U.S. Bancorp Reports Record Revenue and Net Income for the Third Quarter of 2017

U.S. Bancorp Reports Record Revenue and Net Income for the Third Quarter of 2017

Record Earnings Per Diluted Common Share of $0.88

Return on average assets of 1.38 percent and average common equity of 13.6 percent

Returned 79 percent of earnings to shareholders

U.S. Bancorp (NYSE: USB) today reported net income of $1,563 million for the third quarter of 2017, or $0.88 per diluted common share, compared with $1,502 million, or $0.84 per diluted common share, in the third quarter of 2016.

Highlights for the third quarter of 2017 included:

• Record diluted earnings per share of $0.88, record net revenue of $5,608 million, record net income of $1,563 million and positive operating leverage
• Industry-leading return on average assets of 1.38 percent and return on average common equity of 13.6 percent and efficiency ratio of 54.3 percent
• Returned 79 percent of third quarter earnings to shareholders through dividends and share buybacks
• Net interest income (taxable-equivalent basis) grew 8.3 percent year-over-year and 3.8 percent on a linked quarter basis
• Net interest margin of 3.10 percent for the third quarter of 2017 was 12 basis points higher than the third quarter of 2016 and 6 basis points higher than the second quarter of 2017
• Nonperforming assets decreased 24.8 percent on a year-over-year basis and 7.3 percent on a linked quarter basis
• Average total loans grew 3.0 percent over the third quarter of 2016 and 0.8 percent on a linked quarter basis
  • Average total commercial loans grew 4.6 percent over the third quarter of 2016 and 1.0 percent on a linked quarter basis
  • Average total other retail loans grew 6.1 percent over the third quarter of 2016 and 2.6 percent on a linked quarter basis
• Strong capital position. At September 30, 2017, the estimated common equity tier 1 capital to risk-weighted assets ratio was 9.4 percent using the Basel III fully implemented standardized approach and was 11.8 percent using the Basel III fully implemented advanced approaches method.

Net income attributable to U.S. Bancorp was $1,563 million for the third quarter of 2017, 4.1 percent higher than the $1,502 million for the third quarter of 2016, and 4.2 percent higher than the $1,500 million for the second quarter of 2017. Diluted earnings per common share of $0.88 in the third quarter of 2017 were $0.04 higher than the third quarter of 2016 and $0.03 higher than the second quarter of 2017. The increase in net income year-over-year was principally due to a 4.1 percent increase in total net revenue driven by higher net interest income, partially offset by a 3.7 percent increase in noninterest expense. Net interest income increased 8.3 percent on a taxable-equivalent basis (8.4 percent as reported on a GAAP basis), mainly as a result of loan growth and the impact of rising interest rates. Noninterest income decreased 0.9 percent principally due to lower mortgage banking revenue, primarily the result of strong refinancing activities in the third quarter of 2016, partially offset by increases in trust and investment management fees, payment services revenue, and treasury management fees as well as higher equity investment income. The increase in total net revenue was partially offset by higher noninterest expense, primarily due to increased compensation expense related to hiring to support business growth and compliance programs, merit increases, and higher variable compensation. The increase in net income on a linked quarter basis was principally due to an increase in total net revenue of 2.2 percent, reflecting higher net interest income driven by loan growth, the impact of rising interest rates, higher interest recoveries and an additional day in the current quarter. These increases were partially offset by a slight increase in noninterest expense of 0.5 percent.

U.S. Bancorp President and Chief Executive Officer Andy Cecere said, “In the third quarter, U.S. Bancorp delivered industry leading results, supported by record revenue, net income and earnings per diluted share. We produced best-in-class performance metrics, including return on average assets of 1.38 percent, return on average common equity of 13.6 percent and an improving efficiency ratio of 54.3 percent.

“We remain deeply committed to value creation for our shareholders, and in the third quarter, our dividend increased by 7.1 percent. Overall, we returned 79 percent of our earnings to shareholders through dividends and share buybacks. As we move into the fourth quarter, we plan to build on the momentum we have established.

“Our Company is strong and we are well positioned for growth. We continue to be focused on delivering a great customer experience through our One Bank initiatives, optimization of our businesses, data analytics, process improvements and product delivery. We are investing in innovation and technology to drive growth and improve efficiencies in the future. Our strong revenue base and financial discipline positions us for growth heading into the next year. I’m proud of our employees and the effort they make every day to help us deliver consistently strong financial returns and to become our stakeholders’ most trusted choice.”

