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U.S. Bancorp Reports Record Revenue and Net Income for the Second Quarter of 2016

July 15, 2016 6:45 AM

Record Earnings Per Diluted Common Share of $0.83

Return on average assets of 1.43 percent and average common equity of 13.8 percent

Returned 77 percent of second quarter earnings to shareholders

MINNEAPOLIS--(BUSINESS WIRE)-- U.S. Bancorp (NYSE: USB) today reported net income of $1,522 million for the second quarter of 2016, or $0.83 per diluted common share, compared with $1,483 million, or $0.80 per diluted common share, in the second quarter of 2015. The second quarter of 2016 included notable items related to equity investments, legal and regulatory matters and charitable contributions that, combined, increased diluted earnings per common share by $0.01.

Highlights for the second quarter of 2016 included:

EARNINGS SUMMARY Table 1
($ in millions, except per-share data) Percent Percent
Change Change
2Q 1Q 2Q 2Q16 vs 2Q16 vs YTD YTD Percent
2016 2016 2015 1Q16 2Q15 2016 2015 Change
Net income attributable to U.S. Bancorp $1,522 $1,386 $1,483 9.8 2.6 $2,908 $2,914 (.2 )
Diluted earnings per common share $.83 $.76 $.80 9.2 3.8 $1.59 $1.56 1.9
Return on average assets (%) 1.43 1.32 1.46 1.38 1.45
Return on average common equity (%) 13.8 13.0 14.3 13.4 14.2
Net interest margin (%) 3.02 3.06 3.03 3.04 3.05
Efficiency ratio (%) (a) 54.9 54.6 53.2 54.8 53.7
Tangible efficiency ratio (%) (a) 54.1 53.7 52.3 53.9 52.9
Dividends declared per common share $.255 $.255 $.255 -- -- $.510 $.500 2.0
Book value per common share (period end) $24.37 $23.82 $22.51 2.3 8.3

(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 $1,522 million for the second quarter of 2016, 2.6 percent higher than the $1,483 million for the second quarter of 2015, and 9.8 percent higher than the $1,386 million for the first quarter of 2016. Diluted earnings per common share were $0.83 in the second quarter of 2016, $0.03 higher than the second quarter of 2015 and $0.07 higher than the $0.76 reported for the first quarter of 2016. The second quarter of 2016 included $0.01 in notable items, including $180 million of equity investment income, primarily the result of our membership in Visa Europe Limited (“Visa Europe”) which was sold to Visa, Inc. on June 21, 2016, and $110 million in accruals related to legal and regulatory matters along with a $40 million charitable contribution. Excluding the notable items, the increase in net income year-over-year was primarily due to an increase in net interest income of 4.5 percent , mainly a result of strong loan growth, and higher noninterest income of 4.4 percent, driven by growth in credit and debit card revenue, commercial products revenue, and trust and investment management fees. This increase was partially offset by higher noninterest expense related to merit increases and higher variable compensation expense, increased compliance costs, which peaked in the second quarter 2016, and higher marketing expense as a result of brand investment. Excluding the notable items, the increase in net income on a linked quarter basis was principally due to total net revenue growth of 4.6 percent reflecting typical seasonality in certain lines of businesses, including payments, mortgage banking and deposit services, partially offset by higher noninterest expense of 3.4 percent related to increased compliance costs and marketing expense.

U.S. Bancorp Chairman and Chief Executive Officer Richard K. Davis said, “U.S. Bancorp reported strong second quarter results, delivering record revenue and net income in an economy that continues to be challenged by global concerns and low interest rates. Despite these economic headwinds we continued to effectively execute on our strategy to be the most trusted choice and to unify the customer experience. The second quarter was a record quarter for us as we once again delivered industry-leading returns, steady loan growth and strength in our fee-based businesses. Steady loan growth, demonstrated by continued strength in commercial loans and momentum in consumer loans, led to increased net interest income despite a decline in net interest margin. Growth in our fee revenue continued across many of our fee-based businesses, including our payments business lines. We also reported strong results in our capital markets business as we were positioned well to provide products and services to our customers as they navigated through the recent market volatility. And we managed our capital effectively, delivering 77 percent of our second quarter earnings back to shareholders through dividends and share buybacks. During the quarter, we were pleased to receive the Federal Reserve’s non-objection to our capital plan, allowing us once again to return value to our shareholders by increasing our annual common dividend by 9.8 percent in the third quarter of 2016. We also made important investments in our vision for the future, including investments in the U.S. Bank brand that will help us more effectively articulate our compelling story to customers in order to generate long-term growth.

“The strength of our company continues to be driven by the commitment of our employees. Through their hard work and dedication, we continue to deliver consistent, predictable and repeatable industry-leading financial results. We remain well positioned to provide the right products and services to our customers so that they may achieve their financial objectives as we continue to create value for our shareholders.”

