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U.S. Bancorp Reports Second Quarter 2017 Earnings

MINNEAPOLIS--(BUSINESS WIRE)--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.
EARNINGS SUMMARY Table 1

($ in millions, except per-share data)

Percent Percent
Change Change
2Q 1Q 2Q 2Q17 vs 2Q17 vs YTD YTD Percent
2017 2017 2016 1Q17 2Q16 2017 2016 Change
Net income attributable to U.S. Bancorp $1,500 $1,473 $1,522 1.8 (1.4 ) $2,973 $2,908 2.2
Diluted earnings per common share $.85 $.82 $.83 3.7 2.4 $1.66 $1.59 4.4
Return on average assets (%) 1.35 1.35 1.43 1.35 1.38
Return on average common equity (%) 13.4 13.3 13.8 13.4 13.4
Net interest margin (%) 3.04 3.03 3.02 3.04 3.04
Efficiency ratio (%) (a) 55.2 55.6 54.9 55.4 54.8
Tangible efficiency ratio (%) (a) 54.4 54.8 54.1 54.6 53.9
Dividends declared per common share $.280 $.280 $.255 -- 9.8 $.560 $.510 9.8
Book value per common share (period end) $25.55 $25.05 $24.37 2.0 4.8
(a) See Non-GAAP Financial Measures reconciliation on page 21

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.”

INCOME STATEMENT HIGHLIGHTS Table 2
($ in millions, except per-share data) Percent Percent
Change Change
2Q 1Q 2Q 2Q17 vs 2Q17 vs YTD YTD Percent
2017 2017 2016 1Q17 2Q16 2017 2016 Change
Net interest income $3,017 $2,945 $2,845 2.4 6.0 $5,962 $5,680 5.0
Taxable-equivalent adjustment 51 50 51 2.0 -- 101 104 (2.9 )
Net interest income (taxable-equivalent basis) 3,068 2,995 2,896 2.4 5.9 6,063 5,784 4.8
Noninterest income 2,419 2,329 2,552 3.9 (5.2 ) 4,748 4,701 1.0
Total net revenue 5,487 5,324 5,448 3.1 .7 10,811 10,485 3.1
Noninterest expense 3,023 2,944 2,992 2.7 1.0 5,967 5,741 3.9
Income before provision and income taxes 2,464 2,380 2,456 3.5 .3 4,844 4,744 2.1
Provision for credit losses 350 345 327 1.4 7.0 695 657 5.8
Income before taxes 2,114 2,035 2,129 3.9 (.7 ) 4,149 4,087 1.5

Income taxes and taxable-equivalent adjustment

602 549 593 9.7 1.5 1,151 1,150 .1
Net income 1,512 1,486 1,536 1.7 (1.6 ) 2,998 2,937 2.1

Net (income) loss attributable to noncontrolling interests

(12 ) (13 ) (14 ) 7.7 14.3 (25 ) (29 ) 13.8
Net income attributable to U.S. Bancorp $1,500 $1,473 $1,522 1.8 (1.4 ) $2,973 $2,908 2.2

Net income applicable to U.S. Bancorp common shareholders

$1,430 $1,387 $1,435 3.1 (.3 ) $2,817 $2,764 1.9
Diluted earnings per common share $.85 $.82 $.83 3.7 2.4 $1.66 $1.59 4.4
NET INTEREST INCOME Table 3

(Taxable-equivalent basis; $ in millions)

