U.S. Bancorp Reports Fourth Quarter and Full Year 2017 Earnings

MINNEAPOLIS--(BUSINESS WIRE)--U.S. Bancorp (NYSE: USB) today reported net income of $1,682 million for the fourth quarter of 2017, or $0.97 per diluted common share, compared with $1,478 million, or $0.82 per diluted common share, in the fourth quarter of 2016. The fourth quarter of 2017 included notable items related to the impacts of tax reform, a special employee bonus, a charitable contribution to the U.S. Bank Foundation, and a regulatory and legal accrual that, combined, increased diluted earnings per common share by $0.09.

Highlights for the full year of 2017 included:

• Record diluted earnings per common share of $3.51, record net revenue of $22,057 million, and record net income of $6,218 million. Earnings to common shareholders were $3.42 per diluted common share for 2017, excluding notable items.
• Industry-leading return on average assets of 1.39 percent and return on average common equity of 13.8 percent (1.35 percent and 13.4 percent, respectively, excluding notable items)
• Returned 77 percent of 2017 earnings to shareholders through dividends and share buybacks

Highlights for the fourth quarter of 2017 included:

• Record net revenue, both as reported and excluding notable items
• Diluted earnings per common share of $0.88 in the fourth quarter of 2017, excluding notable items
• Return on average assets of 1.46 percent and return on average common equity of 14.7 percent (1.33 percent and 13.4 percent, respectively, excluding notable items)
• Returned 72 percent of fourth quarter earnings to shareholders through dividends and share buybacks
• Net interest income grew 6.4 percent year-over-year and 0.3 percent on a linked quarter basis
• Net interest margin of 3.08 percent for the fourth quarter of 2017 was 10 basis points higher than the fourth quarter of 2016 and 2 basis points lower than the third quarter of 2017
• Positive operating leverage in the fourth quarter of 2017, on a year-over-year basis, excluding notable items
• Nonperforming assets decreased 25.1 percent on a year-over-year basis and 4.1 percent on a linked quarter basis
• Average total loans grew 2.6 percent over the fourth quarter of 2016 and 0.8 percent on a linked quarter basis
  • Average total commercial loans grew 4.0 percent over the fourth quarter of 2016 and 1.0 percent on a linked quarter basis
  • Average total other retail loans grew 6.0 percent over the fourth quarter of 2016 and 1.9 percent on a linked quarter basis
• Strong capital position. At December 31, 2017, the estimated common equity tier 1 capital to risk-weighted assets ratio was 9.1 percent using the Basel III fully implemented standardized approach and was 11.6 percent using the Basel III fully implemented advanced approaches method.

Net income attributable to U.S. Bancorp was $1,682 million for the fourth quarter of 2017, 13.8 percent higher than the $1,478 million for the fourth quarter of 2016, and 7.6 percent higher than the $1,563 million for the third quarter of 2017. Diluted earnings per common share of $0.97 in the fourth quarter of 2017 were $0.15 higher than the fourth quarter of 2016 and $0.09 higher than the third quarter of 2017. The fourth quarter of 2017 included $0.09 of notable items, including a benefit of $910 million related to the estimated impact of tax reform on the Company’s tax related assets and liabilities, partially offset by a $608 million accrual for regulatory and legal matters, and $152 million, net of tax, for a charitable contribution to the U.S. Bank Foundation and a special bonus to certain eligible employees. The regulatory and legal accrual is related to previously disclosed matters related to Bank Secrecy Act/anti-money laundering compliance program adequacy and investigations by the United States Attorney’s Office in Manhattan into that program and U.S. Bank National Association’s legacy banking relationship with payday lending businesses associated with a former customer. The increase in net income year-over-year was primarily due to total net revenue growth, including an increase in net interest income of 6.4 percent, mainly a result of the impact of rising interest rates and loan growth. Noninterest income increased 0.4 percent principally due to higher payment services revenue, trust and investment management fees and deposit service charges, mostly offset by a decrease in mortgage banking revenue and lower equity investment income. Excluding the notable items, 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, variable compensation related to revenue growth and higher employee benefits expense, partially offset by lower professional services expense driven by lower consulting costs for risk and compliance programs. Excluding notable items, net income decreased slightly on a linked quarter basis principally due to a seasonal increase in noninterest expense of 2.5 percent driven by seasonally higher costs related to investments in tax-advantaged projects in addition to higher employee benefits and professional services expense. These increases were partially offset by an increase in total net revenue of 0.5 percent, reflecting an increase in net interest income of 0.3 percent primarily driven by loan growth, and an increase in noninterest income of 0.8 percent related to higher trust and investment management fees and payment services revenue.

