17.6 Percent Increase in Net Income was Driven by an 8.1 Percent Increase in Total Net Revenue and Lower Credit Costs

MINNEAPOLIS--(BUSINESS WIRE)--Jul. 18, 2012-- U.S. Bancorp (NYSE: USB) today reported net income of $1,415 million for the second quarter of 2012, or $.71 per diluted common share. Earnings for the second quarter of 2012 were driven by year-over-year growth in total net revenue and a lower provision for credit losses. Highlights for the second quarter of 2012 included:

• Strong new lending activity of $67.2 billion during the second quarter, including:
  • $36.7 billion of new and renewed commercial and commercial real estate commitments
  • $2.4 billion of lines related to new credit card accounts
  • $28.1 billion of mortgage and other retail loan originations
• Growth in average total loans of 7.7 percent over the second quarter of 2011 (10.0 percent excluding covered loans)
  • Growth in average total loans of 1.9 percent on a linked quarter basis (2.4 percent excluding covered loans)
  • Growth in average total commercial loans of 19.9 percent over the second quarter of 2011 and 5.1 percent over the first quarter of 2012
  • Growth in quarterly average commercial and commercial real estate commitments of 24.3 percent year-over-year and 3.7 percent over the prior quarter
• Significant growth in average deposits of 10.5 percent over the second quarter of 2011, including:
  • Growth in average noninterest-bearing deposits of 32.5 percent
  • Growth in average total savings deposits of 4.4 percent
• Total net revenue growth of 8.1 percent over the second quarter of 2011 and 2.8 percent on a linked quarter basis
• Net interest income growth of 6.6 percent over the second quarter of 2011 (.9 percent linked quarter)
  • Average earning assets growth of 9.4 percent year-over-year
  • Average earning assets growth of 1.2 percent on a linked quarter basis
  • Continued strong growth in lower cost core deposit funding on a year-over-year basis
  • Net interest margin of 3.58 percent for the second quarter of 2012, compared with 3.67 percent for the second quarter of 2011, and 3.60 percent for the first quarter of 2012
• Year-over-year growth in fee-based revenue of 9.7 percent, driven by higher mortgage banking revenue. Linked quarter growth of 5.2 percent, including a 9.8 percent increase in payments-related revenue and an 8.4 percent increase in mortgage banking revenue
• Positive operating leverage on both a year-over-year and a linked quarter basis
• Net charge-offs and nonperforming assets declined on a linked quarter and year-over-year basis. Provision for credit losses was $50 million less than net charge-offs.
  • Net charge-offs declined 8.9 percent from the first quarter of 2012
  • Annualized net charge-offs to average total loans ratio declined to .98 percent
  • Early and late stage loan delinquencies as a percentage of ending loan balances declined in the majority of loan categories
  • Nonperforming assets (excluding covered assets) decreased 6.9 percent from the first quarter of 2012 (12.3 percent including covered assets)
  • Allowance to nonperforming assets (excluding covered assets) was 210 percent at June 30, 2012, compared with 199 percent at March 31, 2012, and 159 percent at June 30, 2011
  • Allowance to period-end loans (excluding covered loans) was 2.34 percent at June 30, 2012, compared with 2.44 percent at March 31, 2012, and 2.83 percent at June 30, 2011

• Capital generation continues to fortify capital position; ratios at June 30, 2012 were:
  • Tier 1 capital ratio of 10.7 percent
  • Total risk based capital ratio of 13.0 percent
  • Tier 1 common equity to risk-weighted assets ratio of 8.8 percent
  • Tier 1 common equity ratio of approximately 7.9 percent using proposed rules for the Basel III standardized approach released June 2012

