U.S. Bancorp — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Comparisons below are against Q1 2018 unless otherwise noted. Balance-sheet comparisons are generally against December 31, 2018.
Financial performance and key metrics
- Earnings: Net income attributable to U.S. Bancorp was $1.699 billion, up 1.4%; diluted EPS was $1.00, up 4.2%. Return on average assets was 1.49% (1.50% in Q1 2018), and return on average common equity was 14.3% (14.9%).
- Revenue and margins: Total net revenue was $5.577 billion, up 2.0%. Net interest income was $3.259 billion, up 2.9% (2.8% on a taxable-equivalent basis); taxable-equivalent net interest margin rose to 3.16% from 3.13%. Noninterest income increased 0.8% to $2.291 billion. The efficiency ratio improved to 55.4% from 55.9%.
- Expenses and credit costs: Noninterest expense rose 1.0% to $3.087 billion, including higher compensation and technology costs. Provision for credit losses increased 10.6% to $377 million. Net charge-offs were $367 million versus $341 million; annualized net charge-offs were 0.52% of average loans versus 0.49%.
- Cash flow: Operating activities provided $1.296 billion, investing activities used $6.544 billion, and financing activities provided $1.910 billion. Cash and due from banks decreased $3.338 billion during the quarter to $18.115 billion. Investing cash use included a $3.661 billion increase in securities purchased under resale agreements.
- Balance sheet and funding: Period-end assets were $475.8 billion, loans $287.7 billion, and deposits $348.1 billion. Long-term debt was $40.7 billion and short-term borrowings $15.4 billion. Total U.S. Bancorp shareholders’ equity was $52.1 billion.
- Liquidity and capital: Management reported $105.1 billion of unencumbered investment securities and $103.3 billion of additional potential borrowing capacity from the FHLB and Federal Reserve, and said the company complied with its Liquidity Coverage Ratio requirement. Basel III standardized CET1 capital was 9.3%, Tier 1 capital 10.9%, and total risk-based capital 12.8%; all regulatory ratios exceeded “well-capitalized” requirements.
- Asset quality: Nonperforming assets were $1.005 billion, up 1.6% from year-end; nonperforming assets were 0.35% of loans plus other real estate. The allowance for credit losses was $4.451 billion, or 1.55% of period-end loans, broadly unchanged as a percentage from year-end.
Material changes versus the comparable period
- Net interest income benefited from higher market rates, loan growth, and improved securities reinvestment yields, partly offset by deposit pricing and funding mix. Average loans rose 2.4%; residential mortgages, commercial loans, and credit card loans grew.
- Noninterest income growth reflected higher merchant processing, corporate payment products, and other income. Declines in deposit service charges, card revenue, and mortgage banking partly offset those increases. Lower deposit service charges primarily reflected the 2018 sale of the third-party ATM processing business.
- Expense growth was contained at 1.0%; lower FDIC assessments and tax-advantaged project costs partly offset compensation and technology investment.
- Credit costs increased: higher credit card and commercial loan net charge-offs contributed to the increase in the provision. Nonperforming commercial loans and commercial real estate loans also rose from year-end, though consumer and OREO nonperforming balances improved.
- Compared with year-end, deposits rose 0.8%, loans 0.3%, and assets 1.8%. Long-term debt declined 1.6%; short-term borrowings increased 8.9%. Noninterest-bearing deposits fell 8.8% from year-end.
Outlook, risks, contingencies, and notable items
- The filing provides no specific earnings or revenue guidance. Management attributes Q1 net interest income growth partly to higher rates but cautions that results depend on balance-sheet growth, deposit behavior, pricing, and funding decisions. Its rate-sensitivity scenarios are model estimates, not forecasts.
- Management expects the expected-credit-loss accounting standard, effective for the company no later than January 1, 2020, to increase the allowance for credit losses at adoption; the size was still under evaluation and will depend on economic conditions and portfolio composition.
- Key disclosed risks include economic or market deterioration, real estate weakness, changing rates, loan and securities credit quality, competition, regulatory and legal developments, tariffs, customer behavior, cybersecurity and data protection, and operational, liquidity, compliance, and reputational risks.
- The company remains subject to litigation and regulatory matters, including mortgage-backed securities trustee lawsuits and ongoing mortgage-related regulatory examinations. It reported a 2018 deferred prosecution agreement concerning a legacy banking relationship and BSA/AML compliance; failure to meet its terms or related regulatory settlement obligations could lead to further penalties or business-practice changes.
- Visa card-association litigation and related indemnification obligations remain contingent on settlement and related outcomes. The company stated that the 2018 proposed settlement was subject to court approval. Management said existing legal and regulatory matters were not expected to have a material adverse effect overall, but acknowledged that an individual matter could materially affect results in a particular period.
- Available-for-sale securities had $800 million of gross unrealized losses at March 31. The company said these were primarily rate- and spread-related, it had no plans to sell the securities, and it did not expect to be required to sell before recovery of amortized cost.
- Q1 included a favorable conclusion of a state tax matter. The company also repurchased approximately 12.6 million shares under its existing authorization; $782 million remained available at March 31.
Important facts for investors to verify
- Whether loan-loss provisions and net charge-offs continue to rise, particularly in commercial and credit card portfolios, and how criticized loans and nonperforming assets trend.
- Whether loan growth and higher asset yields continue to offset deposit repricing, declining noninterest-bearing deposits, and changes in funding mix.
- The company’s liquidity and capital position under stressed conditions, including deposit stability, borrowing capacity, and regulatory capital ratios.
- The eventual allowance impact and implementation details of the expected-credit-loss standard.
- Developments in the BSA/AML deferred prosecution agreement, mortgage-related regulatory matters, trustee litigation, and Visa litigation, including any changes to reserves or potential exposure.