U.S. Bancorp President and Chief Executive Officer Andy Cecere said, “Our fourth quarter results were a strong end to what was a record year for U.S. Bancorp on several measures: we delivered record net revenue, net income, and diluted earnings per common share. Excluding notable items, our fourth quarter performance metrics were highlighted by a return on average common equity of 13.4 percent and a return on average assets of 1.33 percent. In the fourth quarter we returned 72 percent of earnings to shareholders through dividends and share buybacks.

“The economic backdrop is favorable, and tax reform legislation enacted late last year has provided us an opportunity to accelerate investment in our businesses, our people, and our communities, while at the same time enhancing shareholder value through the potential for increased payouts. We previously announced that we will raise our minimum wage in the United States to $15 per hour, provide one-time bonuses to certain eligible employees, and contribute an additional $150 million to the U.S. Bank Foundation, which will help revitalize our communities for years to come. With the ongoing benefit provided by a lower corporate tax rate we plan to increase our investments in technology and innovation, with a focus on enhancing the customer experience and improving operational efficiency that drives long-term growth and creates value for shareholders.

“The successes of 2017 were a direct result of the outstanding dedication and effort of our employees. I want to thank our amazing team members who work tirelessly to be our customers’ most trusted partner. We are operating from a position of strength as we enter 2018 and we will continue to work every day to create value for our investors, our customers, our communities, and our employees.”

Net Interest Income

Net interest income on a taxable-equivalent basis in the fourth quarter of 2017 was $3,197 million, an increase of $193 million (6.4 percent) over the fourth quarter of 2016. The increase was principally driven by the impact of rising interest rates and loan growth. Average earning assets were $11.5 billion (2.9 percent) higher than the fourth quarter of 2016, reflecting increases of $7.1 billion (2.6 percent) in average total loans, $2.9 billion (2.6 percent) in average investment securities and $2.7 billion (19.4 percent) in average other earning assets. Net interest income on a taxable-equivalent basis increased $11 million (0.3 percent) on a linked quarter basis primarily driven by loan growth and higher interest rates. Average earning assets were $4.7 billion (1.1 percent) higher on a linked quarter basis, reflecting increases of $2.1 billion (0.8 percent) in average total loans, $1.5 billion (1.3 percent) in average investment securities and $1.1 billion (7.3 percent) in average other earning assets.

The net interest margin in the fourth quarter of 2017 was 3.08 percent, compared with 2.98 percent in the fourth quarter of 2016, and 3.10 percent in the third quarter of 2017. The increase in the net interest margin year-over-year was primarily due to higher interest rates and loan mix, partially offset by higher funding costs and higher cash balances. The decrease in net interest margin on a linked quarter basis was primarily due to higher interest recoveries in the third quarter of 2017.

Investment Securities

Average investment securities in the fourth quarter of 2017 were $2.9 billion (2.6 percent) higher year-over-year and $1.5 billion (1.3 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 $7.1 billion (2.6 percent) higher than the fourth quarter of 2016. The increase was due to growth in total commercial loans (4.0 percent), residential mortgages (5.2 percent), retail leasing (28.9 percent) and other retail loans (5.2 percent). These increases were partially offset by a decrease in total commercial real estate loans (5.5 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 (18.9 percent). Average total loans were $2.1 billion (0.8 percent) higher than the third quarter of 2017. This increase was primarily driven by linked quarter growth in total other retail loans (1.9 percent), total commercial loans (1.0 percent) and residential mortgages (1.0 percent), partially offset by decreases in total commercial real estate loans (1.5 percent) and covered loans (4.7 percent).

