10-QPeriod: Q1 FY2008

US BANCORP \DE\ Quarterly Report for Q1 Ended Mar 31, 2008

Filed May 12, 2008For Securities:USBUSB-PHUSB-PPUSB-PRUSB-PQUSB-PSUSB-PA

Summary

US BancORP's (USB) first quarter 2008 report shows a slight decrease in net income to $1.09 billion, or $0.62 per diluted share, compared to $1.13 billion, or $0.63 per diluted share, in the prior year. This decline was influenced by several factors, including $253 million in impairment charges on structured investment securities and a $62 million reduction due to the adoption of new accounting standards. The company also saw a significant increase in its provision for credit losses, rising by $308 million year-over-year, reflecting continued stress in residential real estate markets and growth in consumer loan portfolios. Despite these challenges, US Bancorp demonstrated resilience with a 14.3% increase in total net revenue, driven by a 9.8% rise in net interest income and a notable 33.3% surge in noninterest income. This growth was bolstered by a $492 million gain from the Visa Inc. initial public offering. The company also maintained strong regulatory capital ratios, exceeding "well-capitalized" requirements. However, increasing noninterest expenses, up 14.2% primarily due to investments in business initiatives and higher credit collection costs, put pressure on profitability.

Key Highlights

  • 1Net income decreased slightly by 3.5% to $1.09 billion, with diluted EPS falling to $0.62 from $0.63 year-over-year.
  • 2Total net revenue increased by 14.3% to $3.87 billion, significantly boosted by a $492 million gain from the Visa IPO.
  • 3The provision for credit losses more than doubled, increasing by 174% to $485 million, indicating stress in the loan portfolio, particularly in residential real estate.
  • 4Noninterest income saw a substantial 33.3% increase to $2.30 billion, primarily due to the Visa IPO gain, though excluding this, organic fee revenue grew 7.3%.
  • 5Noninterest expense rose by 14.2% to $1.80 billion, driven by investments in business expansion, customer relationships, and higher credit collection costs.
  • 6Total loans grew by 2.9% to $158.3 billion, while total deposits increased by 5.2% to $138.3 billion, reflecting continued balance sheet expansion.
  • 7Regulatory capital ratios remained strong, with Tier 1 capital at 8.6% and Total risk-based capital at 12.6%, well above regulatory minimums.

Frequently Asked Questions

The Visa Inc. initial public offering in March 2008 resulted in a significant one-time gain of $492 million for US Bancorp, which substantially boosted noninterest income and overall net revenue for the quarter. This gain helped offset some of the negative pressures from increased credit loss provisions and security impairments.

The provision for credit losses increased by $308 million year-over-year to $485 million due to ongoing stress in the residential real estate markets and related industries, coupled with the continued growth of the consumer loan portfolios. This indicates management's expectation of future loan losses in these segments.

US Bancorp recorded $253 million in impairment charges on structured investment securities. This reflects the deteriorating value of these assets, likely due to widening credit spreads and ongoing market turmoil in the financial sector during the first quarter of 2008.

The adoption of SFAS 157 (Fair Value Measurements) and SFAS 159 (Fair Value Option) effective January 1, 2008, resulted in a $62 million reduction in pretax income related to accounting standard adoption (SAB 109 also adopted). Specifically, SFAS 157 required a $62 million reduction to trading revenue and caused a $19 million increase in mortgage banking revenue and compensation expense each. SFAS 159 did not have a significant impact on the Company's financial statements at adoption but allows for fair value accounting for certain loans held for sale.