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U.S. Bancorp Reports Third Quarter 2015 Earnings Record Earnings Per Diluted Common Share

The following excerpt is from the company's SEC filing.

Return on average assets of 1.44 percent and average common equity of 14.1 percent

Returned 80 percent of third quarter earnings to shareholders

MINNEAPOLIS, October 15, 2015

U.S. Bancorp (NYSE: USB) today reported net income of $1,489 million for the third quarter of 2015, or $0.81 per diluted common share, compared with $1,471 million, or $0.78 per diluted common share, in the third quarter of 2014.

Highlights for the third quarter of 2015 included:

Growth in average total loans of 1.3 percent on a linked quarter basis and 3.8 percent over the third quarter of 2014 (exclud ing student loans, which were transferred to held for sale at the end of the first quarter of 2015 and returned to held for investment on September 1, 2015)

Growth in average commercial and commercial real estate revolving commitments of 1.8 percent over the prior quarter and 8.9 percent year-over-year

Growth in average total commercial loans of 1.7 percent over the second quarter of 2015 and 9.5 percent over the third quarter of 2014

Growth in total other retail loans of 1.9 percent over the second quarter of 2015 and 5.6 percent over the third quarter of 2014 (excluding student loans)

Growth in average total deposits of 1.4 percent on a linked quarter basis and 6.9 percent over the third quarter of 2014

Growth in average low cost deposits, including noninterest-bearing and total savings deposits, of 2.5 percent on a linked quarter basis and 11.4 percent year-over-year

Net interest income growth of 2.7 percent year-over-year and 1.8 percent linked quarter

Growth in average earnings assets of 0.8 percent on a linked quarter basis and 6.6 percent year-over-year, including strong retail loan growth in the third quarter 2015

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U.S. Bancorp Reports Third Quarter 2015 Results

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Net interest margin stable at 3.04 percent for the third quarter of 2015 compared with the prior quarter 3.03 percent

Positive trends in payments-related fee revenue including year-over-year increases in credit and debit card revenue of 7.2 percent and merchant processing services of 8.5 percent (excluding the impact of foreign currency rate changes)

Decline in net charge-offs of 13.1 percent from the third quarter of 2014 and 1.4 percent on a linked quarter basis

Decreases in nonperforming assets of 18.5 percent on a year-over-year basis and 0.6 percent on a linked quarter basis

Capital generation resulted in a return of 80 percent of third quarter earnings to shareholders through dividends and the buyback of 16 million common shares, and continued to reinforce capital position. Ratios at September 30, 2015 were:

Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented standardized approach was 9.2 percent and for the Basel III fully implemented advanced approaches was 12.4 percent.

EARNINGS SUMMARY

Table 1

($ in millions, except per-share data)

Percent

Change

3Q15 vs

Net income attributable to U.S. Bancorp

$1,483

$4,403

$4,363

Diluted earnings per common share

Return on average assets (%)

Return on average common equity (%)

Net interest margin (%)

Efficiency ratio (%) (a)

Tangible efficiency ratio (%) (a)

Dividends declared per common share

Book value per common share (period end)

$22.99

$22.51

$21.38

(a) Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding net securities gains (losses), and for tangible efficiency ratio, intangible amortization.

Net income attributable to U.S. Bancorp was $1,489 million for the third quarter of 2015, 1.2 percent higher than the $1,471 million for the third quarter of 2014, and 0.4 percent higher than the $1,483 million

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for the second quarter of 2015. Diluted earnings per common share of $0.81 in the third quarter of 2015 were $0.03 higher than the third quarter of 2014 and $0.01 higher than the previous quarter. The increase in net income year-over-year was due to higher net interest income and noninterest income, along with a reduction in the provision for credit losses, partially offset by an increase in noninterest expense. The increase in net income on a linked quarter basis was primarily due to increases in net interest income and noninterest income, partially offset by higher noninterest expense.

U.S. Bancorp Chairman, President and Chief Executive Officer Richard K. Davis said, I am proud of the financial performance our 67,000 employees delivered in the third quarter. Because of their hard work and dedication, we are operating from a position of strength as we grow revenue, manage expenses, seek to exceed customer expectations, and create value for shareholders in a demanding marketplace. U.S. Bancorp achieved record diluted earnings per share (EPS) of $0.81 and continued to deliver industry-leading performance measures, with a return on average assets (ROA) of 1.44 percent, return on average common equity (ROE) of 14.1 percent, and an efficiency ratio of 53.9 percent. In addition, we returned 80 percent of our earnings to shareholders through dividends and share buybacks in the third quarter.

Davis continued, While the near-term external environment remains uncertain for the banking industry, we have built steady momentum throughout the year by focusing on activities that are within our control. We grew total loans 1.3 percent over the second quarter, excluding student loans, and total deposits increased 6.9 percent year-over-year, which highlights the comfort our customers have in trusting one of the highest rated banks in the world, as recently reflected in a debt rating upgrade. Growth trends in our Payment Services franchise have improved, highlighting the strong emphasis we are placing in payments businesses. We recently announced a new co-brand relationship with the Auto Club Trust, which has more than nine million members. As part of that partnership, we also agreed to acquire an approximately $500 million credit card portfolio. In addition, we solidified U.S. Banks leadership role in mobile payments by participating in the Android Pay and Samsung Pay roll-outs.

