U.S. Bancorp Reports Second Quarter 2017 Earnings

U.S. Bancorp Reports Second Quarter 2017 Earnings

Record Earnings Per Diluted Common Share of $0.85

Return on average assets of 1.35 percent and average common equity of 13.4 percent

Returned 81 percent of earnings to shareholders

U.S. Bancorp (NYSE: USB) today reported net income of $1,500 million for the second quarter of 2017, or $0.85 per diluted common share, compared with $1,522 million, or $0.83 per diluted common share, in the second quarter of 2016.

Highlights for the second quarter of 2017 included:

• Industry-leading return on average assets of 1.35 percent and return on average common equity of 13.4 percent and efficiency ratio of 55.2 percent
• Record revenue of $5,487 million and diluted earnings per common share of $0.85
• Net interest income (taxable-equivalent basis) grew 5.9 percent year-over-year and 2.4 percent on a linked quarter basis
• Net interest margin of 3.04 percent for the second quarter of 2017 was 2 basis points higher than the second quarter of 2016 and 1 basis point higher than the first quarter of 2017, benefiting from rising interest rates partially offset by increasing average cash balances
• Average total loans grew 3.4 percent over the second quarter of 2016 and 0.9 percent on a linked quarter basis
• Credit and debit card revenue grew 7.8 percent on a year-over-year basis
• Trust and investment management fees increased 6.1 percent on a year-over-year basis
• Nonperforming assets decreased 19.3 percent on a year-over-year basis and 9.8 percent on a linked quarter basis
• Strong capital position. At June 30, 2017, the estimated common equity tier 1 capital to risk-weighted assets ratio was 9.3 percent using the Basel III fully implemented standardized approach and was 11.7 percent using the Basel III fully implemented advanced approaches method.

Net income attributable to U.S. Bancorp was $1,500 million for the second quarter of 2017, 1.4 percent lower than the $1,522 million for the second quarter of 2016, and 1.8 percent higher than the $1,473 million for the first quarter of 2017. Diluted earnings per common share of $0.85 in the second quarter of 2017 were $0.02 higher than the second quarter of 2016 and $0.03 higher than the first quarter of 2017. The decrease in net income year-over-year included a 5.2 percent decrease in noninterest income and a 1.0 percent increase in noninterest expense, both of which were impacted by notable items in the second quarter of 2016. Notable items included a $180 million Visa gain in noninterest income and $150 million in noninterest expense related to litigation accruals and a charitable contribution. Excluding the prior year notable items, net income increased slightly year-over-year. Net interest income increased 5.9 percent on a taxable-equivalent basis (6.0 percent as reported on a GAAP basis), mainly a result of loan growth and the impact of higher interest rates. Noninterest income, excluding the impact of the prior year notable item, increased 2.0 percent driven by higher payment services revenue, trust and investment management fees and treasury management fees. Revenue increases were partially offset by higher noninterest expense, excluding the prior year notable items, due to increased compensation expense related to hiring to support business growth and compliance programs, merit increases, and higher variable compensation. In addition, other expense was higher due to an FDIC surcharge beginning in late 2016. The increase in net income on a linked quarter basis was principally due to an increase in total net revenue of 3.1 percent, reflecting higher net interest income of 2.4 percent, driven by loan growth, the impact of higher interest rates and an additional day in the current quarter, along with an increase in noninterest income of 3.9 percent primarily due to seasonally higher fee-based revenue. These increases were partially offset by an increase in noninterest expense of 2.7 percent.

U.S. Bancorp President and Chief Executive Officer Andy Cecere said, “I’m proud of our solid second quarter performance and our ability to deliver industry-leading results. As an enterprise we extended our momentum from the first quarter to produce best-in-class performance metrics, including return on average assets of 1.35 percent, return on average common equity of 13.4 percent and an efficiency ratio of 55.2 percent.

“Because of the overall strength and consistency of our financial results, we continued to create value for our shareholders. In the second quarter, we returned 81 percent of our earnings to shareholders through dividends and share repurchases. The results of the Federal Reserve’s annual Stress Test demonstrated our ability to withstand - and remain profitable - in periods of economic stress. As part of the CCAR process we announced a dividend increase of 7.1 percent and a new share repurchase program for the year, maintaining our commitment to shareholders.

