U.S. Bancorp — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. The interim financial statements are unaudited. Comparisons are to 2016 unless otherwise noted; balance-sheet comparisons are to December 31, 2016.
Financial performance
| Metric | Q3 2017 | Change vs. Q3 2016 | Nine months 2017 | Change vs. 2016 |
|---|---|---|---|---|
| Net interest income | $3.135 billion | +8.4% | $9.097 billion | +6.1% |
| Total net revenue | $5.608 billion | +4.1% | $16.419 billion | +3.4% |
| Net income attributable to U.S. Bancorp | $1.563 billion | +4.1% | $4.536 billion | +2.9% |
| Diluted EPS | $0.88 | +4.8% | $2.55 | +4.9% |
| Net interest margin, taxable-equivalent | 3.10% | 2.98% prior year | 3.06% | 3.02% prior year |
| Efficiency ratio | 54.3% | 54.5% prior year | 55.0% | 54.7% prior year |
| Return on average assets | 1.38% | 1.36% prior year | 1.36% | 1.37% prior year |
| Return on average common equity | 13.6% | 13.5% prior year | 13.4% | 13.4% prior year |
Q3 noninterest income was $2.422 billion, including $9 million of net securities gains; excluding those gains, it was $2.413 billion. Nine-month noninterest income was $7.170 billion, including $47 million of net securities gains. Q3 provision for credit losses was $360 million, up 10.8%; nine-month provision was $1.055 billion, up 7.4%. Q3 net charge-offs were $330 million, or 0.47% of average loans annualized; nine-month net charge-offs were $1.005 billion, or 0.49%.
Balance sheet, liquidity and capital
- At September 30, total assets were $459.2 billion, loans $278.7 billion, deposits $342.6 billion and U.S. Bancorp shareholders’ equity $48.7 billion. Since year-end 2016, these increased 3.0%, 2.0%, 2.4% and 3.0%, respectively.
- Long-term debt was $34.5 billion, up 3.6% from year-end; short-term borrowings were $15.9 billion, up from $14.0 billion. Average long-term debt and short-term borrowings declined year over year in Q3.
- Liquidity resources included $104.9 billion of unencumbered available-for-sale and held-to-maturity securities and $90.2 billion of additional borrowing capacity at the FHLB and Federal Reserve, subject to collateral availability. The company reported compliance with the Liquidity Coverage Ratio requirement.
- Basel III transitional standardized ratios were 9.6% common equity tier 1, 11.1% tier 1, 13.2% total risk-based capital and 9.1% leverage. Management said regulatory ratios exceeded “well-capitalized” requirements.
- Nine-month cash flows: operating activities provided $6.641 billion, investing activities used $9.320 billion and financing activities provided $7.514 billion. Cash and due from banks rose $4.835 billion to $20.540 billion. Bank cash-flow totals reflect lending, securities and deposit activity and should not be read like operating cash flow at a nonfinancial company.
Changes and management commentary
- Higher loan balances and rising interest rates drove net interest income and margin growth. Average loans rose 3.0% in Q3 and average deposits rose 5.2% year over year.
- Q3 noninterest income declined 0.9%, mainly because mortgage banking revenue fell 32.2% as refinancing activity eased from the unusually strong 2016 comparison. Trust and investment management fees, payment services and treasury management fees partly offset the decline.
- Noninterest expense rose 3.7% in Q3 and 3.9% for the first nine months, primarily from compensation and staffing for business growth and compliance programs. The nine-month comparison also includes the FDIC insurance surcharge, partly offset by prior-year legal-reserve and charitable-contribution items.
- Credit performance was mixed: nonperforming assets fell 22.0% to $1.251 billion from year-end 2016, while the allowance for credit losses was $4.407 billion, or 1.58% of period-end loans. Higher credit-card charge-offs and loan growth increased credit costs; management also cited recent weather-event exposures. Energy criticized commitments and nonperforming assets improved, with energy loans 0.9% of total loans.
- Shareholders received a quarterly common dividend of $0.30 per share, increased 7.1% from $0.28. The company repurchased 12.7 million shares for $665 million during Q3 under a $2.6 billion authorization running through June 30, 2018.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management’s forward-looking statements are subject to economic, interest-rate, credit, market, regulatory, legal, cybersecurity, operational, liquidity and reputational risks.
- Interest-rate simulations estimated that an immediate 50-basis-point increase would raise next-12-month net interest income 1.48%, while an immediate 50-basis-point decline would reduce it 2.56%. Results depend on balance-sheet mix, deposit behavior and funding assumptions; a 200-basis-point decline scenario was not computed given prevailing rates.
- The company expects the new expected-credit-loss accounting standard, effective no later than January 1, 2020, to increase its allowance; the amount was not yet determined and will depend on economic conditions and portfolio composition.
- Legal and regulatory matters include Visa-related litigation, mortgage-related reviews, and ongoing BSA/AML and sanctions compliance examinations. The company was cooperating with a U.S. Attorney’s Office investigation concerning its banking relationship with Scott Tucker and its BSA/AML program; a resolution could involve fines or other penalties. The OCC’s 2015 BSA/AML Consent Order remained relevant to ongoing compliance work.
- Management said the aggregate upper end of reasonably possible losses for matters where an estimate could be developed was up to $300 million in excess of reserves. It cautioned that actual outcomes may differ materially and that some matters could not yet be estimated. It did not expect existing legal and regulatory matters overall to materially harm financial condition, results or cash flows, but acknowledged a material adverse effect on results in a particular period was possible.
- Available-for-sale securities had $269 million of net unrealized losses at September 30, down from $701 million at year-end. Management said it did not plan to sell securities with unrealized losses and did not expect to be required to sell them before recovery of amortized cost.
Most important facts for investors to verify
- Whether net interest margin growth persists as deposit and other funding costs rise.
- Whether credit-card losses, weather-related exposures and overall provision expense continue to increase, and how the allowance compares with future losses.
- The status and potential financial impact of BSA/AML, sanctions, mortgage-related and Visa litigation matters, including whether estimated exposures change.
- Liquidity and capital resilience under stress, including deposit mix, borrowing needs and regulatory capital requirements.
- The effect of share repurchases, dividends and the pending expected-credit-loss accounting change on capital and per-share results.