Net income attributable to U.S. Bancorp was $1,415 million for the second quarter of 2012, 17.6 percent higher than the $1,203 million for the second quarter of 2011 and 5.8 percent higher than the $1,338 million for the first quarter of 2012. Diluted earnings per common share of $.71 in the second quarter of 2012 were $.11 higher than the second quarter of 2011 and $.04 higher than the previous quarter. Return on average assets and return on average common equity were 1.67 percent and 16.5 percent, respectively, for the second quarter of 2012, compared with 1.54 percent and 15.9 percent, respectively, for the second quarter of 2011. During the second quarter, the Company recorded an accrual related to its portion of indemnification obligations associated with Visa Inc. (NYSE: V) litigation matters, which reduced diluted earnings per common share by $.02 (“Visa accrual”). The provision for credit losses for the second quarter of 2012 was $50 million lower than net charge-offs, compared with a provision for credit losses $90 million lower than net charge-offs for the first quarter of 2012 and $175 million lower than net charge-offs for the second quarter of 2011.

U.S. Bancorp Chairman, President and Chief Executive Officer Richard K. Davis said, “I am exceptionally proud of our Company’s second quarter 2012 results, as we reported record diluted earnings per common share of $.71, an 18.3 percent increase over the prior year’s quarter and a 6.0 percent increase over the first quarter of 2012. Further, our performance metrics remained industry-leading and within the range of our long-term objectives, with a return on average assets of 1.67 percent, a return on average common equity of 16.5 percent and an efficiency ratio of 51.1 percent.

“Our results benefited from solid balance sheet and fee income growth this quarter. Both average loans and average deposits increased over the second quarter of last year and the prior quarter. On a linked quarter basis, average total loans grew by 1.9 percent, slightly higher than the linked quarter growth we experienced in the first quarter, driven once again by the commercial loan and residential mortgage categories, indicating that we are continuing to gain market share. Our investment in mortgage banking over the past few years was very well-timed, as we posted both record origination volume and revenue in the second quarter. All three categories of payments-related revenue were seasonally strong this quarter. In fact, we achieved growth in virtually every fee category this period versus the prior quarter. Expenses were well-controlled, and we achieved positive operating leverage on both a year-over-year and linked quarter basis.

“Credit quality continued to improve this quarter with net charge-offs and nonperforming assets (excluding covered assets) declining by 8.9 percent and 6.9 percent, respectively, from the prior quarter. Net charge-offs as a percent of average total loans in the second quarter were .98 percent – moving below our 'through the cycle' average net charge-off ratio of 1 percent. Given the positive changes in nonperforming assets, as well as the favorable changes in early and late-stage delinquencies and criticized assets, we expect further improvement in credit quality in the third quarter.

“Our capital position remains strong with a Tier 1 common equity ratio of 8.8 percent and a Tier 1 capital ratio of 10.7 percent at June 30th. On June 7th, the Federal Reserve released its proposed Basel III rules for comment. Based on our preliminary assessment of the full impact of the proposed rules for the Basel III standardized approach, our Tier 1 common equity ratio was approximately 7.9 percent at June 30th. Year-to-date we have returned 62 percent of our earnings to our shareholders in the form of dividends and share repurchases.

“Consistent, predictable, repeatable – these are the three words that best describe and frame our Company’s operating philosophy and performance objectives. We continue to invest for the long-term in a diverse, stable mix of businesses, products, and services that are delivered by dedicated and engaged employees, fulfilling and supporting the needs of our customers and the communities we serve. Our Company’s record earnings this quarter demonstrate the benefits we have derived from our diverse business mix and adherence to a straightforward approach to doing business that continues to allow us to deliver industry-leading performance and returns to our shareholders.”

Net income attributable to U.S. Bancorp for the second quarter of 2012 was $212 million (17.6 percent) higher than the second quarter of 2011 and $77 million (5.8 percent) higher than the first quarter of 2012. The increase in net income year-over-year and on a linked quarter basis was the result of growth in total net revenue, driven by increases in both net interest income and fee-based revenue, and a lower provision for credit losses. These positive variances were partially offset by an increase in noninterest expense.

