01—Abstract
Summary
Summary of the 10-K filed February 22, 2013. Cited figures are marked; the original filing is the authoritative source.
U.S. Bancorp (USB) closed fiscal 2012 with record earnings: net income attributable to the company rose 15.9% to $5.6 billiona, or $2.84 per diluted share, versus $2.46 in 2011.
Return on average assets was 1.65% and return on average common equity was 16.2%, which management describes as the highest among its peers. Growth came from net revenue up 6.2% to $20.3 billionb, driven by a 6.0% rise in net interest income and a 6.4% rise in noninterest income, most notably mortgage banking revenue, which nearly doubled (up 96.5%). Credit quality improved: the provision for credit losses fell 19.7% to $1.9 billion, net charge-offs fell 26.2%, and nonperforming assets declined to $2.7 billion from $3.8 billion.
Average loans grew 6.9%c and average deposits grew 10.6%, while the efficiency ratio held at 51.5%. Capital strength was a central theme. The Tier 1 common equity ratio under the proposed Basel III standardized approach was 8.1%, above the company's 8.0% target, and the Tier 1 capital ratio was 10.8%.
The company returned 62% of earnings to common shareholders through dividends and buybacks. The dividend was raised 56% in March 2012 to $0.195d per quarter, and the company repurchased about 59 million shares in 2012 at an average price of $31.78. Key risks flagged in the filing include Dodd-Frank and pending Basel III rules, a CFPB that is becoming more active, and a regulatory-driven shift in revenue, notably lower debit interchange income (an estimated $328 million impact in 2012).
Mortgage servicing and foreclosure practices remain under consent orders, and an $80 million accrual was recorded in 2012 for a related settlement. Exposure to California real estate (21.8% of commercial real estate loans) is a notable concentration. Management expects net charge-offs to be relatively stable to modestly lower in Q1 2013.
02—Key points
Key Highlights
- Record 2012 net income attributable to U.S. Bancorp of $5.6 billion (up 15.9%), with diluted EPS of $2.84 versus $2.46 in 2011
- Return on average common equity of 16.2% and return on average assets of 1.65%, with the efficiency ratio at 51.5%
- Net revenue rose 6.2% to $20.3 billion, led by mortgage banking revenue growth of 96.5% and a 6.0% increase in net interest income
- Credit quality improved: provision for credit losses fell 19.7% to $1.9 billion, net charge-offs fell 26.2%, and nonperforming assets dropped to $2.7 billion
- Strong capital position: Tier 1 common equity ratio of 8.1% under proposed Basel III standardized rules (target 8.0%), Tier 1 capital ratio of 10.8%, and total risk-based capital ratio of 13.1%
- Shareholder returns: dividend raised 56% to $0.195 per quarter, and about 59 million shares repurchased in 2012 at an average of $31.78; 62% of earnings returned to common shareholders
- Key risks include pending Basel III and Dodd-Frank rulemaking, reduced debit interchange revenue, mortgage servicing consent orders (an $80 million accrual recorded), and California real estate concentration (21.8% of commercial real estate loans)
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2012filed February 22, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $20.29B— | — |
| Interest Expense | $2.14B$2.52B | −15.0% |
| Net Income | $5.65B$4.87B | +15.9% |
| EPS (Basic) | $2.85$2.47 | +15.4% |
| EPS (Diluted) | $2.84$2.46 | +15.4% |
| Shares Outstanding (Basic) | 1.89B1.91B | −1.4% |
| Shares Outstanding (Diluted) | 1.90B1.92B | −1.4% |
05—Questions
Frequently Asked Questions
How profitable was U.S. Bancorp in 2012 and how did that compare to 2011?
Net income attributable to U.S. Bancorp was $5.6 billion in 2012, up 15.9% from $4.9 billion in 2011. Diluted EPS was $2.84, compared with $2.46. Return on average assets improved to 1.65% from 1.53%, and return on average common equity improved to 16.2% from 15.8%. Results included an $80 million expense accrual for a mortgage foreclosure-related settlement in 2012, while 2011 included a $263 million merchant settlement gain.
What drove revenue growth, and which business lines were strongest?
Total net revenue increased 6.2% to $20.3 billion. Net interest income rose 6.0%, driven by average earning asset growth, lower-cost core deposits, and long-term debt repricing. Noninterest income rose 6.4%, with mortgage banking revenue up 96.5% to $1.9 billion on strong origination and sales activity. Trust and investment management fees rose 5.5%, and merchant processing revenue rose 3.0%. Partly offsetting these gains, credit and debit card revenue fell 16.9% due to 2011 debit interchange legislation, which reduced revenue by an estimated $328 million in 2012. Consumer and Small Business Banking contributed $1.3 billion of net income, up 71% year over year.
Is the dividend sustainable, and how much capital is being returned to shareholders?
The board raised the quarterly dividend 56% in March 2012, from $0.125 to $0.195 per share, and total 2012 dividends declared were $0.78 per share. In 2012 the company repurchased about 59 million shares for $1.9 billion and returned 62% of earnings to common shareholders through dividends and buybacks. About 54 million shares remained under the authorization at year-end. Capital ratios exceed regulatory minimums and the company's own targets, and the bank subsidiaries are well capitalized. The filing notes that proposed Basel III rules could raise minimum capital requirements, which may constrain future capital distributions, and that Federal Reserve capital plan review applies to capital distributions.
What are the main risks investors should monitor?
Regulatory risk is significant: Dodd-Frank rulemaking is still incomplete, the CFPB is becoming more active, the Volcker Rule takes effect in July 2014, and Basel III proposals may raise capital requirements. Mortgage operations face risk from consent orders on servicing and foreclosure practices, with the company having accrued $80 million in a January 2013 settlement and $130 million for related matters. Credit risk is concentrated in California, where 21.8% of commercial real estate loans and 13.7% of residential mortgages are secured. Revenue risk includes lower debit interchange income and sensitivity to interest rates, both for net interest margin, which fell to 3.58% from 3.65%, and for mortgage servicing rights valuations.
How is credit quality trending?
Credit quality improved through 2012. Net charge-offs were $2.1 billion, or 0.97% of average loans, down from 1.41% in 2011. Nonperforming assets were $2.7 billion (1.19% of loans and other real estate), down from $3.8 billion. Excluding covered assets, nonperforming assets fell 18.9% to $2.1 billion. The allowance for credit losses was $4.7 billion, or 2.12% of total loans, and covered 228% of nonperforming loans. Management expects net charge-offs to be relatively stable to modestly lower in Q1 2013 and expects nonperforming assets to decline further.
06—Continue