US Bank 2005 Annual Report Download - page 20

Management’s Discussion and Analysis
OVERVIEW rating. Credit ratings assigned by various credit rating
agencies reflect the rating agencies’ recognition of the
In 2005, U.S. Bancorp and its subsidiaries (the ‘‘Company’’) Company’s sector-leading earnings performance and lower
continued to demonstrate its financial strength and credit risk profile.
shareholder focus. The Company achieved record earnings In concert with achieving stated financial objectives, the
in 2005 and grew earnings per share, on a diluted basis, by Company exceeded its objective to return at least
11.0 percent despite industry challenges related to rising 80 percent of earnings to shareholders in the form of
interest rates. This represents the fourth consecutive year dividends and share repurchases by returning 90 percent of
that earnings growth has exceeded the Company’s long- 2005 earnings to shareholders. In December 2005, the
term goal of achieving 10 percent earnings per share Company further increased its cash dividend, resulting in a
growth. The Company continues to meet this goal through 10 percent increase from the dividend rate in the fourth
its focus on organic growth, investing in business initiatives quarter of 2004. Throughout 2005, the Company continued
that strengthen our presence and product offerings for to repurchase shares under its share repurchase program.
customers, and acquiring fee-based businesses with The Company continues to affirm its goal of returning at
operating scale. As a result of this focus, the Company’s least 80 percent of earnings to shareholders. During 2006,
fee-based revenue grew 9.4 percent over 2004 with growth the Company will also continue its focus on its financial
in most product categories. Fee income growth was led by objectives of strong earnings growth, creating operating
growth in deposit service charges and revenues generated by leverage and a strong credit risk profile, as well as its five-
payment processing businesses. In addition, average loans star customer service to further strengthen customer loyalty.
outstanding rose 9.0 percent year-over-year despite very
competitive credit pricing. In 2006, the Company will Earnings Summary The Company reported net income of
continue to focus on revenue growth driven by disciplined $4.5 billion in 2005, or $2.42 per diluted share, compared
strategic business initiatives, customer service and an with $4.2 billion, or $2.18 per diluted share, in 2004.
emphasis on payment processing, fiduciary and trust Return on average assets and return on average equity were
businesses, retail banking and commercial lending. The 2.21 percent and 22.5 percent, respectively, in 2005,
Company’s performance was also driven by continued compared with returns of 2.17 percent and 21.4 percent,
improvement in the credit quality of the Company’s loan respectively, in 2004.
portfolios. During the year, nonperforming assets declined Total net revenue, on a taxable-equivalent basis for
13.9 percent from a year ago and total net charge-offs 2005, was $474 million (3.7 percent) higher than 2004
decreased to .51 percent of average loans outstanding in despite the adverse impact of rising interest rates on product
2005, compared with .63 percent in 2004. In 2006, the margins generally experienced by the banking industry. The
Company will continue to focus on credit quality and increase in net revenue was comprised of a 9.5 percent
minimizing volatility of credit-related losses. Finally, increase in noninterest income and a .7 percent decline in
effectively managing costs is always a goal for the Company net interest income. The increase in noninterest income was
and an important factor of financial performance. During driven by 9.4 percent growth in fee-based revenue across
2005, the Company’s efficiency ratio (the ratio of the majority of fee categories and expansion in payment
noninterest expense to taxable-equivalent net revenue processing businesses from a year ago. The decline in net
excluding net securities gains or losses) improved to interest income reflected growth in average earning assets,
44.3 percent, compared with 45.3 percent in 2004, and the
more than offset by lower net interest margins. In 2005,
Company continues to be an industry leader in this
average earning assets increased $10.3 billion (6.1 percent),
category.
compared with 2004, primarily due to growth in residential
The Company’s strong performance is also reflected in
mortgages, commercial loans and retail loans. The net
its capital levels and the favorable credit ratings assigned by
interest margin in 2005 was 3.97 percent, compared with
various credit rating agencies. Equity capital of the
4.25 percent in 2004. The year-over-year decline in net
Company continued to be strong at 5.9 percent of tangible
common assets at December 31, 2005, compared with interest margin reflected narrower credit spreads due to the
6.4 percent at December 31, 2004. In 2005, credit ratings competitive lending environment, the mix of growth in
for the Company were upgraded by Moody’s Investors lower-spread fixed-rate credit products and the impact of
Service. On January 27, 2006, Standard & Poor’s Rating changes in the yield curve from a year ago. The net interest
Services upgraded the Company’s credit ratings to AA–/A- margin also declined due to share repurchases during the
1+. Standard & Poor’s also upgraded the Company’s year, funding incremental growth with higher cost
primary banking subsidiaries to an AA long-term debt
18 U.S. BANCORP