Total net revenue on a taxable-equivalent basis for the second quarter of 2012 was $5,068 million; $378 million (8.1 percent) higher than the second quarter of 2011, reflecting a 6.6 percent increase in net interest income and a 9.7 percent increase in noninterest income. The increase in net interest income year-over-year was largely the result of an increase in average earning assets and continued growth in lower cost core deposit funding. Noninterest income increased year-over-year, primarily due to higher mortgage banking revenue and merchant processing services revenue, partially offset by reductions in credit and debit card revenue and ATM processing services revenue. Total net revenue on a taxable-equivalent basis was $139 million (2.8 percent) higher on a linked quarter basis, principally due to strong mortgage banking and payments-related revenue.

Total noninterest expense in the second quarter of 2012 was $2,601 million; $176 million (7.3 percent) higher than the second quarter of 2011 and $41 million (1.6 percent) higher than the first quarter of 2012. The increase in total noninterest expense year-over-year was primarily due to higher compensation expense, employee benefits costs, mortgage servicing review-related professional services costs and other expense, which included the Visa accrual. Total noninterest expense on a linked quarter basis was higher primarily due to the Visa accrual, as increases in compensation and professional services expenses were offset by lower marketing and business development expense and seasonally lower employee benefits costs.

The Company’s provision for credit losses declined from a year ago and on a linked quarter basis. The provision for credit losses for the second quarter of 2012 was $470 million, $11 million lower than the first quarter of 2012 and $102 million lower than the second quarter of 2011. The provision for credit losses was lower than net charge-offs by $50 million in the second quarter of 2012, $90 million in the first quarter of 2012, and $175 million in the second quarter of 2011. Net charge-offs in the second quarter of 2012 were $520 million, compared with $571 million in the first quarter of 2012, and $747 million in the second quarter of 2011. Given current economic conditions, the Company expects the level of net charge-offs to be modestly lower in the third quarter of 2012.

Nonperforming assets include assets originated or acquired by the Company, as well as loans and other real estate acquired under FDIC loss sharing agreements that substantially reduce the risk of credit losses to the Company (“covered assets”). Excluding covered assets, nonperforming assets were $2,256 million at June 30, 2012, $2,423 million at March 31, 2012, and $3,262 million at June 30, 2011. The decline on a year-over-year basis was led by a reduction in commercial and commercial real estate nonperforming assets. Notably, commercial mortgage and construction and development nonperforming assets declined by $674 million (49.4 percent), as the Company continued to resolve and reduce exposure to these problem assets. On a linked quarter basis, there was a reduction in nonperforming assets in a majority of the portfolios, reflecting the stabilizing economy. Beginning in the second quarter of 2012, the Company included junior lien loans and lines greater than 120 days past due, as well as junior lien loans and lines behind a first lien greater than 180 days past due or in nonaccrual status, as nonperforming loans. Other retail nonperforming assets increased $117 million compared with the first quarter of 2012 primarily due to this policy change. Covered nonperforming assets were $773 million at June 30, 2012, $1,031 million at March 31, 2012, and $1,389 million at June 30, 2011. The ratio of the allowance for credit losses to period-end loans, excluding covered loans, was 2.34 percent at June 30, 2012, compared with 2.44 percent at March 31, 2012, and 2.83 percent at June 30, 2011. The ratio of the allowance for credit losses to period-end loans, including covered loans, was 2.25 percent at June 30, 2012, compared with 2.32 percent at March 31, 2012, and 2.66 percent at June 30, 2011. The Company expects total nonperforming assets to trend lower in the third quarter of 2012.

