U.S. Bancorp Reports First Quarter 2017 Earnings

MINNEAPOLIS--(BUSINESS WIRE)--U.S. Bancorp (NYSE: USB) today reported net income of $1,473 million for the first quarter of 2017, or $0.82 per diluted common share, compared with $1,386 million, or $0.76 per diluted common share, in the first quarter of 2016.

Highlights for the first quarter of 2017 included:

• Industry-leading return on average assets of 1.35 percent and return on average common equity of 13.3 percent
• Net interest income (taxable-equivalent basis) grew 3.7 percent year-over-year and declined slightly on a linked quarter basis due to fewer days in the quarter
  • Net interest margin of 3.03 percent for the first quarter of 2017 decreased 3 basis points from the first quarter of 2016, due to loan mix and reinvestment yields, and grew 5 basis points over the fourth quarter of 2016, due to the favorable impact of higher interest rates
• Average total loans grew 4.1 percent over the first quarter of 2016 and 0.2 percent linked quarter
• Noninterest income increased 8.4 percent on a year-over-year basis
  • Payment services revenue increased 4.9 percent led by credit and debit card revenue growth of 9.8 percent
  • Trust and investment management fees increased 8.6 percent
  • Mortgage banking revenue increased 10.7 percent
• Nonperforming assets decreased 13.0 percent on a year-over-year basis and 6.7 percent on a linked quarter basis
• Strong capital position. At March 31, 2017, the estimated common equity tier 1 capital to risk-weighted assets ratio was 9.2 percent using the Basel III fully implemented standardized approach and was 11.5 percent using the Basel III fully implemented advanced approaches method.

Net income attributable to U.S. Bancorp was $1,473 million for the first quarter of 2017, 6.3 percent higher than the $1,386 million for the first quarter of 2016, and 0.3 percent lower than the $1,478 million for the fourth quarter of 2016. Diluted earnings per common share of $0.82 in the first quarter of 2017 were $0.06 higher than the first quarter of 2016 and were unchanged from the fourth 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 3.7 percent on a taxable-equivalent basis (3.9 percent as reported on a GAAP basis), mainly a result of loan growth, and an increase in noninterest income of 8.4 percent, driven by higher payment services revenue, trust and investment management fees and mortgage banking revenue. This increase was partially offset by higher noninterest expense due to increased compensation expense related to hiring to support business growth and compliance programs as well as merit increases and higher variable compensation expense. The decrease in net income on a linked quarter basis was principally due to a decrease in total net revenue of 2.0 percent, reflecting lower net interest income of 0.3 percent, due to two fewer days, and a decrease in noninterest income of 4.2 percent driven by seasonally lower payment services revenue and a decline in mortgage banking revenue. These decreases were mostly offset by a decline in noninterest expense of 2.0 percent mainly from seasonally lower costs from investments in tax-advantaged projects and professional services expense, along with lower income tax expense.

U.S. Bancorp President and Chief Executive Officer Andy Cecere said, “U.S. Bancorp once again delivered industry-leading returns and profitability in the first quarter of 2017 as we leveraged our diverse business platform and our investments in innovation to deliver the entire bank to our customers in the ways they want to interact with us. We strive to continually improve upon our best-in-class performance, and we are well positioned to do so against the backdrop of an evolving economic and regulatory environment.

“In the first quarter, we maintained our industry-leading performance - a U.S. Bancorp hallmark. Our return on average common equity was 13.3 percent and, compared to a year ago, diluted earnings per share grew by 7.9 percent, supported by strong revenue growth and stable credit quality. We also returned 78 percent of earnings to shareholders.

"In everything we do at U.S. Bancorp, we work to become the most trusted choice for our customers, shareholders and communities. In the first quarter, we were fortunate to be recognized for our commitment to ethics and integrity by the Ethisphere Institute, which named U.S. Bank to its World’s Most Ethical Companies list for the third year in a row. We are proud of this recognition and how it affirms our culture of trust. It is a culture that was fortified by our Executive Chairman Richard Davis and a culture that I will preserve and cultivate in my new role.

“I am excited for the future and working with our employees who have a unique capability to help U.S. Bancorp deliver consistent growth while exploring innovations that create dynamic opportunities with our customers, and accomplishing it all with a commitment to being our customers’ most trusted partner. We are well positioned to create long-term value for our shareholders, customers, communities and employees.”

Net Interest Income

Net interest income on a taxable-equivalent basis in the first quarter of 2017 was $2,995 million, an increase of $107 million (3.7 percent) over the first quarter of 2016. The increase was principally driven by loan growth, partially offset by a lower net interest margin. Average earning assets were $21.1 billion (5.6 percent) higher than the first quarter of 2016, driven by increases of $10.9 billion (4.1 percent) in average total loans, $4.7 billion (4.5 percent) in average investment securities and higher average cash balances. Net interest income on a taxable-equivalent basis decreased $9 million (0.3 percent) linked quarter driven by the impact of two fewer days in the first quarter. In addition, higher net interest margin was partially offset by lower average earning assets, mainly average loans held for sale and average cash balances.