INCOME STATEMENT HIGHLIGHTS Table 2

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

Percent Percent

Change Change
2Q 1Q 2Q 2Q16 vs 2Q16 vs YTD YTD Percent
2016 2016 2015 1Q16 2Q15 2016 2015 Change
Net interest income $2,896 $2,888 $2,770 .3 4.5 $5,784 $5,522 4.7
Noninterest income 2,552 2,149 2,272 18.8 12.3 4,701 4,426 6.2
Total net revenue 5,448 5,037 5,042 8.2 8.1 10,485 9,948 5.4
Noninterest expense 2,992 2,749 2,682 8.8 11.6 5,741 5,347 7.4
Income before provision and taxes 2,456 2,288 2,360 7.3 4.1 4,744 4,601 3.1
Provision for credit losses 327 330 281 (.9 ) 16.4 657 545 20.6
Income before taxes 2,129 1,958 2,079 8.7 2.4 4,087 4,056 .8
Taxable-equivalent adjustment 51 53 54 (3.8 ) (5.6 ) 104 108 (3.7 )
Applicable income taxes 542 504 528 7.5 2.7 1,046 1,007 3.9
Net income 1,536 1,401 1,497 9.6 2.6 2,937 2,941 (.1 )

Net (income) loss attributable to noncontrolling interests

(14 ) (15 ) (14 ) 6.7 -- (29 ) (27 ) (7.4 )
Net income attributable to U.S. Bancorp $1,522 $1,386 $1,483 9.8 2.6 $2,908 $2,914 (.2 )

Net income applicable to U.S. Bancorp common shareholders

$1,435 $1,329 $1,417 8.0 1.3 $2,764 $2,782 (.6 )
Diluted earnings per common share $.83 $.76 $.80 9.2 3.8 $1.59 $1.56 1.9
NET INTEREST INCOME Table 3
(Taxable-equivalent basis; $ in millions)
Change Change
2Q 1Q 2Q 2Q16 vs 2Q16 vs YTD YTD
2016 2016 2015 1Q16 2Q15 2016 2015 Change
Components of net interest income
Income on earning assets $3,305 $3,275 $3,123 $30 $182 $6,580 $6,239 $341
Expense on interest-bearing liabilities 409 387 353 22 56 796 717 79
Net interest income $2,896 $2,888 $2,770 $8 $126 $5,784 $5,522 $262
Average yields and rates paid
Earning assets yield 3.44 % 3.48 % 3.42 % (.04 )% .02 % 3.46 % 3.45 % .01 %
Rate paid on interest-bearing liabilities .58 .56 .52 .02 .06 .57 .54 .03
Gross interest margin 2.86 % 2.92 % 2.90 % (.06 )% (.04 )% 2.89 % 2.91 % (.02 )%
Net interest margin 3.02 % 3.06 % 3.03 % (.04 )% (.01 )% 3.04 % 3.05 % (.01 )%
Average balances
Investment securities (a) $107,132 $106,031 $102,391 $1,101 $4,741 $106,581 $101,556 $5,025
Loans 266,582 262,281 246,560 4,301 20,022 264,432 247,251 17,181
Earning assets 385,368 378,208 366,428 7,160 18,940 381,788 363,650 18,138
Interest-bearing liabilities 285,796 279,516 270,573 6,280 15,223 282,656 269,235 13,421
(a) Excludes unrealized gain (loss)

Net Interest Income

Net interest income on a taxable-equivalent basis in the second quarter of 2016 was $2,896 million, an increase of $126 million (4.5 percent) over the second quarter of 2015. The increase was driven by loan growth and higher rates, partially offset by the loan portfolio mix. Average earning assets were $18.9 billion (5.2 percent) higher than the second quarter of 2015, driven by increases of $20.0 billion (8.1 percent) in average total loans and $4.7 billion (4.6 percent) in average investment securities. Net interest income increased $8 million (0.3 percent) on a linked quarter basis, primarily due to growth in average total loans, partially offset by the loan portfolio mix and higher funding costs. Average total loans were $4.3 billion (1.6 percent) higher on a linked quarter basis.

The net interest margin in the second quarter of 2016 was 3.02 percent, compared with 3.03 percent in the second quarter of 2015, and 3.06 percent in the first quarter of 2016. The decrease in the net interest margin on a year-over-year basis was principally due to 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 the loan portfolio mix as well as lower average rates on new securities purchases and lower reinvestment rates on maturing securities.

Investment Securities

Average investment securities in the second quarter of 2016 were $4.7 billion (4.6 percent) higher year-over-year and $1.1 billion (1.0 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.

AVERAGE LOANS Table 4
($ in millions) Percent Percent
Change Change
2Q 1Q 2Q 2Q16 vs 2Q16 vs YTD YTD Percent
2016 2016 2015 1Q16 2Q15 2016 2015 Change
Commercial $86,899 $84,582 $77,932 2.7 11.5 $85,741 $77,062 11.3
Lease financing 5,255 5,238 5,321 .3 (1.2 ) 5,246 5,323 (1.4 )
Total commercial 92,154 89,820 83,253 2.6 10.7 90,987 82,385 10.4
Commercial mortgages 31,950 31,836 32,499 .4 (1.7 ) 31,893 32,807 (2.8 )
Construction and development 11,038 10,565 9,947 4.5 11.0 10,801 9,751 10.8
Total commercial real estate 42,988 42,401 42,446 1.4 1.3 42,694 42,558 .3
Residential mortgages 55,501 54,208 51,114 2.4 8.6 54,854 51,269 7.0
Credit card 20,140 20,244 17,613 (.5 ) 14.3 20,192 17,718 14.0
Retail leasing 5,326 5,179 5,696 2.8 (6.5 ) 5,253 5,756 (8.7 )
Home equity and second mortgages 16,394 16,368 15,958 .2 2.7 16,381 15,928 2.8
Other 29,748 29,550 25,415 .7 17.0 29,649 26,504 11.9
Total other retail 51,468 51,097 47,069 .7 9.3 51,283 48,188 6.4
Total loans, excluding covered loans 262,251 257,770 241,495 1.7 8.6 260,010 242,118 7.4
Covered loans 4,331 4,511 5,065 (4.0 ) (14.5 ) 4,422 5,133 (13.9 )
Total loans $266,582 $262,281 $246,560 1.6 8.1 $264,432 $247,251 6.9