“Our balance sheet is strong and our core businesses are well positioned for an economic and regulatory backdrop that has the promise to be more conducive to growth. Our strong revenue base and our dedication to managing expenses positions us well as we head into the second half of the year. I couldn’t be more proud of our dedicated employees who work hard to be our customers’ and communities’ trusted financial partner and to bring this commitment to life every day.”

Net Interest Income

Net interest income on a taxable-equivalent basis in the second quarter of 2017 was $3,068 million, an increase of $172 million (5.9 percent) over the second quarter of 2016. The increase was principally driven by loan growth and the impact of higher interest rates. Average earning assets were $18.5 billion (4.8 percent) higher than the second quarter of 2016, reflecting increases of $8.9 billion (3.4 percent) in average total loans, $4.2 billion (4.0 percent) in average investment securities and higher average cash balances to meet certain regulatory liquidity expectations. Net interest income on a taxable-equivalent basis increased $73 million (2.4 percent) linked quarter driven by loan growth, the impact of higher interest rates and an additional day in the second quarter. In addition, average earning assets were $4.6 billion higher on a linked quarter basis, mainly from higher average loans and average cash balances.

The net interest margin in the second quarter of 2017 was 3.04 percent, compared with 3.02 percent in the second quarter of 2016, and 3.03 percent in the first quarter of 2017. The increase in the net interest margin on a year-over-year basis was due to rising interest rates partially offset by loan portfolio mix, lower reinvestment rates on maturing securities through the first quarter of 2017 and higher cash balances. The increase on a linked quarter basis was primarily driven by the recent Federal Reserve rate increases, partially offset by the impact of a flatter yield curve and higher cash balances.

Investment Securities

Average investment securities in the second quarter of 2017 were $4.2 billion (4.0 percent) higher year-over-year and $604 million (0.5 percent) higher than the prior quarter. These increases were primarily due to purchases of U.S. Treasury and U.S. government agency-backed securities, net of prepayments and maturities, in support of liquidity management.

Loans

Average total loans were $8.9 billion (3.4 percent) higher in the second quarter of 2017 than the second quarter of 2016. The increase was due to growth in total commercial loans (3.8 percent), total other retail loans (6.1 percent), residential mortgages (5.5 percent), and credit card loans (2.4 percent). These increases were partially offset by a decrease in total commercial real estate loans (1.0 percent) due to payoffs given recent capital market financing by customers and run-off in the covered loans portfolio (18.3 percent). Average total loans were $2.4 billion (0.9 percent) higher in the second quarter of 2017 than the first quarter of 2017. This increase was primarily driven by linked quarter growth in total commercial loans (2.0 percent), total other retail loans (1.6 percent) and residential mortgages (1.1 percent), partially offset by decreases in total commercial real estate loans (1.4 percent), credit card loans (1.0 percent) and covered loans (5.2 percent).

Deposits

Average total deposits for the second quarter of 2017 were $23.8 billion (7.7 percent) higher than the second quarter of 2016. Average noninterest-bearing deposits increased $3.5 billion (4.5 percent) year-over-year driven by growth across all business lines. Average total savings deposits were $23.6 billion (12.2 percent) higher year-over-year, the result of growth across all business lines. Average time deposits were $3.3 billion (9.8 percent) lower than the prior year quarter. Changes in time deposits are largely related to those deposits managed as an alternative to other funding sources such as wholesale borrowing, based largely on relative pricing and liquidity characteristics.

Average total deposits increased $2.7 billion (0.8 percent) over the first quarter of 2017. On a linked quarter basis, average noninterest-bearing deposits increased $2.0 billion (2.4 percent) mainly in Wealth Management and Securities Services and Consumer and Small Business Banking. Average total savings deposits grew $542 million (0.2 percent) primarily driven by Consumer and Small Business Banking and Wealth Management and Securities Services, partially offset by decreases in Wholesale Banking and Commercial Real Estate. Average time deposits, which are managed based on funding needs, relative pricing, and liquidity characteristics, increased $225 million (0.7 percent) on a linked quarter basis.

