U.S. Bancorp's first-quarter profit fell 3 percent, hurt by soured loans in the energy patch, but executives said the trouble was contained and sounded upbeat about the rest of the year.
"We're feeling good across the board," Richard Davis, the firm's chief executive, said in a discussion with analysts about the results announced Wednesday. "We already know what quarter two is starting to look like and it's feeling very robust."
Davis, the highest-profile bank executive in Minneapolis, also made his first extensive public remarks about the review of bank industry risk and too-big-to-fail policies that's underway at the Federal Reserve Bank of Minneapolis.
Leaders of several major banks and trade groups have criticized the project, which is designed to create legislative proposals for Congress later this year. Davis said he's confident a "balanced recommendation" will emerge from the effort.
He said he's met with Neel Kashkari, the new Minneapolis Fed president who launched the policy review, and has been able to share his thoughts "routinely" with him privately. He said the two enjoy a good relationship.
"I don't think he's coming in with his gun sights on U.S. Bank. In fact, I'm sure he's not," Davis said. "I appreciate his approach. I welcome people coming with ideas."
At a symposium at the Minneapolis Fed earlier this month, one speaker suggested limiting the size of American banking companies at an asset level that is smaller than U.S. Bank's, something that, if accepted by Congress, would force the Minneapolis-based firm to cut down its size.
In the call with analysts, Davis said the company, which is the nation's fifth-largest bank, is the right size. "Kind of the Goldilocks of banks," he said.
Growth in the bank's expenses for employee pay, technology and communications drew some scrutiny from analysts after the results were announced. But it was a solid quarter for U.S. Bank, the results showed, and investors sent the company's shares up 2 percent to $42.73 Wednesday.
U.S. Bank said it earned $1.39 billion, or 76 cents a diluted share, in the quarter. Revenue grew by 2.7 percent to $5.04 billion, on 5.8 percent growth in total loans and 5.1 percent growth in payments-related fee revenue, driven by increased credit and debit card revenue.
Though only 1.3 percent of U.S. Bank's commercial loans are to energy-related businesses, the bank's provision for credit losses — money set aside to cover bad loans — grew by $66 million, or 25 percent, compared with a year ago. Since money for loan losses is taken directly out of the profit column, the energy weakness more than accounted for the $55 million decline in profit.
Executives don't expect another large step upward in the bank's reserve for loan losses, and the firm is better off than most competitors, who have greater exposure to the energy industry. U.S. Bank executives vigorously discussed over the past five years whether to place more chips on the North Dakota oil boom, and they opted not to, said Andy Cecere, the company's president and chief operating officer.
"Given the volatility of this and given the uncertainty around prices in the future, and the likelihood that it could go up or down rather rapidly, we decided not to do that," Cecere said.
Total lending growth was driven by growth in commercial loans and credit cards, and also residential mortgages and auto lending.
Analysts questioned whether expenses at the bank, which grew 3.2 percent in the quarter, would continue to grow.
Compliance costs have nearly tripled in the past five years, Davis said, but those expenses are peaking now, and should come down by "tens of millions of dollars, not hundreds of millions of dollars," in the next few quarters. As long as the bank can continue to expand its portfolio of high-quality loans, "we can make money," Davis said.
Much of the expense growth came from pay increases for employees, said Kathy Rogers, the bank's chief financial officer.
"The increase in compensation, the majority of that was driven by our merit increase," she said, and full-time employees received 20 shares each of company stock in January.
Another headwind is low interest rates. In order to meet its projections, the bank is counting on the Federal Reserve to hike rates once more this year, which would boost interest income for the bank.
"If it doesn't it won't be Armageddon, but it'll be something we hope to get," Davis said.