U.S. Bancorp executives foresee bigger profits in 2018 after its tax rate drops to 21.5 percent

U.S. Bancorp's tax rate fell by nearly one-third under the new federal tax law, executives said Wednesday as they forecast 2018 to outpace last year's record financial performance.

The company's fourth-quarter profit rose nearly 14 percent, a bigger-than-usual jump due to two one-time accounting events: a $910 million gain for revaluing deferred taxes at a lower rate and a $608 million expense to settle a case with the government concerning anti-money laundering practices.

The Minneapolis company, which runs U.S. Bank, the nation's fifth largest, is one of the few giant banks to report both short- and long-term positives from the new tax law. Some larger banks, including Citicorp and Bank of America, announced short-term expenses that produced sizable hits to their profits.

Broadly, however, the banking industry is one of the big winners under the new tax law. U.S. Bancorp executives said the company's federal tax rate would be around 15 percent under the law and about 19 percent when state taxes are included. On a taxable equivalent basis, its rate will be 21.5 percent, down from a rate of 29.8 percent in the just-completed fourth quarter.

"Tax reform will arguably promote job growth, consumer spending and prolong the growth phase of this business cycle," Chief Executive Andy Cecere told investors and analysts in a conference call. Cecere, who became CEO last year, will become the company's chairman at its annual meeting in April, succeeding Richard Davis, who led the company for a decade.

U.S. Bancorp will give about three-fourths of its tax savings to investors in the form of dividend and share buybacks and invest the remaining amount in new initiatives, with executives citing payments-related technology, digital and mobile banking and business-to-business opportunities. That split is roughly in line with the way the company has treated profits for years.

"We're taking some of the benefit associated with the tax reform to accelerate some of our investing in technology and innovation," said Terry Dolan, the company's chief financial officer.

The tax boost comes as U.S. Bank continues to produce some of the best results in the banking industry.

Like other banks, U.S. Bank reported a falloff in growth of commercial loans but it still gained market share.

Commercial loans grew 4 percent in the latest quarter, well above the industry's overall rate of just over 1 percent. Even so, that was half the 8.1 percent pace of growth in commercial loans that the company saw at the end of 2016. And overall loan growth was 2.6 percent in the latest quarter, down from 6.2 percent a year ago.

Dolan attributed the slowdown to a "transitional period" in which business executives, while waiting for Congress and the Trump administration to hammer out the tax law, sought fewer new loans and concentrated on paying down existing loans.

He added the company itself has opted to slow down the pace of lending in commercial real estate, waiting for clearer direction on development activities in many markets.

Even with the reduced growth rate of lending activity, the money that U.S. Bank made from loans increased. The company's net interest margin was 3.08 percent in the quarter, up from 2.98 percent a year ago but down from 3.1 percent in the third quarter of last year.

Overall, U.S. Bancorp said it earned a record $1.68 billion, or 97 cents a share, in the fourth quarter of 2017. Excluding the bump from the tax law and other one-time effects, the company's profit was $1.53 billion, or 88 cents a share. Analysts had forecast a profit of 87 cents a share.

A year ago, the company earned $1.48 billion, or 82 cents a share, in the same period.

Revenue was $5.64 billion, up from $5.44 billion a year ago.

In disclosing the $608 million charge, U.S. Bancorp said the money was being put aside to settle an investigation led by the U.S. attorney's office in Manhattan into the adequacy of its practices to combat money laundering. It expects to pay a penalty in settling the case, though the precise amount is still be negotiated. No further details were disclosed.

Cecere said, "USB embraces the highest standards of integrity and risk management and compliance, and we remain committed to continually improving our controls and processes across the enterprise to protect all of our stakeholders."

Evan Ramstad • 612-673-4241