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U.S. Bancorp Reports $1.5 Billion of Net Income for the Third Quarter 2014

Return on Average Assets of 1.51 percent and Return on Average Common Equity of 14.5 percent

Year-over-Year Positive Operating Leverage

Returned 78 percent of Third Quarter Earnings to Shareholders

MINNEAPOLIS--(BUSINESS WIRE)--Oct. 22, 2014-- U.S. Bancorp (NYSE:USB) today reported net income of $1,471 million for the third quarter of 2014, or $.78 per diluted common share, compared with $1,468 million, or $.76 per diluted common share, in the third quarter of 2013. Highlights for the third quarter of 2014 included:

  • Growth in average total loans of 6.3 percent over the third quarter of 2013 (5.9 percent excluding the Charter One franchise acquisition in late June 2014 and 7.7 percent excluding covered loans) and 1.4 percent on a linked quarter basis (1.1 percent excluding the Charter One acquisition and 1.7 percent excluding covered loans)
    • Growth in average total commercial loans of 13.6 percent over the third quarter of 2013 and 3.1 percent over the second quarter of 2014
    • Growth in average total commercial real estate loans of 6.1 percent over the third quarter of 2013 and .8 percent over the second quarter of 2014
    • Growth in average commercial and commercial real estate commitments of 12.9 percent year-over-year and 3.2 percent over the prior quarter
  • Strong new lending activity of $56.0 billion during the third quarter, including:
    • $36.1 billion of new and renewed commercial and commercial real estate commitments
    • $2.9 billion of lines related to new credit card accounts
    • $17.0 billion of mortgage and other retail loan originations
  • Net interest income growth over the third quarter of 2013 and second quarter 2014
    • Average earning assets growth of 10.0 percent year-over-year and 3.1 percent linked quarter
    • Continued strong growth in lower cost core deposit funding on a year-over-year and linked quarter basis
    • Net interest margin of 3.16 percent for the third quarter of 2014, compared with 3.27 percent for the second quarter of 2014, and 3.43 for the third quarter of 2013
  • Decline in net charge-offs of 3.7 percent on a linked quarter basis. Provision for credit losses was $25 million less than net charge-offs
    • Allowance for credit losses to period-end loans was 1.80 percent at September 30, 2014
    • Annualized net charge-offs to average total loans ratio was .55 percent
  • Decrease in nonperforming assets on both a linked quarter and year-over-year basis
    • Nonperforming assets (excluding covered assets) declined 6.2 percent from the third quarter of 2013
  • Growth in average total deposits of 7.4 percent over the third quarter of 2013 (5.5 percent excluding the Charter One acquisition) and 3.3 percent on a linked quarter basis (1.7 percent excluding the Charter One acquisition)
    • Average low cost deposits, including noninterest-bearing and total savings deposits, grew by 12.2 percent year-over-year and 4.2 percent on a linked quarter basis
  • Industry-leading performance ratios, including:
    • Return on average assets of 1.51 percent
    • Return on average common equity of 14.5 percent
    • Efficiency ratio of 52.4 percent
  • Capital generation continued to reinforce capital position and returns. Ratios at September 30, 2014, were:
    • Basel III transitional standardized approach:
      • Common equity tier 1 capital ratio of 9.7 percent
      • Tier 1 capital ratio of 11.3 percent
      • Total risk-based capital ratio of 13.6 percent
    • Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented standardized approach of 9.0 percent and for the Basel III fully implemented advanced approaches of 11.8 percent
  • Returned 78 percent of third quarter earnings to shareholders through dividends and the buyback of 16 million common shares
                                               
EARNINGS SUMMARY                                             Table 1
($ in millions, except per-share data)               Percent     Percent            
Change Change
3Q 2Q 3Q 3Q14 vs 3Q14 vs YTD YTD Percent
2014     2014     2013     2Q14     3Q13     2014     2013     Change
 
Net income attributable to U.S. Bancorp $ 1,471 $ 1,495 $ 1,468 (1.6 ) .2 $ 4,363 $ 4,380 (.4 )
Diluted earnings per common share $ .78 $ .78 $ .76 -- 2.6 $ 2.29 $ 2.25 1.8
 
Return on average assets (%) 1.51 1.60 1.65 1.56 1.67
Return on average common equity (%) 14.5 15.1 15.8 14.7 16.0
Net interest margin (%) 3.16 3.27 3.43 3.26 3.45
Efficiency ratio (%) (a) 52.4 53.1 52.4 52.8 51.6
Tangible efficiency ratio (%) (b) 51.3 52.1 51.3 51.8 50.5
 
Dividends declared per common share $ .245 $ .245 $ .230 -- 6.5 $ .720 $ .655 9.9
Book value per common share (period-end) $ 21.38 $ 20.98 $ 19.31 1.9 10.7
 
(a)   Efficiency ratio excluding notable items of 51.3% for 2Q 2014 is computed as noninterest expense of $2,753 million less FHA DOJ settlement of $200 million divided by total net revenue of $5,188 million less Visa, Inc. Class B common stock sale of $214 million.
 
(b)   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 intangible amortization.
 

Net income attributable to U.S. Bancorp was $1,471 million for the third quarter of 2014, .2 percent higher than the $1,468 million for the third quarter of 2013, and 1.6 percent lower than the $1,495 million for the second quarter of 2014. Diluted earnings per common share of $.78 in the third quarter of 2014 were $.02 higher than the third quarter of 2013 and equal to the previous quarter. Return on average assets and return on average common equity were 1.51 percent and 14.5 percent, respectively, for the third quarter of 2014, compared with 1.65 percent and 15.8 percent, respectively, for the third quarter of 2013. The provision for credit losses was lower than net charge-offs by $25 million in the third quarter of 2014 and in the second quarter of 2014, and $30 million lower than net charge-offs in the third quarter of 2013.

U.S. Bancorp Chairman, President and Chief Executive Officer Richard K. Davis said, “U.S. Bank delivered another solid performance in the third quarter with $1.5 billion of net income, or $.78 per diluted common share. Our ability to provide customers and clients with a diverse array of banking products and services while addressing their distinct financial objectives, in any economic environment, allows us to continue generating an industry-leading financial performance. Our return on average common equity, return on average assets, and efficiency ratio metrics remain among the strongest in the industry. Our consistently solid financial performance is a result of our adhering closely to the core fundamentals of controlling expenses, managing capital prudently, selectively investing in initiatives that generate steady long-term growth, and expanding existing customer relationships. That was certainly the case in the third quarter as our disciplined approach returned positive operating leverage and the diversification of our business profile allowed us to maintain our momentum as the economy slowly rebounds.

