U.S. Bancorp — Form 10-Q Summary
Reporting period: Quarter ended June 30, 2009; comparisons are with the second quarter of 2008 unless stated otherwise. U.S. Bancorp is a diversified banking and financial-services company spanning wholesale and consumer banking, wealth management, payment services, and treasury and corporate support.
Financial performance and condition
| Metric | Q2 2009 | Q2 2008 |
|---|---|---|
| Total net revenue, taxable-equivalent basis | $4.159 billion | $3.800 billion |
| Net interest income, taxable-equivalent basis | $2.104 billion | $1.908 billion |
| Net interest margin, taxable-equivalent basis | 3.60% | 3.61% |
| Net income attributable to U.S. Bancorp | $471 million | $950 million |
| Net income applicable to common shareholders | $221 million | $926 million |
| Diluted earnings per common share | $0.12 | $0.53 |
| Provision for credit losses | $1.395 billion | $596 million |
| Noninterest expense | $2.129 billion | $1.818 billion |
| Efficiency ratio | 51.0% | 47.1% |
| Return on average assets / common equity | 0.71% / 4.2% | 1.58% / 17.9% |
- First six months: Net income attributable to U.S. Bancorp was $1.0 billion versus $2.0 billion; diluted EPS was $0.36 versus $1.14. Total net revenue was $8.042 billion, up 4.8%; provision for credit losses was $2.713 billion versus $1.081 billion.
- Credit quality: Q2 net charge-offs were $929 million, up from $396 million; first-half charge-offs were $1.717 billion versus $689 million. The allowance for credit losses was $4.571 billion, or 2.51% of total loans, at June 30, compared with $3.639 billion, or 1.96%, at year-end 2008. Nonperforming assets rose to $4.016 billion from $2.624 billion at year-end; the ratio to loans plus other real estate was 2.20%, versus 1.42%.
- Balance sheet at June 30: Assets were $265.560 billion, loans $182.312 billion, deposits $163.883 billion, short-term borrowings $29.698 billion, and long-term debt $39.196 billion. Compared with December 31, 2008, loans declined 1.6%, deposits rose 2.8%, and short-term borrowings declined $4.3 billion.
- Capital: Tier 1 capital, total risk-based capital, and leverage ratios were 9.4%, 13.0%, and 8.4%, respectively; all exceeded regulatory well-capitalized requirements. Tier 1 common equity to risk-weighted assets was 6.7%, compared with 5.1% at year-end.
- Cash flows, first half: Operating activities provided $774 million, investing activities provided $2.771 billion, and financing activities used $4.023 billion. Cash and due from banks ended at $6.381 billion, down from $6.859 billion at year-end.
Material changes and unusual items
- Revenue growth reflected higher net interest income from larger average earning assets and strong mortgage banking revenue. Q2 mortgage banking revenue was $308 million versus $81 million. Weaker customer spending and equity markets weighed on payment-related fees, deposit service charges, and trust and investment management fees.
- Credit costs rose sharply amid housing-market stress and worsening economic conditions across commercial, commercial real estate, and consumer portfolios. The provision exceeded net charge-offs by $466 million in Q2 and $996 million in the first half.
- Q2 expenses included a $123 million FDIC special assessment. Higher deposit insurance, marketing, litigation, acquisition, and integration costs contributed to expense growth; management also cited cost-containment measures.
- The Company redeemed $6.6 billion of Treasury preferred stock on June 17, 2009, after issuing $2.7 billion of common stock and $1.0 billion of non-guaranteed medium-term notes. The redemption generated a $154 million deemed dividend that reduced earnings applicable to common shareholders. On July 15, it repurchased the related Treasury warrant for $139 million.
- Net securities losses were $19 million in Q2 and $217 million in the first half. The first-half result included $834 million of other-than-temporary impairment, partly offset in earnings by $492 million of impairment recognized in other comprehensive income under newly adopted accounting guidance. A $92 million corporate real estate gain also benefited first-half results.
- The comparison with 2008 is affected by a $492 million Visa-related gain in the first half of 2008 and $314 million of net securities losses in that period.
Outlook, risks, and contingencies
- Management expected net interest margin to remain relatively stable for the rest of 2009. It expected delinquencies and nonperforming assets to continue rising; net charge-offs were also expected to increase for the remainder of 2009, but at a slower rate than in prior periods.
- Key risks cited include continued economic and financial-market weakness, falling housing values, unemployment, deterioration in borrower and counterparty credit, securities impairment, interest-rate changes, regulatory and legal developments, competition, and operational and compliance risks.
- Management described liquidity as strong, citing core-deposit growth and access to domestic and global funding markets. This is a management assessment; the filing provides no single summary liquidity ratio.
- Visa litigation remained unresolved. The recorded liability was $149 million, while member-bank indemnification obligations have no specified maximum. The Company also disclosed $4.8 billion in future airline ticket sales exposure in merchant processing, supported by $1.3 billion of collateral, escrow deposits, letters of credit, and indemnities.
- Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether credit deterioration, charge-offs, delinquencies, and nonperforming assets continued to worsen after June 30, especially in commercial real estate, residential mortgages, and credit cards.
- Whether the $4.571 billion credit-loss allowance adequately covers expected losses, including exposures under FDIC loss-sharing agreements.
- How much of reported earnings and capital strength depends on mortgage banking performance, securities valuations, and nonrecurring items.
- The effect of the Treasury preferred-stock redemption, the $139 million warrant repurchase, and related common-stock issuance on future common earnings and capital ratios.
- Potential outcomes and additional exposure from Visa litigation, securities impairments, and merchant-processing guarantees.