US Bank 2008 Annual Report Download - page 6

4 U.S. BANCORP
risk management proved benefi cial in 2008, but could not completely shield our Company
from unprecedented uncertainty in the fi nancial markets and a weakening economy.
Our business diversifi cation, strong balance sheet
and disciplined approach to credit and
Fellow Shareholders:
2008 was an extremely challenging,
and in many ways historic year for all
companies in the fi nancial services
industry — here and around the world.
While I am very disappointed that the
value of our shareholders’ investment
in our Company declined during 2008,
I am proud that our business model
and disciplined risk management
allowed U.S. Bancorp to fare better
than many others in the industry. Our
company continued to make a profi t,
to generate capital, to increase lending,
and to accept and safeguard deposits
throughout the year. We reported key
fi nancial results at or near the top of
our peer group of banks, including
industry-leading returns on average
assets and average common equity.
We built new and deeper customer
relationships, expanded our franchise,
and created innovative new products
and services. In other words, we
continued to create the catalysts for
long-term growth in core operating
earnings. In addition, we gave back to
our communities in both money and
time, engaged, honored and rewarded
our employees and focused on
environmental sustainability. In fact,
our recent focus on employee
engagement is proving to be perfectly
timed, as their support and commitment
are of utmost importance as we
navigate this diffi cult environment.
These are all reasons to be pleased
and proud of our Company.
Flight to quality
The Company continued to
benefi t from the “fl ight to quality”
as customers sought banks with
strong capital and the ability to
provide them with the fi nancial
products and services they need during
this period of economic uncertainty.
Commercial and retail average loans
increased; deposits increased; net
interest income increased, and the net
interest margin widened. Regulatory
capital levels were strong, our capital
generation rate was the highest among
our peers, and we are serving a million
more customers than a year ago. Our
core business results in 2008 were solid.
And yet, we saw an overall decline in
earnings, principally due to signifi cantly
higher credit costs and market-related
write-downs as the economy
deteriorated throughout 2008. Given
the more conservative risk profi le of
U.S. Bancorp’s loan portfolio, the
Company’s overall credit quality was
relatively better than its peers. The cost
of credit, however, still had a sizeable
impact on 2008 results. The provision
for credit losses was higher in 2008
than 2007 by $2,304 million. This
unfavorable change refl ected both
an increase in net-charge-offs
year-over-year of $1,027 million, as
well as a $1,277 million provision
expense to build the allowance for
credit losses. Nonperforming assets
ended the year at $2,624 million,
compared with $690 million at
December 31, 2007. This increase
refl ected the continuing stress in the
residential real estate-related industries
and portfolios and the impact of a
weakening economy on other consumer
and commercial sectors, as well as
recent acquisitions. Given the current
economic environment, we expect
the upward trend in nonperforming
assets and net charge-offs, along
with additional market-related losses,
will continue in 2009, which makes
it imperative that we maintain the
strength of our balance sheet by
adequately providing for future loan
losses — and be assured we will.
Further, and more importantly, the
higher cost of credit was, and will be,
more than covered by the Company’s
strong core operating earnings.
Relative to the rest of the industry,
U.S. Bancorp performed very well in
2008. Still, the impact of higher credit
costs and market-related charges led
to overall 2008 fi nancial results that
were disappointing to both me and
our managing team.
Capital Purchase Program
participation
In November 2008, we announced
that U.S. Bancorp would participate
in the U.S. Treasury Capital Purchase
Program. Subsequently, we issued
$6.6 billion of preferred stock and
related warrants to the U.S. Treasury.