Deposits

Average total deposits for the fourth quarter of 2017 were $10.0 billion (3.0 percent) higher than the fourth quarter of 2016. Average noninterest-bearing deposits decreased $2.6 billion (3.0 percent) year-over-year primarily due to a decrease in Corporate and Commercial Banking. Average total savings deposits were $7.2 billion (3.4 percent) higher year-over-year driven by growth in Consumer and Business Banking and Wealth Management and Investment Services, partially offset by a decrease in Corporate and Commercial Banking. Average time deposits were $5.3 billion (16.8 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 third quarter of 2017. On a linked quarter basis, average noninterest-bearing deposits increased slightly and average total savings deposits grew $3.1 billion (1.4 percent) reflecting increases in Consumer and Business Banking and Wealth Management and Investment Services. Average time deposits, which are managed based on funding needs, relative pricing and liquidity characteristics, increased $622 million (1.7 percent) on a linked quarter basis.

Noninterest Income

Fourth quarter noninterest income of $2,441 million was $10 million (0.4 percent) higher than the fourth quarter of 2016 principally due to higher payment services revenue, trust and investment management fees, and deposit service charges, partially offset by lower mortgage banking and other revenue. Payment services revenue was higher due to an increase in corporate payment products revenue of $18 million (10.5 percent) and an increase in credit and debit card revenue of $17 million (5.4 percent), both driven by higher sales volumes. These increases were partially offset by a decrease in merchant processing services revenue of $4 million (1.0 percent) mainly due to exiting certain joint ventures in the second quarter of 2017. Trust and investment management fees increased $26 million (7.1 percent) principally due to favorable market conditions and net asset and account growth. Deposit service charges increased $12 million (6.5 percent) primarily due to higher transaction volumes and account growth. Mortgage banking revenue decreased $38 million (15.8 percent) primarily due to lower origination and sales volumes from home refinancing activities which were higher in the prior year quarter and lower margins on mortgage loan sales. Other revenue decreased $37 million (14.7 percent) primarily due to lower equity investment income in the current quarter.

Noninterest income was $19 million (0.8 percent) higher in the fourth quarter of 2017 than the third quarter of 2017 reflecting growth in trust and investment management fees, payment services revenue and deposit service charges, partially offset by lower mortgage banking revenue and commercial products revenue. Trust and investment management fees increased $14 million (3.7 percent) driven by account growth and favorable market conditions. Payment services revenue was higher due to an increase in credit and debit card revenue of $25 million (8.1 percent) primarily due to seasonally higher sales volumes. This increase was partially offset by an expected seasonal decline in corporate payment products revenue of $12 million (6.0 percent) and merchant processing services revenue of $5 million (1.2 percent) due to seasonally lower sales volumes. Deposit service charges increased $6 million (3.1 percent) due to higher transaction volumes. Mortgage banking revenue decreased $11 million (5.2 percent) primarily due to the valuation of mortgage servicing rights, net of hedging activities, along with lower origination and sales volumes and lower margins on related sales. Commercial products revenue decreased $10 million (4.5 percent) primarily driven by lower corporate bond fees.

Noninterest Expense

Fourth quarter noninterest expense of $3,939 million was $935 million (31.1 percent) higher than the fourth quarter of 2016 primarily due to notable items which totaled $825 million. This amount consisted of a special bonus to eligible employees, a charitable contribution to the U.S. Bank Foundation, and a $608 million accrual for previously disclosed regulatory and legal matters related to Bank Secrecy Act/anti-money laundering compliance program adequacy and investigations by the United States Attorney’s Office in Manhattan into that program and U.S. Bank National Association’s legacy relationship with payday lending businesses associated with a former customer. The Company is working on a definitive settlement of these matters, which is expected to finalize soon. Excluding the notable items, fourth quarter noninterest expense increased $110 million (3.6 percent) year-over-year primarily due to higher compensation and employee benefits expense, partially offset by lower professional services expense. Compensation expense increased principally due to the impact of hiring to support business growth and compliance programs, merit increases, and higher variable compensation related to business production. The increase in employee benefits expense was primarily driven by increased medical costs. Professional services expense decreased $42 million (26.9 percent) primarily due to fewer consulting services as compliance programs near maturity.

Noninterest expense increased $900 million (29.6 percent) on a linked quarter basis primarily due to the notable items. Excluding the notable items, noninterest expense was $75 million (2.5 percent) higher in the fourth quarter of 2017 than the third quarter of 2017 driven by seasonally higher costs related to investments in tax-advantaged projects and seasonally higher professional services expense in addition to an increase in employee benefits expense due to increased medical costs.

