01—Abstract
Summary
Summary of the 10-K filed March 2, 2009. Cited figures are marked; the original filing is the authoritative source.
U.S. Bancorp's 2008 Form 10-K (filed March 2, 2009) shows a company whose earnings fell sharply but whose balance sheet and capital position were strengthened during the financial crisis.
Net income was $2.9 billiona, or $1.61 per diluted share, down from $4.3 billion ($2.43) in 2007, with ROA falling to 1.21% from 1.93% and ROE to 13.9% from 21.3%. The decline was driven mainly by a $3.1 billion provision for credit losses (up from $792 million), $978 million of net securities losses including impairments on structured investments, and higher noninterest expense. Net revenue still grew 4.4% to $14.7 billion, led by a 16.3% rise in net interest income as the net interest margin improved to 3.66%.
Balance sheet growth was substantial, partly through acquisitions. Total assets reached $265.9 billionb and loans rose 20.4% to $185.2 billion, including $11.5 billion of covered assets from the FDIC-assisted Downey and PFF acquisitions, which carry loss-sharing protection. Deposits grew 21.2% to $159.4 billion.
Credit quality deteriorated markedly: nonperforming assets rose to 1.42% of loans plus OREO from 0.45%, and net charge-offs reached 1.10% of average loans versus 0.54%. Management expects credit conditions to worsen further in 2009. Capital was reinforced in late 2008 through the $6.6 billionc sale of preferred stock and warrants to the U.S. Treasury under the Capital Purchase Program.
The Tier 1 capital ratio ended at 10.6%d and the total risk-based ratio at 14.3%, though tangible common equity was only 3.2% of tangible assets (4.5% excluding AOCI). Participation in the program restricts dividend increases and share repurchases for up to three years, and the 10-K notes that the company repurchased only about 2 million shares in 2008 versus 58 million in 2007.
02—Key points
Key Highlights
- Net income fell 31.9% to $2.9 billion ($1.61 diluted EPS) from $4.3 billion ($2.43) in 2007, mainly due to credit provisions and securities impairments.
- Provision for credit losses more than tripled to $3.1 billion; net charge-offs rose to 1.10% of average loans from 0.54%.
- Net interest income rose 16.3% to $7.9 billion (taxable-equivalent), with net interest margin widening to 3.66% from 3.47%.
- Securities losses of $978 million, including $788 million of impairment charges on structured investment and related securities.
- Total assets grew 11.9% to $265.9 billion; loans rose 20.4% to $185.2 billion, aided by the Downey and PFF acquisitions from the FDIC.
- Received $6.6 billion from the U.S. Treasury via the Capital Purchase Program; Tier 1 capital ratio was 10.6% and total risk-based capital ratio 14.3%.
- Nonperforming assets rose to 1.42% of loans and OREO from 0.45%; dividend declared held at $1.70 per share for 2008, though the 2008 payout ratio reached about 105% of earnings.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed March 2, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Interest Expense | $4.69B$6.45B | −27.3% |
| Net Income | $2.95B$4.32B | −31.9% |
| EPS (Basic) | $1.62$2.45 | −33.9% |
| EPS (Diluted) | $1.61$2.42 | −33.5% |
| Shares Outstanding (Basic) | 1.74B1.74B | +0.4% |
| Shares Outstanding (Diluted) | 1.76B1.76B | 0.0% |
05—Questions
Frequently Asked Questions
Why did U.S. Bancorp's earnings decline so much in 2008?
Earnings fell mainly because of a sharp increase in the provision for credit losses, which reached $3.1 billion versus $792 million in 2007, driven by residential real estate and homebuilding stress and a weakening economy. Securities impairments on structured investments, perpetual preferred stock and non-agency mortgage-backed securities added $978 million of net securities losses. Noninterest expense also rose 6.1%, partly offset by a $551 million Visa gain.
Is U.S. Bancorp's capital position adequate given the credit deterioration?
Regulatory capital ratios are strong: Tier 1 at 10.6% and total risk-based capital at 14.3%, both above well-capitalized thresholds, and the bank subsidiaries were rated well-capitalized. The $6.6 billion Treasury preferred investment strengthened the buffer. However, tangible common equity was only 3.2% of tangible assets, which is a thinner measure that investors often watch closely.
What are the Downey and PFF acquisitions and what risks do they carry?
In November 2008 U.S. Bancorp acquired the banking operations of Downey Savings and PFF Bank from the FDIC, adding $11.5 billion of covered assets. Loss-sharing agreements mean the FDIC absorbs most losses above a $1.6 billion first-loss position on the covered assets, with the company bearing 20% of the next $3.1 billion and 5% beyond that. The company estimated its share of losses at about $0.7 billion, but actual outcomes could differ from estimates.
What credit trends should investors watch in 2009?
Management expects credit conditions to continue worsening in 2009, with net charge-offs and delinquencies rising, particularly in residential mortgages, credit cards and commercial real estate. California commercial real estate, with 21% of that portfolio, and homebuilder exposure are noted as specific concerns. Nonperforming assets were $2.6 billion at year-end, and the allowance covered 151% of nonperforming loans, down from 406% a year earlier.
What limits does the Treasury investment place on shareholder returns?
Participation in the Capital Purchase Program restricts the company from raising its quarterly common dividend and from repurchasing common stock for up to three years or until the preferred stock is redeemed, whichever is shorter. The Treasury's consent is needed for common dividend increases or most repurchases. The 10-K also notes that the preferred dividend is 5% for five years before rising to 9%, and the U.S. Bancorp repurchase authorization was limited to about 20 million shares.
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