U.S. Bancorp — Q2 2011 Form 10-Q Summary
Business context and reporting period
U.S. Bancorp reported unaudited results for the quarter and six months ended June 30, 2011. Comparisons are with the corresponding 2010 periods; balance-sheet comparisons are with December 31, 2010. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise indicated.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Change |
|---|---|---|---|
| Net interest income, taxable-equivalent | $2,544 | $2,409 | +5.6% |
| Total net revenue, taxable-equivalent | $4,690 | $4,519 | +3.8% |
| Noninterest expense | $2,425 | $2,377 | +2.0% |
| Provision for credit losses | $572 | $1,139 | -49.8% |
| Net income attributable to U.S. Bancorp | $1,203 | $766 | +57.0% |
| Diluted earnings per common share | $0.60 | $0.45 | +33.3% |
| Return on average assets | 1.54% | 1.09% | Higher |
| Return on average common equity | 15.9% | 13.4% | Higher |
| Net interest margin, taxable-equivalent | 3.67% | 3.90% | Lower |
| Efficiency ratio | 51.6% | 52.4% | Improved |
For the first six months of 2011, net income attributable to U.S. Bancorp was $2.249 billion, up 56.7%; diluted EPS was $1.12, up 41.8%. Total net revenue rose 4.2% to $9.209 billion, while noninterest expense increased 5.0% to $4.739 billion. The provision for credit losses fell 45.8% to $1.327 billion. First-half results included a $46 million gain from the FCB acquisition and $13 million of net securities losses.
Balance sheet, liquidity, capital and cash flow
- At June 30, 2011, total assets were $320.9 billion, loans were $199.9 billion, deposits were $214.9 billion and shareholders’ equity was $32.5 billion. Since year-end 2010, assets rose 4.3%, loans 1.4%, deposits 5.2% and shareholders’ equity 9.9%.
- Average deposits increased 14.2% year over year in Q2, including 22.1% growth in average noninterest-bearing deposits. Short-term borrowings declined 8.9% from year-end to $29.7 billion; long-term debt increased 4.1% to $32.8 billion.
- Investment securities increased 23.8% from year-end to $65.6 billion, largely reflecting purchases of Treasury and agency securities to increase on-balance-sheet liquidity. Loans held for sale fell to $3.5 billion from $8.4 billion, principally as mortgage origination and refinancing activity slowed.
- Regulatory capital ratios strengthened from year-end: Tier 1 capital was 11.0%, total risk-based capital 13.9%, and leverage 9.2%. The company said all regulatory ratios exceeded “well-capitalized” requirements. Tangible common equity to tangible assets was 6.5%.
- For the first half, operating cash flow was $8.809 billion, investing cash flow was negative $15.306 billion and financing cash flow was positive $7.260 billion. Cash and due from banks increased $763 million to $15.250 billion.
Material changes and credit trends
- Q2 net charge-offs fell to $747 million from $1.114 billion a year earlier; the annualized net charge-off ratio declined to 1.51% from 2.34%. The first-half total was $1.552 billion versus $2.249 billion.
- Total nonperforming assets declined to $4.651 billion from $5.048 billion at year-end; excluding FDIC-covered assets, they were $3.262 billion versus $3.351 billion. Total loans 90 days or more past due, including nonperforming loans, were 2.77% of loans, down from 3.17%.
- The allowance for credit losses was $5.308 billion, or 2.66% of total loans. Management reported the Q2 provision was $175 million below net charge-offs, compared with a provision $25 million above net charge-offs in Q2 2010.
- Lower credit costs and increased revenue drove much of the earnings improvement. Growth in payments-related and commercial-products revenue was partly offset by lower deposit service charges, including effects of overdraft policy changes, and lower trust fees following the sale of the long-term asset management business.
- Noninterest expense growth reflected compensation, benefits and pension costs, expansion and technology spending, and higher FDIC insurance costs.
Outlook, risks and unusual items
- Management expected nonperforming assets and net charge-offs to trend lower in Q3 2011. This is management commentary, not formal earnings guidance.
- The company estimated the Durbin Amendment would reduce future noninterest income by approximately $300 million annualized, based on anticipated transaction volume and before potential mitigating actions.
- During Q2, the company and its two primary bank subsidiaries entered into federal regulatory Consent Orders concerning mortgage servicing and foreclosure practices. The orders require remediation plans, independent review of certain foreclosure actions and ongoing compliance oversight. The company reported progress and did not expect resolution of outstanding issues to materially affect its financial position, results or normal operations; the orders could nevertheless result in fines, restitution or business-practice changes.
- Other notable exposures include mortgage loan-sale representations and warranties, for which the company had a $173 million reserve; Visa litigation, with a $28 million recorded liability; and three overdraft-fee lawsuits for which no loss range could be determined. The filing also describes contingent merchant-processing exposure: $7.4 billion of airline tickets had been purchased for future delivery, supported by $609 million of collateral and related protections.
- Key risks identified include a renewed or prolonged economic downturn, commercial and residential real-estate weakness, credit deterioration, interest-rate and market volatility, regulatory changes, competition, and the management of credit, liquidity, operational and other risks. The filing reported $9 million of Q2 impairment charges, predominantly on non-agency mortgage-backed securities, and noted that further adverse market changes could cause additional impairments.
- Q2 2010 diluted EPS included a $0.05 benefit from a nonrecurring exchange of preferred stock for income trust securities. First-half 2011 also included the $46 million FCB acquisition gain. These items affect period-to-period comparability.
Important facts for investors to verify
- Whether credit improvement continues, particularly in commercial real estate, residential mortgages and covered-loan portfolios; assess charge-offs, delinquencies, nonperforming assets and allowance coverage together.
- How the forecast Durbin-related revenue reduction, overdraft-fee changes and other fee trends affect revenue, and what mitigation actions management takes.
- Progress and costs associated with the mortgage-servicing Consent Orders, including any penalties, remediation expenses or changes in servicing practices.
- Investment portfolio valuation and impairment assumptions, especially for non-agency mortgage-backed securities and other Level 3 assets.
- Effects of deposit growth, securities purchases, funding costs and interest-rate changes on net interest margin and liquidity.
- Capital deployment, including the authorization to repurchase up to 50 million shares through December 31, 2011, and the declared quarterly dividend of $0.125 per common share.