Net Interest Income

Net interest income on a taxable-equivalent basis in the third quarter of 2017 was $3,186 million, an increase of $243 million (8.3 percent) over the third quarter of 2016. The increase was principally driven by loan growth and the impact of rising interest rates. Average earning assets were $15.0 billion (3.8 percent) higher than the third quarter of 2016, reflecting increases of $8.0 billion (3.0 percent) in average total loans, $4.1 billion (36.0 percent) in average other earning assets and $3.7 billion (3.4 percent) in average investment securities. Net interest income on a taxable-equivalent basis increased $118 million (3.8 percent) on a linked quarter basis driven by loan growth, the impact of rising interest rates, higher interest recoveries and an additional day in the third quarter. In addition, average earning assets were $4.9 billion (1.2 percent) higher on a linked quarter basis, mainly from higher average loans, investment securities and other earning assets.

The net interest margin in the third quarter of 2017 was 3.10 percent, compared with 2.98 percent in the third quarter of 2016, and 3.04 percent in the second quarter of 2017. The increase in the net interest margin year-over-year was due to higher interest rates and loan portfolio mix, partially offset by higher funding costs and higher cash balances. The increase in net interest margin on a linked quarter basis was driven by higher interest rates and a change in loan portfolio mix, partially offset by higher funding costs.

Investment Securities

Average investment securities in the third quarter of 2017 were $3.7 billion (3.4 percent) higher year-over-year and $464 million (0.4 percent) higher than the prior quarter. These increases were primarily due to purchases of U.S. Treasury and U.S. government mortgage-backed securities, net of prepayments and maturities, in support of liquidity management.

Loans

Average total loans were $8.0 billion (3.0 percent) higher than the third quarter of 2016. The increase was due to growth in total commercial loans (4.6 percent), residential mortgages (4.9 percent), retail leasing (34.5 percent), and other retail loans (4.6 percent). These increases were partially offset by a decrease in total commercial real estate loans (4.0 percent) due to disciplined underwriting of construction and development loans and payoffs of commercial mortgages given recent capital market financing by customers. Loan growth was also muted by run-off in the covered loans portfolio (19.0 percent). Average total loans were $2.1 billion (0.8 percent) higher than the second quarter of 2017. This increase was primarily driven by linked quarter growth in total commercial loans (1.0 percent), other retail loans (2.6 percent), and retail leasing (8.1 percent), partially offset by decreases in total commercial real estate loans (2.2 percent) and covered loans (5.4 percent).

Deposits

Average total deposits for the third quarter of 2017 were $16.6 billion (5.2 percent) higher than the third quarter of 2016. Average noninterest-bearing deposits were essentially flat year-over-year reflecting a decrease in Wholesale Banking and Commercial Real Estate offset by increases in Wealth Management and Securities Services and Consumer and Small Business Banking. Average total savings deposits were $12.7 billion (6.2 percent) higher year-over-year, a result of growth across all business lines. Average time deposits were $3.9 billion (12.2 percent) higher 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 $4.0 billion (1.2 percent) over the second quarter of 2017. On a linked quarter basis, average noninterest-bearing deposits and average total savings deposits decreased slightly. Average time deposits, which are managed based on funding needs, relative pricing, and liquidity characteristics, increased $5.5 billion (17.9 percent) on a linked quarter basis, primarily driven by Wholesale Banking and Commercial Real Estate.

Noninterest Income

Third quarter noninterest income of $2,422 million was $23 million (0.9 percent) lower than the third quarter of 2016 principally due to lower mortgage banking revenue, partially offset by increases in trust and investment management fees, payment services revenue and other noninterest income. Mortgage banking revenue decreased $101 million (32.2 percent) due to lower origination and sales volumes from home refinancing, as refinancing activities were significantly higher in the third quarter of 2016 due to a decline in longer term interest rates during that period. Trust and investment management fees increased $18 million (5.0 percent) due to favorable market conditions, and net asset and account growth. Payment services revenue was higher due to an increase in corporate payment products revenue of $11 million (5.8 percent) and an increase in credit and debit card revenue of $9 million (3.0 percent), both driven by higher sales volumes. These increases were partially offset by a decrease in merchant processing services revenue of $7 million (1.7 percent) due to exiting certain joint ventures in the second quarter of 2017 and the impacts of recent weather events. Other income increased $37 million (21.5 percent) primarily due to equity investment income in the current quarter.

Noninterest income was $3 million (0.1 percent) higher in the third quarter of 2017 than the second quarter of 2017 reflecting growth in fee-based revenue driven by corporate payment products revenue, commercial products revenue and deposit service charges, partially offset by a decrease in credit and debit card revenue. Corporate payment products revenue increased $17 million (9.2 percent) due to seasonally higher volumes. Commercial products revenue increased $11 million (5.2 percent) primarily driven by higher foreign exchange fees, corporate bond fees and syndication revenue. Deposit service charges increased $8 million (4.3 percent) due to seasonally higher transaction volumes. Credit and debit card revenue decreased $11 million (3.4 percent) primarily due to fewer processing cycles in the third quarter and the impact of previously acquired portfolios.