Loans

Average total loans were $20.0 billion (8.1 percent) higher in the second quarter of 2016 than the second quarter of 2015 (6.5 percent excluding student loans and the credit card portfolio acquisition). The increase was driven by growth in total commercial loans (10.7 percent), residential mortgages (8.6 percent), and credit card loans (14.3 percent, 5.8 percent excluding the credit card portfolio acquisition), and total other retail loans (9.3 percent, 4.1 percent excluding student loans). These increases were partially offset by a decline in the run-off covered loans portfolio (14.5 percent). Average total loans were $4.3 billion (1.6 percent) higher in the second quarter of 2016 than the first quarter of 2016. The increase was driven by growth in total commercial loans (2.6 percent), residential mortgages (2.4 percent) and total commercial real estate (1.4 percent).

AVERAGE DEPOSITS Table 5
($ in millions) Percent Percent
Change Change
2Q 1Q 2Q 2Q16 vs 2Q16 vs YTD YTD Percent
2016 2016 2015 1Q16 2Q15 2016 2015 Change
Noninterest-bearing deposits $79,171 $78,569 $77,347 .8 2.4 $78,870 $75,937 3.9
Interest-bearing savings deposits
Interest checking 60,842 57,910 55,205 5.1 10.2 59,376 54,933 8.1
Money market savings 92,904 86,462 79,898 7.5 16.3 89,683 76,910 16.6
Savings accounts 40,258 39,250 37,071 2.6 8.6 39,754 36,555 8.8
Total of savings deposits 194,004 183,622 172,174 5.7 12.7 188,813 168,398 12.1
Time deposits 34,211 33,687 36,223 1.6 (5.6 ) 33,949 37,787 (10.2 )
Total interest-bearing deposits 228,215 217,309 208,397 5.0 9.5 222,762 206,185 8.0
Total deposits $307,386 $295,878 $285,744 3.9 7.6 $301,632 $282,122 6.9

Deposits

Average total deposits for the second quarter of 2016 were $21.6 billion (7.6 percent) higher than the second quarter of 2015. Average noninterest-bearing deposits increased $1.8 billion (2.4 percent) year-over-year, mainly in Consumer and Small Business Banking and Wholesale Banking and Commercial Real Estate, partially offset by a decline in Wealth Management and Securities Services. Average total savings deposits were $21.8 billion (12.7 percent) higher year-over-year, the result of growth across all business lines. Growth in Consumer and Small Business Banking total savings deposits included net new account growth of 2.8 percent. Average time deposits were $2.0 billion (5.6 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 $11.5 billion (3.9 percent) over the first quarter of 2016. Average noninterest-bearing deposits increased $602 million (0.8 percent) on a linked quarter basis, mainly due to higher balances in Consumer and Small Business Banking, partially offset by lower balances in Wholesale Banking and Commercial Real Estate. Average total savings deposits increased $10.4 billion (5.7 percent) reflecting increases across all business lines. Average time deposits, which are managed based on funding needs, relative pricing, and liquidity characteristics increased $524 million (1.6 percent) on a linked quarter basis.

NONINTEREST INCOME Table 6
($ in millions) Percent Percent
Change Change
2Q 1Q 2Q 2Q16 vs 2Q16 vs YTD YTD Percent
2016 2016 2015 1Q16 2Q15 2016 2015 Change
Credit and debit card revenue $296 $266 $266 11.3 11.3 $562 $507 10.8
Corporate payment products revenue 181 170 178 6.5 1.7 351 348 .9
Merchant processing services 403 373 395 8.0 2.0 776 754 2.9
ATM processing services 84 80 80 5.0 5.0 164 158 3.8
Trust and investment management fees 358 339 334 5.6 7.2 697 656 6.3
Deposit service charges 179 168 174 6.5 2.9 347 335 3.6
Treasury management fees 147 142 142 3.5 3.5 289 279 3.6
Commercial products revenue 238 197 214 20.8 11.2 435 414 5.1
Mortgage banking revenue 238 187 231 27.3 3.0 425 471 (9.8 )
Investment products fees 39 40 48 (2.5 ) (18.8 ) 79 95 (16.8 )
Securities gains (losses), net 3 3 -- -- nm 6 -- nm
Other 386 184 210 nm 83.8 570 409 39.4
Total noninterest income $2,552 $2,149 $2,272 18.8 12.3 $4,701 $4,426 6.2

Noninterest Income

Second quarter noninterest income was $2,552 million, which was $280 million higher than the second quarter of 2015. Excluding the Visa Europe sale, noninterest income increased 4.4 percent reflecting increases in credit and debit card revenue, trust and investment management fees, and commercial products revenue. Credit and debit card revenue increased $30 million (11.3 percent) reflecting higher transaction volumes including acquired portfolios. Merchant processing services revenue increased $8 million (2.0 percent). Adjusted for the approximate $4 million impact of foreign currency rate changes, year-over-year merchant processing services revenue growth would have been approximately 3.0 percent. Trust and investment management fees increased $24 million (7.2 percent) reflecting lower money market fee waivers. Commercial products revenue increased $24 million (11.2 percent) driven by higher bond underwriting fees, foreign currency customer activity and other capital markets activity as a result of market volatility.