“Value creation for our customers and shareholders is our highest priority. One way we create value for our customers is by preserving and leveraging our industry-leading financial strength to help them more efficiently reach their financial goals and objectives. For example, our average deposits grew 7.4 percent over the prior year to $271 billion. In a challenging macro-economic environment, retail and institutional customers gravitate toward the strength and security of U.S. Bank. Likewise, we returned 78 percent of third quarter earnings to shareholders through dividends and share buybacks. Both examples demonstrate our commitment to value creation. The better we are at addressing and meeting our customers’ financial goals and objectives, the stronger our financial performance will be.

“As we head into the final quarter of the year, we remain diligently focused on executing our plan, even with the ongoing economic headwinds, with an emphasis on providing our customers with the trusted products and services to help them build more secure financial futures, backed by the financial strength of U.S. Bank.”

                                                 
INCOME STATEMENT HIGHLIGHTS                                         Table 2
(Taxable-equivalent basis, $ in millions,                 Percent     Percent            
except per-share data) Change Change
3Q 2Q 3Q 3Q14 vs 3Q14 vs YTD YTD Percent
2014     2014     2013     2Q14     3Q13     2014     2013     Change
 
Net interest income $ 2,748 $ 2,744 $ 2,714 .1 1.3 $ 8,198 $ 8,095 1.3
Noninterest income   2,242     2,444     2,177 (8.3 ) 3.0   6,794     6,618 2.7
Total net revenue 4,990 5,188 4,891 (3.8 ) 2.0 14,992 14,713 1.9
Noninterest expense   2,614     2,753     2,565 (5.0 ) 1.9   7,911     7,592 4.2
Income before provision and taxes 2,376 2,435 2,326 (2.4 ) 2.1 7,081 7,121 (.6 )
Provision for credit losses   311     324     298 (4.0 ) 4.4   941     1,063 (11.5 )
Income before taxes 2,065 2,111 2,028 (2.2 ) 1.8 6,140 6,058 1.4
Taxable-equivalent adjustment 56 55 56 1.8 -- 167 168 (.6 )
Applicable income taxes   523     547     542 (4.4 ) (3.5 )   1,566     1,629 (3.9 )
Net income 1,486 1,509 1,430 (1.5 ) 3.9 4,407 4,261 3.4

Net (income) loss attributable to noncontrolling interests

  (15 )   (14 )   38 (7.1 )

nm  

  (44 )   119

nm  

Net income attributable to U.S. Bancorp $ 1,471   $ 1,495   $ 1,468 (1.6 ) .2 $ 4,363   $ 4,380 (.4 )

Net income applicable to U.S. Bancorp common shareholders

$ 1,405   $ 1,427   $ 1,400 (1.5 ) .4 $ 4,163   $ 4,163 --
Diluted earnings per common share $ .78   $ .78   $ .76 -- 2.6 $ 2.29   $ 2.25 1.8
                                                                       
 

Net income attributable to U.S. Bancorp for the third quarter of 2014 was $3 million (.2 percent) higher than the third quarter of 2013, and $24 million (1.6 percent) lower than the second quarter of 2014. The increase in net income year-over-year was principally due to an increase in total net revenue, driven by increases in both net interest income and fee-based revenue. The decrease in net income on a linked quarter basis was principally due to increased noninterest expense driven by merger integration, mortgage servicing- related expenses, and seasonal tax-advantaged projects costs, partially offset by a decrease in the provision for credit losses. The second quarter of 2014 included two previously disclosed notable items impacting other noninterest income and other noninterest expense that, together, had no impact to diluted earnings per common share.

Total net revenue on a taxable-equivalent basis for the third quarter of 2014 was $4,990 million which was $99 million (2.0 percent) higher than the third quarter of 2013, reflecting a 3.0 percent increase in noninterest income and a 1.3 percent increase in net interest income. Noninterest income increased year-over-year due to higher revenue in most fee businesses, partially offset by lower mortgage banking revenue. The increase in net interest income year-over-year was the result of an increase in average earning assets and continued growth in lower cost core deposit funding, offset by lower loan fees. Total net revenue on a taxable-equivalent basis was $198 million (3.8 percent) lower on a linked quarter basis due to an 8.3 percent decrease in noninterest income as a result of the sale of Visa, Inc. Class B common stock in the second quarter of 2014 and lower mortgage banking revenue, partially offset by a $4 million increase in net interest income, the result of an increase in average earning assets and growth in lower cost deposits, offset by lower loan fees.

Total noninterest expense in the third quarter of 2014 was $2,614 million which was $49 million (1.9 percent) higher than the third quarter of 2013 and $139 million (5.0 percent) lower than the second quarter of 2014. The increase in total noninterest expense year-over-year was primarily due to an increase in compensation expense, reflecting the impact of merit increases, acquisitions, and higher staffing for risk and compliance activities. The decrease in total noninterest expense on a linked quarter basis was due to the second quarter settlement with the U.S. Department of Justice to resolve an investigation relating to the endorsement of mortgage loans under the Federal Housing Administration’s insurance program (“FHA DOJ settlement”), partially offset by Charter One merger integration costs and higher mortgage servicing-related costs.

The Company’s provision for credit losses for the third quarter of 2014 was $311 million, $13 million (4.0 percent) lower than the prior quarter and $13 million (4.4 percent) higher than the third quarter of 2013. The provision for credit losses was lower than net charge-offs by $25 million in the third quarter of 2014 and in the second quarter of 2014, and $30 million lower than net charge-offs in the third quarter of 2013. Net charge-offs in the third quarter of 2014 were $336 million, compared with $349 million in the second quarter of 2014, and $328 million in the third quarter of 2013. Given current economic conditions, the Company expects the level of net charge-offs to remain relatively stable in the fourth quarter of 2014.

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 $1,763 million at September 30, 2014, compared with $1,766 million at June 30, 2014, and $1,880 million at September 30, 2013. The decrease in nonperforming assets, excluding covered assets, compared with a year ago was driven primarily by reductions in the commercial mortgage portfolio, as well as by improvement in construction and development and credit card loans. Covered nonperforming assets were $160 million at September 30, 2014, compared with $177 million at June 30, 2014, and $332 million at September 30, 2013. The loss sharing agreement for the majority of the nonperforming covered assets expires in the fourth quarter of 2014. The ratio of the allowance for credit losses to period-end loans was 1.80 percent at September 30, 2014, compared with 1.82 percent at June 30, 2014, and 1.98 percent at September 30, 2013. The Company expects total nonperforming assets to remain relatively stable in the fourth quarter of 2014.