Noninterest Income

Second quarter noninterest income of $2,419 million was $133 million (5.2 percent) lower than the second quarter of 2016. Excluding the impact of the second quarter 2016 notable item ($180 million of equity investment income, primarily the result of selling our membership in Visa Europe Limited to Visa, Inc.), noninterest income increased $47 million (2.0 percent), driven by increases in payment services revenue, trust and investment management fees, and treasury management fees, partially offset by decreases in commercial products revenue and mortgage banking revenue. Payment services revenue was higher principally due to an increase in credit and debit card revenue of $23 million (7.8 percent), driven by higher sales volumes. Merchant processing services revenue increased $4 million (1.0 percent). Adjusted for the impact of foreign currency rate changes, year-over-year merchant processing services revenue increased approximately 2.7 percent. Trust and investment management fees increased $22 million (6.1 percent) primarily due to favorable market conditions and account growth. Treasury management fees increased $13 million (8.8 percent) due to higher transaction volume. Commercial products revenue decreased $28 million (11.8 percent) primarily due to significant market activity in the second quarter of 2016. Mortgage banking revenue decreased $26 million (10.9 percent) due to lower origination and sales volume from home refinancing. Refinancing activities were significantly higher in the second quarter of 2016 due to lower long term interest rates.

Noninterest income was $90 million (3.9 percent) higher in the second quarter of 2017 than the first quarter of 2017 reflecting seasonally higher fee-based revenue driven by payment services revenue. Payment services revenue growth included increases in credit and debit card revenue of $27 million (9.2 percent), corporate payment product revenue of $5 million (2.8 percent) and merchant processing services revenue of $29 million (7.7 percent) primarily due to higher sales volumes. Trust and investment management fees increased $12 million (3.3 percent) principally due to account growth.

Noninterest Expense

Second quarter noninterest expense of $3,023 million was $31 million (1.0 percent) higher than the second quarter of 2016. Excluding the second quarter 2016 notable items, noninterest expense increased $181 million (6.4 percent) primarily due to higher compensation and other noninterest expense. Second quarter 2016 notable items included $110 million in accruals related to legal and regulatory matters, along with $40 million for charitable contributions. Compensation expense increased $139 million (10.9 percent) principally due to the impact of hiring to support business growth and compliance programs, merit increases, and higher variable compensation. Other expense increased $33 million (7.3 percent) primarily due to the impact of the FDIC insurance surcharge which began in the third quarter of 2016.

Noninterest expense increased $79 million (2.7 percent) on a linked quarter basis driven by higher compensation expense, marketing and business development expense, and other expense, partially offset by lower employee benefits expense. Compensation expense increased $25 million (1.8 percent) principally due to the impact of hiring to support business growth and compliance programs, merit increases, and higher variable compensation. Marketing and business development expense increased $19 million (21.1 percent) due to the timing of certain revenue-related marketing and brand advertising, while other expense increased $39 million (8.7 percent) reflecting higher costs related to investments in tax-advantaged projects. Partially offsetting these increases was a decrease in employee benefits expense of $27 million (8.6 percent) driven by seasonally lower payroll tax expense.

Provision for Income Taxes

The provision for income taxes for the second quarter of 2017 resulted in a tax rate on a taxable-equivalent basis of 28.5 percent (effective tax rate of 26.7 percent), compared with 27.9 percent (effective tax rate of 26.1 percent) in the second quarter of 2016, and 27.0 percent (effective tax rate of 25.1 percent) in the first quarter of 2017. The lower tax rate for the first quarter of 2017 reflected the tax benefit associated with stock-based compensation under new accounting guidance effective the first quarter of 2017. The impact of this guidance is expected to principally be reflected in the first quarter of each year.

Credit Quality

The Company’s provision for credit losses for the second quarter of 2017 was $350 million, which was $5 million (1.4 percent) higher than the prior quarter and $23 million (7.0 percent) higher than the second quarter of 2016. Credit quality was relatively stable compared with the first quarter of 2017.