Noninterest income was $403 million higher in the second quarter of 2016 than the first quarter of 2016. Excluding the Visa Europe sale, noninterest income increased 10.4 percent reflecting seasonally higher fee-based revenue including credit and debit card revenue, merchant processing services revenue, mortgage banking revenue and deposit service charges. Credit and debit card revenue increased $30 million (11.3 percent), primarily due to seasonally higher transaction volumes. Merchant processing services revenue increased $30 million (8.0 percent) as a result of seasonally higher transaction volumes. Mortgage banking revenue increased $51 million (27.3 percent) mainly due to seasonally higher production volumes. Commercial products revenue increased $41 million (20.8 percent) primarily due to higher bond underwriting fees, foreign currency customer activity and capital markets volume, partially reflecting market volatility. Trust and investment management fees increased $19 million (5.6 percent) primarily due to account growth, improved market conditions and lower money market fee waivers. Deposit service charges increased $11 million (6.5 percent) due to seasonally higher transaction volumes.

NONINTEREST EXPENSE Table 7
($ in millions) Percent Percent
Change Change
2Q 1Q 2Q 2Q16 vs 2Q16 vs YTD YTD Percent
2016 2016 2015 1Q16 2Q15 2016 2015 Change
Compensation $1,277 $1,249 $1,196 2.2 6.8 $2,526 $2,375 6.4
Employee benefits 278 300 293 (7.3 ) (5.1 ) 578 610 (5.2 )
Net occupancy and equipment 243 248 247 (2.0 ) (1.6 ) 491 494 (.6 )
Professional services 121 98 106 23.5 14.2 219 183 19.7
Marketing and business development 149 77 96 93.5 55.2 226 166 36.1
Technology and communications 241 233 221 3.4 9.0 474 435 9.0
Postage, printing and supplies 77 79 64 (2.5 ) 20.3 156 146 6.8
Other intangibles 44 45 43 (2.2 ) 2.3 89 86 3.5
Other 562 420 416 33.8 35.1 982 852 15.3
Total noninterest expense $2,992 $2,749 $2,682 8.8 11.6 $5,741 $5,347 7.4

Noninterest Expense

Second quarter noninterest expense was $2,992 million, which was $310 million (11.6 percent) higher than the second quarter of 2015. Excluding the notable expense items, noninterest expense increased $160 million (6.0 percent) related to higher compensation expense, professional services expense, and technology and communications expense, partially offset by lower employee benefits expense. Compensation expense increased $81 million (6.8 percent), principally due to the impact of merit increases along with higher variable compensation including performance-based incentives. Professional services expense increased $15 million (14.2 percent) primarily due to compliance-related matters, while technology and communications expense increased $20 million (9.0 percent) due to acquired card portfolio conversion costs. Excluding the notable charitable contribution, the marketing and business development increase of $13 million reflected brand advertising. Postage, printing and supplies expense increased $13 million (20.3 percent) reflecting the impact of a prior year reimbursement from a business partner. Offsetting these increases was lower employee benefits expense of $15 million (5.1 percent) mainly due to lower pension costs.

Noninterest expense increased $243 million (8.8 percent) on a linked quarter basis, $93 million (3.4 percent) excluding the second quarter 2016 notable items, reflecting higher professional services and compensation expenses, partially offset by lower employee benefits expense. Excluding the notable charitable contribution, the marketing and business development expense increase of $32 million was driven by brand advertising. Professional services expense was $23 million (23.5 percent) higher compared with the first quarter of 2016 principally due to higher costs for compliance-related matters. Compensation expense increased $28 million (2.2 percent) due to merit increases and higher variable compensation including performance-based incentives. Partially offsetting these increases was a decrease in employee benefits expense of $22 million (7.3 percent), driven by seasonally lower payroll tax expense.

Provision for Income Taxes

The provision for income taxes for the second quarter of 2016 resulted in a tax rate on a taxable-equivalent basis of 27.9 percent (effective tax rate of 26.1 percent), compared with 28.0 percent (effective tax rate of 26.1 percent) in the second quarter of 2015, and 28.4 percent (effective tax rate of 26.5 percent) in the first quarter of 2016, reflecting the favorable settlement of certain tax exam matters in the second quarter of 2016.

