US Bank 2011 Annual Report Download - page 20

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Management’s Discussion and Analysis
Overview
U.S. Bancorp and its subsidiaries (the “Company”) achieved
record earnings in 2011, demonstrating the advantage of its
diversified business model, and ability to implement its
strategy. The Company achieved these results despite the
challenges of continued economic weakness and increasing
regulatory costs, by continuing to focus on execution,
prudently managing its businesses and investing in its
franchise. The Company’s 2011 financial results were driven
by record total net revenue, lower credit costs due to a
continued stabilizing economy, and ongoing dedication to
operational efficiency. Total net revenue reflected growth in
both the balance sheet and fee-based businesses. The
Company grew both loans and deposits substantially in 2011,
benefiting from investments it made in its business lines and
the overall “flight-to-quality” by customers.
The Company earned $4.9 billion in 2011, an increase of
46.9 percent over 2010. Growth in total net revenue of $960
million (5.3 percent) was attributable to an increase in net
interest income, the result of higher earning assets and
continued growth in lower cost core deposit funding, and
higher noninterest income. Noninterest income grew year-
over-year as increases in payments-related revenue and other
fee-based businesses were partially offset by expected
decreases in revenue from recent legislative actions. The
Company’s total net charge-offs and nonperforming assets
decreased throughout the year. The Company also continued
to focus on effectively managing costs while making
investments to increase revenue and enhance customer service,
with an industry-leading efficiency ratio (the ratio of
noninterest expense to taxable-equivalent net revenue,
excluding net securities gains and losses) in 2011 of
51.8 percent.
The Company’s capital position remained strong and
grew during 2011, with a Tier 1 common equity to risk-
weighted assets ratio (using Basel I definition) of 8.6 percent
and a Tier 1 capital ratio of 10.8 percent at December 31,
2011. Importantly, using anticipated Basel III calculations, the
Company’s Tier 1 common equity ratio was 8.2 percent at
December 31, 2011 — well above the proposed minimum of 7
percent required in 2019 when these calculations are proposed
to be fully implemented. In addition, at December 31, 2011,
the Company’s total risk-based capital ratio was 13.3 percent,
and its tangible common equity to risk-weighted assets ratio
was 8.1 percent (refer to “Non-GAAP Financial Measures”
for further information on the calculation of the Tier 1
common equity to risk-weighted assets and tangible common
equity to risk-weighted assets ratios). Given the strength of its
capital position and on-going ability to generate significant
capital through earnings, the Company was able to return 31
percent of its earnings to common shareholders in the form of
dividends and common share repurchases during 2011. Credit
rating organizations rate the Company’s debt among the
highest of its large domestic banking peers. This comparative
financial strength provides the Company with favorable
funding costs, strong liquidity and the ability to attract new
customers, leading to growth in loans and deposits.
In 2011, the Company’s loans and deposits grew
significantly. Average loans and deposits increased
$8.4 billion (4.4 percent) and $28.4 billion (15.4 percent),
respectively, over 2010. Loan growth reflected increases in
residential mortgages, commercial loans, commercial real
estate loans and other retail loans, partially offset by decreases
in loans covered by loss sharing agreements with the Federal
Deposit Insurance Corporation (“FDIC”) (“covered” loans)
and credit card loans. Deposit growth reflected the
Company’s continued benefit from customer
“flight-to-quality”.
The Company’s provision for credit losses decreased
$2.0 billion (46.2 percent) in 2011, compared with 2010. Net
charge-offs decreased $1.3 billion (32.0 percent) in 2011,
compared with 2010, due to improvement in all major loan
portfolio classes. The provision for credit losses was $500
million less than net charge-offs in 2011, while exceeding net
charge-offs by $175 million in 2010, reflecting improvement
in credit trends and the risk profile of the Company’s loan
portfolio throughout 2011.
18 U.S. BANCORP