Net Interest Income

Net interest income on a taxable-equivalent basis in the second quarter of 2012 was $2,713 million, compared with $2,544 million in the second quarter of 2011, an increase of $169 million (6.6 percent). The increase was principally the result of growth in average earning assets and lower cost core deposit funding. The year-over-year increase was also impacted by the first quarter 2012 change in the classification of credit card balance transfer fees. Average earning assets were $26.2 billion (9.4 percent) higher than the second quarter of 2011, driven by increases of $15.3 billion (7.7 percent) in average total loans and $10.2 billion (16.2 percent) in average investment securities. Net interest income increased $23 million (.9 percent) on a linked quarter basis, the result of growth in average earning assets, including lower yielding investment securities and average total loans. The net interest margin in the second quarter of 2012 was 3.58 percent, compared with 3.67 percent in the second quarter of 2011, and 3.60 percent in the first quarter of 2012. The expected decline in the net interest margin year-over-year reflected higher balances in lower yielding investment securities and a decline in loan yields, partially offset by lower deposit rates and a reduction in the average cash balances held at the Federal Reserve compared with the second quarter of 2011, as well as the credit card balance transfer fees classification change in the first quarter of 2012. On a linked quarter basis, the decline in the net interest margin reflected an increase in lower yielding investment securities and lower loan yields, partially offset by a reduction in average cash balances held at the Federal Reserve and lower rates on long-term debt.

Average total loans were $15.3 billion (7.7 percent) higher in the second quarter of 2012 than the second quarter of 2011, driven by growth in total commercial loans (19.9 percent), residential mortgages (19.6 percent), credit card loans (5.1 percent) and total commercial real estate loans (3.0 percent). These increases were partially offset by declines in total other retail (.1 percent) and covered loans (17.7 percent). Average total loans, excluding covered loans, were higher by 10.0 percent year-over-year. Impacting the increase in average credit card loans was a purchase of approximately $700 million of consumer credit cards in the fourth quarter of 2011. Average total loans were $3.9 billion (1.9 percent) higher in the second quarter of 2012 than the first quarter of 2012 with increases in total commercial loans (5.1 percent), residential mortgages (3.5 percent) and total commercial real estate loans (1.6 percent), partially offset by a decrease in covered loans (5.3 percent). Excluding covered loans, average total loans grew by 2.4 percent on a linked quarter basis.

Average investment securities in the second quarter of 2012 were $10.2 billion (16.2 percent) higher year-over-year and $1.7 billion (2.4 percent) higher than the prior quarter. The increases over the prior year and linked quarter were primarily due to purchases of U.S. Treasury and government agency-backed securities.

Average total deposits for the second quarter of 2012 were $21.9 billion (10.5 percent) higher than the second quarter of 2011. Average noninterest-bearing deposits increased $15.8 billion (32.5 percent) year-over-year, with growth in average balances in a majority of the lines of business including Wholesale Banking, Wealth Management and Securities Services, and Consumer and Small Business Banking. Average total savings deposits were $5.1 billion (4.4 percent) higher year-over-year, the result of growth in Consumer and Small Business Banking and corporate trust average balances, partially offset by lower broker-dealer average balances. Average time certificates of deposit less than $100,000 were slightly lower, while time deposits greater than $100,000 were $1.6 billion (5.3 percent) higher than the second quarter of 2011, principally in broker-dealer average balances.

Average total deposits increased $3.0 billion (1.3 percent) over the first quarter of 2012. Average noninterest-bearing deposits increased by $948 million (1.5 percent) on a linked quarter basis, mainly driven by growth in Consumer and Small Business Banking. Total average savings deposits decreased $2.3 billion (1.9 percent) on a linked quarter basis due to lower corporate and institutional trust and Wholesale Banking average balances, partially offset by an increase in Consumer and Small Business Banking average balances. Compared with the first quarter of 2012, average time certificates of deposit less than $100,000 were flat, while time deposits greater than $100,000 increased $4.5 billion (16.5 percent), primarily in Wholesale Banking.

