Business context and reporting period
U.S. Bancorp’s Form 10-Q covers the quarter and six months ended June 30, 2010. The bank reported results against the corresponding 2009 periods; balance-sheet comparisons are primarily with December 31, 2009. Amounts below are U.S. dollars.
Financial performance and position
| Metric | Q2 2010 | Comparable period |
|---|---|---|
| Taxable-equivalent net interest income | $2.409 billion | $2.104 billion; up 14.5% year over year |
| Total net revenue, taxable-equivalent | $4.519 billion | $4.159 billion; up 8.7% |
| Net income attributable to U.S. Bancorp | $766 million | $471 million; up 62.6% |
| Diluted earnings per share | $0.45 | $0.12 |
| Provision for credit losses | $1.139 billion | $1.395 billion; down 18.4% |
| Net charge-offs | $1.114 billion | $929 million |
| Net interest margin, taxable-equivalent | 3.90% | 3.60% |
| Efficiency ratio | 52.4% | 51.0% |
For the first six months, attributable net income was $1.435 billion versus $1.000 billion, and diluted EPS was $0.79 versus $0.36. Taxable-equivalent net revenue increased 9.9% to $8.840 billion. Net interest income rose 14.6% to $4.812 billion; noninterest income, excluding net securities losses, increased 4.8% to $4.083 billion. Noninterest expense increased 12.8% to $4.513 billion.
At June 30, total assets were $283.2 billion, loans $191.6 billion, deposits $183.1 billion, and shareholders’ equity $28.2 billion. Loans were down 1.6% and deposits were nearly unchanged from year-end. Short-term borrowings were $33.8 billion, up from $31.3 billion; long-term debt was $29.1 billion, down from $32.6 billion. The allowance for credit losses was $5.536 billion. Six-month operating cash flow was $3.960 billion; investing cash flow was negative $2.411 billion and financing cash flow negative $2.722 billion. Cash and due from banks declined to $5.033 billion from $6.206 billion.
Capital ratios strengthened from year-end: Tier 1 capital was 10.1%, total risk-based capital 13.4%, and leverage 8.8%. Tier 1 common equity to risk-weighted assets was 7.4%; tangible common equity to tangible assets was 6.0%. Management stated regulatory ratios exceeded “well-capitalized” requirements. The filing describes a strong liquidity position supported by core deposits and access to capital markets but does not provide a single summarized liquidity ratio.
Material changes versus prior periods
- Higher net interest income and margin reflected growth in lower-cost core deposits, higher average earning assets, acquisitions, and improved credit spreads.
- Credit costs remained substantial: Q2 provision fell year over year, but net charge-offs rose 19.9%. First-half net charge-offs increased to $2.249 billion from $1.717 billion, while provision declined to $2.449 billion from $2.713 billion.
- Noninterest expense growth reflected acquisitions, higher compensation and benefits, and tax-advantaged investment costs. The comparison was also affected by the $123 million FDIC special assessment recorded in Q2 2009. The efficiency ratio deteriorated.
- Payments-related and commercial products revenue increased, while mortgage banking revenue and deposit service charges declined. Trust and investment management fees also fell.
- Nonperforming assets totaled $5.885 billion, little changed from year-end; excluding FDIC-covered assets, they declined to $3.734 billion from $3.904 billion. Covered loans had higher past-due and nonperforming ratios, with losses substantially mitigated by FDIC loss-sharing agreements.
- Investment securities increased to $48.4 billion. Available-for-sale securities moved from a $635 million net unrealized loss at year-end to a $226 million net unrealized gain; securities still in unrealized-loss positions had $948 million of losses.
Outlook, commentary, risks and unusual items
- Management expected net charge-offs and nonperforming assets excluding covered assets to trend lower in Q3 2010. It noted delinquencies in major loan categories declined from Q1, though economic, housing and commercial real estate stress continued. No broader earnings or revenue guidance was provided.
- Q2 EPS included a nonrecurring $0.05 benefit related to exchanging newly issued perpetual preferred stock for income trust securities, net of debt-extinguishment costs. The quarter also included $21 million of net securities losses and a $28 million Visa-related gain.
- The first-half comparison was affected by prior-year items including greater securities losses, the FDIC special assessment, recognition of preferred-stock discount upon redemption, and a $92 million corporate real estate gain.
- New VIE accounting adopted January 1, 2010 increased consolidation of certain assets and liabilities and reduced equity by $89 million. The Company also consolidated a conduit, including $0.6 billion of held-to-maturity securities.
- In July 2010, the Company announced a strategic alliance involving the long-term asset management business of FAF Advisors; U.S. Bancorp Asset Management would retain its money market fund business.
- The Dodd-Frank Act, signed July 21, 2010, was identified as a future risk. The Company estimated the deposit-insurance assessment base change could increase annual assessments by about $200 million at then-approved rates. It said capital provisions could reduce its Tier 1 ratio by 1.4 percentage points as phased in beginning in 2013, and expected other provisions, including debit interchange regulation, to adversely affect results; the overall impact was not yet quantifiable.
- Management cited risks from economic weakness, real estate markets, credit deterioration, interest-rate and market movements, regulation, competition, and liquidity and operational exposures. It recorded $67 million of investment-security impairment charges in the first half, mainly on non-agency mortgage-backed and structured investment securities, and warned further adverse market changes could prompt additional charges.
- Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter. The filing reported no subsequent event requiring recognition in the financial statements.
Important facts for investors to verify
- How much of earnings growth persists after the $0.05-per-share ITS exchange benefit, Visa gain, acquisition effects, and prior-year comparison items?
- Whether rising charge-offs—particularly in commercial real estate, construction and development, residential mortgages, and cards—continue to moderate, and whether the $5.536 billion allowance remains adequate.
- Performance and collectability of FDIC-covered loans, the related loss-sharing recoveries, and the trend in covered-asset delinquencies.
- Valuation assumptions and potential further impairment in non-agency mortgage-backed and structured securities, including the $948 million of unrealized losses.
- Effects of Dodd-Frank rulemaking on interchange revenue, deposit-insurance expense, and regulatory capital.
- Whether deposit funding, borrowings, and cash flows support liquidity needs as debt maturities and funding requirements evolve.