01—Abstract
Summary
Summary of the 10-K filed February 23, 2012. Cited figures are marked; the original filing is the authoritative source.
U.S. Bancorp reported record 2011 results, with net income attributable to the company of $4.9 billiona ($2.46 per diluted share), up 46.9% from $3.3 billion in 2010.
Total net revenue rose 5.3% to $19.1 billionb, driven by a 5.7% increase in net interest income and a 4.8% increase in noninterest income. The efficiency ratio was 51.8%, and return on average assets and common equity were 1.53% and 15.8%. Results were helped by a $263 million merchant settlement gain and a $46 million gain on the First Community Bank of New Mexico acquisition, partly offset by a $130 million accrual for mortgage servicing matters.
Credit quality improved markedly. The provision for credit losses fell 46.2% to $2.3 billionc, which was $500 million below net charge-offs, and net charge-offs dropped 32% to $2.8 billion. Nonperforming assets declined to $3.8 billion from $5.0 billion, and the allowance for credit losses stood at 2.39% of period-end loans.
Loans grew 6.5% to $209.8 billiond and deposits rose 13.0% to $230.9 billion, reflecting strong flight-to-quality inflows. Capital remained strong, with a Tier 1 capital ratio of 10.8%, total risk-based capital of 13.3%, and a 8.6% Tier 1 common ratio under Basel I (8.2% under anticipated Basel III). Shareholders' equity grew to $34.0 billion.
The main investor considerations are a sharp increase in investment securities (up 33.7% to $70.8 billion, partly to build liquidity for anticipated regulatory requirements), pressure on noninterest income from Durbin Amendment debit interchange limits (estimated at roughly $300 million annualized), elevated regulatory and compliance costs under Dodd-Frank, and ongoing mortgage servicing and foreclosure remediation under Consent Orders with federal regulators. The company also repurchased 22 million shares in 2011 and returned 31% of earnings to common shareholders.
02—Key points
Key Highlights
- Net income attributable to U.S. Bancorp rose 46.9% to $4.9 billion, or $2.46 per diluted share, versus $1.73 in 2010, with ROA of 1.53% and ROE of 15.8%.
- Total net revenue increased 5.3% to $19.1 billion, with net interest income up 5.7% to $10.3 billion and noninterest income up 4.8% to $8.8 billion.
- Credit costs continued to normalize: the provision for credit losses fell 46.2% to $2.3 billion, net charge-offs fell 32% to $2.8 billion, and nonperforming assets dropped to $3.8 billion from $5.0 billion.
- Balance sheet growth was strong, with loans up 6.5% to $209.8 billion and deposits up 13.0% to $230.9 billion, including a 51.3% increase in noninterest-bearing deposits.
- Capital position remained robust, with a Tier 1 capital ratio of 10.8%, total risk-based capital of 13.3%, leverage of 9.1%, and an 8.2% Tier 1 common ratio under anticipated Basel III definitions.
- Earnings included one-time items: a $263 million merchant settlement gain and $46 million FCB acquisition gain, offset by a $130 million mortgage servicing accrual.
- Regulatory headwinds include Durbin Amendment debit interchange reductions (about $300 million annualized revenue impact), Dodd-Frank compliance costs, and Consent Orders on mortgage servicing and foreclosure practices.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 23, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Interest Expense | $2.52B$2.58B | −2.4% |
| Net Income | $4.87B$3.32B | +46.9% |
| EPS (Basic) | $2.47$1.74 | +42.0% |
| EPS (Diluted) | $2.46$1.73 | +42.2% |
| Shares Outstanding (Basic) | 1.91B1.91B | +0.1% |
| Shares Outstanding (Diluted) | 1.92B1.92B | +0.1% |
05—Questions
Frequently Asked Questions
How did U.S. Bancorp's 2011 profitability compare with 2010, and what drove the change?
Net income attributable to U.S. Bancorp was $4.9 billion in 2011 versus $3.3 billion in 2010, a 46.9% increase. The improvement came mainly from a 46.2% lower provision for credit losses, a 5.7% rise in net interest income on growth in earning assets and lower-cost core deposits, and a 4.8% rise in noninterest income. Results also benefited from one-time gains of $263 million and $46 million, partly offset by a $130 million mortgage servicing accrual and higher noninterest expense (up 5.6%).
Is the credit quality trend improving, and what should investors watch?
Credit trends improved throughout 2011. Net charge-offs fell to 1.41% of average loans from 2.17%, nonperforming assets declined 23% excluding covered assets, and accruing loans 90 days or more past due decreased. Investors should watch residential mortgage stress, where nonperforming residential loans rose, and California concentration, which accounts for 21.3% of commercial real estate and 11.7% of residential mortgage loans. Credit reserve coverage stood at 2.39% of total loans.
What regulatory and legal risks could affect future results?
The Durbin Amendment is expected to reduce noninterest income by about $300 million annually. Dodd-Frank rulemaking, including Basel III capital and liquidity requirements, capital plan review, and the Volcker Rule, could raise capital needs and constrain activities. The company and two bank subsidiaries entered into Consent Orders over mortgage servicing and foreclosure processes, with a $130 million accrual. Additional state and federal mortgage settlement discussions were ongoing, and checking overdraft fee litigation was pending without a certified class.
How strong is U.S. Bancorp's capital position and what does it mean for shareholders?
At December 31, 2011, the Tier 1 capital ratio was 10.8%, total risk-based capital 13.3%, and leverage 9.1%, all well above well-capitalized thresholds. The Tier 1 common ratio was 8.6% under Basel I and 8.2% under anticipated Basel III. The company repurchased about 22 million shares for $550 million and paid $961 million in common dividends, returning 31% of earnings. Remaining repurchase authority was about 29 million shares, and dividends rose to $0.125 per quarter from $0.05.
Why did investment securities and deposits grow so quickly in 2011?
Deposit growth reflected customer 'flight-to-quality' and organic growth in core deposits, including a 51.3% rise in noninterest-bearing deposits. Investment securities rose 33.7% to $70.8 billion as the company deliberately increased on-balance sheet liquidity in anticipation of regulatory liquidity requirements, mainly U.S. Treasury and agency mortgage-backed securities. This added liquidity lowered the net interest margin to 3.65% from 3.88%, which is a key trade-off for investors to monitor.
06—Continue