01—Abstract
Summary
Summary of the 10-K filed February 25, 2008. Cited figures are marked; the original filing is the authoritative source.
U.S. Bancorp's 2007 Form 10-K (filed February 25, 2008) shows a company still highly profitable but with earnings declining.
Net income fell 9.0% to $4.3 billiona ($2.43 diluted EPS, versus $2.61 in 2006), driven by a $330 million Visa litigation indemnification charge, higher credit costs, and investments in payments, geographic expansion, and technology. Return on average common equity was 21.3% and efficiency ratio deteriorated to 49.3% from 45.4%. Fee-based revenue remained strong, exceeding 50% of total net revenue, and fee growth was 8.6% organically, but net interest margin compressed to 3.47% from 3.65% amid competitive lending, a flat yield curve, and higher funding costs.
Credit quality is the key watch item. Net charge-offs rose to 0.54% of average loans from 0.39%, the provision increased 45.6% to $792 million, and nonperforming assets rose to $690 millionb. Management expects credit quality to deteriorate across the industry in 2008, with nonperforming assets and retail charge-offs expected to rise moderately.
Exposure to California commercial real estate (19.8% of the CRE portfolio) and residential mortgage and home-equity stress are specific concerns. The company also took a $107 millionc valuation loss on structured investment securities bought from affiliate-managed money market funds, and further impairments were flagged as likely. Capital remains solid but thinner.
Tier 1 risk-based capital was 8.3% (versus 8.8%), total risk-based capital 12.2%, and tangible common equity 5.1% of tangible assets. The company returned 111% of 2007 earnings to shareholders through dividends and buybacks, above its 80% target, and raised the quarterly dividend 6.25% to $0.425d.
Management plans to resume buybacks after Q1 2008 and targets 8.5% Tier 1 capital in 2008. Credit ratings were upgraded by S&P in February 2007 and remain stable or positive across agencies.
02—Key points
Key Highlights
- Net income of $4.3 billion ($2.43 diluted EPS) declined 9.0% from 2006, reflecting a $330 million Visa indemnification charge and higher credit costs
- Total net revenue rose 2.2% to $13.9 billion, with noninterest income up 4.8% to $7.2 billion and fee-based revenue growing 8.6% organically
- Net interest margin compressed 18 basis points to 3.47% due to competitive loan pricing, a flat yield curve, and higher funding costs
- Net charge-offs rose to 0.54% of average loans (from 0.39%) and the provision for credit losses increased 45.6% to $792 million; management expects further credit deterioration in 2008
- Nonperforming assets rose to $690 million (0.45% of loans plus OREO), with California CRE (19.8% of CRE loans) and residential/home equity portfolios flagged as stress areas
- Tier 1 capital ratio declined to 8.3% from 8.8%; the company returned 111% of earnings to shareholders, above its 80% target, and raised the quarterly dividend 6.25% to $0.425
- Structured investment vehicle exposure produced a $107 million valuation loss, with further impairments considered likely in coming quarters
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 25, 2008Financial Statements
| Interest Expense | $6.45B |
| Net Income | $4.32B |
| EPS (Basic) | $2.45 |
| EPS (Diluted) | $2.42 |
| Shares Outstanding (Basic) | 1.74B |
| Shares Outstanding (Diluted) | 1.76B |
05—Questions
Frequently Asked Questions
Why did U.S. Bancorp's earnings decline in 2007?
Net income fell 9.0% to $4.3 billion, mainly because of a $330 million charge tied to its contingent obligation for Visa U.S.A. litigation, a $107 million valuation loss on securities bought from affiliate-managed money market funds, a 45.6% increase in the provision for credit losses, and higher noninterest expense from growth investments. Net interest margin also compressed, from 3.65% to 3.47%.
How strong is the company's credit quality outlook?
Credit quality remained relatively strong on an absolute basis but is deteriorating. Net charge-offs rose to 0.54% of average loans, and 90-day delinquencies reached 0.38% (from 0.24%). Management expects industry credit quality to worsen in 2008, with nonperforming assets and retail net charge-offs expected to rise moderately, and it highlights exposure to California real estate and sub-prime residential mortgages.
Is the dividend and buyback policy sustainable given capital levels?
The company paid out 111% of 2007 earnings, above its 80% target, and raised its dividend 6.25%. Capital ratios declined (Tier 1 to 8.3% from 8.8%, tangible common equity to 5.1% from 5.5%), though all regulatory ratios remain well above 'well-capitalized' thresholds. Management plans to resume share repurchases after Q1 2008 and targets an 8.5% Tier 1 ratio in 2008, implying it expects to rebuild capital.
What is the outlook for the company's profitability and key financial objectives?
Management expects net income to grow somewhat moderately in 2008 and continues to target 10% long-term EPS growth and a return on common equity of at least 20%. The 2007 ROE of 21.3% was above that threshold. Net interest margin is expected to remain roughly stable at 2007 levels if the Federal Reserve holds rates, and the Visa Inc. IPO is expected to generate a gain exceeding the 2007 Visa charges.
What risks in the investment portfolio should investors monitor?
The available-for-sale portfolio carried a $1.1 billion net unrealized loss at year-end 2007, versus $600 million a year earlier. Structured investment vehicle securities, classified as asset-backed, are highly sensitive to credit spread widening, and management stated that further impairment of these holdings is likely over the next few quarters. Some municipal securities are also insured by monoline insurers that have recently been downgraded.
06—Continue