News details

Record Earnings Per Diluted Common Share of $0.84

Return on average assets of 1.36 percent and average common equity of 13.5 percent

Returned 79 percent of third quarter earnings to shareholders

MINNEAPOLIS--(BUSINESS WIRE)--Oct. 19, 2016-- U.S. Bancorp (NYSE: USB) today reported net income of $1,502 million for the third quarter of 2016, or $0.84 per diluted common share, compared with $1,489 million, or $0.81 per diluted common share, in the third quarter of 2015.

Highlights for the third quarter of 2016 included:

• Industry-leading return on average assets of 1.36 percent, return on average common equity of 13.5 percent and efficiency ratio of 54.5 percent
• Returned 79 percent of third quarter earnings to shareholders through dividends and share buybacks
• Average total loans grew 1.1 percent on a linked quarter basis and 7.6 percent over the third quarter of 2015 (6.4 percent year-over-year, excluding the credit card portfolio acquisition at the end of the fourth quarter of 2015 and student loans, which were transferred from held for sale to held for investment in the third quarter of 2015)
• Average total deposits grew 3.6 percent on a linked quarter basis and 10.0 percent over the third quarter of 2015
• Net interest income (taxable-equivalent basis) grew 1.6 percent on a linked quarter basis and 4.3 percent year-over-year
  • Average earning assets grew 2.2 percent on a linked quarter basis and 6.6 percent year-over-year
  • Net interest margin of 2.98 percent for the third quarter of 2016, impacted by higher average cash balances, was down 4 basis points from 3.02 percent in the second quarter of 2016, and down 6 basis points from 3.04 percent in the third quarter of 2015
• Mortgage banking revenue increased 31.9 percent linked quarter and 40.2 percent year-over-year driven by strong refinancing activities due to lower longer-term interest rates during the third quarter of 2016
• Credit quality was relatively stable
  • Nonperforming assets and net charge-offs decreased slightly on a linked quarter basis
• Strong capital position. At September 30, 2016, 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 12.1 percent using the Basel III fully implemented advanced approaches method

Net income attributable to U.S. Bancorp was $1,502 million for the third quarter of 2016, 0.9 percent higher than the $1,489 million for the third quarter of 2015, and 1.3 percent lower than the $1,522 million for the second quarter of 2016. Diluted earnings per common share were $0.84 in the third quarter of 2016, $0.03 higher than the third quarter of 2015 and $0.01 higher than the second quarter of 2016. The increase in net income year-over-year was principally due to total net revenue growth, including an increase in net interest income of 4.3 percent on a taxable-equivalent basis (4.5 percent as reported on a GAAP basis), mainly a result of loan growth, and noninterest income growth of 5.1 percent, driven by higher mortgage banking revenue, trust and investment management fees, and credit and debit card revenue. This increase was partially offset by higher noninterest expense related to increased compensation expense due to merit increases and higher variable compensation expense along with hiring to support business growth and compliance programs, increased technology and communications expense reflecting capital investments, continued brand marketing, and higher other noninterest expense, which includes a special FDIC surcharge that began in the third quarter of 2016. The decrease in net income on a linked quarter basis was primarily driven by a 4.2 percent decrease in noninterest income partially offset by a 2.0 percent decrease in noninterest expense, both of which were impacted by notable items in the prior quarter including a $180 million Visa gain in noninterest income and $150 million in noninterest expense related to litigation accruals and a charitable contribution. Excluding the notable items from the second quarter of 2016, the increase in net income on a linked quarter basis was principally due to total net revenue growth of 2.3 percent reflecting an increase in net interest income of 1.6 percent on a taxable-equivalent basis (1.7 percent as reported on a GAAP basis) and noninterest income of 3.1 percent driven by mortgage banking and payment services revenue, partially offset by higher noninterest expense of 3.1 percent related to increased compensation expense, impacted by an additional business day in the current quarter compared with the previous quarter and increased staffing, and other noninterest expense reflecting seasonally higher costs related to investments in tax-advantaged projects and the FDIC surcharge.

