U.S. Bancorp — Q1 2010 Form 10-Q
Business context and reporting period. U.S. Bancorp is a diversified bank holding company with wholesale and consumer banking, wealth management, payment services, and treasury operations. This unaudited quarterly report covers the three months ended March 31, 2010; comparisons are with Q1 2009 for income and cash flow, and December 31, 2009 for period-end balances.
Financial performance and condition
| Metric | Q1 2010 / March 31, 2010 | Comparison |
|---|---|---|
| Net income attributable to U.S. Bancorp | $669 million; diluted EPS $0.34 | $529 million; $0.24 diluted EPS in Q1 2009 |
| Net interest income, taxable-equivalent | $2.403 billion | Up 14.7% year over year |
| Net interest margin, taxable-equivalent | 3.90% | 3.59% in Q1 2009 |
| Total net revenue, taxable-equivalent | $4.321 billion | Up 11.3% year over year |
| Noninterest expense | $2.136 billion | Up 14.2%; efficiency ratio rose to 49.0% from 45.8% |
| Provision for credit losses | $1.310 billion | Down 0.6%; net charge-offs rose to $1.135 billion from $788 million |
| Operating cash flow | $2.876 billion | $1.847 billion in Q1 2009 |
| Cash and due from banks | $8.380 billion | $6.206 billion at December 31, 2009 |
| Total assets / total loans | $282.428 billion / $191.153 billion | Assets up 0.4%; loans down 1.8% from year-end |
| Deposits / long-term debt | $184.039 billion / $32.399 billion | Deposits up 0.4%; debt down 0.6% from year-end |
| Capital | Tier 1 9.9%; total risk-based 13.2%; leverage 8.6% | All exceeded regulatory well-capitalized requirements |
Return on average assets was 0.96%, versus 0.81% a year earlier; return on average common equity was 10.5%, versus 9.0%. Common dividends declared were $0.05 per share. Net cash from investing activities was $1.081 billion and financing activities used $1.783 billion; cash increased by $2.174 billion during the quarter.
Material changes and drivers
- Earnings improved primarily on higher net interest income, reflecting growth in average earning assets and lower-cost core deposit funding. Average deposits increased 13.7% year over year, including acquisition-related growth; excluding acquisitions, average deposits rose 4.5%.
- Payments-related and commercial products revenue strengthened, while trust and investment management fees, deposit service charges, and mortgage banking revenue declined. Reported noninterest income also benefited from $164 million less in net securities losses year over year; Q1 2010 still recorded $34 million of net securities losses.
- Expenses increased due to acquisitions, higher FDIC deposit insurance costs, and affordable-housing and other tax-advantaged project costs. The efficiency ratio worsened despite higher revenue.
- Average loans grew 3.9% year over year, including growth in residential mortgages, retail loans, and FDIC-covered loans. Period-end loans fell from year-end, led by lower commercial lending balances and weaker business loan demand.
- Credit quality showed mixed signals: delinquency ratios excluding covered loans improved from year-end, but quarterly net charge-offs rose 44.0% year over year. Nonperforming assets increased to $6.380 billion from $5.907 billion, including covered assets; excluding covered assets, they were $3.995 billion versus $3.904 billion.
Outlook, risks, contingencies, and unusual items
- Management expected nonperforming assets excluding covered assets and net charge-offs to remain relatively stable in Q2 2010. It expected increases in restructured loans to moderate. The filing provides no broader earnings or revenue guidance.
- The allowance for credit losses was $5.439 billion, or 2.85% of total loans and 3.20% excluding covered loans. Provision exceeded net charge-offs by $175 million in Q1 2010, compared with $530 million in Q1 2009.
- The company recorded $46 million of investment-security impairment charges in Q1 2010, primarily on non-agency mortgage-backed and structured investment-related securities. Management cited continued mortgage-pool defaults and regulatory actions affecting an insurer; further adverse market changes could lead to additional charges. Net unrealized losses on available-for-sale securities were $255 million, down from $635 million at year-end.
- FDIC loss-sharing agreements cover acquired assets, with approximately $3.9 billion of expected FDIC reimbursements recorded at March 31, 2010. Covered-asset credit performance remains a risk despite this protection.
- Adoption of new VIE accounting guidance on January 1, 2010 consolidated approximately $1.6 billion of assets and reduced total equity by $89 million. The filing also reports approximately $4.8 billion of maximum exposure to unconsolidated VIEs.
- Interest-rate sensitivity models remained within policy limits. Liquidity management commentary describes a strong core deposit and wholesale funding position; parent-company debt scheduled to mature in the remainder of 2010 was $3.8 billion.
- Visa litigation liability was $117 million at quarter-end. The company also reported substantial contingent guarantees, including $17.890 billion maximum potential future payments under standby letters of credit; maximum potential payments are not estimates of likely losses. Management stated other litigation was not expected to materially adversely affect financial condition, results, or cash flows.
- Forward-looking risks include a weak or worsening economy, real-estate market stress, credit deterioration, interest-rate and securities valuation changes, regulatory developments, competition, and legal, operational, and compliance risks. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether higher charge-offs, rising nonperforming assets, and commercial real-estate stress remain consistent with management’s Q2 stability outlook, and whether the allowance remains adequate.
- How much of earnings improvement is recurring net interest and fee performance versus acquisition effects and year-over-year comparisons with unusually high prior-year securities losses.
- Future impairment and valuation assumptions for non-agency mortgage-backed securities, structured investments, and other Level 3 assets.
- The collectability and timing of FDIC reimbursements, and the continuing credit performance of covered loans and assets.
- Potential effects of Visa litigation, guarantees, VIE exposures, and the $3.8 billion of remaining-2010 parent debt maturities.
- Whether capital and liquidity remain strong as credit costs, funding conditions, and regulatory requirements evolve.