U.S. Bancorp — 2013 Second-Quarter Form 10-Q
Reporting period: Three and six months ended June 30, 2013; balance-sheet comparisons are generally with December 31, 2012. Dollar figures are in millions unless otherwise stated.
Business context and financial performance
U.S. Bancorp is a diversified financial services company. For the three months ended June 30, 2013, it reported net income attributable to U.S. Bancorp of $1,484, or diluted EPS of $0.76, compared with $1,415 and $0.71 in the prior-year quarter. For the first half, net income was $2,912 and diluted EPS was $1.49, versus $2,753 and $1.38.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total net revenue, taxable-equivalent basis | $4,948 | $5,068 | $9,822 | $9,997 |
| Net interest income, taxable-equivalent basis | $2,672 | $2,713 | $5,381 | $5,403 |
| Noninterest income, including securities gains/losses | $2,276 | $2,355 | $4,441 | $4,594 |
| Noninterest expense | $2,557 | $2,601 | $5,027 | $5,161 |
| Provision for credit losses | $362 | $470 | $765 | $951 |
| Net income attributable to U.S. Bancorp | $1,484 | $1,415 | $2,912 | $2,753 |
- Q2 return on average assets was 1.70% (1.67% prior year); return on average common equity was 16.1% (16.5%). First-half figures were 1.68% and 16.1%, respectively.
- Net interest margin was 3.43% in Q2 and 3.46% for the first half, down from 3.58% and 3.59%. The efficiency ratio was 51.7% in Q2 versus 51.1%; first-half ratio was 51.2% versus 51.5%.
- Net charge-offs were $392 in Q2 and $825 for the first half, compared with $520 and $1,091. Annualized charge-off ratios were 0.70% and 0.74%, respectively, versus 0.98% and 1.03%.
Balance sheet, liquidity, capital and cash flow
- At June 30, total assets were $353.4 billion, loans $228.0 billion, investment securities $75.0 billion and deposits $251.6 billion. Loans increased 2.1% and deposits 1.0% from year-end 2012.
- Long-term debt was $19.7 billion, down 22.7% from year-end, mainly reflecting VIE deconsolidation and debt maturities. Short-term borrowings were $26.2 billion, approximately unchanged.
- Cash and due from banks was $6.6 billion, down from $8.3 billion at year-end. First-half cash flows were $6.5 billion provided by operating activities, $7.3 billion used in investing and $0.8 billion used in financing; cash declined by $1.6 billion.
- Liquidity resources included $57.9 billion of unencumbered available-for-sale and held-to-maturity securities and stated additional FHLB/Federal Reserve borrowing capacity of $65.5 billion. Management said parent-company funds exceeded its stated 12-month obligations with common dividends and 24-month obligations assuming dividends were reduced to zero.
- Regulatory capital ratios at June 30 were 11.1% Tier 1, 13.3% total risk-based capital and 9.5% leverage. Basel I Tier 1 common equity was 9.2%; the estimated ratio under final Basel III standardized rules was 8.6%. The company said it did not expect the final rules’ impact to be material to the financial statements.
Changes, outlook and material items
- Revenue declined 2.4% in Q2 and 1.8% in the first half. Lower loan and securities yields compressed net interest margin; growth in average loans, securities and lower-cost core deposits partly offset the pressure.
- Noninterest income fell mainly because mortgage banking revenue declined (19.2% in Q2; 15.4% first half) and other revenue was lower. Trust and investment management fees and payment-related revenue provided offsets.
- Expense reductions included the absence of a second-quarter 2012 Visa litigation accrual and lower professional-services costs; higher compensation, benefits and pension costs partly offset these savings. The effective tax rate was 26.8% in Q2 and 27.7% for the first half, lower than the comparable 2012 rates partly due to favorable developments in tax examinations.
- Credit quality improved overall: nonperforming assets were $2.3 billion versus $2.7 billion at year-end; excluding covered assets, they were $1.9 billion versus $2.1 billion. The allowance for credit losses was $4.6 billion, or 2.02% of period-end loans, versus $4.7 billion and 2.12% at year-end.
- Management expected nonperforming assets and net charge-offs to remain relatively stable in Q3 2013. The filing provides no broader earnings or revenue guidance.
- Second-quarter transfer of control over certain community-development and tax-advantaged VIEs led to deconsolidation, reducing both assets and liabilities by approximately $4.6 billion, with no material income-statement impact. The company also reported a $798 million unfavorable change in unrealized gains on available-for-sale securities from year-end; Q2 other comprehensive income was a loss of $347 million.
- The board authorized up to $2.25 billion of common-stock repurchases through March 31, 2014. The company repurchased approximately 17.9 million shares in Q2. The quarterly dividend was increased 18%, from $0.195 to $0.23 per share.
Risks, contingencies and controls
- Management cited economic and real-estate weakness, interest-rate changes, credit deterioration, securities valuation, competition, customer behavior, regulatory and legal developments, and operational, market and liquidity risks. A gradual 200-basis-point rate increase was estimated to reduce next-12-month net interest income by 1.53%; a 200-basis-point increase reduced modeled market value of equity by 4.5%.
- The company disclosed mortgage origination, servicing and foreclosure-related investigations and examinations, and possible settlement discussions with government authorities; it had not agreed to a settlement. For matters where losses could be estimated, management placed reasonably possible aggregate losses above existing reserves at approximately $200 million, subject to significant uncertainty.
- The Visa litigation liability, net of escrow funding, was $65 million; the class-action settlement remained subject to court approval and challenge. Mortgage representation-and-warranty reserves were $190 million, down from $240 million at year-end.
- Management stated disclosure controls were effective and that there had been no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether continued margin compression and lower mortgage originations offset loan growth and deposit funding benefits.
- Whether credit improvement persists, including trends in charge-offs, nonperforming assets, criticized loans and allowance coverage.
- How rising rates affect securities values, net interest income, mortgage servicing rights and available liquidity.
- Potential outcomes and costs of Visa litigation, mortgage-related investigations and representation-and-warranty claims.
- The quality and assumptions underlying VIE tax-credit investments, securities valuations and the reported Basel III capital estimate.