01—Abstract
Summary
Summary of the 10-K filed February 22, 2018. Cited figures are marked; the original filing is the authoritative source.
U.S. Bancorp (USB) reported record 2017 results, with net income attributable to the company of $6.2 billiona ($3.51 per diluted share), up 5.6% from 2016 and a 1.39% return on average assets and 13.8% return on average common equity.
Results were lifted by a $910 millionb one-time benefit from the 2017 tax reform (revaluation of deferred tax assets), partly offset by a $608 million accrual for regulatory and legal matters tied to its legacy Bank Secrecy Act/anti-money laundering program. Management says the notable items net to about $0.09 of diluted EPS, so underlying growth is more modest than the headline figures suggest. Revenue growth was driven by rising interest rates and loan growth.
Net interest income rose 6.2% to $12.2 billionc, with the net interest margin up to 3.06%. Noninterest income was essentially flat at $9.6 billion, as payment services, trust and treasury fees offset weaker mortgage banking and equity investment income. Noninterest expense rose 10.9% to $12.9 billion, pushing the efficiency ratio to 58.8% from 54.9%.
Average loans grew 3.3%d and average deposits grew 6.6%. Credit quality remained stable, with nonperforming assets down 25% and net charge-offs at 0.48% of average loans. Capital remained strong.
The Basel III standardized common equity tier 1 ratio was 9.3%, and the company returned 77% of earnings to shareholders through dividends and buybacks. The quarterly dividend was raised 7.1% to $0.30, and about $1.3 billion remained under the buyback authorization. The main risk to watch is regulatory and legal exposure: in February 2018 the company agreed to a deferred prosecution agreement and related settlements totaling about $613 million paid, with the DPA running two years, plus continuing BSA/AML remediation obligations.
02—Key points
Key Highlights
- Net income attributable to U.S. Bancorp rose 5.6% to $6.2 billion; diluted EPS was $3.51, up from $3.24 in 2016.
- Headline earnings include a $910 million tax reform benefit, partly offset by a $608 million legal and regulatory reserve; management says these net to about $0.09 of EPS.
- Net interest income rose 6.2% to $12.2 billion and net interest margin expanded to 3.06%, driven by higher rates and loan growth.
- Noninterest expense rose 10.9% to $12.9 billion and the efficiency ratio deteriorated to 58.8% from 54.9%.
- Credit quality improved: nonperforming assets fell 25.1% to $1.2 billion, while net charge-offs were 0.48% of average loans.
- Capital was strong, with a 9.3% common equity tier 1 ratio (standardized, transitional) and 77% of earnings returned to shareholders; the dividend was raised 7.1% to $0.30 per quarter.
- February 2018 settlements with the DOJ, OCC, FinCEN and the Federal Reserve total about $613 million in penalties related to legacy BSA/AML compliance and a payday lending relationship.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 22, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $21.90B$21.31B | +2.8% |
| Interest Expense | $1.97B$1.47B | +33.9% |
| Net Income | $6.22B$5.89B | +5.6% |
| EPS (Basic) | $3.53$3.25 | +8.6% |
| EPS (Diluted) | $3.51$3.24 | +8.3% |
| Shares Outstanding (Basic) | 1.68B1.72B | −2.4% |
| Shares Outstanding (Diluted) | 1.68B1.72B | −2.4% |
05—Questions
Frequently Asked Questions
What drove the increase in 2017 earnings, and how much of it was one-time?
Earnings rose 5.6% to $6.2 billion, mainly from higher net interest income on rising rates and loan growth. The reported figure includes a one-time $910 million tax reform benefit and a $608 million legal and regulatory accrual, along with about $152 million of after-tax charitable and bonus expenses. Management estimates the net effect of these items was about $0.09 of diluted EPS.
Is the bank's expense growth sustainable?
Noninterest expense rose 10.9%, including the $608 million legal reserve and a charitable contribution to the U.S. Bank Foundation. Excluding these items, expense growth was more moderate, reflecting hiring for compliance and business growth. Management plans to increase technology investment in 2018 as the lower tax rate provides room, so elevated expense levels may persist.
How strong is the company's capital position and what does it mean for shareholder returns?
The standardized common equity tier 1 ratio was 9.3%, above the company's 8.5% target and well above the 7.0% fully phased-in minimum. The company returned 77% of 2017 earnings through dividends and buybacks, repurchased about 50 million shares, and had $1.3 billion left under its buyback authorization. Capital strength supports continued shareholder returns, subject to Federal Reserve stress test and capital plan approval.
What are the main legal and regulatory risks investors should monitor?
The company agreed to a two-year deferred prosecution agreement with the U.S. Attorney's Office in Manhattan and related settlements with the OCC, FinCEN and the Federal Reserve, with total penalties of about $613 million already paid. The company remains under an ongoing OCC Consent Order for BSA/AML compliance, and failure to meet its obligations could bring further penalties, extended terms or other enforcement actions. Investors should also watch residential mortgage-backed securities trustee litigation, which remains pending.
06—Continue