U.S. Bancorp — Form 10-Q summary
Reporting period: Quarter ended September 30, 2018; comparisons are primarily with Q3 2017. Balance-sheet changes are compared with December 31, 2017. Amounts are in U.S. dollars.
Financial performance and position
| Metric | Q3 2018 | Comparison |
|---|---|---|
| Total net revenue | $5.70 billion | Up 2.4% year over year |
| Net interest income | $3.25 billion | Up 2.4%; taxable-equivalent net interest margin was 3.15%, versus 3.14% |
| Noninterest income | $2.42 billion | Up 3.3%; payment services and trust/investment fees grew, while mortgage banking and commercial products declined |
| Noninterest expense | $3.04 billion | Up 1.5%; efficiency ratio improved to 53.5% from 53.9% |
| Provision for credit losses | $343 million | Down 4.7%; net charge-offs were $328 million versus $330 million |
| Net income attributable to U.S. Bancorp | $1.82 billion | Up 16.1%; diluted EPS was $1.06 versus $0.88 |
| Returns | ROA 1.58%; return on average common equity 15.5% | Versus 1.38% and 13.6%, respectively |
- Nine months: Net revenue was $16.81 billion, up 3.1%; net income attributable to U.S. Bancorp was $5.24 billion, up 15.5%; diluted EPS was $3.04 versus $2.55. Net interest margin was 3.14% versus 3.09%.
- Balance sheet at September 30: Assets were $464.6 billion; loans $281.5 billion; investment securities $111.0 billion; and deposits $331.2 billion. Loans were up 0.4% and assets up 0.6% from year-end, while deposits declined 4.6%.
- Funding and liquidity: Short-term borrowings were $23.9 billion and long-term debt $40.9 billion, up 43.3% and 26.8%, respectively, from year-end. The company reported $98.9 billion of fair-value unencumbered securities and $92.1 billion of additional potential FHLB/Federal Reserve borrowing capacity. It said it met the regulatory Liquidity Coverage Ratio requirement.
- Capital and distributions: Standardized CET1 was 9.0%, Tier 1 capital 10.6%, and total risk-based capital 12.6%; all regulatory ratios exceeded “well-capitalized” requirements. The board authorized up to $3.0 billion of repurchases through June 30, 2019; $753 million remained under the authorization at quarter-end. The quarterly common dividend increased 23% to $0.37 per share.
- Cash flow, first nine months: Operating cash flow was $7.91 billion, investing cash flow was negative $4.22 billion, and financing cash flow was negative $3.12 billion. Cash and due from banks increased $577 million to $20.08 billion.
Material changes and management commentary
- Management attributed stronger net interest income mainly to rising rates, growth in earning assets, and higher reinvestment yields; higher deposit costs and funding-mix changes partly offset these benefits. Average earning assets grew 1.6% in Q3.
- Payment services revenue and trust and investment management fees were important sources of fee growth. Mortgage banking revenue fell 18.3% in Q3, reflecting lower production and industry pressure on gain-on-sale margins; commercial products revenue fell 10.0%.
- Expenses rose with compensation, benefits, and technology investment, partly offset by lower costs related to tax-advantaged projects, FDIC insurance, mortgage servicing, and pensions. The effective tax rate fell to 20.2% in Q3 from 27.3%, primarily reflecting 2017 tax reform.
- Credit indicators improved overall: nonperforming assets declined 16.3% from year-end to $1.00 billion, and the ratio of nonperforming assets to loans and other real estate fell to 0.36% from 0.43%. The allowance was $4.43 billion, or 1.57% of period-end loans. Credit-card charge-offs remained comparatively elevated and increased year over year.
- Available-for-sale securities had $2.0 billion of net unrealized losses, versus $580 million at year-end, mainly due to interest-rate changes. Management said it did not plan to sell these securities and did not expect to be required to sell them before recovery of amortized cost.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue guidance. Management’s interest-rate sensitivity estimates projected next-12-month net interest income changes of +1.02% under an immediate 50-basis-point increase and +1.49% under a gradual 200-basis-point increase; results depend on deposit behavior, balance-sheet growth, pricing, and funding decisions.
- The company expects the new expected-credit-loss accounting standard, effective no later than January 1, 2020, to increase its allowance; the amount remained under evaluation. It expected the 2019 lease standard to add approximately $1.5 billion of lease assets and related liabilities, without a material income-statement effect.
- Key stated risks include economic and financial-market deterioration, interest-rate changes, credit quality and collateral values, regulatory changes, competition, cybersecurity and operational failures, liquidity, and litigation. The filing also discusses exposure to tariffs and trade-policy changes.
- U.S. Bank’s 2015 OCC Bank Secrecy Act/anti-money-laundering consent order remained open. A February 2018 deferred prosecution agreement concerning a legacy payday-lending relationship and compliance program deferred prosecution for two years, subject to ongoing requirements; violations could lead to extension, prosecution, civil action, further orders, or penalties.
- Other matters include mortgage-related regulatory examinations and litigation alleging failures in trustee duties for mortgage-backed securities. Management said existing matters were not expected to materially affect financial condition, results, or cash flows, but cautioned that an individual period could be materially affected and loss estimates are uncertain. A new Visa class-action settlement announced in September remained subject to court approval.
Most important facts for investors to verify
- Whether the benefits from higher rates continue to outweigh rising deposit and wholesale funding costs, given the decline in deposits and increase in borrowings.
- Whether fee growth can offset weakness in mortgage banking and commercial products, and whether expense growth remains controlled.
- Trends in credit-card losses, commercial criticized loans, nonperforming assets, and allowance adequacy, including the impact of transferring $1.3 billion of covered mortgages to loans held for sale.
- The valuation and potential recovery of securities unrealized losses, and the effect of interest rates on capital and net interest income.
- Progress and costs related to the BSA/AML consent order and deferred prosecution agreement, mortgage-related matters, and Visa litigation settlement approval.
- Capital and liquidity after repurchases, dividend increases, deposit outflows, and additional debt issuance.