The net interest margin in the first quarter of 2017 was 3.03 percent, compared with 3.06 percent in the first quarter of 2016, and 2.98 percent in the fourth quarter of 2016. The decrease in the net interest margin of 3 basis points on a year-over-year basis reflected the net impact of loan mix, lower yield on securities purchased, higher rates paid on deposits, and a shift in interest-bearing liabilities mix. On a linked quarter basis, the increase of 5 basis points was principally due to the benefit of asset repricing during a period of rising rates.

Investment Securities

Average investment securities in the first quarter of 2017 were $4.7 billion (4.5 percent) higher year-over-year and $378 million (0.3 percent) higher than the prior quarter. These increases were primarily due to purchases of U.S. Treasury securities, partially offset by a reduction in U.S. government agency-backed securities, net of prepayments and maturities, in support of liquidity management.

Loans

Average total loans were $10.9 billion (4.1 percent) higher in the first quarter of 2017 than the first quarter of 2016. The increase was due to growth in total commercial loans (4.4 percent), residential mortgages (6.8 percent), total other retail loans (5.3 percent), total commercial real estate (1.8 percent) and credit card loans (3.0 percent). These increases were partially offset by run-off in the covered loans portfolio (17.3 percent). Average total loans were $487 million (0.2 percent) higher in the first quarter of 2017 than the fourth quarter of 2016. This increase was primarily driven by linked quarter growth in residential mortgages (2.1 percent) and retail leasing (4.5 percent), partially offset by a decline in total commercial real estate (0.5 percent), home equity and second mortgages (1.1 percent) and covered loans (5.1 percent).

Deposits

Average total deposits for the first quarter of 2017 were $32.6 billion (11.0 percent) higher than the first quarter of 2016. Average noninterest-bearing deposits increased $2.2 billion (2.8 percent) year-over-year mainly in Consumer and Small Business Banking and Wealth Management and Securities Services. Average total savings deposits were $33.4 billion (18.2 percent) higher year-over-year, the result of growth across all business lines. Average time deposits were $3.0 billion (9.0 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 decreased $750 million (0.2 percent) from the fourth quarter of 2016. On a linked quarter basis, average noninterest-bearing deposits seasonally decreased $4.2 billion (4.9 percent) across all business lines, while average total savings deposits grew $4.5 billion (2.1 percent) reflecting increases in 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, decreased $1.1 billion (3.3 percent) on a linked quarter basis.

Noninterest Income

First quarter noninterest income of $2,329 million was $180 million (8.4 percent) higher than the first quarter of 2016, driven by increases in payment services revenue, trust and investment management fees, mortgage banking and other revenue. Payment services revenue was higher principally due to an increase in credit and debit card revenue of $26 million (9.8 percent), reflecting higher sales volumes. Merchant processing services revenue increased $5 million (1.3 percent). Adjusted for the approximate $5 million impact of foreign currency rate changes, year-over-year merchant processing services revenue increased approximately 2.7 percent. Trust and investment management fees increased $29 million (8.6 percent) primarily due to improved market conditions and account growth, along with lower money market fee waivers. Mortgage banking revenue increased $20 million (10.7 percent) mainly due to the valuation of mortgage servicing rights, net of hedging activities. Other income increased $30 million (16.3 percent) compared with the prior year quarter, primarily due to higher equity investment income in the first quarter of 2017.

Noninterest income was $102 million (4.2 percent) lower in the first quarter of 2017 than the fourth quarter of 2016 driven by an expected decline in mortgage banking revenue and other income, along with seasonally lower fee-based revenue including credit and debit card revenue, merchant processing services revenue and deposit service charges, partially offset by securities gains. Mortgage banking revenue decreased $33 million (13.8 percent), reflecting seasonality and lower origination and sales volume. Other income decreased $37 million (14.7 percent) primarily driven by lower syndication revenue related to refinancings from tax credits. Credit and debit card revenue decreased $24 million (7.6 percent) mainly due to seasonally lower sales volume. Merchant processing services revenue decreased $26 million (6.4 percent) primarily as a result of seasonality and the timing of marketing incentives from card associations. Deposit service charges decreased $9 million (4.8 percent) due to seasonally lower transaction volumes, while commercial products revenue decreased $10 million (4.6 percent) due to lower syndication fees.

Noninterest Expense

First quarter noninterest expense of $2,944 million was $195 million (7.1 percent) higher than the first quarter of 2016, primarily due to higher compensation, employee benefits, marketing and business development expense and other expense. Compensation expense increased $142 million (11.4 percent) principally due to the impact of hiring to support business growth and compliance programs, merit increases, and higher variable compensation. Employee benefits expense increased $14 million (4.7 percent) primarily driven by higher payroll taxes. Marketing and business development expense increased $13 million (16.9 percent) to support new business development. Other expense was $26 million (6.2 percent) higher primarily reflecting the impact of the FDIC insurance surcharge, which began in the third quarter of 2016.

