01—Abstract
Summary
Summary of the 10-K filed February 28, 2003. Cited figures are marked; the original filing is the authoritative source.
U.S. Bancorp (USB) closed 2002 with record earnings recovery and a markedly improved risk profile.
Net income rose 92.7% to $3.29 billiona, or $1.71 per diluted share, versus $1.7 billion ($0.88) in 2001. Operating earnings (excluding merger and restructuring charges and an accounting change) grew 38.7% to $3.5 billion, or $1.84 per diluted share. Return on average equity was 19.4% (20.9% on an operating basis) and return on average assets was 1.91%.
Total net revenue grew 8.4% on a taxable-equivalent basis, while noninterest expense rose only 4.8% on an operating basis, and the efficiency ratio improved to 47.7% from 49.5%. The provision for credit losses fell to $1.35 billionb from $2.15 billion on an operating basis, reflecting the absence of the large 2001 credit actions. Credit quality remained elevated but appeared to be stabilizing.
Nonperforming assets rose to $1.37 billionc (1.18% of loans plus other real estate) from $1.12 billion, and net charge-offs were 1.20% of average loans versus 1.31% in 2001. The allowance for credit losses was $2.4 billion, or 2.08% of loans. Growth drivers included a 9.8% increase in period-end deposits, a 4.61% net interest margin (up 19 basis points), and fee-based revenue growth led by merchant processing (NOVA acquisition), mortgage banking, and cash management.
Acquisitions of Bay View branches, Leader Mortgage, and State Street Corporate Trust added franchise scale and goodwill. The headline strategic event is the planned spin-off of the capital markets business (U.S. Bancorp Piper Jaffray) to shareholders, expected in the third quarter of 2003.
Management characterized the unit as contributing only about $1.1 milliond of 2002 net income, so the spin-off is largely a portfolio simplification rather than a material earnings event. Investors should monitor execution, the tax-free treatment conditions, and the continued credit cost trajectory in 2003.
02—Key points
Key Highlights
- Net income of $3.29 billion ($1.71 diluted EPS) up 92.7% from 2001; operating earnings of $3.54 billion ($1.84 diluted EPS) up 38.7%, excluding $211.3M after-tax merger charges and a $37.2M accounting-change charge.
- Return on average equity of 19.4% (20.9% operating) and return on average assets of 1.91% (2.06% operating), both substantially improved from 2001 levels of 10.5% and 1.03%.
- Total net revenue (taxable-equivalent) grew 8.4% to $12.7 billion, while operating noninterest expense rose only 4.8%, improving the operating efficiency ratio to 47.7% from 49.5%.
- Provision for credit losses fell to $1.35 billion from $2.53 billion reported in 2001 (about $2.15 billion on an operating basis), as 2001's large credit actions did not recur; net charge-offs eased to 1.20% of average loans.
- Credit quality remains a watch item: nonperforming assets rose to $1.37 billion (1.18% of loans and ORE) from $1.12 billion, though management said NPAs appeared to stabilize in late 2002.
- Period-end deposits grew 9.8% to $115.5 billion and the net interest margin widened to 4.61%, supported by the declining rate environment's funding benefit and a stronger noninterest-bearing deposit base.
- Announced plan to spin off the capital markets business (U.S. Bancorp Piper Jaffray) to shareholders in Q3 2003; the unit contributed only about $1.1 million of 2002 net income, and the Company will retain $215 million of the new company's subordinated debt.
03—Questions
Frequently Asked Questions
Why did reported net income nearly double in 2002?
The 2001 results were depressed by $844.3 million of after-tax merger and restructuring charges and a $2.5 billion total provision for credit losses that included a $1.025 billion third-quarter 2001 provision. In 2002, after-tax merger charges fell to $211.3 million and the provision declined to $1.35 billion, so earnings rebounded strongly even though the underlying operating growth was a more modest 38.7%.
Is the Piper Jaffray spin-off material to shareholders?
Based on the disclosures, the capital markets unit is small relative to the company. It generated about $737 million of revenue (5.8% of total revenue) but contributed only $1.1 million of 2002 net income and had about $3.0 billion in average assets. The spin-off is therefore primarily a strategic simplification, and the Company states that it has no obligation to complete it, pending SEC registration, regulatory approval and a tax-free determination.
How healthy is the loan portfolio and credit outlook?
Credit costs remain elevated. Nonperforming loans reached 1.06% of total loans and the allowance covered 196% of nonperforming loans. Management indicated that net charge-offs are expected to stay near recent levels until the economy improves, and cited continued stress in communications, transportation, manufacturing and highly leveraged enterprise-value financings. Commercial loans declined 9.5% year over year, while retail loans and residential mortgages grew.
What drove the improvement in the net interest margin and noninterest income?
The net interest margin rose 19 basis points to 4.61%, driven by funding benefits from lower rates, a more favorable funding mix and product repricing. Noninterest income rose 8.7% to $5.9 billion, led by merchant processing (up 83.7%, largely from the NOVA acquisition), mortgage banking (up 41.1%), and cash management fees (up 20.0%), partially offset by lower capital markets revenue and investment banking revenue.
04—Continue