Overall, our actions to generate growth in our balance sheet and revenues, combined with our deliberate efforts to optimize our expense management initiatives, resulted in a solid quarter and put us on a positive forward-looking trajectory. As U.S. Bancorp pursues its vision for the future, we are focused on sustainable growth. We continue to make prudent long-term investments to protect our industry leading competitive positions and help our customers build financially secure futures.

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INCOME STATEMENT HIGHLIGHTS

Table 2

(Taxable-equivalent basis, $ in millions, except per-share data)

$2,821

$2,770

$2,748

$8,343

$8,198

Noninterest income

Total net revenue

15,095

14,992

Noninterest expense

Income before provision and taxes

Provision for credit losses

Income before taxes

Taxable-equivalent adjustment

Applicable income taxes

Net (income) loss attributable to noncontrolling interests

Net income applicable to U.S. Bancorp common shareholders

$1,422

$1,417

$1,405

$4,204

$4,163

Net income attributable to U.S. Bancorp for the third quarter of 2015 was $18 million (1.2 percent) higher than the third quarter of 2014, and $6 million (0.4 percent) higher than the second quarter of 2015. The increase in net income year-over-year was due to higher net interest income, primarily due to growth in earning assets, and noninterest income, primarily driven by increases in commercial products, payments and trust and investment management fee revenue. These increases were offset by an increase in noninterest expense, which included higher compensation and employee benefits expense and other costs related to risk and compliance activities. The increase in net income on a linked quarter basis was primarily due to increases in net interest income and noninterest income, partially offset by higher noninterest expense. As previously disclosed in recent weeks, the third quarter of 2015 included several unrelated items that, combined, were relatively neutral to earnings.

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NET INTEREST INCOME

Table 3

(Taxable-equivalent basis; $ in millions)

Components of net interest income

Income on earning assets

$3,171

$3,123

$3,114

$9,410

$9,296

Expense on interest-bearing liabilities

Average yields and rates paid

Earning assets yield

(.25)%

Rate paid on interest-bearing liabilities

(.07)

Gross interest margin

(.18)%

(.21)%

Average balances

Investment securities (a)

$103,943

$102,391

$93,141

$1,552

$10,802

$102,361

$87,687

$14,674

250,536

246,560

243,867

248,358

240,098

369,265

366,428

346,422

22,843

365,543

336,287

29,256

Interest-bearing liabilities

269,479

270,573

254,501

(1,094

14,978

269,317

246,614

22,703

(a) Excludes unrealized gain (loss)

Net Interest Income

Net interest income on a taxable-equivalent basis in the third quarter of 2015 was $2,821 million, an increase of $73 million (2.7 percent) over the third quarter of 2014. The increase was the result of growth in average earning assets, partially offset by a continued shift in loan portfolio mix and lower reinvestment rates on investment securities. Average earning assets were $22.8 billion (6.6 percent) higher than the third quarter of 2014, driven by increases of $6.7 billion (2.7 percent) in average total loans and $10.8 billion (11.6 percent) in average investment securities. Net interest income increased $51 million (1.8 percent) on a linked quarter basis, primarily due to higher average total loans and an additional day in the current quarter relative to the second quarter of 2015. Average total loans were $3.1 billion (1.3 percent) higher on a linked quarter basis, excluding student loans.

The net interest margin in the third quarter of 2015 was 3.04 percent, compared with 3.16 percent in the third quarter of 2014, and 3.03 percent in the second quarter of 2015. The decrease in the net interest margin on a year-over-year basis primarily reflected a change in loan portfolio mix as well as growth in the investment portfolio at lower average rates and lower reinvestment rates on investment securities. On a linked quarter basis, the increase in the net interest margin was principally due to earning assets growth and

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continued deposit growth, partially offset by growth in lower rate investment securities along with lower investment portfolio reinvestment rates.

Investment Securities

Average investment securities in the third quarter of 2015 were $10.8 billion (11.6 percent) higher year-over-year and $1.6 billion (1.5 percent) higher than the prior quarter. These increases were primarily due to purchases of U.S. government agency-backed securities, net of prepayments and maturities, to support regulatory liquidity coverage ratio requirements.

AVERAGE LOANS

Table 4

($ in millions)

Commercial

$79,486

$77,932

$72,190

$77,880

$69,276

Lease financing

Total commercial

84,704

83,253

77,345

83,167

74,424

Commercial mortgages

32,083

32,499

31,965

32,563

32,005

Construction and development

10,233

Total commercial real estate

42,316

42,446

40,839

42,476

40,465

Residential mortgages

51,831

51,114

51,994

51,458

51,799

Credit card

17,944

17,613

17,753

17,794

17,516

Retail leasing

Home equity and second mortgages

16,083

15,958

15,704

15,980

15,467

27,286

25,415

27,003

26,768

26,636

Total other retail (a)

48,849

47,069

48,698

48,411

48,098

Total loans, excluding covered loans

245,644

241,495

236,629

243,306

232,302

Covered loans

$250,536

$246,560

$243,867

$248,358

$240,098

(a) The Company transferred all of its student loans to loans held for sale at the end of the first quarter of 2015. The portfolio was subsequently transferred back to held for investment effective September 1, 2015.

