U.S. Bancorp — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Comparisons are primarily with the corresponding 2017 periods; balance-sheet comparisons are with December 31, 2017. Amounts are U.S. dollars.
Business context and results
U.S. Bancorp is a diversified financial services company operating across commercial and consumer banking, wealth management, payment services, and treasury and corporate support. Second-quarter earnings growth reflected higher net interest income, fee growth in payment services and trust management, and a lower tax burden. Management attributed net interest income growth chiefly to rising rates and earning-asset growth.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net interest income (GAAP) | $3.197B | $3.049B | $6.365B | $6.029B |
| Net interest income, taxable-equivalent | $3.226B | $3.100B | $6.423B | $6.130B |
| Noninterest income (GAAP) | $2.414B | $2.348B | $4.686B | $4.607B |
| Total net revenue, taxable-equivalent basis | $5.640B | $5.448B | $11.109B | $10.737B |
| Noninterest expense | $3.085B | $2.984B | $6.140B | $5.893B |
| Provision for credit losses | $327M | $350M | $668M | $695M |
| Net income attributable to U.S. Bancorp | $1.750B | $1.500B | $3.425B | $2.973B |
| Diluted EPS | $1.02 | $0.85 | $1.98 | $1.66 |
- Q2 return on average assets was 1.54% (1.35% in 2017); return on average common equity was 15.3% (13.4%). Taxable-equivalent net interest margin was 3.13% (3.08%). Efficiency ratio was 54.8% (54.9%).
- Six-month operating cash flow was $4.689B, investing cash flow was negative $2.169B, and financing cash flow was negative $3.004B. Cash and due from banks declined $484M from year-end to $19.021B.
- At June 30, assets were $461.3B, loans $280.2B, deposits $340.1B, short-term borrowings $18.1B, long-term debt $37.2B, and U.S. Bancorp shareholders’ equity $49.6B.
- Basel III standardized ratios: common equity tier 1 9.1%, Tier 1 10.5%, and total risk-based capital 12.6%; leverage ratio 8.9%. The filing says all regulatory ratios exceeded “well-capitalized” requirements.
- Credit quality: nonperforming assets were $1.091B, down 9.1% from year-end; allowance for credit losses was $4.411B, or 1.57% of period-end loans. Q2 net charge-offs were $332M, or 0.48% of average loans.
Material changes versus comparable periods
- Q2 net income attributable to U.S. Bancorp rose 16.7%; diluted EPS rose 20.0%. For the first six months, net income rose 15.2% and diluted EPS rose 19.3%.
- Q2 taxable-equivalent net interest income increased 4.1%; average earning assets increased 2.2% year over year. Net interest margin improved 5 basis points. Deposit and borrowing costs also rose, and management cited funding mix and tax reform as offsets.
- Payment-related and trust fees supported noninterest income. Q2 credit and debit card revenue increased 6.4%, corporate payment products 12.9%, and trust and investment management fees 5.5%. Mortgage banking revenue fell 9.9% and commercial products revenue fell 3.7%.
- Q2 noninterest expense increased 3.4%, mainly due to compensation, benefits, and technology spending. The provision for credit losses decreased 6.6%; net charge-offs were $332M versus $340M.
- The effective tax rate fell to 20.1% in Q2 from 26.7%, and to 18.9% for the first six months from 25.9%, primarily reflecting the 2017 Tax Cuts and Jobs Act.
- Period-end deposits fell 2.1% from December 31, 2017, while long-term debt rose 15.2%, primarily reflecting $5.1B of bank-note and $850M of medium-term-note issuance. Period-end loans were nearly unchanged.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue guidance. Management’s rate scenarios estimate next-12-month net interest income changes of positive 1.28% for an immediate 50-basis-point increase and positive 1.67% for a gradual 200-basis-point increase; a gradual 200-basis-point decline scenario indicates negative 4.02%. Results depend on balance-sheet growth, deposit behavior, pricing, and funding decisions.
- Management expects the future expected-credit-loss accounting standard, effective for the Company no later than January 1, 2020, to increase the allowance for credit losses; the amount remains dependent on economic conditions and portfolio composition.
- Available-for-sale securities had net unrealized losses of $1.6B at June 30, versus $580M at year-end, primarily due to interest-rate-driven fair-value declines. The Company said it had no plans to sell securities with losses and did not expect to be required to sell before recovery of amortized cost.
- Regulatory and legal matters include an open 2015 OCC consent order concerning Bank Secrecy Act/anti-money-laundering controls and a February 2018 deferred prosecution agreement, with a two-year term, concerning a legacy banking relationship and AML compliance. Violations could lead to extended terms, prosecution, penalties, or business-practice changes.
- The Company faces ongoing mortgage-related regulatory examinations and litigation, including a trustee lawsuit seeking unspecified damages. Management said it believes existing matters will not materially affect its overall financial condition, results, or cash flows, but acknowledged a matter could materially affect a particular period and that estimates are uncertain.
- Other notable items: the Company sold its federally guaranteed student-loan portfolio during the first half; Q2 included a gain on the sale. It authorized up to $3.0B of common-stock repurchases for July 2018–June 2019, following completion of the prior $2.6B authorization.
- Forward-looking risks include economic or market deterioration, interest-rate changes, credit quality and collateral values, regulatory changes, litigation, competition, cybersecurity and operational failures, and liquidity, capital, and reputational risks.
Important facts for investors to verify
- Whether deposit mix and rising funding costs continue to pressure net interest margin, particularly as noninterest-bearing deposits declined and time deposits grew.
- Whether unrealized securities losses change, and whether management’s stated ability and intent to hold affected securities remains valid as rates and liquidity needs evolve.
- Credit trends by portfolio, especially credit-card losses, commercial real estate, and the allowance’s adequacy; also monitor the expected allowance impact of the forthcoming credit-loss standard.
- Progress and compliance under the AML consent order and deferred prosecution agreement, and any developments in mortgage-related inquiries, trustee litigation, Visa matters, or other contingencies.
- Capital ratios, debt issuance and maturities, deposit outflows, and the pace and funding of the new repurchase authorization.