The provision for credit losses was $10 million higher than net charge-offs in the second quarter of 2017, the first quarter of 2017, and the second quarter of 2016. Total net charge-offs in the second quarter of 2017 were $340 million, compared with $335 million in the first quarter of 2017, and $317 million in the second quarter of 2016. Net charge-offs increased $5 million (1.5 percent) compared with the first quarter of 2017 mainly due to higher credit card loan net charge-offs. Net charge-offs increased $23 million (7.3 percent) compared with the second quarter of 2016 primarily due to higher credit card loan net charge-offs, partially offset by lower net charge-offs from total commercial real estate and residential mortgages. The net charge-off ratio was 0.49 percent in the second quarter of 2017, compared with 0.50 percent in the first quarter of 2017 and 0.48 percent in the second quarter of 2016.

The allowance for credit losses was $4,377 million at June 30, 2017, compared with $4,366 million at March 31, 2017, and $4,329 million at June 30, 2016. The ratio of the allowance for credit losses to period-end loans was 1.58 percent at June 30, 2017, compared with 1.60 percent at March 31, 2017, and 1.61 percent at June 30, 2016. The ratio of the allowance for credit losses to nonperforming loans was 383 percent at June 30, 2017, compared with 338 percent at March 31, 2017, and 312 percent at June 30, 2016.

Nonperforming assets were $1,349 million at June 30, 2017, compared with $1,495 million at March 31, 2017, and $1,672 million at June 30, 2016. The ratio of nonperforming assets to loans and other real estate was 0.49 percent at June 30, 2017, compared with 0.55 percent at March 31, 2017, and 0.62 percent at June 30, 2016. The $146 million (9.8 percent) decrease in nonperforming assets on a linked quarter basis was driven by improvements in commercial loans and residential mortgages. The $323 million (19.3 percent) decrease in nonperforming assets on a year-over-year basis was driven by improvements in commercial loans, residential mortgages and other real estate. Accruing loans 90 days or more past due were $639 million ($477 million excluding covered loans) at June 30, 2017, compared with $718 million ($524 million excluding covered loans) at March 31, 2017, and $724 million ($478 million excluding covered loans) at June 30, 2016.

Capital Management

Total U.S. Bancorp shareholders’ equity was $48.3 billion at June 30, 2017, compared with $47.8 billion at March 31, 2017, and $47.4 billion at June 30, 2016. During the second quarter, the Company returned 81 percent of earnings to shareholders through dividends and share buybacks.

All regulatory ratios continue to be in excess of “well-capitalized” requirements. The estimated common equity tier 1 capital to risk-weighted assets ratio using the Basel III fully implemented standardized approach was 9.3 percent at June 30, 2017, compared with 9.2 percent at March 31, 2017, and 9.3 percent at June 30, 2016. The estimated common equity tier 1 capital to risk-weighted assets ratio using the Basel III fully implemented advanced approaches method was 11.7 percent at June 30, 2017, compared with 11.5 percent at March 31, 2017, and 12.0 percent at June 30, 2016.

On Wednesday, July 19, 2017, at 8:00 a.m. CDT, Andy Cecere, president and chief executive officer, and Terry Dolan, vice chairman and chief financial officer, will host a conference call to review the financial results. The conference call will be available online or by telephone. To access the webcast and presentation, go to www.usbank.com and click on “About U.S. Bank.” The “Webcasts & Presentations” link can be found under the Investor/Shareholder information heading, which is at the left side near the bottom of the page. To access the conference call from locations within the United States and Canada, please dial 866-316-1409. Participants calling from outside the United States and Canada, please dial 706-634-9086. The conference ID number for all participants is 32712626. For those unable to participate during the live call, a recording will be available at approximately 11:00 a.m. CDT on Wednesday, July 19 and will be accessible through Wednesday, July 26 at 11:00 p.m. CDT. To access the recorded message within the United States and Canada, please dial 855-859-2056. If calling from outside the United States and Canada, please dial 404-537-3406 to access the recording. The conference ID is 32712626.