U.S. Bancorp Chairman and Chief Executive Officer Richard K. Davis said, “U.S. Bancorp reported solid, industry-leading financial results in the third quarter. The banking industry continues to face steady headwinds, including persistently low interest rates, a flat yield curve, and a slow economic recovery that caused some commercial customers to pause investments in their businesses during the quarter. Despite the operating environment, we announced record earnings per share and solid revenue growth, particularly within our fee-based businesses. The continuing momentum in consumer lending led to growth in net interest income despite a decline in net interest margin. Fee-based revenues grew year over year across most categories including payments, mortgage banking and wealth management while capital markets continued to have solid performance in the third quarter. We remain confident in our ability to generate consistent, predictable and repeatable industry-leading financial results because of our diversified business model and the execution of our strategy.

“In this challenging operating environment, we remain focused on doing the right thing for our customers, our communities and our shareholders, and investing in our businesses in order to create value over the long-term. For customers who are looking to establish a relationship with a trusted financial institution, we continue to enhance offerings and business processes to provide convenient, accessible and affordable products and services to meet their unique objectives. For our communities, we achieved record-breaking results in our annual employee giving campaign. Every year, our employees choose to invest their time, talents and resources generously in the communities where we operate to make them more vibrant and prosperous. I am extremely proud of our 67,000 employees who work hard every day to create value for our customers, communities, and shareholders.

“And for our shareholders, our financial performance has enabled us to return 79 percent of our third quarter earnings to shareholders through dividends and share buybacks. We accomplished all this while strengthening the U.S. Bank brand and positioning the company for long-term growth.”

Net Interest Income

Net interest income on a taxable-equivalent basis in the third quarter of 2016 was $2,943 million, an increase of $122 million (4.3 percent) over the third quarter of 2015. The increase was driven by loan growth and higher interest rates, partially offset by the loan portfolio mix and lower yields in the investment portfolio. Average earning assets were $24.5 billion (6.6 percent) higher than the third quarter of 2015, driven by increases of $19.1 billion (7.6 percent) in average total loans and $4.2 billion (4.0 percent) in average investment securities. Net interest income on a taxable-equivalent basis increased $47 million (1.6 percent) linked quarter, primarily due to growth in average total loans, partially offset by lower reinvestment yields in the investment securities portfolio and higher average cash balances in the third quarter of 2016. Average earning assets were $8.4 billion (2.2 percent) higher on a linked quarter basis, reflecting growth in total loans of $3.1 billion (1.1 percent) and higher average cash balances.

The net interest margin in the third quarter of 2016 was 2.98 percent, compared with 3.04 percent in the third quarter of 2015, and 3.02 percent in the second quarter of 2016. The decrease in the net interest margin on a year-over-year basis was principally due to increased funding costs and higher average cash balances, along with securities purchases at lower average rates and lower reinvestment rates on maturing securities, partially offset by higher rates on new loans. On a linked quarter basis, the decrease in net interest margin primarily reflected higher average cash balances as well as lower average rates on new securities purchases and lower reinvestment rates on maturing securities, partially offset by the benefit of somewhat higher LIBOR rates for loans during the quarter.

Investment Securities

Average investment securities in the third quarter of 2016 were $4.2 billion (4.0 percent) higher year-over-year and $1.0 billion (0.9 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, to support regulatory liquidity coverage ratio requirements.

Loans

Average total loans were $19.1 billion (7.6 percent) higher in the third quarter of 2016 than the third quarter of 2015 (6.4 percent excluding student loans and the credit card portfolio acquisition). The increase was driven by growth in total commercial loans (9.0 percent), residential mortgages (8.6 percent), total other retail loans (8.2 percent, 5.2 percent excluding student loans), and credit card loans (15.0 percent, 5.9 percent excluding the credit card portfolio acquisition). These increases were partially offset by a decline in the run-off covered loans portfolio (15.6 percent). Average total loans were $3.1 billion (1.1 percent) higher in the third quarter of 2016 than the second quarter of 2016. The increase was driven by linked quarter growth in credit card loans (2.4 percent), residential mortgages (1.4 percent), and total other retail loans (2.7 percent).