Noninterest Expense

Third quarter noninterest expense of $3,039 million was $108 million (3.7 percent) higher than the third quarter of 2016 primarily due to higher compensation expense, partially offset by lower professional services expense. Compensation expense increased $111 million (8.4 percent) principally due to the impact of hiring to support business growth and compliance programs, merit increases, and higher variable compensation. Professional services expense decreased $23 million (18.1 percent) primarily due to fewer consulting services as compliance programs near maturity.

Noninterest expense increased $16 million (0.5 percent) on a linked quarter basis driven by higher compensation expense, partially offset by lower marketing and business development expense. Compensation expense increased $24 million (1.7 percent) principally due to corporate incentive plans and the impact of hiring to support business growth. Marketing and business development expense decreased $17 million (15.6 percent) due to seasonal timing of certain revenue-related marketing and brand advertising.

Provision for Income Taxes

The provision for income taxes for the third quarter of 2017 resulted in a tax rate on a taxable-equivalent basis of 29.0 percent (effective tax rate of 27.3 percent), compared with 28.9 percent (effective tax rate of 27.2 percent) in the third quarter of 2016, and 28.5 percent (effective tax rate of 26.7 percent) in the second quarter of 2017.

Credit Quality

The Company’s provision for credit losses for the third quarter of 2017 was $360 million, which was $10 million (2.9 percent) higher than the prior quarter and $35 million (10.8 percent) higher than the third quarter of 2016. Credit quality was relatively stable compared with the second quarter of 2017.

Total net charge-offs in the third quarter of 2017 were $330 million, compared with $340 million in the second quarter of 2017, and $315 million in the third quarter of 2016. Net charge-offs decreased $10 million (2.9 percent) compared with the second quarter of 2017 mainly due to seasonally lower credit card loan net charge-offs. Net charge-offs increased $15 million (4.8 percent) compared with the third quarter of 2016 primarily due to higher credit card loan net charge-offs related to maturity of vintages within the portfolio, partially offset by lower net charge-offs in residential mortgages and higher recoveries in total commercial. The net charge-off ratio was 0.47 percent in the third quarter of 2017, compared with 0.49 percent in the second quarter of 2017 and 0.46 percent in the third quarter of 2016.

The allowance for credit losses was $4,407 million at September 30, 2017, compared with $4,377 million at June 30, 2017, and $4,338 million at September 30, 2016. The ratio of the allowance for credit losses to period-end loans was 1.58 percent at September 30, 2017 and at June 30, 2017, compared with 1.60 percent at September 30, 2016. The ratio of the allowance for credit losses to nonperforming loans was 426 percent at September 30, 2017, compared with 383 percent at June 30, 2017, and 310 percent at September 30, 2016.

Nonperforming assets were $1,251 million at September 30, 2017, compared with $1,349 million at June 30, 2017, and $1,664 million at September 30, 2016. The ratio of nonperforming assets to loans and other real estate was 0.45 percent at September 30, 2017, compared with 0.49 percent at June 30, 2017, and 0.61 percent at September 30, 2016. The $98 million (7.3 percent) decrease in nonperforming assets on a linked quarter basis was driven by improvements in commercial loans and residential mortgages. The $413 million (24.8 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 $649 million ($497 million excluding covered loans) at September 30, 2017, compared with $639 million ($477 million excluding covered loans) at June 30, 2017, and $748 million ($518 million excluding covered loans) at September 30, 2016.

Capital Management

Total U.S. Bancorp shareholders’ equity was $48.7 billion at September 30, 2017, compared with $48.3 billion at June 30, 2017, and $47.8 billion at September 30, 2016. During the third quarter, the Company returned 79 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 9.4 percent at September 30, 2017, compared with 9.3 percent at June 30, 2017, and at September 30, 2016. The estimated common equity tier 1 capital to risk-weighted assets ratio using the Basel III fully implemented advanced approaches method was 11.8 percent at September 30, 2017, compared with 11.7 percent at June 30, 2017, and 12.1 percent at September 30, 2016.

On Wednesday, October 18, 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 75774124. For those unable to participate during the live call, a recording will be available at approximately 11:00 a.m. CDT on Wednesday, October 18 and will be accessible through Wednesday, October 25 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 75774124.

Minneapolis-based U.S. Bancorp (NYSE: USB), with $459 billion in assets as of September 30, 2017, is the parent company of U.S. Bank National Association, the fifth largest commercial bank in the United States. The Company operates 3,072 banking offices in 25 states and 4,801 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.