01—Abstract
Summary
Summary of the 10-K filed February 26, 2007. Cited figures are marked; the original filing is the authoritative source.
U.S. Bancorp (USB) reported record 2006 net income of $4.8 billiona, or $2.61 per diluted share, up from $2.42 in 2005 (diluted EPS growth of 7.9%).
Returns remained industry-leading, with return on average assets of 2.23% and return on average common equity of 23.6%. Total assets reached $219 billionb, and the efficiency ratio was 45.4%, well below the peer median cited in the report. Growth came mainly from fee-based businesses, with fee income exceeding 50% of total net revenue and noninterest income up 13.3%.
Net interest margin compressed sharply to 3.65%c from 3.97% amid a flat yield curve and competitive lending, and net interest income fell 4.2%. Credit quality improved, with net charge-offs at 0.39% of average loans versus 0.52% in 2005. The company returned 112% of 2006 earnings to shareholders through dividends and buybacks, exceeding its 80% target.
The dividend rate was raised 21.2%d in December 2006, and the Board authorized a new 150 million share repurchase program through 2008. Management reaffirmed long-term goals of 10% EPS growth and at least 20% return on common equity. Leadership also changed: Richard Davis succeeded Jerry Grundhofer as CEO on December 12, 2006, with Grundhofer staying on as chairman through 2007.
Ratings were upgraded by S&P and DBRS, and the Fitch outlook was revised to positive. Key risks flagged in the filing include a flat or inverted yield curve that could keep margins under pressure, a shift in the commercial real estate and condominium segments, a reduction in new vehicle sales affecting auto lease residuals, and the integration of several large trust and payments acquisitions. Overall, the filing presents a highly profitable, fee-diversified bank whose 2006 results were resilient despite a difficult rate environment.
02—Key points
Key Highlights
- Record net income of $4.75 billion (diluted EPS $2.61, up 7.9%), with ROA of 2.23% and ROE of 23.6%
- Fee-based revenue exceeded 50% of total net revenue; noninterest income rose 13.3% to $6.8 billion, led by trust, investment management, and payment processing
- Net interest margin fell 32 bps to 3.65% and net interest income declined 4.2% due to a flat yield curve and competitive loan pricing
- Credit quality strengthened: net charge-offs fell to 0.39% of average loans (from 0.52%) and provision for credit losses declined 18.3% to $544 million
- Capital returned to shareholders equaled 112% of 2006 earnings; dividend raised 21.2% and a new 150 million share buyback authorized through 2008
- Tier 1 capital ratio rose to 8.8% from 8.2%, and S&P upgraded the company's ratings to AA/A-1+ in February 2007
- CEO transition completed: Richard Davis succeeded Jerry Grundhofer as CEO in December 2006, with Grundhofer remaining chairman through 2007
03—Questions
Frequently Asked Questions
How profitable is U.S. Bancorp relative to peers?
In 2006 U.S. Bancorp posted a 2.23% return on average assets and 23.6% return on average common equity, compared with peer medians of 1.38% and 15.1%. Its efficiency ratio of 45.4% was also far better than the peer median of 58.6%, according to the company's own peer comparison, which includes its chosen group of large banks.
What drove the decline in net interest income in 2006?
Net interest income fell $298 million on a taxable-equivalent basis, to $6.8 billion, as the net interest margin compressed from 3.97% to 3.65%. The main causes were a flatter yield curve, tighter credit spreads of about 17 basis points on loans, and funding growth with higher-cost wholesale borrowings and share repurchases. Growth in average earning assets of 4.4% partly offset these pressures.
Is U.S. Bancorp's dividend and buyback program sustainable?
The company returned 112% of 2006 earnings, above its 80% target, funded by strong earnings and capital levels that exceed well-capitalized thresholds. The Board raised the dividend 21.2% and approved a 150 million share repurchase authorization through 2008. Parent company funding relies on dividends from subsidiaries, and about $1.1 billion was available for dividends from bank subsidiaries without prior regulatory approval at year-end 2006.
What are the main risks investors should watch?
The filing highlights a flat or inverted yield curve that could continue to compress margins, slowing commercial real estate and condominium activity, softening new vehicle sales that could affect auto lease residual values, and rising delinquencies in consumer lending as bankruptcy filings normalize. It also flags integration risk from recent trust and payments acquisitions and dependence on fee-based businesses for growth.
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