U.S. Bancorp (NYSE:USB) is the nation's 6th largest bank. The bank offers loans, credit, and insurance products to consumers primarily in the Midwestern and Western United States. USB competes against large banks such as Bank of America (BAC), as well as regional banks such as Regions Financial Corporation (RF).
U.S. Bancorp, like other U.S. banks, has been hurt by the 2008 Financial Crisis. In 2008, USB held $2.64 Billion in non-performing ("toxic") assets, which caused the bank to increase its loan loss provision to $3.1 Billion. This caused USB's net income to decline over 31% from 2007 to 2008. Unlike its competitors, USB did profit in Q4 08, however. The bank made $264 million in the quarter. Comparatively, Bank of America (BAC), Wells Fargo (WFC), and Regions Financial Corporation (RF) lost $1.8 Billion, $2.7 Billion and $5.6 Billion, respectively. USB was given $6.6 Billion in TARP funds to improve its financial health. To pay back the TARP funds immediately, the bank cut its dividends for the first time in 75 years. In addition, volatile interest rates are inversely proportional to USB profitability. Rising interest rates cause decreased demand from consumers, as they cannot afford to take out a loan, and makes consumers more likely to default. Thus, if interest rates increase, USB net income decreases. The Federal Funds Rate and Prime Rate have decreased in the past year, which caused USB net interest income to increase over 15%.
U.S. Bancorp's commercial and consumer lending services are principally offered to customers within the Company’s domestic markets, to domestic customers with foreign operations and within certain niche national venues. Lending services include traditional credit products, as well as credit card services, financing and import/export trade, asset-backed lending, agricultural finance and other products. Leasing products are offered through bank leasing subsidiaries. Depository services include checking accounts, savings accounts and time certificate contracts. Ancillary services, such as foreign exchange, treasury management and receivable lock-box collection are provided to corporate customers. U.S. Bancorp’s bank and trust subsidiaries provide a range of asset management and fiduciary services for individuals, estates, foundations, business corporations and charitable organizations.
U.S. Bancorp’s non-banking subsidiaries primarily offer investment and insurance products to the Company’s customers principally within its markets, and mutual fund processing services to a broad range of mutual funds. As of December 31, 2009, its banking and investment services are provided through a network of 3,015 banking offices principally operating in 24 states in the Midwest and West. The Company operates a network of 5,148 branded ATMs and provides around-the-clock, seven day a week telephone customer service. Mortgage banking services are provided through banking offices and loan production offices throughout the Company’s markets. Consumer lending products may be originated through banking offices, indirect correspondents, brokers or other lending sources, and a consumer finance division. The Company is also a provider of Visa corporate and purchasing card services and corporate trust services in the United States. U.S. Bancorp's wholly owned subsidiary, Elavon, Inc., provides merchant processing services directly to merchants and through a network of banking affiliations. Affiliates of Elavon provide similar merchant services in Canada and segments of Europe.
First Quarter 2010 Results
U.S. Bancorp reported earnings of 34 cents per share during the first quarter of 2010. Revenues were $4.3 billion, up 11.3% year over year, reflecting growth in interest income and fee income. Credit metrics continued to deteriorate in the quarter, though the pace moderated. Net charge-offs (excluding covered loans) were 268 basis points (bps) of average loans outstanding, up 14 bps sequentially and 86 bps year over year. Profitability metrics improved both sequentially and year over year. Return on average assets and return on average common equity were 0.96% (up 10 bps sequentially and 15 bps year over year) and 10.5% (up 90 bps sequentially and 150 bps year over year), respectively.
The Payment Services segment offers corporate payment systems as well as debit, credit, and small business retail payment methods. Its Elavon brand also offers electronic check and gift card merchant processing. During 2009, Payment Services contributed $291 million of the Company’s net income.
The Wholesale Banking segment provides market knowledge and banking products to companies. Banking products range from treasury management to loans and trade financing. Wholesale Banking offers lending, equipment finance and small-ticket leasing, depository, treasury management, capital markets, foreign exchange, international trade services and other financial services to middle market, corporate, commercial real estate, and public sector clients. During the year ended December 31, 2009, Wholesale Banking contributed $240 million of the Company’s net income.
The Wealth Management and Securities Services segment provides investment, trust, and insurance products to businesses and individuals. Wealth Management & Securities Services provides trust, private banking, financial advisory, investment management, retail brokerage services, insurance, custody and mutual fund servicing through five businesses: Wealth Management, Corporate Trust, FAF Advisors, Institutional Trust and Custody and Fund Services. During 2009, Wealth Management & Securities Services contributed $373 million of the Company’s net income.
The Consumer Banking segment offers banking products to more than 14 million consumers. Segment products include consumer lending, home mortgages, and transactions. Consumer Banking delivers products and services through banking offices, telephone servicing and sales, online services, direct mail and ATM processing. It encompasses community banking, metropolitan banking, in-store banking, small business banking, consumer lending, mortgage banking, consumer finance, workplace banking, student banking and around-the-clock banking. During 2009, Consumer Banking contributed $917 million of the Company’s net income.
