How did U.S. Bancorp's profitability change in 2009?

Net income attributable to U.S. Bancorp declined to $2.2 billion ($.97 per diluted share) from $2.9 billion ($1.61) in 2008. Return on average assets was .82 percent and return on average common equity was 8.2 percent, versus 1.21 and 13.9 percent a year earlier. The decline was driven mainly by a $2.5 billion increase in the provision for credit losses, partly offset by higher net revenue.

What is driving the increase in credit losses, and what does management expect?

Credit losses rose on weak housing and construction markets, commercial real estate stress, and rising unemployment affecting credit card and prime residential portfolios. Net charge-offs rose $2.1 billion. Management expects nonperforming assets, delinquencies and net charge-offs to keep increasing in early 2010, but at a decreasing rate compared with prior quarters.

What are the FDIC loss-sharing agreements and why do they matter to investors?

Assets acquired from failed institutions (Downey, PFF and First Bank of Oak Park) are covered by agreements under which the FDIC reimburses a large share of future credit losses: 80 percent of the first $3.5 billion of losses on FBOP assets and 95 percent beyond that. Covered assets totaled $22.5 billion at year-end. These agreements limit the company's exposure to losses on acquired loans, though nonperforming covered assets were $2.0 billion.

Is U.S. Bancorp's capital position adequate, and did the dividend change?

The company says its capital is strong. It redeemed $6.6 billion of TARP preferred stock in 2009, raised $2.7 billion in common equity, and ended with a Tier 1 capital ratio of 9.6 percent and a tangible common equity to risk-weighted assets ratio of 6.1 percent. Quarterly dividends were reduced to $.05 per share in 2009 from $.425, which cut total dividends to $.20 for the year from $1.70, a move that retains capital.

US BANCORP \DE\ 10-K FY2009 Annual Report

01—Abstract

Summary

Summary of the 10-K filed February 26, 2010. Cited figures are marked; the original filing is the authoritative source.

U.S. Bancorp's 2009 Form 10-K reports a year of elevated credit costs that nonetheless left the company profitable.

Net income attributable to U.S. Bancorp was $2.2 billion^a, or $.97 per diluted share, down from $2.9 billion ($1.61) in 2008. Return on average assets fell to .82 percent and return on average common equity to 8.2 percent. Net revenue rose 13.6 percent to $16.7 billion, driven by a 10.8 percent increase in net interest income and a 16.8 percent increase in noninterest income, largely from mortgage banking.

However, the provision for credit losses more than doubled-to-nearly-double, rising 79.5 percent to $5.6 billion^b, and net charge-offs reached 2.08 percent of average loans versus 1.10 percent in 2008. The balance sheet grew to $281.2 billion in total assets, aided by the October 2009 FDIC-assisted acquisition of First Bank of Oak Park (about $18.0 billion of assets) and the November 2008 Downey/PFF transactions. Those acquisitions carry FDIC loss-sharing agreements covering $22.5 billion of assets.

Nonperforming assets rose to 3.02 percent of loans and other real estate (2.25 percent excluding covered assets), and management expects nonperforming assets and charge-offs to keep rising in early 2010, though at a slower pace. Capital was rebuilt during the year. The company redeemed $6.6 billion^c of TARP preferred stock in June 2009 and raised $2.7 billion through a common stock sale in May.

Tier 1 common equity to risk-weighted assets improved to 6.8 percent from 5.1 percent, and the Tier 1 capital ratio was 9.6 percent. The dividend was cut sharply to $.05 per quarter, totaling $.20 for 2009 versus $1.70^d in 2008, which reflects a deliberate retention of capital.

02—Key points

Key Highlights

Net income attributable to U.S. Bancorp fell 25 percent to $2.2 billion, or $.97 per diluted share, from $2.9 billion ($1.61) in 2008.
Provision for credit losses rose 79.5 percent to $5.6 billion, and net charge-offs reached 2.08 percent of average loans (1.10 percent in 2008).
Total net revenue grew 13.6 percent to $16.7 billion, with net interest income up 10.8 percent and noninterest income up 16.8 percent, led by mortgage banking revenue of $1.0 billion versus $270 million.
Nonperforming assets reached $5.9 billion, or 3.02 percent of loans and other real estate, up from 1.42 percent; excluding covered assets the ratio was 2.25 percent.
Tier 1 common equity to risk-weighted assets rose to 6.8 percent from 5.1 percent after a $2.7 billion common stock offering and the $6.6 billion TARP preferred redemption.
The FDIC-assisted acquisition of First Bank of Oak Park added about $18.0 billion of assets; $22.5 billion of covered assets are protected by FDIC loss-sharing agreements.
The efficiency ratio was 48.4 percent, and the full-year dividend was cut to $.20 per share from $1.70 in 2008.

03—One dollar

04—Financials

Financial Highlights

10-KFY2009filed February 26, 2010

Net Income$2.21B EPS (Diluted)$0.97 Total Assets$281.18B Cash & Equivalents$6.21B Free Cash Flow$7.60B

Financial Statements

FY2009 against FY2008

Line item	FY2009FY2008	FY2008	Change
Interest Expense	$3.02B$4.69B	$4.69B	−35.6%
Net Income	$2.21B$2.95B	$2.95B	−25.2%
EPS (Basic)	$0.97$1.62	$1.62	−40.1%
EPS (Diluted)	$0.97$1.61	$1.61	−39.8%
Shares Outstanding (Basic)	1.85B1.74B	1.74B	+6.3%
Shares Outstanding (Diluted)	1.86B1.76B	1.76B	+5.9%

05—Questions

Frequently Asked Questions

How did U.S. Bancorp's profitability change in 2009?
Net income attributable to U.S. Bancorp declined to $2.2 billion ($.97 per diluted share) from $2.9 billion ($1.61) in 2008. Return on average assets was .82 percent and return on average common equity was 8.2 percent, versus 1.21 and 13.9 percent a year earlier. The decline was driven mainly by a $2.5 billion increase in the provision for credit losses, partly offset by higher net revenue.
What is driving the increase in credit losses, and what does management expect?
Credit losses rose on weak housing and construction markets, commercial real estate stress, and rising unemployment affecting credit card and prime residential portfolios. Net charge-offs rose $2.1 billion. Management expects nonperforming assets, delinquencies and net charge-offs to keep increasing in early 2010, but at a decreasing rate compared with prior quarters.
What are the FDIC loss-sharing agreements and why do they matter to investors?
Assets acquired from failed institutions (Downey, PFF and First Bank of Oak Park) are covered by agreements under which the FDIC reimburses a large share of future credit losses: 80 percent of the first $3.5 billion of losses on FBOP assets and 95 percent beyond that. Covered assets totaled $22.5 billion at year-end. These agreements limit the company's exposure to losses on acquired loans, though nonperforming covered assets were $2.0 billion.
Is U.S. Bancorp's capital position adequate, and did the dividend change?
The company says its capital is strong. It redeemed $6.6 billion of TARP preferred stock in 2009, raised $2.7 billion in common equity, and ended with a Tier 1 capital ratio of 9.6 percent and a tangible common equity to risk-weighted assets ratio of 6.1 percent. Quarterly dividends were reduced to $.05 per share in 2009 from $.425, which cut total dividends to $.20 for the year from $1.70, a move that retains capital.

06—Continue

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