was a major contributor; management also noted continued pressure on loan yields and debit-card revenue.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Taxable-equivalent net interest income | $2,713 | $2,544 | $5,403 | $5,051 |
| Noninterest income, excluding securities gains | $2,374 | $2,154 | $4,613 | $4,171 |
| Total net revenue, taxable-equivalent | $5,068 | $4,690 | $9,997 | $9,209 |
| Noninterest expense | $2,601 | $2,425 | $5,161 | $4,739 |
| Provision for credit losses | $470 | $572 | $951 | $1,327 |
| Net income attributable to U.S. Bancorp | $1,415 | $1,203 | $2,753 | $2,249 |
| Diluted earnings per share | $0.71 | $0.60 | $1.38 | $1.12 |
| Return on average assets | 1.67% | 1.54% | 1.64% | 1.46% |
| Return on average common equity | 16.5% | 15.9% | 16.3% | 15.2% |
| Net interest margin, taxable-equivalent | 3.58% | 3.67% | 3.59% | 3.68% |
| Efficiency ratio | 51.1% | 51.6% | 51.5% | 51.4% |
| Annualized net charge-offs / average loans | 0.98% | 1.51% | 1.03% | 1.58% |
For the six months, cash provided by operating activities was $3,628, versus $8,809 in 2011; investing activities used $10,274, versus $15,306; financing activities provided $8,087, versus $7,260. The filing’s cash-flow statement reflects substantial mortgage-loan origination and sale activity, so operating cash flow should be read in that context.
Balance sheet, debt, liquidity and capital
| At June 30, 2012 | Amount | Change from Dec. 31, 2011 |
|---|---|---|
| Total assets | $353,136 | +3.8% |
| Total loans | $216,088 | +3.0% |
| Investment securities | $73,948 | +4.4% |
| Total deposits | $241,316 | +4.5% |
| Short-term borrowings | $30,684 | +$216 |
| Long-term debt | $28,821 | -9.8% |
| U.S. Bancorp shareholders’ equity | $37,792 | +11.2% |
| Nonperforming assets | $3,029 | -19.7% |
| Allowance for credit losses | $4,864 | -3.0% |
Liquidity resources included $52.5 billion of unencumbered available-for-sale and held-to-maturity securities and $62.2 billion of additional borrowing capacity at the FHLB and Federal Reserve. The company said parent-company funds exceeded its stated liquidity needs, including a 12-month horizon with common dividends forecast and a 24-month horizon assuming dividends were reduced to zero.
Regulatory capital ratios were 10.7% Tier 1, 13.0% total risk-based capital and 9.1% leverage; all exceeded well-capitalized requirements. Tangible common equity to tangible assets was 6.9%, and the company’s approximate Tier 1 common ratio under the June 2012 proposed Basel III standardized approach was 7.9%.
Material changes versus comparable periods
- Q2 net income attributable to U.S. Bancorp rose 17.6%; six-month income rose 22.4%. Revenue increased 8.1% and 8.6%, respectively, while credit-loss provision fell 17.8% and 28.3%.
- Mortgage banking revenue increased to $490 from $239 in Q2 and to $942 from $438 for six months, primarily reflecting higher mortgage origination and sales revenue.
- Net interest income increased with growth in earning assets and lower-cost core deposits, but net interest margin declined 9 basis points in both the quarter and half-year comparisons, amid lower loan yields and a larger balance of lower-yielding securities.
- Noninterest expense increased 7.3% in Q2 and 8.9% for six months, including higher staffing and benefits, mortgage-servicing review costs, and legal/regulatory-related items.
- Average loans grew 7.7% in Q2 and 7.0% for six months. Period-end deposits increased 4.5% from year-end, including growth in large time deposits and noninterest-bearing deposits.
- Credit quality improved overall: nonperforming assets fell to $3.0 billion from $3.8 billion at year-end, and Q2 net charge-offs declined to $520 from $747.
Outlook, risks, contingencies and unusual items
- Near-term credit outlook: Management expected nonperforming assets to trend lower in Q3 2012 and net charge-offs to be modestly lower. The filing provides no specific earnings or revenue guidance.
- Legal and other accruals: Q2 expense included an accrual for U.S. Bancorp’s share of Visa litigation obligations. A July 13, 2012 Visa settlement memorandum followed quarter-end; the June 30 net Visa litigation liability was $65 million. A $55 million overdraft-fee litigation settlement was reached in principle in July and had already been accrued. The company had also accrued $130 million for mortgage-servicing and related matters; it had not agreed to a broader governmental settlement.
- Mortgage representations and warranties: The reserve was $216 million, up from $160 million at year-end, partly because the GSEs increased the number of loans selected for repurchase review. Unresolved GSE claims were $164 million.
- Investment securities: The company transferred about $11.7 billion of agency mortgage-backed securities from available-for-sale to held-to-maturity. It recorded $27 million of Q2 impairment on perpetual preferred securities and $13 million on non-agency mortgage-backed securities. Further adverse market or collateral developments could cause additional impairment.
- Other risks: Management identified economic weakness, real-estate market stress, interest-rate changes, loan and collateral deterioration, regulation, competition, operational and liquidity risks, and litigation as factors that could adversely affect results. European exposures included about $500 million of deposits at European banks and preferred investments in European banks; the company held no sovereign debt of a European country.
- Capital returns: The quarterly common dividend was raised 56% to $0.195 per share. The board authorized repurchases of up to 100 million shares through March 31, 2013; 12.9 million shares were repurchased in Q2.
- Reporting controls: Management concluded disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether mortgage banking revenue and elevated origination volumes are sustainable, and how mortgage servicing costs and MSR valuations evolve.
- Whether declining credit losses and nonperforming assets continue, especially in commercial real estate, junior-lien home equity, and restructured-loan portfolios.
- The adequacy of the $4.9 billion allowance, including assumptions for collateral values, borrower performance and FDIC loss-sharing recoveries.
- Final outcomes and potential costs for Visa litigation, mortgage servicing matters, overdraft litigation, and GSE repurchase claims.
- Effects of persistently low interest rates, regulatory changes and proposed Basel III rules on margins, capital ratios and funding needs.