Treasury and Corporate Support include the Company’s investment portfolios, funding, capital management, asset securitization and interest rate risk management. It also includes the net effect of transfer pricing related to average balances and the residual aggregate of those expenses associated with corporate activities that are managed on a consolidated basis. During 2009, Treasury and Corporate Support contributed $384 million of the Company’s net income.
The 2008 Financial Crisis has crippled many banks, ranging from large, well-known banks like Bank of America (BAC) to smaller, regional banks such as Regions Financial Corporation (RF). Subprime lending and holding toxic assets make banks lose money, as the bank is not being repaid for lending credit. For example, BAC and RF lost $1.8 Billion and $5.6 Billion in Q4 08, respectively. Unlike its competitors, USB profited during the crisis, as it made $260 Million in Q4 08 and $2.95 Billion for the year.
However, USB had $2.64 Billion in non-performing assets, such as loans, which caused the bank to increase its Provision for Loan Losses to $3.1 Billion in 2008. This led to a 31.9% decrease in net income from 2007 to 2008. A 31.9% decrease in net income would be alarming in other years, but it is a smaller decline than other banks have had due to the crisis. USB's relatively conservative portfolio has protected the bank from getting as crushed as its competitors. In addition, USB acquired two banks held by the FDIC: California-based Downey Financial (DSL) and PFF Bank & Trust  The move added $16.5 Billion in assets to USB's portfolio. Furthermore, USB had a Tier 1 Capital Ratio of 10.6% in December 2008. Tier 1 Capital Ratio is a bank's equity capital to its total risk-weighted assets, and the ratio is used to describe the financial health of the bank. In addition, USB was ranked the 2nd safest U.S. bank (behind Wells Fargo (WFC)) by Global Finance.
USB received $6.6 Billion in TARP funding, and then announced it will pay all of it back. USB has either maintained or increased its dividend for the past 75 years, and has paid its dividend for 146 consecutive years. This month, USB announced it would pay back the TARP funds by cutting its dividend -- breaking the 75-year streak. Furthermore, it is the first time in 37 years that USB has not increased its dividend. USB made the move to increase its ever-important common equity ; the cut will preserve $2.6 billion in capital. In other words, USB will save money to repay its TARP funds back. In addition, the bank announced it would issue $750 million in 2.25% notes on March 13th, 2012. Credit rating agency Fitch gave the deal its highest credit rating -- AAA. The AAA credit rating signifies that USB can be relied on to pay its debt (i.e. it has zero credit risk).
|Bank||Q4 08 Results||TARP Funding|
|U.S. Bancorp (USB)||$260 M||$6.6 B|
|SunTrust Banks (STI)||($379 M)||$4.9 B|
|Capital One Financial (COF)||($1.4 B)||$3.6 B|
|Regions Financial Corporation (RF)||($5.6 B)||$3.5 B|
|BB&T (BBT)||$284 M||$3.1 B|
|Bank of America (BAC)||($1.8 B)||$45 B|
Changes in interest rates inversely affect a bank's net interest margin — the difference between the yield the bank earns on assets and the interest rate it pays for deposits and other sources of funding. Interest rate fluctuations, such as in the Federal Funds Rate (the rate at which financial institutions lend federal funds to other depository institutions) and Prime Rate (rate at which banks lend to their highest-credited consumers) affect bank products such as loans, deposits, securities, and short-term lending. As interest rates rise, banks are forced to pay higher rates on deposits and other interest bearing accounts. Meanwhile consumer demand for mortgages and other loan products diminishes as borrowing becomes more expensive. The combination of these two effects reduces both the volume of loans and the profitability of each loan. Rising interest rates also have the potential to increase a bank's defaults as holders of adjustable rate mortgages find themselves unable to meet their obligations. This is especially true of subprime borrowers, as seen in the 2007 Credit Crunch.
U.S. Bancorp derives 68% of their income from net interest income , so increasing interest rates hurt the bank's profitability. As seen from the graph, as the FFR and Prime rates increase, USB's net interest income decreases, with the converse also being true. From 2007 to 2008, the average FFR decreased 55.4%, which caused USB net interest income to increase 15.9%.
|2008 Financial Comparison||U.S. Bancorp (USB)||SunTrust Banks (STI)||Capital One Financial (COF)||Regions Financial Corporation (RF)||BB&T (BBT)||Bank of America (BAC)||Wells Fargo (WFC)|
|Net Interest Income $Mil||7,866.00||8,327.40||11,112.00||6,562.40||7,207.00||85,684.0||34,898.00|
|Provision for Loan Losses $Mil||3,096.00||2,474.20||5,101.00||2,057.00||1,445.00||26,825.00||15,979.00|
|Net Income $Mil||2,946.00||795.80||(46.00)||(5,595.80)||1,519.00||4,008.00||2,655.00|
|Q4 2008 Net Income $Mil||330.00||(347.60)||(1,421.60)||(6,218.30)||305.00||(1,789.00)||(2,734.00)|
|TARP Funding $Bil||6.6||4.9||3.6||3.5||3.1||45.0||25.0|
|Price to Book||1.08||0.16||0.15||0.14||0.52||0.14||1.02|
|Price to Book Compared to Industry Average (0.75)||+0.33||-0.59||-0.60||-0.61||-0.23||-0.61||+0.27|