Noninterest Income

Second quarter noninterest income was $2,355 million; $209 million (9.7 percent) higher than the second quarter of 2011 and $116 million (5.2 percent) higher than the first quarter of 2012. The year-over-year increase in noninterest income was primarily driven by strong mortgage banking revenue and higher merchant processing services revenue. The $251 million increase in mortgage banking revenue over the same quarter of last year was principally due to higher origination and sales revenue. The $21 million (6.2 percent) increase in merchant processing services revenue was primarily due to increased transaction volumes. Other income increased $22 million (12.6 percent) year-over-year, principally due to higher retail lease residual revenue. Offsetting these positive variances was a $51 million (17.8 percent) decrease in credit and debit card revenue due to lower debit card interchange fees as a result of fourth quarter of 2011 legislation, net of mitigation efforts, and a change in the classification of credit card balance transfer fees from noninterest income to interest income beginning in the first quarter of 2012. However, these negative variances were partially offset by higher transaction volumes and an $18 million credit related to the final expiration of debit card customer rewards. ATM processing services revenue decreased $25 million (21.9 percent), due to classifying surcharge revenue passed through to others as a reduction of revenue beginning in the first quarter of 2012, rather than occupancy expense as in previous periods. In addition, the second quarter of 2012 had an $11 million unfavorable change in net securities losses compared with the same quarter of 2011, as the Company recognized impairment on a number of securities following the recent downgrades of money center banks by a rating agency.

Noninterest income was $116 million (5.2 percent) higher in the second quarter of 2012 than the first quarter of 2012, primarily due to strong mortgage banking and payments-related revenue. Credit and debit card revenue increased $33 million (16.3 percent) due to higher transaction volumes and legislative-mitigation efforts, including a credit for the final expiration of debit card customer rewards. Corporate payment products revenue increased $15 million (8.6 percent) and merchant processing services revenue increased $22 million (6.5 percent), primarily due to higher volumes. Mortgage banking revenue was $38 million (8.4 percent) higher compared with the first quarter of 2012, principally due to higher mortgage production. Trust and investment management fees increased $10 million (4.0 percent) on a linked quarter basis, reflecting account growth, including business expansion. These positive variances were partially offset by the $19 million of net securities losses in the current quarter.

Noninterest Expense

Noninterest expense in the second quarter of 2012 totaled $2,601 million, an increase of $176 million (7.3 percent) over the second quarter of 2011, and a $41 million (1.6 percent) increase over the first quarter of 2012. The increase in total noninterest expense year-over-year was primarily due to higher compensation expense, employee benefits expense, professional services expense and other expense. Compensation and employee benefits expense increased over the prior year by $72 million (7.2 percent) and $19 million (9.0 percent), respectively. The increase in compensation expense was primarily the result of growth in staffing for business initiatives and mortgage servicing-related activities, in addition to merit increases. Employee benefits expense increased principally due to higher pension costs and staffing levels. Professional services expense was $54 million (65.9 percent) higher year-over-year, principally due to mortgage servicing review-related projects. Technology and communications expense was $12 million (6.3 percent) higher year-over-year, due to business expansion and technology projects. In addition, other expense increased $52 million (11.6 percent) and included the Visa accrual and higher mortgage servicing costs, partially offset by lower FDIC insurance expense. These increases were partly offset by a decrease in net occupancy and equipment expense of $19 million (7.6 percent), principally reflecting the change in classification in the first quarter of 2012 of ATM surcharge revenue passed through to others and a $10 million (11.1 percent) decrease in marketing and business development expense due to the timing of advertising campaigns.

Noninterest expense was $41 million (1.6 percent) higher than the first quarter of 2012, primarily due to the Visa accrual. Compensation expense increased $24 million (2.3 percent) on a linked quarter basis, due to the impact of merit increases and higher staffing. Professional services expense was $52 million (61.9 percent) higher due to mortgage servicing review-related projects. Other expense increased by $13 million (2.7 percent) primarily due to the Visa accrual and costs related to investments in affordable housing and other tax-advantaged projects, partially offset by lower regulatory and insurance-related costs. These increases were partially offset by a $31 million (11.9 percent) decrease in employee benefits expense reflecting seasonally lower costs and a $29 million (26.6 percent) decline in marketing and business development expense due to the timing of charitable contributions and payments-related initiatives.