Deposits

Average total deposits for the third quarter of 2016 were $28.9 billion (10.0 percent) higher than the third quarter of 2015. Average noninterest-bearing deposits increased $1.1 billion (1.3 percent) year-over-year, mainly in Consumer and Small Business Banking, partially offset by a decline in deposits within Wealth Management and Securities Services. Average total savings deposits were $29.4 billion (16.8 percent) higher year-over-year, the result of growth across all business lines. Average time deposits were $1.6 billion (4.7 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 $11.2 billion (3.6 percent) over the second quarter of 2016. On a linked quarter basis, average noninterest-bearing deposits increased $2.9 billion (3.6 percent) and average total savings deposits increased $10.1 billion (5.2 percent) reflecting increases across all business lines. Average time deposits, which are managed based on funding needs, relative pricing, and liquidity characteristics, decreased $1.8 billion (5.1 percent) on a linked quarter basis.

Noninterest Income

Third quarter noninterest income was $2,445 million, which was $119 million (5.1 percent) higher than the third quarter of 2015, reflecting increases in mortgage banking revenue, trust and investment management fees, credit and debit card revenue, and merchant processing services revenue, partially offset by declines in commercial products revenue and other noninterest income. Mortgage banking revenue increased $90 million (40.2 percent) driven by higher origination and sales volume in part due to refinancing activities in the marketplace. Trust and investment management fees increased $33 million (10.0 percent) reflecting lower money market fee waivers along with account growth, an increase in assets under management and improved market conditions. Credit and debit card revenue increased $30 million (11.2 percent) reflecting higher transaction volumes including acquired portfolios. Merchant processing services revenue increased $12 million (3.0 percent) as a result of an increase in product fees and higher volumes. Adjusted for the approximate $9 million impact of foreign currency rate changes, year-over-year merchant processing services revenue increased approximately 5.3 percent. Commercial products revenue decreased $12 million (5.2 percent), primarily driven by a large syndication transaction in the prior year.

Noninterest income was $107 million (4.2 percent) lower in the third quarter of 2016 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 our membership in Visa Europe Limited which was sold to Visa, Inc. in the second quarter), noninterest income increased 3.1 percent principally driven by higher mortgage banking revenue, payment services revenue and deposit service charges. Mortgage banking revenue increased $76 million (31.9 percent) reflecting higher origination and sales volumes impacted by stronger refinancing activities along with a favorable change in the valuation of mortgage servicing rights, net of hedging activities. Deposit service charges increased $13 million (7.3 percent), corporate payment products revenue was seasonally higher by $9 million (5.0 percent) and merchant processing services revenue increased $9 million (2.2 percent) due to seasonally higher transaction volumes. Adjusted for the approximate $5 million impact of foreign currency rate changes, linked quarter merchant processing services revenue increased approximately 3.5 percent. Commercial products revenue decreased $19 million (8.0 percent) primarily due to higher capital markets volume in the prior quarter as a result of market volatility in the second quarter of 2016. Excluding the second quarter notable item, other noninterest income decreased $34 million (16.5 percent) primarily due to lower retail leasing revenue reflecting lower end-of-term gains on auto leases.

Noninterest Expense

Third quarter noninterest expense was $2,931 million, which was $156 million (5.6 percent) higher than the third quarter of 2015, primarily related to higher compensation expense, technology and communications expense and other noninterest expense. Compensation expense increased $104 million (8.5 percent) principally due to the impact of hiring decisions to support business growth and compliance programs, merit increases, and higher variable compensation. Professional services increased $12 million (10.4 percent) from a year ago primarily due to compliance programs. Technology and communications expense increased $21 million (9.5 percent) including the impact of capital investments and costs related to acquired card portfolios. Other noninterest expense increased $16 million (3.5 percent), reflecting the impact of the FDIC surcharge, which began in the third quarter 2016.

Noninterest expense decreased $61 million (2.0 percent) on a linked quarter basis. Excluding the second quarter 2016 notable items, noninterest expense increased $89 million (3.1 percent), driven by higher compensation and other noninterest expense. Second quarter 2016 notable items included $110 million in accruals related to legal and regulatory matters along with a $40 million charitable contribution. Compensation expense increased $52 million (4.1 percent) due to an additional business day in the current quarter compared with the previous quarter and increased staffing. Excluding the second quarter notable items, other noninterest expense increased $23 million (5.1 percent) due to seasonally higher costs related to investments in tax-advantaged projects and the impact of the FDIC surcharge, which began in the current quarter, while marketing and business development decreased $7 million (6.4 percent) due to the timing of various marketing programs.

