U.S. Bancorp — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unless otherwise noted, financial figures are in U.S. dollars; “prior year” refers to the comparable 2018 period.
Business context and results
U.S. Bancorp is a diversified bank with consumer and commercial banking, wealth management, payment services and treasury operations. It reported second-quarter net income attributable to U.S. Bancorp of $1.821 billion and diluted EPS of $1.09, compared with $1.750 billion and $1.02 a year earlier.
Key financial metrics
| Metric | Q2 2019 | Comparison |
|---|---|---|
| Total net revenue, taxable-equivalent basis | $5.822 billion | Up 3.2% year over year |
| Net interest income, GAAP | $3.305 billion | Up 3.4% year over year |
| Noninterest income | $2.490 billion | Up 3.1% year over year |
| Noninterest expense | $3.153 billion | Up 2.2% year over year |
| Provision for credit losses | $365 million | Up 11.6% year over year |
| Net income attributable to U.S. Bancorp | $1.821 billion | Up 4.1% year over year |
| Diluted EPS | $1.09 | Up from $1.02 |
| Net interest margin, taxable-equivalent | 3.13% | Unchanged year over year |
| Efficiency ratio | 54.3% | Improved from 54.8% |
| Return on average assets / common equity | 1.55% / 15.0% | Prior year: 1.54% / 15.3% |
For the first six months, net income attributable to U.S. Bancorp was $3.520 billion, diluted EPS was $2.10, and total net revenue was $11.399 billion, up 2.8%, 6.1% and 2.6%, respectively, from the first half of 2018. First-half net interest margin was 3.14%, versus 3.13%.
At June 30, 2019, total assets were $481.7 billion, loans $292.0 billion, deposits $353.2 billion, long-term debt $41.0 billion and shareholders’ equity $52.9 billion. Compared with December 31, 2018, assets rose 3.1%, loans 1.8%, deposits 2.2%, and equity 3.7%; long-term debt declined 0.8%. Period-end cash and due from banks was $16.9 billion, down from $21.5 billion at year-end.
Basel III standardized capital ratios were 9.5% CET1, 11.0% Tier 1, 13.0% total risk-based capital and 9.3% leverage. The company reported compliance with its regulatory Liquidity Coverage Ratio requirement. It cited $105.6 billion of unencumbered investment securities and $104.4 billion of additional potential FHLB and Federal Reserve borrowing capacity.
For the six months, operating cash flow was $1.905 billion, compared with $4.689 billion in 2018; investing cash flow was an outflow of $11.872 billion, versus $2.169 billion; and financing cash flow was $5.446 billion, versus an outflow of $3.004 billion. Cash declined $4.521 billion during the first half.
Material changes and management commentary
- Revenue growth reflected loan growth and mix, higher securities reinvestment yields, and gains in payment services, trust and investment management, commercial products and other income. A flatter yield curve, deposit pricing and funding mix constrained net interest income; deposit service charges fell 16.8% in Q2.
- Expenses increased mainly from personnel, technology and occupancy costs supporting business growth. Lower FDIC assessment and tax-advantaged project costs partly offset the increases.
- Credit provision and net charge-offs rose, with management attributing the charge-off increase primarily to credit cards. Q2 net charge-offs were $350 million versus $332 million; the annualized net charge-off ratio was 0.49% versus 0.48%.
- Loans grew $5.2 billion from year-end, led by residential mortgages, commercial loans and other retail loans; commercial real estate loans declined. Average noninterest-bearing deposits fell 7.5% year over year as balances migrated to interest-bearing accounts or were deployed by customers.
- Nonperforming assets declined to $953 million from $989 million at year-end, while accruing loans 90 days or more past due rose to $752 million from $584 million. The filing says elevated commercial past-due loans related to one customer expected to resolve without a credit loss.
- Available-for-sale securities moved from $1.3 billion of net unrealized losses at year-end to $218 million of net unrealized gains at June 30, principally reflecting interest-rate-related fair-value increases. The company said it did not plan to sell securities with unrealized losses and did not expect to be required to sell them before recovery.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided in the supplied filing text. Management notes that results remain sensitive to interest rates, deposit behavior, loan mix and funding decisions. Its 12-month net-interest-income simulations showed +0.98% under an immediate 50-basis-point rate increase and -1.83% under an immediate 50-basis-point decrease; outcomes depend on assumptions and could differ.
- The company expected its allowance for credit losses to increase when it adopts the expected-loss accounting standard, effective no later than January 1, 2020; the amount remained under evaluation and would depend on economic conditions and portfolio composition.
- The company reported a February 2018 deferred prosecution agreement concerning a legacy customer relationship and Bank Secrecy Act/anti-money-laundering controls. Continued compliance is required; violations could lead to prosecution, additional penalties or extended obligations. Other regulatory examinations and litigation—including mortgage-related matters and Visa card-association litigation—could result in costs, fines, restitution or business changes. Management said ultimate resolution of existing matters was not expected to materially harm overall financial condition, results or cash flows, while acknowledging that particular-period impacts could be material.
- Management said Brexit-related European exposures were not expected to have a significant effect. European revenue was about 2% of total net revenue in the quarter and first half; deposits with European banks were approximately $7.2 billion.
- The company completed adoption of lease accounting on January 1, 2019, recognizing about $1.3 billion of lease assets and liabilities; adoption was not material to the income statement. It authorized up to $3.0 billion of common-stock repurchases for July 2019 through June 2020. It repurchased $1.441 billion of common stock in the first half of 2019 and declared Q2 dividends of $0.37 per common share, up from $0.30.
Important facts for investors to verify
- Whether higher credit-card charge-offs and the rise in loans 90 days or more past due persist, and how the single commercial delinquency resolves.
- How deposit repricing, migration from noninterest-bearing accounts and the yield curve affect net interest margin and funding costs.
- The expected allowance increase and retained-earnings impact from adoption of expected-loss accounting in 2020.
- Developments in the deferred prosecution agreement, regulatory reviews, mortgage-related matters and Visa litigation, including potential financial exposure.
- Cash-flow trends, planned repurchases and dividends, and the sustainability of capital and liquidity levels.