U.S. Bancorp — Q1 2016 Form 10-Q
Business context and period: Unaudited quarterly results for the three months ended March 31, 2016, compared primarily with Q1 2015; balance-sheet comparisons are with December 31, 2015. U.S. Bancorp is a diversified banking and financial services company. Amounts are in U.S. dollars; financial-statement figures are generally in millions unless noted.
Financial performance and position
| Metric | Q1 2016 / March 31, 2016 | Comparison |
|---|---|---|
| Net interest income, taxable-equivalent | $2.888 billion | Up 4.9% year over year |
| Total net revenue, taxable-equivalent | $5.037 billion | Up 2.7% year over year |
| Net income attributable to U.S. Bancorp | $1.386 billion | Down 3.1% year over year |
| Diluted EPS | $0.76 | Unchanged year over year |
| Net interest margin, taxable-equivalent | 3.06% | 3.08% in Q1 2015 |
| Efficiency ratio | 54.6% | 54.3% in Q1 2015 |
| Return on average assets / common equity | 1.32% / 13.0% | 1.44% / 14.1% in Q1 2015 |
| Provision for credit losses / net charge-offs | $330 million / $315 million | Provision up 25%; charge-offs were $279 million in Q1 2015 |
| Loans / deposits | $264.5 billion / $306.3 billion | Loans up 1.4% and deposits up 2.0% from year-end |
| Assets / U.S. Bancorp shareholders’ equity | $428.6 billion / $46.8 billion | Up 1.6% / 1.4% from year-end |
| Short-term borrowings / long-term debt | $23.8 billion / $34.9 billion | Down 14.7% / up 8.7% from year-end |
| Operating cash flow | $1.261 billion | $1.751 billion in Q1 2015 |
Material changes and management commentary
- Revenue growth reflected higher net interest income, supported by loan growth and higher rates. The margin edged down as portfolio mix shifted and yields on new and reinvested securities were lower.
- Noninterest income was $2.149 billion, down 0.2%. Mortgage banking revenue fell 22.1% to $187 million, primarily from lower mortgage production and pricing; card revenue and trust and investment management fees increased.
- Noninterest expense rose 3.2% to $2.749 billion. Compensation, professional services and technology costs increased; professional services costs included compliance-related matters, and technology costs included acquisition conversion costs. Management also cited a one-time all-employee stock grant. Lower pension costs and an insurance recovery partly offset the increases.
- Credit deterioration was concentrated in energy-related commercial lending. Energy loans were $3.417 billion, or 1.3% of total loans; criticized commitments rose to $4.167 billion from $1.886 billion at year-end, and energy nonperforming assets increased to $276 million from $19 million.
- Total nonperforming assets increased 12.9% to $1.719 billion, primarily due to energy-related commercial loans. Excluding energy-related loans, nonperforming assets declined 4.1%. Net charge-offs were $315 million, or 0.48% of average loans on an annualized basis, versus 0.46% a year earlier.
- The allowance for credit losses was $4.320 billion, 1.63% of period-end loans, versus $4.306 billion and 1.65% at year-end. The allowance-to-nonperforming-loans ratio declined to 303% from 361%.
- Average loans grew 5.8% year over year, including growth in commercial, credit card and residential mortgage balances. Average deposits grew 6.3%; the company also reported acquisition-related growth in average credit card loans.
Liquidity, capital, outlook and risks
- Cash and due from banks was $10.981 billion. The company reported $94.9 billion of unencumbered investment securities and $79.1 billion of additional borrowing capacity at the FHLB and Federal Reserve, based on available collateral. It said it was compliant with the fully implemented LCR requirement.
- Basel III transitional standardized ratios were 9.5% CET1, 11.1% Tier 1 and 13.1% total risk-based capital; the leverage ratio was 9.3%. All regulatory ratios exceeded “well-capitalized” requirements. Capital ratios were modestly lower than at year-end under transitional measures.
- The filing provides no quantitative earnings or revenue guidance. Management describes risks from economic and interest-rate changes, credit deterioration, regulation, competition, litigation, cybersecurity and operational, compliance, liquidity and reputational risks.
- Regulatory matters include an October 2015 OCC consent order concerning deficiencies in the Bank Secrecy Act/anti-money-laundering program. The company reported ongoing examinations and investigations, including mortgage-related and sanctions-compliance matters, and cooperation with a U.S. Attorney’s Office investigation involving a customer. It warned that proceedings could lead to fines, restitution or business-practice changes.
- Litigation includes residential mortgage-backed securities trustee lawsuits and unresolved Visa-related card-association litigation. The Visa litigation liability, net of escrow funding, was $19 million. Management stated that ultimate legal and regulatory outcomes remain uncertain; where it could estimate reasonably possible losses above reserves, it did not expect the aggregate excess to be material, but actual results could differ.
- Other notable exposures include guarantees and commitments. Standby letters of credit had maximum potential future payments of $12.817 billion; merchant-processing guarantees and other contingent exposures are also disclosed. These maximum amounts are not forecasts of expected losses.
Key facts for investors to verify
- Track energy-sector criticized loans, nonperforming assets, charge-offs and any further increases in credit provisions.
- Review the allowance’s coverage ratios and the detailed credit-quality tables, including how FDIC-covered and GNMA-guaranteed loans affect reported measures.
- Assess whether loan and deposit growth can sustain net interest income as margin pressures, funding costs and portfolio mix evolve.
- Monitor compliance remediation under the OCC consent order and developments in the disclosed regulatory inquiries, investigations and litigation.
- Confirm liquidity and capital trends, including debt issuance and maturities, repurchases, and changes in Basel III capital measures.
- Compare reported cash flows with earnings and consider the quarter’s investment and loan-growth cash uses; operating cash flow was lower than in Q1 2015.