Provision for Income Taxes

During the fourth quarter of 2017, tax legislation was enacted that, among other provisions, reduced the statutory tax rate for corporations from 35 percent to 21 percent effective in 2018. In accordance with generally accepted accounting principles, the Company revalued deferred tax assets and liabilities at the end of the fourth quarter of 2017 resulting in an estimated net tax benefit of $910 million during the fourth quarter of 2017. The provision for income taxes for the fourth quarter of 2017 reflects this benefit resulting in a tax benefit of 23.6 percent on a taxable-equivalent basis (effective tax benefit of 28.6 percent), compared with tax expense of 28.6 percent (effective tax rate of 26.9 percent) in the fourth quarter of 2016, and 29.0 percent (effective tax rate of 27.3 percent) in the third quarter of 2017.

Credit Quality

The Company’s provision for credit losses for the fourth quarter of 2017 was $335 million, which was $25 million (6.9 percent) lower than the prior quarter and $7 million (2.0 percent) lower than the fourth quarter of 2016. Credit quality was relatively stable compared with the third quarter of 2017.

Total net charge-offs in the fourth quarter of 2017 were $325 million, compared with $330 million in the third quarter of 2017, and $322 million in the fourth quarter of 2016. Net charge-offs decreased $5 million (1.5 percent) compared with the third quarter of 2017 mainly due to lower total commercial loan net charge-offs driven by higher recoveries, partially offset by higher total commercial real estate and credit card loan net charge-offs. Net charge-offs increased $3 million (0.9 percent) compared with the fourth quarter of 2016 primarily due to higher total commercial real estate and credit card loan net charge-offs, mostly offset by lower total commercial loan net charge-offs driven by higher recoveries. The net charge-off ratio was 0.46 percent in the fourth quarter of 2017, compared with 0.47 percent in the third quarter of 2017 and in the fourth quarter of 2016.

The allowance for credit losses was $4,417 million at December 31, 2017, compared with $4,407 million at September 30, 2017, and $4,357 million at December 31, 2016. The ratio of the allowance for credit losses to period-end loans was 1.58 percent at December 31, 2017 and at September 30, 2017, compared with 1.59 percent at December 31, 2016. The ratio of the allowance for credit losses to nonperforming loans was 438 percent at December 31, 2017, compared with 426 percent at September 30, 2017, and 318 percent at December 31, 2016.

Nonperforming assets were $1,200 million at December 31, 2017, compared with $1,251 million at September 30, 2017, and $1,603 million at December 31, 2016. The ratio of nonperforming assets to loans and other real estate was 0.43 percent at December 31, 2017, compared with 0.45 percent at September 30, 2017, and 0.59 percent at December 31, 2016. The linked quarter and year-over-year decreases in nonperforming assets were driven by improvements in total commercial loans, residential mortgages and other real estate owned, partially offset by an increase in total commercial real estate loans. Accruing loans 90 days or more past due were $720 million ($572 million excluding covered loans) at December 31, 2017, compared with $649 million ($497 million excluding covered loans) at September 30, 2017, and $764 million ($552 million excluding covered loans) at December 31, 2016.

Capital Management

Total U.S. Bancorp shareholders’ equity was $49.0 billion at December 31, 2017, compared with $48.7 billion at September 30, 2017, and $47.3 billion at December 31, 2016. During the fourth quarter, the Company returned 72 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 9.1 percent at December 31, 2017, compared with 9.4 percent at September 30, 2017, and 9.1 percent at December 31, 2016. The estimated common equity tier 1 capital to risk-weighted assets ratio using the Basel III fully implemented advanced approaches method was 11.6 percent at December 31, 2017, compared with 11.8 percent at September 30, 2017, and 11.7 percent at December 31, 2016.

On Wednesday, January 17, 2018, at 8:00 a.m. CST, 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 8669609. For those unable to participate during the live call, a recording will be available at approximately 11:00 a.m. CST on Wednesday, January 17 and will be accessible through Wednesday, January 24 at 11:00 p.m. CST. 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 8669609.

Minneapolis-based U.S. Bancorp (NYSE: USB), with $462 billion in assets as of December 31, 2017, is the parent company of U.S. Bank National Association, the fifth largest commercial bank in the United States. The Company operates 3,067 banking offices in 25 states and 4,771 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.

In addition, certain performance measures are presented excluding notable items in the fourth quarter of 2017. Management believes this information helps investors understand the effect of these items on reported results.

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.