Noninterest expense decreased $60 million (2.0 percent) on a linked quarter basis driven by seasonally lower costs related to investments in tax-advantaged projects, lower professional services and marketing and business development expense, partially offset by higher employee benefits and compensation expense. Other noninterest expense decreased $72 million (13.9 percent) primarily due to seasonally lower costs related to investments in tax-advantaged projects. Professional services expense was $60 million (38.5 percent) lower primarily due to the timing of business initiatives and a decrease in costs related to compliance and legal matters. Marketing and business development expense decreased $17 million (15.9 percent) due to the timing of certain marketing campaigns and seasonally lower travel costs. Partially offsetting these declines was a seasonal increase in employee benefits expense of $53 million (20.3 percent) primarily driven by seasonally higher payroll tax and healthcare expenses, in addition to an increase in compensation expense of $34 million (2.5 percent) reflecting the impact of variable compensation including the timing of stock-based compensation grants and merit increases.

Provision for Income Taxes

The provision for income taxes for the first quarter of 2017 resulted in a tax rate on a taxable-equivalent basis of 27.0 percent (effective tax rate of 25.1 percent), compared with 28.4 percent (effective tax rate of 26.5 percent) in the first quarter of 2016, and 28.6 percent (effective tax rate of 26.9 percent) in the fourth quarter of 2016. The lower tax rate for the first quarter of 2017 reflects 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 first quarter of 2017 was $345 million, which was $3 million (0.9 percent) higher than the prior quarter and $15 million (4.5 percent) higher than the first quarter of 2016. Credit quality was relatively stable compared with the fourth quarter of 2016.

The provision for credit losses was $10 million higher than net charge-offs in the first quarter of 2017, $20 million higher than net charge-offs in the fourth quarter of 2016, and $15 million higher than net charge-offs in the first quarter of 2016. The reserve build for the first quarter of 2017 was $10 million lower than the prior quarter due to lower portfolio growth and stable credit quality. Total net charge-offs in the first quarter of 2017 were $335 million, compared with $322 million in the fourth quarter of 2016, and $315 million in the first quarter of 2016. Net charge-offs increased $13 million (4.0 percent) compared with the fourth quarter of 2016 mainly due to seasonally higher credit card loan net charge-offs and lower total commercial real estate recoveries. Net charge-offs increased $20 million (6.3 percent) compared with the first quarter of 2016 primarily due to higher credit card loan and total other retail net charge-offs, partially offset by lower net charge-offs related to total commercial and residential mortgages. The net charge-off ratio was 0.50 percent in the first quarter of 2017, compared with 0.47 percent in the fourth quarter of 2016 and 0.48 percent in the first quarter of 2016.

The allowance for credit losses was $4,366 million at March 31, 2017, compared with $4,357 million at December 31, 2016, and $4,320 million at March 31, 2016. The ratio of the allowance for credit losses to period-end loans was 1.60 percent at March 31, 2017, compared with 1.59 percent at December 31, 2016, and 1.63 percent at March 31, 2016. The ratio of the allowance for credit losses to nonperforming loans was 338 percent at March 31, 2017, compared with 318 percent at December 31, 2016, and 303 percent at March 31, 2016.

Nonperforming assets were $1,495 million at March 31, 2017, compared with $1,603 million at December 31, 2016, and $1,719 million at March 31, 2016. The ratio of nonperforming assets to loans and other real estate was 0.55 percent at March 31, 2017, compared with 0.59 percent at December 31, 2016, and 0.65 percent at March 31, 2016. The $108 million (6.7 percent) decrease in nonperforming assets on a linked quarter basis was driven by improvements in commercial loans, commercial real estate, residential mortgages and other real estate. The $224 million (13.0 percent) decrease in nonperforming assets on a year-over-year basis was driven by commercial loans, residential mortgages and other real estate. Accruing loans 90 days or more past due were $718 million ($524 million excluding covered loans) at March 31, 2017, compared with $764 million ($552 million excluding covered loans) at December 31, 2016, and $804 million ($528 million excluding covered loans) at March 31, 2016.

Capital Management

Total U.S. Bancorp shareholders’ equity was $47.8 billion at March 31, 2017, compared with $47.3 billion at December 31, 2016, and $46.8 billion at March 31, 2016. During the first quarter, the Company returned 78 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 9.2 percent at March 31, 2017, compared with 9.1 percent at December 31, 2016, and 9.2 percent at March 31, 2016. The estimated common equity tier 1 capital to risk-weighted assets ratio using the Basel III fully implemented advanced approaches method was 11.5 percent at March 31, 2017, compared with 11.7 percent at December 31, 2016, and 11.9 percent at March 31, 2016.

On Wednesday, April 19, 2017, at 8:00 a.m. CT, 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 73528771. For those unable to participate during the live call, a recording will be available at approximately 11:00 a.m. CT on Wednesday, April 19 and be accessible through Wednesday, April 26 at 11:00 p.m. CT. To access the recording within the United States and Canada, 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 73528771.

Minneapolis-based U.S. Bancorp (NYSE: USB), with $450 billion in assets as of March 31, 2017, is the parent company of U.S. Bank National Association, the fifth largest commercial bank in the United States. The Company operates 3,091 banking offices in 25 states and 4,838 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 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.