                                                 
NET INTEREST INCOME                                         Table 3
(Taxable-equivalent basis; $ in millions)                                
Change Change
3Q 2Q 3Q 3Q14 vs 3Q14 vs YTD YTD
2014     2014     2013     2Q14     3Q13     2014     2013     Change
Components of net interest income
Income on earning assets $ 3,114 $ 3,104 $ 3,125 $ 10 $ (11 ) $ 9,296 $ 9,388 $ (92 )
Expense on interest-bearing liabilities   366         360         411         6         (45 )       1,098         1,293         (195 )
Net interest income $ 2,748       $ 2,744       $ 2,714       $ 4       $ 34       $ 8,198       $ 8,095       $ 103  
 
Average yields and rates paid
Earning assets yield 3.58 % 3.70 % 3.95 % (.12 )% (.37 )% 3.69 % 4.00 % (.31 )%
Rate paid on interest-bearing liabilities   .57         .58         .71         (.01 )       (.14 )       .60         .75         (.15 )
Gross interest margin   3.01 %       3.12 %       3.24 %       (.11 )%       (.23 )%       3.09 %       3.25 %       (.16 )%
Net interest margin   3.16 %       3.27 %       3.43 %       (.11 )%       (.27 )%       3.26 %       3.45 %       (.19 )%
 
Average balances
Investment securities (a) $ 93,141 $ 87,583 $ 74,988 $ 5,558 $ 18,153 $ 87,687 $ 74,303 $ 13,384
Loans 243,867 240,480 229,362 3,387 14,505 240,098 225,682 14,416
Earning assets 346,422 335,992 315,060 10,430 31,362 336,287 313,663 22,624
Interest-bearing liabilities 254,501 246,886 230,825 7,615 23,676 246,614 230,805 15,809
 
(a) Excludes unrealized gain (loss)
 

Net Interest Income

Net interest income on a taxable-equivalent basis in the third quarter of 2014 was $2,748 million, an increase of $34 million (1.3 percent) from the third quarter of 2013. The increase was the result of growth in average earning assets and growth in lower cost core deposit funding, partially offset by lower rates on new loans and securities and lower loan fees. Average earning assets were $31.4 billion (10.0 percent) higher than the third quarter of 2013, driven by increases of $14.5 billion (6.3 percent) in average total loans and $18.2 billion (24.2 percent) in average investment securities, partially offset by a decrease of $1.4 billion (28.5 percent) in average loans held for sale. Net interest income increased $4 million on a linked quarter basis, due to higher average earning assets, partially offset by lower loan fees and lower loan and investment securities rates. The net interest margin in the third quarter of 2014 was 3.16 percent, compared with 3.43 percent in the third quarter of 2013, and 3.27 percent in the second quarter of 2014. The decline in the net interest margin on a year-over-year basis primarily reflected lower reinvestment rates on investment securities, as well as growth in the investment portfolio at lower average rates, lower loan fees due to the previously communicated wind down of the short-term, small-dollar deposit advance product, Checking Account Advance (“CAA”), and lower rates on new loans, partially offset by lower funding costs. On a linked quarter basis, the reduction in net interest margin was principally due to growth in lower rate investment securities and lower loan fees due to the CAA product wind down.

                                                 
AVERAGE LOANS                                         Table 4
($ in millions)                 Percent     Percent            
Change Change
3Q 2Q 3Q 3Q14 vs 3Q14 vs YTD YTD Percent
2014     2014     2013     2Q14     3Q13     2014     2013     Change
 
Commercial $ 72,190 $ 69,920 $ 62,856 3.2 14.8 $ 69,276 $ 61,439 12.8
Lease financing   5,155       5,100       5,208 1.1 (1.0 )   5,148       5,280 (2.5 )
Total commercial 77,345 75,020 68,064 3.1 13.6 74,424 66,719 11.5
 
Commercial mortgages 31,965 32,001 31,546 (.1 ) 1.3 32,005 31,311 2.2
Construction and development   8,874       8,496       6,955 4.4 27.6   8,460       6,561 28.9
Total commercial real estate 40,839 40,497 38,501 .8 6.1 40,465 37,872 6.8
 
Residential mortgages 51,994 51,815 49,139 .3 5.8 51,799 47,055 10.1
 
Credit card 17,753 17,384 16,931 2.1 4.9 17,516 16,627 5.3
 
Retail leasing 5,991 6,014 5,664 (.4 ) 5.8 5,995 5,589 7.3
Home equity and second mortgages 15,704 15,327 15,648 2.5 .4 15,467 16,021 (3.5 )
Other   27,003       26,587       25,682 1.6 5.1   26,636       25,424 4.8
Total other retail   48,698       47,928       46,994 1.6 3.6   48,098       47,034 2.3
 
Total loans, excluding covered loans   236,629       232,644       219,629 1.7 7.7   232,302       215,307 7.9
 
Covered loans   7,238       7,836       9,733 (7.6 ) (25.6 )   7,796       10,375 (24.9 )
 
Total loans $ 243,867     $ 240,480     $ 229,362 1.4 6.3 $ 240,098     $ 225,682 6.4
                                                                 
 

Average total loans were $14.5 billion (6.3 percent) higher in the third quarter of 2014 than the third quarter of 2013, driven by growth in total commercial loans (13.6 percent), total commercial real estate (6.1 percent), residential mortgages (5.8 percent), credit card (4.9 percent), and total other retail loans (3.6 percent). These increases were partially offset by a decline in covered loans (25.6 percent). Average total loans, excluding covered loans, were higher by 7.7 percent year-over-year. Average total loans were $3.4 billion (1.4 percent) higher in the third quarter of 2014 than the second quarter of 2014, driven by growth in total commercial loans (3.1 percent), credit card (2.1 percent), total other retail loans (1.6 percent), total commercial real estate (.8 percent), and residential mortgages (.3 percent). These increases were partially offset by a decline in covered loans (7.6 percent). Average total loans, excluding covered loans, were higher by 1.7 percent on a linked quarter basis.

Average investment securities in the third quarter of 2014 were $18.2 billion (24.2 percent) higher year-over-year and $5.6 billion (6.3 percent) higher than the prior quarter. The increases were primarily due to purchases of U.S. government agency-backed securities, net of prepayments and maturities, in anticipation of final liquidity coverage ratio regulatory requirements.

