U.S. Bancorp — Q1 2017 Form 10-Q
Business context and reporting period. U.S. Bancorp is a diversified banking and financial services company. This unaudited quarterly report covers the three months ended March 31, 2017; income-statement comparisons are with Q1 2016, while balance-sheet comparisons are generally with December 31, 2016. Amounts below are in U.S. dollars.
Financial performance and condition
- Revenue and earnings: Total net revenue was $5.324 billion, up 5.7% year over year, including $29 million of net securities gains. Net interest income was $2.945 billion, up 3.9%; on a taxable-equivalent basis it was $2.995 billion, up 3.7%. Noninterest income was $2.329 billion, up 8.4%, led by payment services, trust and investment management, and mortgage banking.
- Profit: Net income attributable to U.S. Bancorp was $1.473 billion, up 6.3%; diluted EPS was $0.82 versus $0.76. Return on average assets was 1.35% versus 1.32%, and return on average common equity was 13.3% versus 13.0%.
- Expenses and margins: Noninterest expense increased 7.1% to $2.944 billion, with higher compensation, benefits, marketing, and FDIC insurance costs. The efficiency ratio increased to 55.6% from 54.6%. Net interest margin was 3.03% versus 3.06%; management cited loan mix, lower yields on securities purchases, higher deposit rates, and funding mix.
- Credit costs: Provision for credit losses was $345 million, up 4.5%. Net charge-offs rose to $335 million from $315 million; the annualized charge-off ratio was 0.50% versus 0.48%, driven mainly by higher credit-card and other-retail losses.
- Cash flow: Operating cash flow was $3.190 billion, compared with $1.261 billion in Q1 2016; investing activities used $1.721 billion versus $4.889 billion; financing activities provided $3.145 billion versus $3.462 billion. Cash and due from banks ended the quarter at $20.319 billion, up from $15.705 billion at year-end.
- Balance sheet and funding: Period-end assets were $449.5 billion, loans $273.6 billion, and deposits $336.9 billion. Deposits rose 0.7% from year-end and average deposits increased 11.0% year over year. Long-term debt rose to $35.9 billion from $33.3 billion; short-term borrowings declined to $12.2 billion from $14.0 billion.
- Asset quality: Nonperforming assets declined to $1.495 billion from $1.603 billion at year-end; the ratio to loans plus other real estate improved to 0.55% from 0.59%. The allowance for credit losses was $4.366 billion, or 1.60% of period-end loans, compared with $4.357 billion, or 1.59%.
- Capital and liquidity: Common equity Tier 1 was 9.5% under the transitional standardized approach and 11.8% under the advanced approach; management reported regulatory ratios above “well-capitalized” requirements. The company reported $101.9 billion of unencumbered investment securities, additional borrowing capacity of $88.2 billion at the FHLB and Federal Reserve, and compliance with the regulatory Liquidity Coverage Ratio.
Material changes and management commentary
- Average loans increased 4.1% year over year, supporting net interest income growth; average earning assets rose 5.6%. Average deposits grew 11.0%, while average time deposits fell 9.0%.
- Business-line results were mixed: Wholesale Banking and Commercial Real Estate net income rose to $259 million from $118 million, primarily reflecting lower credit provision after prior-year energy-sector reserve building. Consumer and Small Business Banking fell 16.7% to $295 million, and Payment Services fell 4.5% to $274 million, partly due to higher credit costs and expenses. Wealth Management and Securities Services rose 39.7% to $109 million.
- The effective tax rate declined to 25.1% from 26.5%, partly reflecting the new accounting treatment for stock-based compensation tax benefits. The company also recorded a $10 million charge to common earnings related to the planned redemption of Series G preferred stock; it issued $993 million of Series J preferred stock during the quarter.
- No specific full-year earnings or revenue guidance is provided in the supplied filing text. Management notes that net-interest-income sensitivity depends on balance-sheet growth, product mix, deposit behavior, pricing, and funding decisions; modeled rate scenarios are estimates, not forecasts.
Risks, contingencies, and unusual items
- Credit and economic risk: The filing identifies economic contraction, interest-rate changes, deterioration in borrower credit or collateral values, commercial and residential real-estate weakness, and market volatility as potential adverse factors. Energy loans were $2.418 billion, or 0.9% of loans; criticized energy commitments were $2.836 billion, and energy nonperforming assets were $182 million.
- Legal and regulatory matters: The company faces ongoing litigation, examinations, inquiries, and investigations, including matters involving mortgage practices and Bank Secrecy Act/anti-money-laundering and sanctions compliance. It remains subject to an OCC consent order concerning its BSA/AML program. Management states that the aggregate upper end of reasonably possible losses, in excess of established reserves for probable matters, is approximately $200 million; actual outcomes may differ materially.
- Visa litigation: The company reported a $19 million net liability related to Visa litigation after escrow offsets. The underlying class-action matter continues in district court following the rejection of a proposed settlement.
- Other risk exposures: Management highlights operational, compliance, cybersecurity, liquidity, interest-rate, market, strategic, and reputational risks. It also notes that adoption of the expected-credit-loss accounting standard, required no later than January 1, 2020, is expected to increase the allowance; the amount is not yet clear.
Most important facts for investors to verify
- Whether revenue growth can continue to outpace expense growth, given the efficiency ratio’s deterioration and higher compensation and compliance-related costs.
- Whether the lower net interest margin persists as deposit pricing and funding mix respond to interest-rate changes.
- Whether card and other-retail charge-offs continue rising, and how credit performance in the energy portfolio develops.
- How much of the reported earnings growth reflects recurring operations versus securities gains, tax effects, and the prior-year energy reserve comparison.
- Developments in BSA/AML and other regulatory matters, Visa litigation, and potential losses beyond recorded reserves.
- The eventual allowance impact of the expected-credit-loss standard; the filing does not provide a clear estimate.