U.S. Bancorp — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet figures are as of March 31, 2012. Comparisons are primarily with Q1 2011 for income results and December 31, 2011 for period-end balances. U.S. Bancorp is a diversified U.S. banking and financial-services company. The interim statements are unaudited.
Financial performance
| Metric | Q1 2012 | Comparison |
|---|---|---|
| Net interest income, taxable-equivalent | $2.690 billion | Up 7.3% year over year |
| Noninterest income | $2.239 billion | Up 11.3% year over year |
| Total net revenue, taxable-equivalent | $4.929 billion | Up 9.1% year over year |
| Noninterest expense | $2.560 billion | Up 10.6% year over year |
| Provision for credit losses | $481 million | Down 36.3% year over year |
| Net income attributable to U.S. Bancorp | $1.338 billion | Up 27.9% year over year |
| Diluted earnings per share | $0.67 | $0.52 in Q1 2011 |
| Return on average assets / common equity | 1.60% / 16.2% | 1.38% / 14.5% in Q1 2011 |
| Net interest margin, taxable-equivalent | 3.60% | 3.69% in Q1 2011 |
| Efficiency ratio | 51.9% | 51.1% in Q1 2011 |
Revenue growth reflected higher average earning assets, lower-cost core deposits, and mortgage banking activity. Mortgage banking revenue was $452 million versus $199 million a year earlier. Expense growth—especially compensation, benefits, marketing, and regulatory and insurance-related costs—outpaced revenue growth, resulting in a higher efficiency ratio. The provision was below net charge-offs by $90 million in Q1 2012.
Balance sheet, credit, liquidity, and capital
- Scale and lending: Total assets were $340.8 billion, essentially unchanged from year-end. Period-end loans were $211.9 billion, up 1.0% from year-end; average loans rose 6.4% year over year. Commercial loans, residential mortgages, and commercial real estate contributed to growth, while credit card and covered loans declined from year-end.
- Funding and debt: Deposits were $233.6 billion, up 1.2% from year-end. Short-term borrowings fell to $27.5 billion from $30.5 billion, and long-term debt declined to $30.4 billion from $32.0 billion. Management attributed lower short-term borrowing needs partly to deposit growth.
- Credit quality: Net charge-offs were $571 million versus $805 million in Q1 2011; the annualized charge-off ratio improved to 1.09% from 1.65%. Nonperforming assets declined to $3.454 billion from $3.774 billion at year-end. The allowance for credit losses was $4.919 billion, 2.32% of period-end loans, versus $5.014 billion and 2.39% at year-end. Residential mortgage stress from continued home-value weakness remained a concern.
- Liquidity: Cash and due from banks fell to $9.6 billion from $14.0 billion at year-end. The company reported $53.7 billion of unencumbered available-for-sale and held-to-maturity securities and $57.4 billion of additional borrowing capacity at the Federal Home Loan Bank and Federal Reserve based on available collateral.
- Capital and shareholder returns: Tier 1 capital was 10.9%, total risk-based capital 13.3%, and leverage 9.2%; all exceeded regulatory “well-capitalized” requirements. U.S. Bancorp shareholders’ equity was $35.9 billion. The quarterly common dividend increased 56% to $0.195 per share, and a new authorization permitted repurchases of up to 100 million shares through March 31, 2013.
- Cash flows: Operating activities provided $3.091 billion, compared with $6.228 billion in Q1 2011; investing activities used $5.782 billion, versus $7.488 billion used; financing activities used $1.710 billion, versus $573 million provided. Cash and due from banks declined $4.401 billion during the quarter. These figures are affected by loan originations and sales and securities activity.
Material changes and unusual items
- Q1 2011 included a $46 million gain related to the FDIC-assisted acquisition of First Community Bank of New Mexico and a gain on the company’s Visa investment; these affected year-over-year comparisons. Q1 2012 included the FDIC-assisted BankEast acquisition.
- Debit-card interchange legislation reduced Q1 2012 revenue; management estimated a $76 million impact, net of mitigation efforts. About $20 million of credit card balance-transfer fees was reported in interest income starting in 2012 rather than noninterest income.
- Investment securities increased to $74.3 billion from $70.8 billion at year-end, partly as the company built on-balance-sheet liquidity. The filing reports $9 million of Q1 impairment charges, primarily on non-agency mortgage-backed securities; further adverse market changes could cause additional impairment.
- Mortgage servicing rights were valued at $1.737 billion. Mortgage banking results and MSR values are sensitive to refinancing and prepayment assumptions, interest rates, and related hedges.
Outlook, risks, and contingencies
- Management outlook: The company expected nonperforming assets to trend lower and net charge-offs to be modestly lower in Q2 2012. The filing provides no clear full-year earnings or revenue guidance.
- Core risks: Management cited economic and financial-market deterioration, commercial and residential real-estate conditions, interest-rate changes, loan and securities credit quality, competition, legal and regulatory developments, customer behavior, and its ability to manage credit, market, interest-rate, operational, residual-value, and liquidity risks.
- Legal and servicing matters: The company had accrued $130 million for mortgage-related governmental matters, including a possible settlement it had not agreed to. It also reported a $202 million reserve for mortgage representation-and-warranty losses, up from $160 million at year-end, and $134 million of unresolved GSE claims. The company was subject to mortgage servicing and foreclosure consent orders; related civil money penalties were described as not significant. It reported no net carrying liability for remaining Visa litigation after escrow offsets.
- Other exposures: The company disclosed substantial contingent guarantees, including merchant-processing exposure, and a maximum potential loss of approximately $5.2 billion on unconsolidated variable-interest entities under severe assumptions. It reported approximately $800 million deposited with European banks, no sovereign debt holdings of European countries, and indirect exposure through certain investments and counterparties.
- Interest-rate sensitivity: A gradual 200-basis-point increase was projected to raise net interest income 1.95% over 12 months; an immediate 50-basis-point increase was projected to raise it 1.43%. A 200-basis-point rate shock was estimated to reduce market value of equity 2.3%; management said the company remained within policy limits.
Most important facts for investors to verify
- Whether credit improvement continued: charge-offs, nonperforming assets, criticized loans, and allowance coverage, especially in residential real estate and commercial real estate.
- Whether mortgage banking revenue and MSR valuations were sustainable as refinancing volumes, interest rates, and prepayment assumptions changed.
- Whether expense growth moderated and the efficiency ratio improved after rising faster than revenue in Q1.
- Developments in mortgage servicing/foreclosure matters, representation-and-warranty claims and reserves, and Visa-related litigation.
- Whether deposit growth and liquidity resources remained adequate while cash balances declined and securities holdings expanded.
- Capital and shareholder-return capacity following the dividend increase, repurchases, and preferred-stock issuance.