Recent success of company has been attributed to a mixture of conservative banking and bold moves by their CEO Richard K. Davis. Despite current widespread banking problems U.S. Bancorp raised dividends to 6%, in December 2007 which yields a new annual payout of $1.70 per share. The company reports their lack of worry from a very conservative business model. USB claims to be content to grow at a slower rate. This may not be entirely their choice due in part to legal problems faced by the commercial lending side of their business. Otherwise, USB has avoided aggressive lending practices unlike strategies used by other large banks in recent years. USB’s press release points out that the company has raised its dividend for 36 straight years, and their charter has paid a dividend in the past 145 consecutive years.[i] These solid numbers have attracted Warren Buffett’s attention. Buffett increased his holdings in U.S. Bancorp by 76.59% last year.[ii]
This January U.S. Richard Davis announced “During 2007, we returned 111% of earnings to shareholders in the form of dividends and share buybacks.”[iii] Davis reported that the company’s credit quality remains sound. Both net charge-offs and nonperforming assets increased during the fourth quarter, but the growth was moderate and as expected.[iv] He warned that USB will not be immune to the current stress in the residential real estate markets and mortgage-related industries. Davis reassured that given the Company’s overall credit risk profile, increases in net charge-offs and nonperforming assets in the coming year will be manageable. Davis is eluding to potential questions regarding USB’s capitalization requirements enforced by the OCC, as previously discussed.
US Bancorp is not a problem company yet, but returns of 111% of earnings in a deteriorating environment need to be scrutinized carefully. Loan loss provisions and write offs are climbing exponentially. This is not the environment to come to shareholders and make the case for returns of 111% of earnings.[v] Investors who are receiving 111% of earnings need to question the financial accounting practices justifying the returns. As attorneys we need to question these types of actions. The most obvious answer to this current behavior is that USB is taking advantage of the current preferred tax rate on dividends of 15% as opposed to ordinary income levels. This decision is likely to eventually come back to haunt U.S. Bancorp. Banks must proscribe Regulatory Accounting Principles which are more stringent than the General Accepted Accounting Principles that were manipulated by Enron Corp. and WorldCom. The executives and Board of Directors owe the shareholders fiduciary duties and are subject to civil action for breach of their duties under the Investment Company Act.[vi] The Sarbanes-Oxley Act of 2003 codified many accounting safe stops that the banking industry had been using.[vii] General Counsel Lee Mitau and CEO Richard Davis are primarily responsible for the accuracy of the financial statements. This is evidenced by their prominent certification of the 10-K report.
Last year U.S. Bancorp had a market cap of $55.8 billion as opposed to $55.06 this year. Its shares were traded at around $32.44 with P/E ratio of 12.45. USB’s current P/E ratio is 13.18, their shares closed at $31.83 on March 4th, 2008. The dividend yield of U.S. Bancorp stocks is 5.2%. U.S. Bancorp 2008 year end financials show their fourth-quarter profit fell 21 percent, hurt by losses from loans, money market mutual funds, and a legal settlement.[viii] Net income for the Minneapolis-based company fell to $942 million from $1.19 billion a year earlier.[ix] The fall was due primarily to a $107 million valuation loss on asset-backed commercial paper and a $215 million legal litigation involving the Visa/NOVA lawsuit.[x] There are no ongoing issues noted. The Visa Restructuring and Card Association Litigation are noted as a contingent liability.[xi]
The rise of U.S Bancorp to one of the largest financial holding companies in the United States is marked by the evolution of banking law. Generally, Congress has worked to allow both growth and to ensure the safety and soundness of the industry though Title 12 legislation. History is still in the making. Current leadership in the banking industry and actions by Congress will be watched with a critical eye in the coming years. The only guarantee is that face of the banking industry will prove to be quite different tomorrow than it is today. U.S. Bancorp is one of those few institutions whose actions will lend a direct hand in what that face will be through its yet-to-be-determined successes and failures.
[i] as reported by Peridot Capital Management LLC.
[ii] Rueters
[iii] George Gutowski, US Bancorp Is Whistling Through the Graveyard.
[iv] U.S. Bancorp, Annual Report (Form 10-K), at 53 (Feb. 25, 2008).
[v] Id.
[vi] 15 U.S.C. §80a-29
[vii] Banking Regulators Begin to Apply the Sarbanes-Oxley Act, By V. Gerard Comizio.
[viii] U.S. Bancorp Q4 profit falls 21 percent Tue Jan 15, 2008
[ix] Reuters U.S. Bancorp 4th-Qtr Profit Falls 21 Pct Wed Jan 16, 2008 3:01am EST
[x] US Bancorp Unfazed by Credit Crisis By Emil Lee January 16, 2008 The Motley Fool
[xi] Risk Factors US BANCORP \DE\ (USB) Form: 10-K Filing Date: 2/25/2008
Filed under: Banking Law, Real Esate Law Issues | Tagged: Banking Law, Banking Regulation, U.S. Bancorp