                                                 
AVERAGE DEPOSITS                                         Table 5
($ in millions)                 Percent     Percent            
Change Change
3Q 2Q 3Q 3Q14 vs 3Q14 vs YTD YTD Percent
2014     2014     2013     2Q14     3Q13     2014     2013     Change
 
Noninterest-bearing deposits $ 74,126 $ 71,837 $ 68,264 3.2 8.6 $ 72,274 $ 67,183 7.6
Interest-bearing savings deposits
Interest checking 54,454 52,989 48,235 2.8 12.9 52,928 48,347 9.5
Money market savings 66,250 61,370 55,982 8.0 18.3 62,314 54,826 13.7
Savings accounts   34,615       33,991       32,083 1.8 7.9   33,940       31,809 6.7
Total of savings deposits 155,319 148,350 136,300 4.7 14.0 149,182 134,982 10.5
Time deposits less than $100,000 11,045 10,971 12,495 .7 (11.6 ) 11,151 13,082 (14.8 )
Time deposits greater than $100,000   30,518       31,193       35,309 (2.2 ) (13.6 )   31,055       33,037 (6.0 )
Total interest-bearing deposits   196,882       190,514       184,104 3.3 6.9   191,388       181,101 5.7
Total deposits $ 271,008     $ 262,351     $ 252,368 3.3 7.4 $ 263,662     $ 248,284 6.2
                                                                 
 

Average total deposits for the third quarter of 2014 were $18.6 billion (7.4 percent) higher than the third quarter of 2013. Average noninterest-bearing deposits increased $5.9 billion (8.6 percent) year-over-year, mainly in Consumer and Small Business Banking, including the $.4 billion impact of the Charter One acquisition, corporate trust, and commercial banking balances. Average total savings deposits were $19.0 billion (14.0 percent) higher year-over-year, the result of growth in Consumer and Small Business Banking, including the $3.4 billion impact of the Charter One acquisition, corporate trust, broker-dealer, and government banking related balances. Time deposits less than $100,000 were $1.5 billion (11.6 percent) lower due to maturities, while time deposits greater than $100,000 decreased $4.8 billion (13.6 percent), primarily due to a decline in broker-dealer and Consumer and Small Business Banking balances. Time deposits greater than $100,000 are managed as an alternative to other funding sources, such as wholesale borrowing, based largely on relative pricing.

Average total deposits increased $8.7 billion (3.3 percent) over the second quarter of 2014. Average noninterest-bearing deposits increased $2.3 billion (3.2 percent) on a linked quarter basis, due to higher balances in Consumer and Small Business Banking, including the impact of the Charter One acquisition, and Wholesale Banking and Commercial Real Estate, partially offset by lower corporate trust balances. Average total savings deposits increased $7.0 billion (4.7 percent), reflecting increases in Consumer and Small Business Banking, including the impact of the Charter One acquisition, corporate trust, and broker-dealer balances, partially offset by a decrease in government banking related balances. Compared with the second quarter of 2014, average time deposits less than $100,000 increased $74 million (.7 percent) due to an increase in Consumer and Small Business Banking driven by the impact of the Charter One acquisition. Average time deposits greater than $100,000 decreased $675 million (2.2 percent) on a linked quarter basis, principally due to declines in Wholesale Banking and Commercial Real Estate and corporate trust balances.

                                                 
NONINTEREST INCOME                                         Table 6
($ in millions)                 Percent     Percent            
Change Change
3Q 2Q 3Q 3Q14 vs 3Q14 vs YTD YTD Percent
2014     2014     2013     2Q14     3Q13     2014     2013     Change
 
Credit and debit card revenue $ 251 $ 259 $ 244 (3.1 ) 2.9 $ 749 $ 702 6.7
Corporate payment products revenue 195 182 192 7.1 1.6 550 540 1.9
Merchant processing services 387 384 371 .8 4.3 1,127 1,091 3.3
ATM processing services 81 82 83 (1.2 ) (2.4 ) 241 248 (2.8 )
Trust and investment management fees 315 311 280 1.3 12.5 930 842 10.5
Deposit service charges 185 171 180 8.2 2.8 513 493 4.1
Treasury management fees 136 140 134 (2.9 ) 1.5 409 408 .2
Commercial products revenue 209 221 207 (5.4 ) 1.0 635 616 3.1
Mortgage banking revenue 260 278 328 (6.5 ) (20.7 ) 774 1,125 (31.2 )
Investment products fees 49 47 46 4.3 6.5 142 133 6.8
Securities gains (losses), net (3 ) -- (3 ) nm -- 2 8 (75.0 )
Other   177         369       115   (52.0 ) 53.9   722       412 75.2
 
Total noninterest income $ 2,242       $ 2,444     $ 2,177   (8.3 ) 3.0 $ 6,794     $ 6,618 2.7
                                                                     
 

Noninterest Income

Third quarter noninterest income was $2,242 million which was $65 million (3.0 percent) higher than the third quarter of 2013 and $202 million (8.3 percent) lower than the second quarter of 2014. The year-over-year increase in noninterest income was due to increases in a majority of fee revenue categories, partially offset by a $68 million (20.7 percent) reduction in mortgage banking revenue, principally due to a $59 million unfavorable change in the valuation of mortgage servicing rights (“MSRs”), net of hedging activities, compared with the prior year. Trust and investment management fees increased $35 million (12.5 percent) year-over-year, reflecting account growth, improved market conditions and business expansion. Merchant processing services revenue was $16 million (4.3 percent) higher as a result of an increase in product fees and higher volumes, partially offset by lower rates. Credit and debit card revenue increased $7 million (2.9 percent) over the third quarter of 2013 primarily due to higher transaction volumes. Deposit services charges were $5 million (2.8 percent) higher than a year ago due to account growth, the Charter One acquisition and pricing changes. The increase in other income was primarily due to gains on sales of other equity investments and an increase in retail leasing revenue.

Noninterest income was $202 million (8.3 percent) lower in the third quarter of 2014 than the second quarter of 2014, primarily due to the second quarter Visa, Inc. Class B common stock sale, lower mortgage banking revenue, and lower commercial products revenue. Mortgage banking revenue decreased $18 million (6.5 percent), principally due to a $44 million unfavorable change in the valuation of MSRs, net of hedging activities, partially offset by an increase in origination and sales revenue. Commercial products revenue decreased $12 million (5.4 percent) due to lower wholesale transaction activity, including standby letters of credit, loan and bond underwriting fees, and syndication fees. Credit and debit card revenue decreased $8 million (3.1 percent) primarily due to higher rewards. Partially offsetting these decreases was an increase in deposit service charges of $14 million (8.2 percent), mainly due to higher transaction volumes. Additionally, corporate payment products revenue increased $13 million (7.1 percent) on a linked quarter basis, principally due to seasonally higher transaction volumes, and trust and investment management fees were $4 million (1.3 percent) higher than the prior quarter due to improved market conditions and account growth, including business expansion.