ALLOWANCE FOR CREDIT LOSSES Table 8
($ in millions) 2Q 1Q 4Q 3Q 2Q
2016 % (b) 2016 % (b) 2015 % (b) 2015 % (b) 2015 % (b)
Balance, beginning of period $4,320 $4,306 $4,306 $4,326 $4,351
Net charge-offs
Commercial 74 .34 78 .37 58 .28 68 .34 39 .20
Lease financing 5 .38 5 .38 5 .38 3 .23 3 .23
Total commercial 79 .34 83 .37 63 .29 71 .33 42 .20
Commercial mortgages (4 ) (.05 ) (2 ) (.03 ) 2 .02 -- -- 4 .05
Construction and development 4 .15 (3 ) (.11 ) (2 ) (.08 ) (11 ) (.43 ) (3 ) (.12 )
Total commercial real estate -- -- (5 ) (.05 ) -- -- (11 ) (.10 ) 1 .01
Residential mortgages 17 .12 19 .14 16 .12 25 .19 33 .26
Credit card 170 3.39 164 3.26 166 3.50 153 3.38 169 3.85
Retail leasing 2 .15 1 .08 1 .08 2 .14 1 .07
Home equity and second mortgages (1 ) (.02 ) 2 .05 6 .15 7 .17 11 .28
Other 50 .68 51 .69 53 .71 45 .65 39 .62
Total other retail 51 .40 54 .43 60 .47 54 .44 51 .43
Total net charge-offs,
excluding covered loans 317 .49 315 .49 305 .48 292 .47 296 .49
Covered loans -- -- -- -- -- -- -- -- -- --
Total net charge-offs 317 .48 315 .48 305 .47 292 .46 296 .48
Provision for credit losses 327 330 305 282 281
Other changes (a) (1 ) (1 ) -- (10 ) (10 )
Balance, end of period $4,329 $4,320 $4,306 $4,306 $4,326
Components
Allowance for loan losses $3,806 $3,853 $3,863 $3,965 $4,013
Liability for unfunded
credit commitments 523 467 443 341 313
Total allowance for credit losses $4,329 $4,320 $4,306 $4,306 $4,326
Gross charge-offs $407 $405 $381 $372 $380
Gross recoveries $90 $90 $76 $80 $84
Allowance for credit losses as a percentage of
Period-end loans,
excluding covered loans 1.62 1.65 1.67 1.71 1.76
Nonperforming loans,
excluding covered loans 311 302 360 347 348
Nonperforming assets,
excluding covered assets 263 255 288 280 279
Period-end loans 1.61 1.63 1.65 1.69 1.74
Nonperforming loans 312 303 361 347 349
Nonperforming assets 259 251 283 275 274

(a) Includes net changes in credit losses to be reimbursed by the FDIC and reductions in the allowance for covered loans where the reversal of a previously recorded allowance was offset by an associated decrease in the indemnification asset, and the impact of any loan sales.

(b) Annualized and calculated on average loan balances

Credit Quality

The Company’s provision for credit losses for the second quarter of 2016 was $327 million, which was $3 million (0.9 percent) lower than the prior quarter and $46 million (16.4 percent) higher than the second quarter of 2015. Credit quality was relatively stable.

The provision for credit losses was $10 million higher than net charge-offs in the second quarter of 2016, $15 million higher than net charge-offs in the first quarter of 2016 and $15 million lower than net charge-offs in the second quarter of 2015. The reserve build for the second quarter of 2016 was driven by portfolio growth, partially offset by reduced energy portfolio exposures and residential mortgage credit quality improvement. Total net charge-offs in the second quarter of 2016 were $317 million, compared with $315 million in the first quarter of 2016, and $296 million in the second quarter of 2015. Net charge-offs increased $2 million (0.6 percent) compared with the first quarter of 2016 mainly due to modest increases in construction and development and credit card net charge-offs. Net charge-offs increased $21 million (7.1 percent) compared with the second 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 0.48 percent in the second quarter of 2016, the first quarter of 2016 and in the second quarter of 2015.

The allowance for credit losses was $4,329 million at June 30, 2016, compared with $4,320 million at March 31, 2016, and $4,326 million at June 30, 2015. The ratio of the allowance for credit losses to period-end loans was 1.61 percent at June 30, 2016, compared with 1.63 percent at March 31, 2016, and 1.74 percent at June 30, 2015. The ratio of the allowance for credit losses to nonperforming loans was 312 percent at June 30, 2016, compared with 303 percent at March 31, 2016, and 349 percent at June 30, 2015.

Nonperforming assets were $1,672 million at June 30, 2016, compared with $1,719 million at March 31, 2016, and $1,577 million at June 30, 2015. The ratio of nonperforming assets to loans and other real estate was 0.62 percent at June 30, 2016, compared with 0.65 percent at March 31, 2016, and 0.63 percent at June 30, 2015. The $95 million (6.0 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 $47 million (2.7 percent) was driven by improvements in the energy portfolio and in residential mortgages. Accruing loans 90 days or more past due were $724 million ($478 million excluding covered loans) at June 30, 2016, compared with $804 million ($528 million excluding covered loans) at March 31, 2016, and $801 million ($469 million excluding covered loans) at June 30, 2015.

Commercial loans to customers in the energy sector were approximately $3.0 billion ($11.3 billion of commitments) at June 30, 2016, compared with $3.4 billion ($11.9 billion of commitments) at March 31, 2016. The decline was primarily driven by the completion of our spring borrowing base redeterminations on reserve-based loans within our energy portfolio. During the second quarter 2016, criticized commitments within the energy portfolio decreased by $509 million while nonperforming loans in the energy portfolio decreased $54 million. Energy portfolio loans represent 1.1 percent of the Company’s total loans outstanding at June 30, 2016, and 1.3 percent at March 31, 2016. At June 30, 2016, the Company had credit reserves of 8.8 percent of total outstanding energy loan balances, compared with 9.1 percent of total outstanding energy loan balances at March 31, 2016.

