U.S. Bancorp — Q3 2013 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. Dollar amounts are in millions unless stated otherwise. Comparisons are with Q3 or the first nine months of 2012, except balance-sheet comparisons, which are with December 31, 2012.
Business context and results
U.S. Bancorp is a diversified bank holding company operating across wholesale and commercial real estate banking, consumer and small business banking, wealth management and securities services, payment services, and treasury and corporate support.
- Q3 net income attributable to U.S. Bancorp was $1,468, down 0.4%; diluted EPS was $0.76, up 2.7%. Return on average assets was 1.65% and return on average common equity was 15.8%.
- For the first nine months, attributable net income was $4,380, up 3.6%, and diluted EPS was $2.25, up 6.1%. Return on average assets was 1.67% and return on average common equity was 16.0%.
Financial metrics and changes
| Metric | Q3 2013 | Change vs. Q3 2012 | Nine months 2013 | Change vs. 2012 |
|---|---|---|---|---|
| Net interest income, taxable-equivalent | $2,714 | Down 2.5% | $8,095 | Down 1.1% |
| Net interest margin, taxable-equivalent | 3.43% | 3.59% prior year | 3.45% | 3.59% prior year |
| Total net revenue, taxable-equivalent | $4,891 | Down 5.6% | $14,713 | Down 3.1% |
| Noninterest income | $2,177 | Down 9.1% | $6,618 | Down 5.3% |
| Noninterest expense | $2,565 | Down 1.7% | $7,592 | Down 2.3% |
| Provision for credit losses | $298 | Down 38.9% | $1,063 | Down 26.1% |
| Net charge-offs | $328 | Down from $538 | $1,153 | Down from $1,629 |
| Efficiency ratio | 52.4% | 50.4% prior year | 51.6% | 51.1% prior year |
Mortgage banking revenue fell 36.8% in Q3 to $328 and 23.0% for the nine-month period to $1,125, mainly reflecting lower mortgage origination and sales revenue. Higher servicing income and favorable MSR valuation changes, net of hedging, partly offset the decline. Trust and investment management fees, card revenue, and merchant processing revenue grew.
At September 30, total assets were $360,681; loans were $231,379, up 3.6% from year-end; deposits were $261,716, up 5.0%; and U.S. Bancorp shareholders’ equity was $40,132, up 2.9%. Long-term debt was $18,750, down 26.5%, principally because of VIE deconsolidation and note maturities. Short-term borrowings were $26,128.
- Asset quality improved overall: nonperforming assets were $2,212 versus $2,671 at year-end; excluding covered assets, they were $1,880 versus $2,088. Net charge-offs were 0.57% of average loans in Q3, versus 0.99% a year earlier.
- The allowance for credit losses was $4,578, or 1.98% of period-end loans, compared with $4,733, or 2.12%, at year-end. Allowance coverage of nonperforming loans was 276% (294% excluding covered loans).
- Capital ratios included Tier 1 capital of 11.2%, total risk-based capital of 13.3%, leverage of 9.6%, and estimated Basel III common equity tier 1 of 8.6%. All regulatory ratios exceeded the applicable well-capitalized requirements.
- For the first nine months, operating cash flow was $8,657, investing cash flow was negative $12,663, and financing cash flow was $7,369. Cash and due from banks increased $3,363 to $11,615. These cash-flow totals reflect banking and lending activity.
Liquidity, capital and shareholder actions
Management reported $60.0 billion of fair-value unencumbered investment securities and additional borrowing capacity of $67.2 billion at the FHLB and Federal Reserve based on available collateral. Deposits provide a significant funding base. The parent company reported available funds above its stated requirements to meet obligations for 12 months with common dividends included, or 24 months assuming dividends were reduced to zero.
The Board authorized up to $2.25 billion of common share repurchases through March 31, 2014. The company repurchased 17.8 million shares for $659 million in Q3; $981 million remained under the authorization at quarter-end. The quarterly common dividend increased 18% to $0.23 per share.
Outlook, risks and unusual items
- Management expected nonperforming assets and net charge-offs to remain relatively stable in Q4 2013. The filing does not provide quantitative earnings or revenue guidance.
- Interest-rate exposure remains relevant: a gradual 200-basis-point increase was estimated to raise 12-month net interest income 1.45%; a 200-basis-point shock increase would reduce modeled market value of equity 4.5%. Management said these exposures were within policy limits.
- Available-for-sale securities had $67 million of net unrealized gains at September 30, down from $1.1 billion at year-end; gross unrealized losses were $624 million, versus $147 million. Management said it did not plan to sell securities with unrealized losses and did not expect to be required to sell them before recovery. It recorded $13 million of impairment charges on non-agency mortgage-backed securities for the nine months and warned that further adverse market changes could cause additional impairment.
- During 2013, transfer of control over certain community development and tax-advantaged VIEs led to deconsolidation, reducing reported assets and liabilities by approximately $4.6 billion without a material income-statement impact. Maximum exposure to loss from unconsolidated VIEs was $7.2 billion, including previously recognized tax credits subject to potential recapture; management considered potential losses remote.
- Mortgage-related investigations and examinations were ongoing. The company had not agreed to a potential government settlement concerning mortgage origination, servicing and foreclosure practices. For litigation and regulatory matters with estimable losses, management estimated the aggregate upper end of reasonably possible losses, beyond recorded reserves for probable matters, at approximately $200 million; actual outcomes could differ materially. A separate Visa litigation liability, net of escrow funding, was $59 million; the class settlement had not received final court approval.
- Other material risks identified include credit deterioration, interest-rate and market movements, liquidity, operational and regulatory risks, competition, legal developments, and the sensitivity of MSR and securities valuations to assumptions and market conditions. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Key facts investors should verify
- Whether mortgage revenue pressure and the lower net interest margin persist, and how MSR valuation and hedging affect reported results.
- Credit trends by portfolio, especially residential mortgage delinquencies, nonperforming assets, charge-offs, and whether allowance reductions remain appropriate as loans grow.
- Investment-security unrealized losses, impairment assumptions, and sensitivity to further interest-rate increases.
- Developments in mortgage investigations, Visa litigation approval, representation-and-warranty claims, and the estimated litigation exposure.
- VIE deconsolidation effects, tax-credit recapture exposure, and the sustainability of liquidity and capital levels under stress.