US Bank 2013 Annual Report Download - page 22

Management’s Discussion and Analysis
Overview
U.S. Bancorp and its subsidiaries (the “Company”) achieved
record earnings in 2013, reflecting growth in its balance
sheet businesses, sound expense management and
improved credit quality. The Company’s results reflected its
continuing ability to manage through an environment marked
by slow economic growth, continued regulatory and
legislative change and uncertainty, as its diversified mix of
businesses and conservative risk profile mitigated the impact
of lower mortgage banking activity during 2013. The
Company experienced solid growth in loans and deposits
during 2013, as it continued to expand and deepen
relationships with current customers, as well as acquire new
customers and market share. In addition, growth in several of
the Company’s fee-based revenue categories helped to
offset the decline in mortgage banking revenue. With
expanded distribution and scale, enhanced products,
services and capabilities, and gains in market share, the
Company remains well positioned to capitalize on future
growth opportunities.
The Company earned $5.8 billion in 2013, an increase of
3.3 percent over 2012, principally due to a lower provision
for credit losses and controlled expenses, partially offset by
lower total net revenue. Total net revenue declined from the
prior year as a result of lower net interest income, due to a
decrease in net interest margin, and lower noninterest
income, due primarily to a decrease in mortgage banking
revenue. The Company’s credit quality continued to improve
throughout the year, as reflected by the decrease in net
charge-offs and nonperforming assets. The Company
continued to focus on effectively controlling expenses,
achieving an industry-leading efficiency ratio (the ratio of
noninterest expense to taxable-equivalent net revenue,
excluding net securities gains and losses) in 2013 of
52.4 percent. In addition, the Company’s return on average
assets and return on common equity were 1.65 percent and
15.8 percent, respectively, the highest among the
Company’s peers.
The Company continues to generate significant capital
through earnings, and returned 71 percent of its 2013
earnings to common shareholders in the form of dividends
and common share repurchases, while maintaining a very
strong capital base. Using the final rules for the Basel III
standardized approach, as if fully implemented, the
Company’s estimated common equity tier 1 to risk-weighted
assets ratio was 8.8 percent at December 31, 2013 — above
the Company’s targeted ratio of 8.0 percent and well above
the minimum of 7.0 percent required in 2019. The Company
had a Tier 1 common equity to risk-weighted assets ratio
(using Basel I definition) of 9.4 percent and a Tier 1 capital
ratio of 11.2 percent at December 31, 2013. In addition, at
December 31, 2013, the Company’s total risk-based capital
ratio was 13.2 percent, and its tangible common equity to
risk-weighted assets ratio was 9.1 percent (refer to “Non-
GAAP Financial Measures” for further information on the
calculation of certain of these measures). 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.
In 2013, the Company’s loans and deposits grew
significantly. Average loans and deposits increased
$12.1 billion (5.6 percent) and $14.7 billion (6.3 percent),
respectively, over 2012. Loan growth reflected increases in
residential mortgages, commercial loans, commercial real
estate loans and credit card loans, partially offset by
decreases in other retail loans and loans covered by loss
sharing agreements with the Federal Deposit Insurance
Corporation (“FDIC”) (“covered” loans), which is a run-off
portfolio. Deposit growth reflected increases in interest
checking, money market and savings deposits.
The Company’s provision for credit losses decreased
$542 million (28.8 percent) in 2013, compared with 2012.
Net charge-offs decreased $632 million (30.1 percent) in
2013, compared with 2012, principally due to improvement
in the commercial, commercial real estate, residential
mortgages and home equity and second mortgages
portfolios. The provision for credit losses was $125 million
less than net charge-offs in 2013, compared with
$215 million less than net charge-offs in 2012.
20 U.S. BANCORP