Good times are rolling at U.S. Bancorp, with just one bit of caution

U.S. Bancorp hit another profit record this spring and buoyant executives on Wednesday gave an upbeat forecast for the economy and near-term future of the nation's fifth-largest bank.

But they are also keeping an eye on bond prices for a signal of recession. Caution in the bond market at the moment is clashing with the behavior of U.S. Bank's customers, both businesses and consumers, who are borrowing and investing more.

Executives of the Minneapolis-based company said they just have to work through the contradictory signs.

"We do have confidence in the economy," Chief Executive Andy Cecere said. "From small business to middle market to large corporate, confidence is up, activity is up. On the consumer side of the equation, spending is up and activity is up. You talk to our leaders and our lenders, who are talking to their customers, and things are very positive."

He and other executives forecast solid growth in lending and deposits for the next two years at what, by most financial metrics, is the strongest-performing major bank in the U.S. With interest rates up and the effect of the federal tax cut still cycling through its books, U.S. Bancorp experienced a 17 percent jump in second-quarter profit.

Revenue grew faster than expenses for only the second quarter in the past three years. Executives said they anticipate that condition, called positive operating leverage, to continue through the rest of 2018 and accelerate next year.

At the same time, along with many in the financial industry, U.S. Bancorp executives have been watching the yield curve in the bond market — the difference between the interest paid for 2-year and 10-year bonds — narrow in recent months. Usually in a strong-performing economy the curve is steep, with the interest on the 10-year bond well above the two-year rate.

For more than 50 years, a flattening or inversion of the yield curve, which happens when short-term bonds become more expensive than long-term ones, has indicated that recession is ahead. Economists and investors debate whether bond investors are sending that signal at the moment. No matter the reason, it is influencing planning at U.S. Bank, Terry Dolan, the company's chief financial officer, said.

"The yield curve is flat and we're a pretty conservative organization and we take that into consideration and make sure we're ready for any environment," Dolan said.

With the latest results, U.S. Bank executives quelled jitters that analysts and investors expressed in April when the company reported expense growth of 5 percent, at the high end of a forecast range, during the first three months of the year. For April to June, expense grew 3.4 percent and executives said they would aim for around that level in coming quarters.

"We're always balancing between making long-term investments and the short-term expense," Dolan said.

The faster revenue growth in the latest period was led by interest income as higher interest rates underscored growth in commercial loans, credit cards and residential mortgages. The company scaled back its lending in commercial real estate and the sell-off of a portion of its student loan portfolio led to a slight reduction in its total loan base at the end of June compared to the end of March.

The company's profit was $1.75 billion, or $1.02 a diluted share, during the April to June period. That's up from $1.5 billion in the same three months last year. Revenue was $5.6 billion, up 3.5 percent from $5.45 billion a year ago.

The federal tax cut passed in December contributed heavily to the profit jump and will continue to influence the bottom line for the rest of the year. U.S. Bank's taxes were 22 percent lower in the latest quarter than they were a year ago. Its pretax profit was up 5.4 percent.

The company's net interest margin, the difference between what it charges for loans and what it pays to attract deposits, was 3.13 percent, up from 3.08 percent a year ago.

That margin has widened at many banks while the Federal Reserve raised the benchmark federal funds rate over the last two years. During that time, banks generally did not raise the interest paid to depositors as quickly as the interest charged to borrowers. But that's changing as banks seek to attract more deposits to be able to offer more loans.

"Today, every time you see a [federal funds] rate hike, the rate of increase of deposit pricing is going to match that," Dolan said.

Evan Ramstad • 612-673-4241