DELINQUENT LOAN RATIOS AS A PERCENT OF ENDING LOAN BALANCES Table 9
(Percent)
Jun 30 Mar 31 Dec 31 Sep 30 Jun 30
2016 2016 2015 2015 2015
Delinquent loan ratios - 90 days or more past due excluding nonperforming loans
Commercial .05 .05 .05 .05 .05
Commercial real estate .03 .04 .03 .05 .05
Residential mortgages .27 .31 .33 .33 .30
Credit card .98 1.10 1.09 1.10 1.03
Other retail .13 .15 .15 .14 .14
Total loans, excluding covered loans .18 .20 .21 .20 .19
Covered loans 5.81 6.23 6.31 6.57 6.66
Total loans .27 .30 .32 .32 .32
Delinquent loan ratios - 90 days or more past due including nonperforming loans
Commercial .58 .57 .25 .25 .16
Commercial real estate .27 .28 .33 .39 .46
Residential mortgages 1.39 1.54 1.66 1.73 1.80
Credit card 1.00 1.14 1.13 1.16 1.12
Other retail .43 .45 .46 .47 .51
Total loans, excluding covered loans .70 .75 .67 .70 .70
Covered loans 5.98 6.39 6.48 6.80 6.88
Total loans .79 .84 .78 .81 .82
ASSET QUALITY Table 10
($ in millions)
Jun 30 Mar 31 Dec 31 Sep 30 Jun 30
2016 2016 2015 2015 2015
Nonperforming loans
Commercial $450 $457 $160 $157 $78
Lease financing 39 16 14 12 12
Total commercial 489 473 174 169 90
Commercial mortgages 91 94 92 105 116
Construction and development 12 10 35 39 59
Total commercial real estate 103 104 127 144 175
Residential mortgages 628 677 712 735 769
Credit card 5 7 9 12 16
Other retail 157 157 162 171 178
Total nonperforming loans, excluding covered loans 1,382 1,418 1,184 1,231 1,228
Covered loans 7 7 8 11 11
Total nonperforming loans 1,389 1,425 1,192 1,242 1,239
Other real estate (a) 229 242 280 276 287
Covered other real estate (a) 34 33 32 31 35
Other nonperforming assets 20 19 19 18 16
Total nonperforming assets (b) $1,672 $1,719 $1,523 $1,567 $1,577
Total nonperforming assets, excluding covered assets $1,631 $1,679 $1,483 $1,525 $1,531
Accruing loans 90 days or more
past due, excluding covered loans $478 $528 $541 $510 $469
Accruing loans 90 days or more past due $724 $804 $831 $825 $801
Performing restructured loans, excluding GNMA
and covered loans $2,676 $2,735 $2,766 $2,746 $2,815
Performing restructured GNMA and covered loans $1,602 $1,851 $1,944 $2,031 $2,111
Nonperforming assets to loans
plus ORE, excluding covered assets (%) .62 .64 .58 .61 .63
Nonperforming assets to loans plus ORE (%) .62 .65 .58 .61 .63
(a) Includes equity investments in entities whose principal assets are other real estate owned.
(b) Does not include accruing loans 90 days or more past due.
COMMON SHARES Table 11
(Millions) 2Q 1Q 4Q 3Q 2Q
2016 2016 2015 2015 2015
Beginning shares outstanding 1,732 1,745 1,754 1,767 1,780
Shares issued for stock incentive plans,
acquisitions and other corporate purposes 2 3 1 3 1
Shares repurchased (15 ) (16 ) (10 ) (16 ) (14 )
Ending shares outstanding 1,719 1,732 1,745 1,754 1,767
CAPITAL POSITION Table 12
($ in millions) Jun 30 Mar 31 Dec 31 Sep 30 Jun 30
2016 2016 2015 2015 2015
Total U.S. Bancorp shareholders' equity $47,390 $46,755 $46,131 $45,075 $44,537
Standardized Approach
Basel III transitional standardized approach
Common equity tier 1 capital $33,444 $32,827 $32,612 $32,124 $31,674
Tier 1 capital 39,148 38,532 38,431 37,197 36,748
Total risk-based capital 47,049 45,412 45,313 44,015 43,526
Common equity tier 1 capital ratio 9.5 % 9.5 % 9.6 % 9.6 % 9.5 %
Tier 1 capital ratio 11.1 11.1 11.3 11.1 11.0
Total risk-based capital ratio 13.4 13.1 13.3 13.1 13.1
Leverage ratio 9.3 9.3 9.5 9.3 9.2

Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented

standardized approach 9.3 9.2 9.1 9.2 9.2
Advanced Approaches
Common equity tier 1 capital to risk-weighted assets
for the Basel III transitional advanced approaches 12.3 12.3 12.5 13.0 12.9

Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented

advanced approaches 12.0 11.9 11.9 12.4 12.4
Tangible common equity to tangible assets 7.6 7.7 7.6 7.7 7.5
Tangible common equity to risk-weighted assets 9.3 9.3 9.2 9.3 9.2
Beginning January 1, 2014, the regulatory capital requirements effective for the Company follow Basel III, subject to certain transition provisions from Basel I over the following four years to full implementation by January 1, 2018. Basel III includes two comprehensive methodologies for calculating risk-weighted assets: a general standardized approach and more risk-sensitive advanced approaches, with the Company's capital adequacy being evaluated against the methodology that is most restrictive.