                                                 
NONINTEREST EXPENSE                                         Table 7
($ in millions)                 Percent     Percent            
Change Change
3Q 2Q 3Q 3Q14 vs 3Q14 vs YTD YTD Percent
2014     2014     2013     2Q14     3Q13     2014     2013     Change
 
Compensation $ 1,132 $ 1,125 $ 1,088 .6 4.0 $ 3,372 $ 3,268 3.2
Employee benefits 250 257 278 (2.7 ) (10.1 ) 796 865 (8.0 )
Net occupancy and equipment 249 241 240 3.3 3.8 739 709 4.2
Professional services 102 97 94 5.2 8.5 282 263 7.2
Marketing and business development 78 96 85 (18.8 ) (8.2 ) 253 254 (.4 )
Technology and communications 219 214 214 2.3 2.3 644 639 .8
Postage, printing and supplies 81 80 76 1.3 6.6 242 230 5.2
Other intangibles 51 48 55 6.3 (7.3 ) 148 167 (11.4 )
Other   452       595       435 (24.0 ) 3.9   1,435       1,197 19.9
 
Total noninterest expense $ 2,614     $ 2,753     $ 2,565 (5.0 ) 1.9 $ 7,911     $ 7,592 4.2
                                                                 
 

Noninterest Expense

Noninterest expense in the third quarter of 2014 totaled $2,614 million, an increase of $49 million (1.9 percent) over the third quarter of 2013, and a $139 million (5.0 percent) decrease from the second quarter of 2014. The increase in total noninterest expense year-over-year was the result of higher compensation expense, reflecting the impact of merit increases, acquisitions, and higher staffing for risk and compliance activities. Net occupancy and equipment expense increased $9 million (3.8 percent) year-over-year due to business initiatives and maintenance costs. Professional services expense increased $8 million (8.5 percent) due mainly to mortgage servicing-related project costs. The $17 million (3.9 percent) increase in other expense primarily reflected the Charter One merger integration and mortgage servicing-related expenses, partially offset by lower costs for investments in tax-advantaged projects related to a change in first quarter 2014 in accounting for affordable housing investments. Offsetting these increases was a $28 million (10.1 percent) reduction in employee benefits expense driven by lower pension costs.

Noninterest expense decreased $139 million (5.0 percent) on a linked quarter basis, primarily driven by the second quarter FHA DOJ settlement in other expense, partially offset by mortgage servicing-related expenses, the Charter One merger integration costs, and seasonally higher costs related to investments in tax-advantaged projects. Marketing and business development expense decreased $18 million (18.8 percent) due to charitable contributions in the second quarter of 2014 and the timing of marketing programs in Payment Services. Additionally, employee benefits expense decreased $7 million (2.7 percent) primarily resulting from lower payroll tax expense. Partially offsetting these decreases was a $7 million (.6 percent) increase in compensation expense reflecting the impact of merit increases, and additional employees related to the Charter One acquisition and for risk and compliance activities. Professional services expense was $5 million (5.2 percent) higher, mainly due to higher mortgage servicing-related project costs.

Provision for Income Taxes

The provision for income taxes for the third quarter of 2014 resulted in a tax rate on a taxable-equivalent basis of 28.0 percent (effective tax rate of 26.0 percent), compared with 29.5 percent (effective tax rate of 27.5 percent) in the third quarter of 2013, and 28.5 percent (effective tax rate of 26.6 percent) in the second quarter of 2014.

                                                             
ALLOWANCE FOR CREDIT LOSSES                                               Table 8      
($ in millions)     3Q         2Q         1Q         4Q         3Q    
2014     % (b)     2014     % (b)     2014     % (b)     2013     % (b)     2013     % (b)
Balance, beginning of period $ 4,449 $ 4,497 $ 4,537 $ 4,578 $ 4,612
Net charge-offs
Commercial 52 .29 52 .30 34 .21 33 .21 18 .11
Lease financing   6   .46   3   .24   2   .16   3   .23   (7 ) (.53 )
Total commercial 58 .30 55 .29 36 .21 36 .21 11 .06
Commercial mortgages 1 .01 (6 ) (.08 ) (1 ) (.01 ) 1 .01 2 .03
Construction and development   3   .13   2   .09   (2 ) (.10 )   (30 ) (1.58 )   (8 ) (.46 )
Total commercial real estate 4 .04 (4 ) (.04 ) (3 ) (.03 ) (29 ) (.29 ) (6 ) (.06 )
Residential mortgages 42 .32 57 .44 57 .45 49 .38 57 .46
Credit card 158 3.53 170 3.92 170 3.96 163 3.72 160 3.75
Retail leasing -- -- 1 .07 -- -- -- -- 1 .07
Home equity and second mortgages 24 .61 23 .60 31 .82 37 .95 43 1.09
Other   49   .72   45   .68   45   .69   52   .79   54   .83
Total other retail   73   .59   69   .58   76   .65   89   .75   98   .83

Total net charge-offs, excluding covered loans

335 .56 347 .60 336 .60 308 .55 320 .58
Covered loans   1   .05   2   .10   5   .24   4   .18   8   .33
Total net charge-offs 336 .55 349 .58 341 .59 312 .53 328 .57
Provision for credit losses 311 324 306 277 298
Other changes (a)   (10 )   (23 )   (5 )   (6 )   (4 )
Balance, end of period $ 4,414   $ 4,449   $ 4,497   $ 4,537   $ 4,578  
 
Components
Allowance for loan losses $ 4,065 $ 4,132 $ 4,189 $ 4,250 $ 4,258

Liability for unfunded credit commitments

  349     317     308     287     320  
Total allowance for credit losses $ 4,414   $ 4,449   $ 4,497   $ 4,537   $ 4,578  
Gross charge-offs $ 410 $ 432 $ 422 $ 429 $ 450
Gross recoveries $ 74 $ 83 $ 81 $ 117 $ 122
Allowance for credit losses as a percentage of

Period-end loans, excluding covered loans

1.81 1.83 1.90 1.94 1.99

Nonperforming loans, excluding covered loans

291 294 293 297 294

Nonperforming assets, excluding covered assets

245 246 243 242 235
Period-end loans 1.80 1.82 1.89 1.93 1.98
Nonperforming loans 282 279 278 283 276
Nonperforming assets 230 229 225 223 207
 

 

(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 allowance for credit losses was $4,414 million at September 30, 2014, compared with $4,449 million at June 30, 2014, and $4,578 million at September 30, 2013. Nonperforming assets declined on a linked quarter and year-over-year basis as economic conditions continued to slowly improve. Total net charge-offs in the third quarter of 2014 were $336 million, compared with $349 million in the second quarter of 2014, and $328 million in the third quarter of 2013. The $13 million (3.7 percent) decrease in net charge-offs on a linked quarter basis was due to improvements in the residential mortgage and credit card portfolios, while the $8 million (2.4 percent) increase in net charge-offs on a year-over-year basis reflected higher commercial loan charge-offs and lower recoveries in commercial real estate, partially offset by improvements in residential mortgages and home equity and second mortgages. The Company recorded $311 million of provision for credit losses in the current quarter, which was $25 million less than net charge-offs.