Provision for Income Taxes

The provision for income taxes for the third quarter of 2016 resulted in a tax rate on a taxable-equivalent basis of 28.9 percent (effective tax rate of 27.2 percent), compared with 28.1 percent (effective tax rate of 26.2 percent) in the third quarter of 2015, and 27.9 percent (effective tax rate of 26.1 percent) in the second quarter of 2016, reflecting the favorable settlement of certain tax examination matters in the prior quarters.

Credit Quality

The Company’s provision for credit losses for the third quarter of 2016 was $325 million, which was relatively flat to the prior quarter and $43 million (15.2 percent) higher than the third quarter of 2015. Credit quality was relatively stable compared with the second quarter of 2016.

The provision for credit losses was $10 million higher than net charge-offs in the third quarter of 2016 and in the second quarter of 2016 and $10 million lower than net charge-offs in the third quarter of 2015. The reserve build for the third quarter of 2016 was driven by portfolio growth, partially offset by residential mortgage credit quality improvement. Total net charge-offs in the third quarter of 2016 were $315 million, compared with $317 million in the second quarter of 2016, and $292 million in the third quarter of 2015. Net charge-offs were relatively flat to the second quarter of 2016 mainly due to a modest increase in commercial loan net charge-offs, offset by seasonal declines in credit card net charge-offs. Net charge-offs increased $23 million (7.9 percent) compared with the third quarter of 2015 primarily due to higher commercial loan net charge-offs, partially offset by lower charge-offs related to residential mortgages. The net charge-off ratio was 0.46 percent in the third quarter of 2016, compared with 0.48 percent in the second quarter of 2016 and 0.46 percent in the third quarter of 2015.

The allowance for credit losses was $4,338 million at September 30, 2016, compared with $4,329 million at June 30, 2016, and $4,306 million at September 30, 2015. The ratio of the allowance for credit losses to period-end loans was 1.60 percent at September 30, 2016, compared with 1.61 percent at June 30, 2016, and 1.69 percent at September 30, 2015. The ratio of the allowance for credit losses to nonperforming loans was 310 percent at September 30, 2016, compared with 312 percent at June 30, 2016, and 347 percent at September 30, 2015.

Nonperforming assets were $1,664 million at September 30, 2016, compared with $1,672 million at June 30, 2016, and $1,567 million at September 30, 2015. The ratio of nonperforming assets to loans and other real estate was 0.61 percent at September 30, 2016, compared with 0.62 percent at June 30, 2016, and 0.61 percent at September 30, 2015. The $97 million (6.2 percent) increase in nonperforming assets on a year-over-year basis was driven by commercial loans within the energy portfolio, partially offset by improvements in the Company’s residential and commercial real estate portfolios. The decrease in nonperforming assets on a linked quarter basis of $8 million was driven by improvements in residential mortgages and other real estate. Accruing loans 90 days or more past due were $748 million ($518 million excluding covered loans) at September 30, 2016, compared with $724 million ($478 million excluding covered loans) at June 30, 2016, and $825 million ($510 million excluding covered loans) at September 30, 2015.

Commercial loans to customers in the energy sector were approximately $2.7 billion ($11.1 billion of commitments) at September 30, 2016, compared with $3.0 billion ($11.3 billion of commitments) at June 30, 2016. During the third quarter 2016, criticized commitments within the energy portfolio decreased by $427 million while nonperforming loans in the energy portfolio increased $37 million, primarily due to a single account. Energy portfolio loans represented 1.0 percent of the Company’s total loans outstanding at September 30, 2016, compared with 1.1 percent at June 30, 2016. At September 30, 2016, the Company had credit reserves of 8.9 percent of total outstanding energy loan balances, compared with 8.8 percent of total outstanding energy loan balances at June 30, 2016.