Capital Management

Total U.S. Bancorp shareholders’ equity was $47.4 billion at June 30, 2016, compared with $46.8 billion at March 31, 2016, and $44.5 billion at June 30, 2015. During the second quarter, the Company returned 77 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 9.3 percent at June 30, 2016, compared with 9.2 percent at March 31, 2016, and at June 30, 2015. The estimated common equity tier 1 capital to risk-weighted assets ratio using the Basel III fully implemented advanced approaches method was 12.0 percent at June 30, 2016, compared with 11.9 percent at March 31, 2016, and 12.4 percent at June 30, 2015.

On Friday, July 15, 2016, at 8:00 a.m. CDT, Richard K. Davis, chairman and chief executive officer, and Kathy Rogers, vice chair 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 8158556. For those unable to participate during the live call, a recording will be available at approximately 11:00 a.m. CDT on Friday, July 15 and be accessible through Friday, July 22 at 11:00 p.m. CDT. To access the recorded message 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 8158556.

Minneapolis-based U.S. Bancorp (NYSE: USB), with $438 billion in assets as of June 30, 2016, is the parent company of U.S. Bank National Association, the fifth largest commercial bank in the United States. The Company operates 3,122 banking offices in 25 states and 4,923 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, U.S. Bancorp’s business and financial performance is likely to be negatively impacted by recently enacted and future legislation and regulation. 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, 2015, 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:

These 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 includes unrealized gains and losses related to available-for-sale securities and excludes preferred securities, including preferred stock, the nature and extent of which varies among different financial services companies. These 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 measures disclosed by the Company may be considered non-GAAP financial measures.

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.

U.S. Bancorp

Consolidated Statement of Income

(Dollars and Shares in Millions, Except Per Share Data)

Three Months Ended Six Months Ended
June 30, June 30,
(Unaudited) 2016 2015 2016 2015
Interest Income
Loans $ 2,664 $ 2,463 $ 5,308 $ 4,956
Loans held for sale 36 65 67 106
Investment securities 523 505 1,040 1,000
Other interest income 29 35 58 67
Total interest income 3,252 3,068 6,473 6,129
Interest Expense
Deposits 152 113 291 231
Short-term borrowings 66 62 131 123
Long-term debt 189 177 371 361
Total interest expense 407 352 793 715
Net interest income 2,845 2,716 5,680 5,414
Provision for credit losses 327 281 657 545
Net interest income after provision for credit losses 2,518 2,435 5,023 4,869
Noninterest Income
Credit and debit card revenue 296 266 562 507
Corporate payment products revenue 181 178 351 348
Merchant processing services 403 395 776 754
ATM processing services 84 80 164 158
Trust and investment management fees 358 334 697 656
Deposit service charges 179 174 347 335
Treasury management fees 147 142 289 279
Commercial products revenue 238 214 435 414
Mortgage banking revenue 238 231 425 471
Investment products fees 39 48 79 95
Securities gains (losses), net 3 -- 6 --
Other 386 210 570 409
Total noninterest income 2,552 2,272 4,701 4,426
Noninterest Expense
Compensation 1,277 1,196 2,526 2,375
Employee benefits 278 293 578 610
Net occupancy and equipment 243 247 491 494
Professional services 121 106 219 183
Marketing and business development 149 96 226 166
Technology and communications 241 221 474 435
Postage, printing and supplies 77 64 156 146
Other intangibles 44 43 89 86
Other 562 416 982 852
Total noninterest expense 2,992 2,682 5,741 5,347
Income before income taxes 2,078 2,025 3,983 3,948
Applicable income taxes 542 528 1,046 1,007
Net income 1,536 1,497 2,937 2,941
Net (income) loss attributable to noncontrolling interests (14 ) (14 ) (29 ) (27 )
Net income attributable to U.S. Bancorp $ 1,522 $ 1,483 $ 2,908 $ 2,914
Net income applicable to U.S. Bancorp common shareholders $ 1,435 $ 1,417 $ 2,764 $ 2,782
Earnings per common share $ .83 $ .80 $ 1.60 $ 1.57
Diluted earnings per common share $ .83 $ .80 $ 1.59 $ 1.56
Dividends declared per common share $ .255 $ .255 $ .510 $ .500
Average common shares outstanding 1,725 1,771 1,731 1,776
Average diluted common shares outstanding 1,731 1,779 1,737 1,784
U.S. Bancorp
Consolidated Ending Balance Sheet
June 30, December 31, June 30,
(Dollars in Millions) 2016 2015 2015
Assets (Unaudited) (Unaudited)
Cash and due from banks $ 14,038 $ 11,147 $ 17,925
Investment securities
Held-to-maturity 42,030 43,590 46,233
Available-for-sale 66,490 61,997 57,078
Loans held for sale 4,311 3,184 8,498
Loans
Commercial 92,514 88,402 84,620
Commercial real estate 43,290 42,137 42,258
Residential mortgages 55,904 53,496 51,337
Credit card 20,571 21,012 17,788
Other retail 52,008 51,206 47,652
Total loans, excluding covered loans 264,287 256,253 243,655
Covered loans 4,234 4,596 4,984
Total loans 268,521 260,849 248,639
Less allowance for loan losses (3,806 ) (3,863 ) (4,013 )
Net loans 264,715 256,986 244,626
Premises and equipment 2,459 2,513 2,551
Goodwill 9,359 9,361 9,374
Other intangible assets 2,852 3,350 3,225
Other assets 32,209 29,725 29,565
Total assets $ 438,463 $ 421,853 $ 419,075
Liabilities and Shareholders' Equity
Deposits
Noninterest-bearing $ 86,572 $ 83,766 $ 86,189
Interest-bearing 231,018 216,634 210,659
Total deposits 317,590 300,400 296,848
Short-term borrowings 18,433 27,877 27,784
Long-term debt 36,941 32,078 34,141
Other liabilities 17,470 14,681 15,071
Total liabilities 390,434 375,036 373,844
Shareholders' equity
Preferred stock 5,501 5,501 4,756
Common stock 21 21 21
Capital surplus 8,402 8,376 8,335
Retained earnings 48,269 46,377 44,434
Less treasury stock (14,241 ) (13,125 ) (12,144 )
Accumulated other comprehensive income (loss) (562 ) (1,019 ) (865 )
Total U.S. Bancorp shareholders' equity 47,390 46,131 44,537
Noncontrolling interests 639 686 694
Total equity 48,029 46,817 45,231
Total liabilities and equity $ 438,463 $ 421,853 $ 419,075

