01—Abstract
Summary
Summary of the 10-K filed February 28, 2005. Cited figures are marked; the original filing is the authoritative source.
U.S. Bancorp (USB) closed 2004 as the 6th largest U.S. financial holding company, with $195.1 billiona in total assets, $120.7 billion in deposits and $126.3 billion in loans.
Net income reached a record $4.17 billionb, up 11.6%, and diluted EPS rose 13.0% to $2.18. Returns were strong, with ROA of 2.17%, ROE of 21.4% and an efficiency ratio of 45.3%, which management describes as industry-leading. Growth came mainly from fee income rather than net interest income.
Noninterest income rose 3.9% to $5.5 billionc, driven by payment processing (merchant processing up 20.2%, credit and debit card revenue up 15.8%). Net interest income fell 1.1% as the net interest margin compressed to 4.25% from 4.49%, and net securities losses of $104.9 million partly offset fee gains. Credit quality improved sharply: the provision for credit losses fell 46.6% to $669.6 million, net charge-offs dropped to 0.63% of average loans, and nonperforming assets declined 34.8%.
The company also released $98.5 milliond of its allowance for credit losses. Capital was returned aggressively. The company repurchased 93.8 million shares at an average of $28.34 and raised the quarterly dividend 25% to $0.30, returning 109% of 2004 earnings to shareholders against a stated 80% target.
Management's stated priorities for 2005 are revenue growth, particularly commercial lending and payments, continued credit improvement and a long-term goal of at least 10% diluted EPS growth. Tangible common equity was 6.4% of tangible assets, and Moody's upgraded the holding company to Aa2 in January 2005.
02—Key points
Key Highlights
- Record net income of $4.17 billion (+11.6%) and diluted EPS of $2.18 (+13.0%), with ROA of 2.17% and ROE of 21.4%.
- Fee-based revenue growth of 11.0% led by payment processing; noninterest income rose 3.9% to $5.52 billion, partly offset by $104.9 million of net securities losses.
- Net interest income fell 1.1% to $7.1 billion as net interest margin compressed 24 basis points to 4.25%, reflecting competitive loan pricing and higher wholesale funding costs.
- Credit quality improved markedly: provision for credit losses fell 46.6% to $669.6 million, net charge-offs fell to 0.63% of average loans from 1.06%, and nonperforming assets dropped 34.8%.
- Aggressive capital return: 93.8 million shares repurchased at $28.34 average, dividend raised 25% to $0.30 per quarter, and 109% of earnings returned to shareholders.
- Loan growth of 6.8% to $126.3 billion, driven by retail loans (+10.7%) and residential mortgages (+14.2%); commercial loans grew 4.3% and showed first year-over-year average growth since mid-2001.
- Moody's upgraded U.S. Bancorp senior debt to Aa2 in January 2005 and U.S. Bank National Association to Aa1; Fitch upgraded the company to AA- in September 2004.
03—Questions
Frequently Asked Questions
How profitable was U.S. Bancorp in 2004 and how did it compare with 2003?
Net income rose 11.6% to a record $4.17 billion from $3.73 billion. Diluted EPS increased 13.0% to $2.18 from $1.93. ROA improved to 2.17% from 1.99% and ROE to 21.4% from 19.2%. The 2003 figure included $22.5 million of discontinued operations income, which is excluded from the 2004 comparison.
What drove revenue growth, and why did net interest income decline?
Total net revenue rose only 1.0% to $12.66 billion. Fee income grew strongly, especially payment processing, with merchant processing up 20.2% and credit and debit card revenue up 15.8%, including European merchant acquisitions. Net interest income fell 1.1% to $7.1 billion because the net interest margin dropped to 4.25% from 4.49%, due to competitive loan pricing, a shift toward adjustable-rate securities, lower loan prepayment fees, and higher costs of wholesale funding as rates rose.
Are the 2004 earnings sustainable, given the lower credit costs?
Part of the improvement is cyclical. Lower provisioning and a $98.5 million allowance release boosted 2004 results, and management expects net charge-offs to rise modestly in 2005 as commercial loan recoveries normalize. Nonperforming assets are expected to fall slightly further but not much after mid-2005. Management also cited $154.8 million of debt prepayment costs and $56.8 million of MSR impairment as one-time or volatile 2004 items, and a lower effective tax rate of 32.5% from tax examination resolutions, which contributed $106.3 million of benefit.
How much capital did the company return to shareholders, and is it sustainable?
The company returned 109% of 2004 earnings through dividends and buybacks, above its 80% target. It repurchased 93.8 million shares for $2.66 billion and declared $1.02 per share in dividends. A new 150 million share buyback authorization runs for 24 months. Tangible common equity was 6.4%, Tier 1 capital 8.6% and total risk-based capital 13.1%, all above well-capitalized thresholds, though buybacks at this pace drew down equity, which fell slightly to $19.5 billion.
What are the key risks highlighted in the filing?
Key risks include exposure to the airline and transportation sectors, which remained stressed; leveraged enterprise-value financings of about $1.7 billion; commercial real estate concentration (21.8% of loans); interest rate risk, with net interest income sensitivity that management described as substantively neutral; and the retail lease residual portfolio of roughly $4.0 billion. The company also faces operational risk from its merchant processing business, with a contingent charge-back exposure of about $51.5 billion over four months and about $1.9 billion of airline ticket futures exposure.
04—Continue