Minneapolis-based U.S. Bancorp (NYSE: USB), with $464 billion in assets as of June 30, 2017, is the parent company of U.S. Bank National Association, the fifth largest commercial bank in the United States. The Company operates 3,088 banking offices in 25 states and 4,826 ATMs and provides a comprehensive line of banking, investment, mortgage, trust and payment services products to consumers, businesses and institutions. Visit U.S. Bancorp on the web at www.usbank.com.

Forward-Looking Statements

The following information appears in accordance with the Private Securities Litigation Reform Act of 1995:

This press release contains forward-looking statements about U.S. Bancorp. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements and are based on the information available to, and assumptions and estimates made by, management as of the date hereof. These forward-looking statements cover, among other things, anticipated future revenue and expenses and the future plans and prospects of U.S. Bancorp. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated. A reversal or slowing of the current economic recovery or another severe contraction could adversely affect U.S. Bancorp’s revenues and the values of its assets and liabilities. Global financial markets could experience a recurrence of significant turbulence, which could reduce the availability of funding to certain financial institutions and lead to a tightening of credit, a reduction of business activity, and increased market volatility. Stress in the commercial real estate markets, as well as a downturn in the residential real estate markets could cause credit losses and deterioration in asset values. In addition, changes to statutes, regulations, or regulatory policies or practices could affect U.S. Bancorp in substantial and unpredictable ways. U.S. Bancorp’s results could also be adversely affected by deterioration in general business and economic conditions; changes in interest rates; deterioration in the credit quality of its loan portfolios or in the value of the collateral securing those loans; deterioration in the value of securities held in its investment securities portfolio; legal and regulatory developments; litigation; increased competition from both banks and non-banks; changes in customer behavior and preferences; breaches in data security; effects of mergers and acquisitions and related integration; effects of critical accounting policies and judgments; and management’s ability to effectively manage credit risk, market risk, operational risk, compliance risk, strategic risk, interest rate risk, liquidity risk and reputational risk.

For discussion of these and other risks that may cause actual results to differ from expectations, refer to U.S. Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2016, on file with the Securities and Exchange Commission, including the sections entitled “Risk Factors” and “Corporate Risk Profile” contained in Exhibit 13, and all subsequent filings with the Securities and Exchange Commission under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934. However, factors other than these also could adversely affect U.S. Bancorp’s results, and the reader should not consider these factors to be a complete set of all potential risks or uncertainties. Forward-looking statements speak only as of the date hereof, and U.S. Bancorp undertakes no obligation to update them in light of new information or future events.

Non-GAAP Financial Measures

In addition to capital ratios defined by banking regulators, the Company considers various other measures when evaluating capital utilization and adequacy, including:

• Tangible common equity to tangible assets,
• Tangible common equity to risk-weighted assets,
• Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented standardized approach, and
• Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented advanced approaches.

These capital measures are viewed by management as useful additional methods of reflecting the level of capital available to withstand unexpected negative market or economic conditions. Additionally, presentation of these measures allows investors, analysts and banking regulators to assess the Company’s capital position relative to other financial services companies. These measures differ from currently effective capital ratios defined by banking regulations principally in that the numerator of the currently effective ratios, which are subject to certain transitional provisions, temporarily excludes a portion of unrealized gains and losses related to available-for-sale securities and retirement plan obligations, and includes a portion of capital related to intangible assets, other than mortgage servicing rights. These capital measures are not defined in generally accepted accounting principles (“GAAP”), or are not currently effective or defined in federal banking regulations. As a result, these capital measures disclosed by the Company may be considered non-GAAP financial measures.

The Company also discloses net interest income and related ratios and analysis on a taxable-equivalent basis, which may also be considered non-GAAP financial measures. The Company believes this presentation to be the preferred industry measurement of net interest income as it provides a relevant comparison of net interest income arising from taxable and tax-exempt sources. In addition, certain performance measures, including the efficiency ratio and net interest margin utilize net interest income on a taxable-equivalent basis.

There may be limits in the usefulness of these measures to investors. As a result, the Company encourages readers to consider the consolidated financial statements and other financial information contained in this press release in their entirety, and not to rely on any single financial measure. A table follows that shows the Company’s calculation of these non-GAAP financial measures.