$48,849

$47,069

$48,698

$48,411

$48,098

Less: Student loans

(3,296

(1,304

(3,410

Total other retail excluding student loans

$47,960

$45,402

$47,107

$44,688

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Loans

Average total loans were $6.7 billion (2.7 percent) higher in the third quarter of 2015 than the third quarter of 2014, ($9.1 billion, 3.8 percent, excluding student loans), driven by growth in total commercial loans (9.5 percent), total other retail loans (5.6 percent excluding student loans), total commercial real estate (3.6 percent) and credit card (1.1 percent). These increases were partially offset by declines in covered loans (32.4 percent), including the impact of the expiration of the loss sharing agreements on commercial and commercial real estate assets at the end of 2014, and residential mortgages (0.3 percent). Average total loans were $4.0 billion (1.6 percent) higher in the third quarter of 2015 than the second quarter of 2015. Excluding student loans, average total loans were $3.1 billion (1.3 percent) higher in the third quarter of 2015 than the second quarter of 2015. The increase was driven by growth in total commercial loans (1.7 percent), total other retail loans (1.9 percent excluding student loans), residential mortgages (1.4 percent) and credit card (1.9 percent).

AVERAGE DEPOSITS

Table 5

Noninterest-bearing deposits

80,940

77,347

74,126

77,623

72,274

Interest-bearing savings deposits

Interest checking

56,888

55,205

54,454

55,592

52,928

Money market savings

80,338

79,898

66,250

78,065

62,314

Savings accounts

37,480

37,071

34,615

36,866

33,940

Total of savings deposits

174,706

172,174

155,319

170,523

149,182

Time deposits less than $100,000

11,045

11,151

Time deposits greater than $100,000

24,497

26,290

30,518

26,566

31,055

Total interest-bearing deposits

208,752

208,397

196,882

207,050

191,388

Total deposits

289,692

285,744

271,008

284,673

263,662

Deposits

Average total deposits for the third quarter of 2015 were $18.7 billion (6.9 percent) higher than the third quarter of 2014. Average noninterest-bearing deposits increased $6.8 billion (9.2 percent) year-over-year, mainly in Wholesale Banking and Commercial Real Estate and Consumer and Small Business Banking. Average total savings deposits were $19.4 billion (12.5 percent) higher year-over-year, the result of growth in corporate trust, Wholesale Banking and Commercial Real Estate, and Consumer and Small Business

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Banking balances. Growth in Consumer and Small Business Banking total savings deposits included net new account growth of 3.1 percent. Average time deposits less than $100,000 were $1.5 billion (13.5 percent) lower due to maturities, while average time deposits greater than $100,000 decreased $6.0 billion (19.7 percent). Time deposits greater than $100,000 are primarily managed as an alternative to other funding sources, such as wholesale borrowing, based largely on funding needs and relative pricing.

Average total deposits increased $3.9 billion (1.4 percent) over the second quarter of 2015. Average noninterest-bearing deposits increased $3.6 billion (4.6 percent) on a linked quarter basis, due to higher balances in Wholesale Banking and Commercial Real Estate, corporate trust, and Consumer and Small Business Banking. Average total savings deposits increased $2.5 billion (1.5 percent), reflecting increases in Wholesale Banking and Commercial Real Estate and Consumer and Small Business Banking. Compared with the second quarter of 2015, average time deposits less than $100,000 decreased $384 million (3.9 percent) due to maturities. Average time deposits greater than $100,000, which are managed based on funding needs, decreased $1.8 billion (6.8 percent) on a linked quarter basis.

NONINTEREST INCOME

Table 6

Credit and debit card revenue

Corporate payment products revenue

Merchant processing services

ATM processing services

Trust and investment management fees

Deposit service charges

Treasury management fees

Commercial products revenue

Mortgage banking revenue

Investment products fees

Securities gains (losses), net

Total noninterest income

Page 9

Noninterest Income

Third quarter noninterest income was $2,326 million, which was $84 million (3.7 percent) higher than the third quarter of 2014 and $54 million (2.4 percent) higher than the second quarter of 2015. The year-over-year increase in noninterest income was primarily due to a third quarter 2015 gain from the sale of Visa Inc. Class B common stock of approximately $135 million (Visa sale), partially offset by a $58 million market valuation adjustment to write down the value of student loans previously held for sale as a result of recent disruption in the student loan securitization market (student loan market adjustment). These loans were subsequently transferred back to held for investment. The remaining increase in noninterest income was principally due to higher commercial products revenue, credit and debit card revenue, merchant processing services, and trust and investment management fees, partially offset by a decrease...


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