U.S. Bancorp — Q3 2019 Form 10-Q Summary
Business context and reporting period
U.S. Bancorp is a diversified financial services company. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019; comparisons are primarily with the corresponding 2018 periods, or December 31, 2018 for balance-sheet measures. Amounts below are in U.S. dollars.
Financial performance and condition
- Q3 earnings: Net income attributable to U.S. Bancorp was $1.908 billion, up 5.1%; diluted EPS was $1.15, up 8.5%. For the first nine months, net income was $5.428 billion, up 3.6%, and diluted EPS was $3.25, up 6.9%.
- Revenue and margins: Q3 total net revenue was $5.920 billion, up 3.9%; nine-month revenue was $17.319 billion, up 3.0%. Q3 taxable-equivalent net interest income rose 0.8%, while noninterest income excluding securities gains increased 8.1%. Q3 net interest margin was 3.02%, down from 3.15%; the nine-month margin was 3.10%, versus 3.14%. Q3 efficiency ratio improved to 53.3% from 53.5%.
- Costs and credit: Q3 noninterest expense rose 3.3% to $3.144 billion. Provision for credit losses increased 7.0% to $367 million; net charge-offs were $352 million, and the annualized net charge-off ratio rose to 0.48% from 0.46%. For nine months, provision was $1.109 billion and net charge-offs were $1.069 billion.
- Balance sheet and liquidity: At September 30, assets were $487.7 billion, loans $294.6 billion, deposits $359.7 billion, and shareholders’ equity $53.5 billion. Loans and deposits increased 2.7% and 4.1%, respectively, from year-end 2018. Available borrowing capacity from the FHLB and Federal Reserve was $101.7 billion; unencumbered investment securities had a fair value of $110.2 billion. The company reported compliance with its Liquidity Coverage Ratio requirement.
- Debt and capital: Long-term debt was $41.3 billion, essentially unchanged from year-end; short-term borrowings were $14.6 billion, up 3.1%. Standardized CET1 capital was 9.6%, up from 9.1% at year-end; total risk-based capital was 13.2%, and the leverage ratio was 9.3%. All regulatory capital ratios exceeded “well-capitalized” requirements.
- Cash flows, nine months: Operating activities provided $4.951 billion, compared with $7.914 billion in 2018. Investing activities used $21.371 billion versus $4.220 billion; financing activities provided $10.239 billion versus using $3.117 billion. Cash and due from banks decreased $6.181 billion to $15.272 billion. These figures reflect, among other items, increased securities purchases and loan growth.
Material changes versus comparable periods
- Revenue growth came from loan growth, higher reinvestment yields, and stronger payment services, mortgage banking, commercial products, and other income. Q3 mortgage banking revenue rose 56.3%, partly reflecting higher origination and sales activity as rates declined.
- Net interest margin contracted amid a flatter yield curve, deposit and funding mix shifts, and higher cash balances. Deposit interest expense rose substantially as balances and rates on interest-bearing deposits increased.
- Expenses grew due mainly to personnel, technology and communications, and professional services costs; lower FDIC assessment costs partly offset the increases.
- Credit costs and charge-offs increased, especially in commercial, commercial real estate, and credit card portfolios. Nonperforming assets edged down to $979 million from $989 million at year-end; the allowance was $4.481 billion, or 1.52% of period-end loans, versus 1.55% at year-end.
- Available-for-sale securities moved from $1.3 billion of net unrealized losses at year-end 2018 to $476 million of net unrealized gains at September 30, 2019, primarily due to interest-rate-driven fair-value increases.
Outlook, commentary, risks and unusual items
- The filing gives no specific earnings or revenue guidance. Management attributed growth to customer demand and business activity, while noting that lower rates and a flatter yield curve pressured margins.
- Management expected the January 1, 2020 adoption of the expected-credit-loss standard (CECL) to increase the allowance by an estimated $1.2 billion to $1.6 billion. The eventual impact depends on economic conditions, portfolio composition, and model assumptions.
- Following regulatory tailoring rules, the company requested approval to increase its share-repurchase authorization, which could allow it to reduce CET1 from 9.6% toward approximately 9.0%; approval was pending. A $3.0 billion repurchase program ran from July 2019 through June 2020; $2.205 billion remained at quarter-end. The quarterly common dividend increased 13.5%, from $0.37 to $0.42 per share.
- Interest-rate sensitivity modeling showed projected next-12-month net interest income changes of -1.31% for an immediate 50-basis-point decline and +0.36% for an immediate 50-basis-point increase. Results depend on assumptions, including deposit behavior. The company also identified LIBOR discontinuance after 2021 as a multi-year transition and operational risk.
- Other risks include credit deterioration, economic and market stress, cybersecurity and operational failures, regulatory and compliance matters, litigation, and changes in customer behavior. The company was operating under a deferred prosecution agreement entered in 2018 relating to a legacy Bank Secrecy Act/anti-money-laundering matter. It also disclosed ongoing mortgage-related regulatory inquiries and Visa-related litigation; management said ultimate resolution of existing legal matters was not expected to materially harm overall financial condition, but period-specific material effects remain possible.
- The company adopted lease accounting in January 2019, recognizing approximately $1.3 billion of lease assets and liabilities; the income-statement effect was not material. Q3 results also included $25 million of net securities gains.
Most important facts for investors to verify
- Whether revenue and EPS growth can continue if margin pressure persists as rates and deposit costs change.
- Credit trends, particularly commercial and credit-card charge-offs, and the adequacy of reserves ahead of the estimated $1.2–$1.6 billion CECL increase.
- Regulatory approval and execution of the proposed capital target, repurchases, and the higher dividend.
- Developments in the deferred prosecution agreement, mortgage-related inquiries, Visa litigation, and any associated costs or restrictions.
- Cash-flow and liquidity trends, including the drivers of the large investing outflow and the continued availability of diversified funding and contingent borrowing capacity.