Change Change
2Q 1Q 2Q 2Q17 vs 2Q17 vs YTD YTD
2017 2017 2016 1Q17 2Q16 2017 2016 Change
Components of net interest income
Income on earning assets $3,584 $3,451 $3,305 $133 $279 $7,035 $6,580 $455
Expense on interest-bearing liabilities 516 456 409 60 107 972 796 176
Net interest income $3,068 $2,995 $2,896 $73 $172 $6,063 $5,784 $279
Average yields and rates paid
Earning assets yield 3.56 % 3.49 % 3.44 % .07 % .12 % 3.52 % 3.46 % .06 %
Rate paid on interest-bearing liabilities .69 .62 .58 .07 .11 .66 .57 .09
Gross interest margin 2.87 % 2.87 % 2.86 % -- % .01 % 2.86 % 2.89 % (.03 )%
Net interest margin 3.04 % 3.03 % 3.02 % .01 % .02 % 3.04 % 3.04 % -- %
Average balances
Investment securities (a) 1,368 $110,764 $107,132 $604 $4,236 1,067 $106,581 $4,486
Loans 275,528 273,158 266,582 2,370 8,946 274,350 264,432 9,918
Earning assets 403,883 399,281 385,368 4,602 18,515 401,595 381,788 19,807
Interest-bearing liabilities 299,271 296,170 285,796 3,101 13,475 297,729 282,656 15,073
(a) Excludes unrealized gain (loss)

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.

AVERAGE LOANS Table 4
($ in millions) Percent Percent
Change Change
2Q 1Q 2Q 2Q17 vs 2Q17 vs YTD YTD Percent
2017 2017 2016 1Q17 2Q16 2017 2016 Change
Commercial $90,061 $88,284 $86,899 2.0 3.6 $89,177 $85,741 4.0
Lease financing 5,577 5,455 5,255 2.2 6.1 5,517 5,246 5.2
Total commercial 95,638 93,739 92,154 2.0 3.8 94,694 90,987 4.1
Commercial mortgages 30,627 31,461 31,950 (2.7 ) (4.1 ) 31,042 31,893 (2.7 )
Construction and development 11,922 11,697 11,038 1.9 8.0 11,810 10,801 9.3
Total commercial real estate 42,549 43,158 42,988 (1.4 ) (1.0 ) 42,852 42,694 .4
Residential mortgages 58,544 57,900 55,501 1.1 5.5 58,224 54,854 6.1
Credit card 20,631 20,845 20,140 (1.0 ) 2.4 20,737 20,192 2.7
Retail leasing 7,181 6,469 5,326 11.0 34.8 6,827 5,253 30.0
Home equity and second mortgages 16,252 16,259 16,394 -- (.9 ) 16,256 16,381 (.8 )
Other 31,194 31,056 29,748 .4 4.9 31,125 29,649 5.0
Total other retail 54,627 53,784 51,468 1.6 6.1 54,208 51,283 5.7
Total loans, excluding covered loans 271,989 269,426 262,251 1.0 3.7 270,715 260,010 4.1
Covered loans 3,539 3,732 4,331 (5.2 ) (18.3 ) 3,635 4,422 (17.8 )
Total loans $275,528 $273,158 $266,582 .9 3.4 $274,350 $264,432 3.8

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).

AVERAGE DEPOSITS Table 5
($ in millions) Percent Percent
Change Change
2Q 1Q 2Q 2Q17 vs 2Q17 vs YTD YTD Percent
2017 2017 2016 1Q17 2Q16 2017 2016 Change
Noninterest-bearing deposits $82,710 $80,738 $79,171 2.4 4.5 $81,729 $78,870 3.6
Interest-bearing savings deposits
Interest checking 67,290 65,681 60,842 2.4 10.6 66,490 59,376 12.0
Money market savings 106,777 108,759 92,904 (1.8 ) 14.9 107,763 89,683 20.2
Savings accounts 43,524 42,609 40,258 2.1 8.1 43,069 39,754 8.3
Total savings deposits 217,591 217,049 194,004 .2 12.2 217,322 188,813 15.1
Time deposits 30,871 30,646 34,211 .7 (9.8 ) 30,759 33,949 (9.4 )
Total interest-bearing deposits 248,462 247,695 228,215 .3 8.9 248,081 222,762 11.4
Total deposits $331,172 $328,433 $307,386 .8 7.7 $329,810 $301,632 9.3

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...


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