As banks this summer grappled with the first cuts to interest rates since the last recession, U.S. Bancorp received a boost from mortgage refinancing and other noninterest businesses.
The Minneapolis-based company, which operates U.S. Bank, on Wednesday announced a 5% jump in third-quarter profit, beating investor expectations.
The nation's fifth-largest bank continued to refashion its services around online and smartphone access, now used by customers for the vast majority of transactions.
The restructuring of its 3,000-unit branch network proceeded on pace, with the closing of 159 locations since April. That is about halfway through a process that, with openings and moves, will result in about 300 fewer branches overall.
Meanwhile, the company's executives remained upbeat about the U.S. economy though less confident than usual about forecasting the company's performance because of uncertainty about interest rates. "Having an outlook much beyond a quarter is pretty tough right now," said Terry Dolan, the company's chief financial officer.
He said the bank's executives anticipate another rate cut this month but are less certain about one that many economists think will happen in December.
The effect of the Federal Reserve's two rate cuts in July and September showed up in U.S. Bank's net interest margin, the difference between what it pays to attract deposits and what it is paid for making loans. That gap narrowed to 3.03% in the third quarter from 3.15% a year ago and 3.13% in the second quarter.
It is likely to drop to around 2.95% during the last three months of the year, Dolan said. That would wipe tens of millions of dollars from U.S. Bancorp's bottom line.
In the third quarter, the company made up part of that effect with growth in several fee-generating businesses, including commercial products and mortgage banking.
Overall, U.S. Bancorp earned $1.91 billion, or $1.15 a diluted share, during the period ended Sept. 30. The per-share profit consensus forecast by analysts was $1.11. U.S. Bancorp earned $1.82 billion, or $1.06 a share, in the same period last year.
Revenue was $5.9 billion, up 4% from $5.7 billion a year ago.
The company's shares rose 1.5% on a day when broad market indexes were marginally lower.
Interest income, which accounts for about two-thirds of revenue, rose less than 1%. Noninterest income jumped 8%.
Trust and investment management fees, the biggest source of noninterest income, grew 2%. Mortgage banking, which had declined in recent years, roared back with a 56% jump in revenue. Home sales remained strong in much of the country and refinancing took off as consumers embraced offers associated with lower interest rates.
"As we head into the final quarter of 2019, we feel good about our loan and deposit trends and our ability to gain market share across our franchise," Andy Cecere, the company's chief executive, said. "We are seeing good digital uptake trends. As loans are increasingly sourced through our digital channels, we expect better customer experience, higher account and volume growth and improved operational efficiencies."
Executives said credit quality remained stable and consumer spending was solid. "We are not seeing any early indicators in our portfolio that cause us concern," Cecere said. "However, we are mindful that at some point the industry will experience a credit downturn, and we remain disciplined."
But even with 2020 less than three months away, Dolan said it's become difficult to confidently forecast what's going to happen in the short term. Perceptions about short-term and long-term interest rates are changing too quickly.
"You could have a change in trade policy and long-term rates would pop up almost immediately," he said. "On short-term rates, the probability is strong for an October cut and moderate for December. A week ago, the probability was high for both of those. It changes every day."