Provision for Income Taxes

The provision for income taxes for the second quarter of 2012 resulted in a tax rate on a taxable-equivalent basis of 31.0 percent (effective tax rate of 29.0 percent), compared with 30.4 percent (effective tax rate of 28.0 percent) in the second quarter of 2011 and 30.9 percent (effective tax rate of 28.8 percent) in the first quarter of 2012.

Credit Quality

Net charge-offs and nonperforming assets declined on a linked quarter and year-over-year basis as economic conditions continued to slowly improve. The allowance for credit losses was $4,864 million at June 30, 2012, compared with $4,919 million at March 31, 2012, and $5,308 million at June 30, 2011. Total net charge-offs in the second quarter of 2012 were $520 million, compared with $571 million in the first quarter of 2012 and $747 million in the second quarter of 2011. The decrease in total net charge-offs was due to improvement in the commercial and commercial real estate and other retail portfolios, compared with the first quarter of 2012. The Company recorded $470 million of provision for credit losses, $50 million less than net charge-offs, during the second quarter of 2012. The allowance for credit losses reimbursable by the FDIC decreased to $65 million at June 30, 2012.

Commercial and commercial real estate loan net charge-offs decreased to $124 million (.52 percent of average loans outstanding) in the second quarter of 2012, compared with $157 million (.68 percent of average loans outstanding) in the first quarter of 2012, and $260 million (1.22 percent of average loans outstanding) in the second quarter of 2011.

Residential mortgage loan net charge-offs decreased to $109 million (1.12 percent of average loans outstanding) in the second quarter of 2012, compared with $112 million (1.19 percent of average loans outstanding) in the first quarter of 2012 and $119 million (1.46 percent of average loans outstanding) in the second quarter of 2011. Credit card loan net charge-offs remained relatively flat at $170 million (4.10 percent of average loans outstanding) in the second quarter of 2012, compared with $169 million (4.05 percent of average loans outstanding) in the first quarter of 2012, and lower than the $216 million (5.45 percent of average loans outstanding) in the second quarter of 2011. Total other retail loan net charge-offs were $117 million (.98 percent of average loans outstanding) in the second quarter of 2012, lower than both the $132 million (1.11 percent of average loans outstanding) in the first quarter of 2012, and the $147 million (1.23 percent of average loans outstanding) in the second quarter of 2011.

The ratio of the allowance for credit losses to period-end loans was 2.25 percent (2.34 percent excluding covered loans) at June 30, 2012, compared with 2.32 percent (2.44 percent excluding covered loans) at March 31, 2012, and 2.66 percent (2.83 percent excluding covered loans) at June 30, 2011. The ratio of the allowance for credit losses to nonperforming loans was 196 percent (247 percent excluding covered loans) at June 30, 2012, compared with 174 percent (238 percent excluding covered loans) at March 31, 2012, and 140 percent (188 percent excluding covered loans) at June 30, 2011.

Nonperforming assets at June 30, 2012, totaled $3,029 million, compared with $3,454 million at March 31, 2012, and $4,651 million at June 30, 2011. Total nonperforming assets at June 30, 2012, included $773 million of covered assets. The ratio of nonperforming assets to loans and other real estate was 1.40 percent (1.11 percent excluding covered assets) at June 30, 2012, compared with 1.63 percent (1.22 percent excluding covered assets) at March 31, 2012, and 2.32 percent (1.77 percent excluding covered assets) at June 30, 2011. The decrease in nonperforming assets, excluding covered assets, compared with a year ago was driven primarily by reductions in the construction and development portfolio, as well as by improvement in commercial mortgages and other commercial loan portfolios, partially offset by an increase in nonperforming other retail loans primarily due to the policy change for junior lien lines and loans.