01—Abstract
Summary
Summary of the 10-K filed February 21, 2014. Cited figures are marked; the original filing is the authoritative source.
U.S. Bancorp reported record 2013 earnings of $5.8 billiona ($3.00 diluted EPS), up 3.3% from 2012, driven primarily by a $542 million (28.8%) decline in the provision for credit losses and disciplined expense control, which more than offset a 5.8% decline in noninterest income.
Net revenue fell 3.4% as net interest margin compressed to 3.44% from 3.58%, and mortgage banking revenue dropped 30% as refinancing activity slowed. Management highlighted an industry-leading efficiency ratio of 52.4%, return on average assets of 1.65% and return on common equity of 15.8%. Balance sheet growth was solid: average loans rose 5.6% to $227.5 billionb and average deposits rose 6.3%, while credit quality continued to improve with net charge-offs down 30.1% to $1.5 billion and nonperforming assets down 23.7% to $2.0 billion including covered assets.
The company returned 71% of 2013 earnings to common shareholders through dividends and buybacks, repurchasing about 65 million shares, and raised its quarterly dividend 18% to $0.23c. Capital remained strong, with a Basel I Tier 1 capital ratio of 11.2%, a total risk-based capital ratio of 13.2%, and an estimated Basel III common equity Tier 1 ratio of 8.8% under final standardized rules. Investors should weigh the margin pressure, reliance on mortgage and regulatory-driven fee changes (including the Durbin amendment and the court challenge to debit interchange caps), and ongoing Dodd-Frank and CFPB rulemaking as the main risks to future earnings.
02—Key points
Key Highlights
- Record 2013 net income attributable to U.S. Bancorp of $5.8 billion, up 3.3%; diluted EPS of $3.00 versus $2.84 in 2012
- Provision for credit losses fell 28.8% to $1.3 billion and net charge-offs declined 30.1% to $1.5 billion, reflecting improving credit trends
- Net interest margin compressed to 3.44% from 3.58%, and net interest income fell 1.3% to $10.8 billion (taxable-equivalent)
- Noninterest income declined 5.8% to $8.8 billion as mortgage banking revenue dropped 30.0%, partially offset by growth in trust, card, and merchant fees
- Efficiency ratio improved to 52.4%, with noninterest expense down 1.7% to $10.3 billion
- Returned 71% of 2013 earnings to common shareholders; repurchased about 65 million shares and raised quarterly dividend 18% to $0.23
- Capital position strong: Basel I Tier 1 capital ratio 11.2%, total risk-based capital 13.2%, leverage ratio 9.6%, and estimated Basel III CET1 ratio of 8.8%
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 21, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $19.60B$20.29B | −3.4% |
| Interest Expense | $1.68B$2.14B | −21.4% |
| Net Income | $5.84B$5.65B | +3.3% |
| EPS (Basic) | $3.02$2.85 | +6.0% |
| EPS (Diluted) | $3.00$2.84 | +5.6% |
| Shares Outstanding (Basic) | 1.84B1.89B | −2.5% |
| Shares Outstanding (Diluted) | 1.85B1.90B | −2.5% |
05—Questions
Frequently Asked Questions
How did U.S. Bancorp's profitability change in 2013?
Net income attributable to U.S. Bancorp rose 3.3% to $5.8 billion, or $3.00 per diluted share, versus $2.84 in 2012. The increase came mainly from a $542 million lower provision for credit losses and controlled expenses, which offset a 3.4% decline in total net revenue. Return on average assets held at 1.65% and return on average common equity was 15.8%, down from 16.2%.
What is driving the pressure on net interest income and the margin?
The net interest margin fell to 3.44% from 3.58%, mainly due to lower reinvestment rates on investment securities, growth in the lower-yielding investment portfolio, and lower loan rates. These were partly offset by lower deposit rates and reduced higher-cost long-term debt. Average earning assets grew 2.9%, but this was not enough to offset the margin decline, leaving net interest income down 1.3%.
Is credit quality improving, and what should investors watch?
Credit quality continued to improve, with total net charge-offs at 0.64% of average loans versus 0.97% in 2012, and nonperforming assets down to $2.0 billion. However, accruing loans 90+ days past due rose 8% excluding covered loans, driven by restructured residential mortgages in trial periods. Management expects net charge-offs to increase modestly in early 2014, and California exposure (23% of commercial real estate and 17% of residential mortgages) remains a concentration risk.
How is the company returning capital and how strong is its capital base?
The company returned 71% of 2013 earnings through dividends and share repurchases, buying back about 65 million shares at an average price of $35.55 and raising its quarterly dividend 18% to $0.23. It finished 2013 with a Basel I Tier 1 capital ratio of 11.2% and an estimated Basel III CET1 ratio of 8.8%, above its 8.0% target, though the Basel III ratio is an estimate and new rules phase in through 2019.
What regulatory risks could affect future earnings?
Key risks include the Dodd-Frank Act's reduction of debit interchange fees, which a D.C. District Court invalidated in July 2013 with an appeal and stay pending, potentially leaving the cap lower in future rules; new CFPB mortgage rules; the Volcker Rule, effective April 1, 2014; Basel III capital and liquidity (LCR) requirements; and CCAR stress testing that governs capital distributions. The filing notes these could increase compliance costs and reduce fee revenue.
06—Continue