Commercial and commercial real estate loan net charge-offs were $62 million (.21 percent of average loans outstanding) in the third quarter of 2014, compared with $51 million (.18 percent of average loans outstanding) in the second quarter of 2014, and $5 million (.02 percent of average loans outstanding) in the third quarter of 2013.

Residential mortgage loan net charge-offs were $42 million (.32 percent of average loans outstanding) in the third quarter of 2014, compared with $57 million (.44 percent of average loans outstanding) in the second quarter of 2014, and $57 million (.46 percent of average loans outstanding) in the third quarter of 2013. Credit card loan net charge-offs were $158 million (3.53 percent of average loans outstanding) in the third quarter of 2014, compared with $170 million (3.92 percent of average loans outstanding) in the second quarter of 2014, and $160 million (3.75 percent of average loans outstanding) in the third quarter of 2013. Total other retail loan net charge-offs were $73 million (.59 percent of average loans outstanding) in the third quarter of 2014, compared with $69 million (.58 percent of average loans outstanding) in the second quarter of 2014, and $98 million (.83 percent of average loans outstanding) in the third quarter of 2013.

The ratio of the allowance for credit losses to period-end loans was 1.80 percent (1.81 percent excluding covered loans) at September 30, 2014, compared with 1.82 percent (1.83 percent excluding covered loans) at June 30, 2014, and 1.98 percent (1.99 percent excluding covered loans) at September 30, 2013. The ratio of the allowance for credit losses to nonperforming loans was 282 percent (291 percent excluding covered loans) at September 30, 2014, compared with 279 percent (294 percent excluding covered loans) at June 30, 2014, and 276 percent (294 percent excluding covered loans) at September 30, 2013.

                               
DELINQUENT LOAN RATIOS AS A PERCENT OF ENDING LOAN BALANCES                       Table 9
(Percent)                    
Sep 30 Jun 30 Mar 31 Dec 31 Sep 30
  2014     2014     2014     2013     2013
 
Delinquent loan ratios - 90 days or more past due excluding nonperforming loans
Commercial .05 .06 .06 .08 .07
Commercial real estate .03 .06 .06 .07 .02
Residential mortgages .41 .49 .64 .65 .53
Credit card 1.10 1.06 1.21 1.17 1.11
Other retail .16 .15 .18 .18 .16
Total loans, excluding covered loans .22 .25 .30 .31 .27
Covered loans 6.10 6.14 5.83 5.63 5.47
Total loans .39 .43 .49 .51 .48
 
Delinquent loan ratios - 90 days or more past due including nonperforming loans
Commercial .27 .30 .32 .27 .24
Commercial real estate .62 .62 .73 .83 .94
Residential mortgages 2.02 2.06 2.14 2.16 1.99
Credit card 1.32 1.35 1.59 1.60 1.66
Other retail .53 .54 .58 .58 .60
Total loans, excluding covered loans .84 .87 .95 .97 .94
Covered loans 7.34 7.73 7.46 7.13 7.13
Total loans 1.03 1.08 1.17 1.19 1.20
                               
 
                               
ASSET QUALITY                       Table 10
($ in millions)                    
Sep 30 Jun 30 Mar 31 Dec 31 Sep 30
2014     2014     2014     2013     2013
Nonperforming loans
Commercial $ 161 $ 174 $ 174 $ 122 $ 104
Lease financing   12       16       14       12       12
Total commercial 173 190 188 134 116
Commercial mortgages 147 121 156 182 210
Construction and development   94       105       113       121       146
Total commercial real estate 241 226 269 303 356
Residential mortgages 841 818 777 770 732
Credit card 40 52 65 78 94
Other retail   184       191       188       191       206
Total nonperforming loans, excluding covered loans 1,479 1,477 1,487 1,476 1,504
Covered loans   88       119       132       127       156
Total nonperforming loans 1,567 1,596 1,619 1,603 1,660
Other real estate (a) 275 279 296 327 366
Covered other real estate (a) 72 58 73 97 176
Other nonperforming assets   9       10       11       10       10
Total nonperforming assets (b) $ 1,923     $ 1,943     $ 1,999     $ 2,037     $ 2,212
Total nonperforming assets, excluding covered assets $ 1,763     $ 1,766     $ 1,794     $ 1,813     $ 1,880
 

Accruing loans 90 days or more past due, excluding covered loans

$ 532     $ 581     $ 695     $ 713     $ 591
 
Accruing loans 90 days or more past due $ 962     $ 1,038     $ 1,167     $ 1,189     $ 1,105
 

Performing restructured loans, excluding GNMA and covered loans

$ 2,818     $ 2,911     $ 3,006     $ 3,067     $ 3,097
 
Performing restructured GNMA and covered loans $ 2,685     $ 3,072     $ 3,003     $ 2,932     $ 2,262
 

Nonperforming assets to loans plus ORE, excluding covered assets (%)

.74 .75 .78 .80 .85
 

Nonperforming assets to loans plus ORE (%)

.78 .80 .84 .86 .95
 
(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.
 

Nonperforming assets at September 30, 2014, totaled $1,923 million, compared with $1,943 million at June 30, 2014, and $2,212 million at September 30, 2013. Total nonperforming assets at September 30, 2014, included $160 million of covered assets. The ratio of nonperforming assets to loans and other real estate was .78 percent (.74 percent excluding covered assets) at September 30, 2014, compared with .80 percent (.75 percent excluding covered assets) at June 30, 2014, and .95 percent (.85 percent excluding covered assets) at September 30, 2013. Total commercial nonperforming loans were $17 million (8.9 percent) lower on a linked quarter basis and $57 million (49.1 percent) higher year-over-year. Commercial real estate nonperforming loans increased by $15 million (6.6 percent) on a linked quarter basis and decreased $115 million (32.3 percent) year-over-year. Residential mortgage nonperforming loans increased $23 million (2.8 percent) on a linked quarter basis and $109 million (14.9 percent) year-over-year. Credit card nonperforming loans were $12 million (23.1 percent) lower on a linked quarter basis and $54 million (57.4 percent) lower year-over-year. Other retail nonperforming loans decreased $7 million (3.7 percent) on a linked quarter basis and $22 million (10.7 percent) year-over-year.