U.S. Bancorp

Non-GAAP Financial Measures

(Dollars in Millions, Unaudited)

June 30,

March 31,

December 31,

September 30,

June 30,

2016

2016

2015

2015

2015

Total equity $ 48,029 $ 47,393 $ 46,817 $ 45,767 $ 45,231
Preferred stock (5,501 ) (5,501 ) (5,501 ) (4,756 ) (4,756 )
Noncontrolling interests (639 ) (638 ) (686 ) (692 ) (694 )
Goodwill (net of deferred tax liability) (1) (8,246 ) (8,270 ) (8,295 ) (8,324 ) (8,350 )
Intangible assets, other than mortgage servicing rights (796 ) (820 ) (838 ) (779 ) (744 )
Tangible common equity (a) 32,847 32,164 31,497 31,216 30,687
Tangible common equity (as calculated above) 32,847 32,164 31,497 31,216 30,687
Adjustments (2) 133 99 67 118 125
Common equity tier 1 capital estimated for the Basel III fully
implemented standardized and advanced approaches (b) 32,980 32,263 31,564 31,334 30,812
Total assets 438,463 428,638 421,853 415,943 419,075
Goodwill (net of deferred tax liability) (1) (8,246 ) (8,270 ) (8,295 ) (8,324 ) (8,350 )
Intangible assets, other than mortgage servicing rights (796 ) (820 ) (838 ) (779 ) (744 )
Tangible assets (c) 429,421 419,548 412,720 406,840 409,981
Risk-weighted assets, determined in accordance with prescribed
transitional standardized approach regulatory requirements (d)

351,462

*

346,227 341,360 336,227 333,177
Adjustments (3)

3,079

*

3,485 3,892 3,532 3,532
Risk-weighted assets estimated for the Basel III fully implemented
standardized approach (e)

354,541

*

349,712 345,252 339,759 336,709
Risk-weighted assets, determined in accordance with prescribed
transitional advanced approaches regulatory requirements

271,495

*

267,309 261,668 248,048 245,038
Adjustments (4)

3,283

*

3,707 4,099 3,723 3,721
Risk-weighted assets estimated for the Basel III fully implemented
advanced approaches (f)

274,778

*

271,016 265,767 251,771 248,759
Ratios *
Tangible common equity to tangible assets (a)/(c) 7.6 % 7.7 % 7.6 % 7.7 % 7.5

%

Tangible common equity to risk-weighted assets (a)/(d) 9.3 9.3 9.2 9.3 9.2
Common equity tier 1 capital to risk-weighted assets estimated for the
Basel III fully implemented standardized approach (b)/(e) 9.3 9.2 9.1 9.2 9.2
Common equity tier 1 capital to risk-weighted assets estimated for the
Basel III fully implemented advanced approaches (b)/(f) 12.0 11.9 11.9 12.4 12.4
* Preliminary data. Subject to change prior to filings with applicable regulatory agencies.

(1)

Includes goodwill related to certain investments in unconsolidated financial institutions per prescribed regulatory requirements.

(2)

Includes net losses on cash flow hedges included in accumulated other comprehensive income (loss) and other adjustments.

(3)

Includes higher risk-weighting for unfunded loan commitments, investment securities, residential mortgages, mortgage servicing rights and other adjustments.

(4) Primarily reflects higher risk-weighting for mortgage servicing rights.

U.S. Bancorp

Media

Dana Ripley, 612-303-3167

or

Investors/Analysts

Jennifer Thompson, 612-303-0778

Source: U.S. Bancorp

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