Accruing loans 90 days or more past due were $962 million ($532 million excluding covered loans) at September 30, 2014, compared with $1,038 million ($581 million excluding covered loans) at June 30, 2014, and $1,105 million ($591 million excluding covered loans) at September 30, 2013.

                               
COMMON SHARES                       Table 11
(Millions)     3Q     2Q     1Q     4Q     3Q
  2014     2014     2014     2013     2013
 
Beginning shares outstanding 1,809 1,821 1,825 1,832 1,844

Shares issued for stock option and stock purchase plans, acquisitions and other corporate purposes

2 3 8 6 5
Shares repurchased   (16 )     (15 )     (12 )     (13 )     (17 )
Ending shares outstanding   1,795       1,809       1,821       1,825       1,832  
                                         
 

Total U.S. Bancorp shareholders’ equity was $43.1 billion at September 30, 2014, compared with $42.7 billion at June 30, 2014, and $40.1 billion at September 30, 2013. During the third quarter, the Company returned 78 percent of third quarter earnings to shareholders, including $441 million in common stock dividends and $654 million of repurchased common stock.

                                         
CAPITAL POSITION                             Table 12  
($ in millions)     Sep 30     Jun 30     Mar 31     Dec 31     Sep 30
2014       2014       2014       2013       2013
 
Total U.S. Bancorp shareholders' equity $ 43,141 $ 42,700 $ 42,054 $ 41,113 $ 40,132
 
Standardized Approach
 
Basel III transitional standardized approach/Basel I (a)
Common equity tier 1 capital $ 30,213 $ 29,760 $ 29,463 $ 27,942 $ 27,265
Tier 1 capital 35,377 34,924 34,627 33,386 32,707
Total risk-based capital 42,509 41,034 40,741 39,340 38,873
 
Common equity tier 1 capital ratio 9.7 % 9.6 % 9.7 % 9.4 % 9.3 %
Tier 1 capital ratio 11.3 11.3 11.4 11.2 11.2
Total risk-based capital ratio 13.6 13.2 13.5 13.2 13.3
Leverage ratio 9.4 9.6 9.7 9.6 9.6
 

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

9.0 8.9 9.0 8.8 8.6
 
Advanced Approaches
 

Common equity tier 1 capital to risk-weighted assets for the Basel III transitional advanced approaches

12.4 12.3
 

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

11.8 11.7
 
Tangible common equity to tangible assets 7.6 7.5 7.8 7.7 7.4
Tangible common equity to risk-weighted assets 9.3 9.2 9.3 9.1 8.9
 
(a) 2014 amounts and ratios calculated under the Basel III transitional standardized approach; all prior periods under Basel I
 
 

Prior to 2014, the regulatory capital requirements effective for the Company followed Basel I. 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 next four years to full implementation by January 1, 2018. In addition, beginning the second quarter of 2014, the advanced approaches portion of Basel III became effective for the Company. Under the Basel III transitional standardized approach, the common equity tier 1 capital ratio was 9.7 percent at September 30, 2014, compared with 9.6 percent at June 30, 2014. The tier 1 capital ratio was 11.3 percent at September 30, 2014, and at June 30, 2014, compared with 11.2 percent at September 30, 2013. Under the Basel III transitional advanced approaches, the common equity tier 1 capital to risk-weighted assets ratio was 12.4 percent at September 30, 2014, compared with 12.3 percent at June 30, 2014. All regulatory ratios continue to be in excess of “well-capitalized” requirements. In addition, the common equity tier 1 capital to risk-weighted assets ratio estimated for the Basel III standardized approach as if fully implemented was 9.0 percent at September 30, 2014, compared with 8.9 percent at June 30, 2014, and 8.6 percent at September 30, 2013, and the common equity tier 1 capital to risk-weighted assets ratio estimated for the Basel III advanced approaches as if fully implemented was 11.8 percent at September 30, 2014, compared with 11.7 percent at June 30, 2014. The tangible common equity to tangible assets ratio was 7.6 percent at September 30, 2014, compared with 7.5 percent at June 30, 2014, and 7.4 percent at September 30, 2013.

                                                         
LINE OF BUSINESS FINANCIAL PERFORMANCE (a)                       Table 13  
($ in millions)                                
Net Income Attributable Net Income Attributable
to U.S. Bancorp Percent Change to U.S. Bancorp 3Q 2014
3Q 2Q 3Q 3Q14 vs 3Q14 vs YTD YTD Percent Earnings
Business Line     2014     2014     2013     2Q14     3Q13     2014     2013     Change     Composition  

Wholesale Banking and Commercial Real Estate

$ 267 $ 279 $ 324 (4.3 ) (17.6 ) $ 827 $ 959 (13.8 ) 18 %

Consumer and Small Business Banking

307 316 373 (2.8 ) (17.7 ) 907 1,110 (18.3 ) 21

Wealth Management and Securities Services

63 57 36 10.5 75.0 173 121 43.0 4
Payment Services 298 279 266 6.8 12.0 809 743 8.9 20
Treasury and Corporate Support   536       564       469 (5.0 ) 14.3   1,647       1,447 13.8 37
 
Consolidated Company $ 1,471     $ 1,495     $ 1,468 (1.6 ) .2 $ 4,363     $ 4,380 (.4 ) 100 %
 
(a) preliminary data
 
 

Lines of Business

The Company’s major lines of business are Wholesale Banking and Commercial Real Estate, Consumer and Small Business Banking, Wealth Management and Securities Services, Payment Services, and Treasury and Corporate Support. These operating segments are components of the Company about which financial information is prepared and is evaluated regularly by management in deciding how to allocate resources and assess performance. Noninterest expenses incurred by centrally managed operations or business lines that directly support another business line’s operations are charged to the applicable business line based on its utilization of those services, primarily measured by the volume of customer activities, number of employees or other relevant factors. These allocated expenses are reported as net shared services expense within noninterest expense. Designations, assignments and allocations change from time to time as management systems are enhanced, methods of evaluating performance or product lines change or business segments are realigned to better respond to the Company’s diverse customer base. During 2014, certain organization and methodology changes were made and, accordingly, prior period results were restated and presented on a comparable basis.

Wholesale Banking and Commercial Real Estate offers lending, equipment finance and small-ticket leasing, depository services, treasury management, capital markets, international trade services and other financial services to middle market, large corporate, commercial real estate, financial institution, non-profit and public sector clients. Wholesale Banking and Commercial Real Estate contributed $267 million of the Company’s net income in the third quarter of 2014, compared with $324 million in the third quarter of 2013 and $279 million in the second quarter of 2014. Wholesale Banking and Commercial Real Estate’s net income decreased $57 million (17.6 percent) from the same quarter of 2013 due to a higher provision for credit losses and a decrease in total net revenue. Total net revenue declined by $18 million (2.3 percent), due to an 11.3 percent decrease in total noninterest income, partially offset by a 2.4 percent increase in net interest income. Net interest income increased $12 million (2.4 percent) year-over-year, primarily due to an increase in average total loans and deposits, partially offset by lower rates and fees on loans. Total noninterest income decreased by $30 million (11.3 percent), driven by lower wholesale transaction activity and loan-related fees, partially offset by increases in commercial leasing revenue and equity and bond underwriting fees. Total noninterest expense was relatively flat compared with a year ago, as an increase in the FDIC insurance assessment allocation based on the level of commitments, was offset by lower professional services expense and net shared services expense. The provision for credit losses was $70 million higher year-over-year due to an increase in net charge-offs and an unfavorable change in the reserve allocation.

Wholesale Banking and Commercial Real Estate’s contribution to net income in the third quarter of 2014 was $12 million (4.3 percent) lower than the second quarter of 2014, due to a decrease in total net revenue and an increase in the provision for credit losses, partially offset by a decrease in total noninterest expense. Total net revenue decreased by $17 million (2.2 percent) compared with the prior quarter. Total noninterest income decreased by $22 million (8.5 percent), driven by lower wholesale transaction activity, in part due to seasonally higher transaction volumes in the prior quarter, and lower equity investment revenue. Net interest income increased by $5 million (1.0 percent) on a linked quarter basis, primarily due to higher average loans and an additional day in the current quarter relative to the prior quarter, partially offset by lower loan rates. Total noninterest expense decreased by $13 million (4.1 percent) due to lower compensation and employee benefits expense and seasonally lower net shared services expense. The provision for credit losses increased by $14 million (93.3 percent) due to higher net charge-offs.

Consumer and Small Business Banking delivers products and services through banking offices, telephone servicing and sales, on-line services, direct mail, ATM processing and mobile devices, such as mobile phones and tablet computers. It encompasses community banking, metropolitan banking, in-store banking, small business banking, consumer lending, mortgage banking, workplace banking, student banking and 24-hour banking. Consumer and Small Business Banking contributed $307 million of the Company’s net income in the third quarter of 2014, a $66 million (17.7 percent) decrease from the third quarter of 2013 and a $9 million (2.8 percent) decrease from the prior quarter. Within Consumer and Small Business Banking, the retail banking division reported a 22.0 percent decrease in its contribution from the same quarter of last year, principally due to lower total net revenue and an increase in total noninterest expense. Retail banking’s total net revenue was 3.6 percent lower than the third quarter of 2013. Net interest income decreased 7.2 percent, primarily as a result of lower fees due to the wind down of the CAA product, lower rates on loans, and the impact of lower rates on the margin benefit from deposits, partially offset by higher average loan and deposit balances. Total noninterest income for the retail banking division increased 5.3 percent over a year ago, principally due to an increase in retail lease revenue and deposit service charges. Total noninterest expense for the retail banking division in the third quarter of 2014 increased 5.2 percent over the same quarter of the prior year, primarily due to merger integration and higher compensation and employee benefits expense, partially offset by lower FDIC insurance assessments. The provision for credit losses for the retail banking division decreased 19.1 percent on a year-over-year basis, due to lower net charge-offs, partially offset by an unfavorable change in the reserve allocation. The contribution of the mortgage banking division was lower by 11.6 percent than the third quarter of 2013, reflecting a decrease in total net revenue, partially offset by a reduction in the provision for credit losses. The division’s 15.7 percent decrease in total net revenue was due to a 21.3 percent decrease in total noninterest income, principally due to an unfavorable change in the valuation of MSRs, net of hedging activities, as well as a 4.8 percent decrease in net interest income, primarily the result of lower average loans held for sale. Total noninterest expense was 6.6 percent higher than the prior year, primarily due to mortgage servicing-related expenses, partially offset by lower incentive compensation. The $62 million favorable change in the provision for credit losses for the mortgage banking division was due to lower net charge-offs and a favorable change in the reserve allocation.

Consumer and Small Business Banking’s contribution in the third quarter of 2014 was $9 million (2.8 percent) lower than the second quarter of 2014, primarily due to an increase in total noninterest expense. Within Consumer and Small Business Banking, the retail banking division’s contribution decreased 6.6 percent, mainly due to an increase in total noninterest expense, partially offset by a decrease in the provision for credit losses. Total net revenue for the retail banking division decreased .9 percent compared with the previous quarter. Net interest income was 2.0 percent lower, primarily due to lower loan fees due to the wind down of the CAA product, partially offset by higher average loan and deposit balances and one additional day in the current quarter relative to the prior quarter. Total noninterest income was 1.7 percent higher on a linked quarter basis, driven by higher deposit service charges. Total noninterest expense increased 3.4 percent on a linked quarter basis due to merger integration expense. The provision for credit losses decreased 22.5 percent on a linked quarter basis due to lower net charge-offs and a favorable change in the reserve allocation in the current quarter. The contribution of the mortgage banking division increased 2.2 percent over the second quarter of 2014 primarily due to a lower provision for credit losses, partially offset by higher total noninterest expense. Total net revenue was relatively flat due to an 11.3 percent increase in net interest income, due to higher average loans held for sale, higher average loan balances, and an additional day in the quarter, offset by a 6.6 percent decrease in total noninterest income, due to an unfavorable change in the valuation of MSRs, net of hedging activities. Total noninterest expense increased 3.9 percent, primarily reflecting higher mortgage servicing-related expenses and higher compensation and employee benefits expense. The provision for credit losses for the mortgage banking division decreased $14 million on a linked quarter basis due to a decrease in net charge-offs and a favorable change in the reserve allocation.

Wealth Management and Securities Services provides private banking, financial advisory services, investment management, retail brokerage services, insurance, trust, custody and fund servicing through five businesses: Wealth Management, Corporate Trust Services, U.S. Bancorp Asset Management, Institutional Trust & Custody and Fund Services. Wealth Management and Securities Services contributed $63 million of the Company’s net income in the third quarter of 2014, compared with $36 million in the third quarter of 2013 and $57 million in the second quarter of 2014. The business line’s contribution was $27 million (75.0 percent) higher than the same quarter of 2013, as an increase in total net revenue was partially offset by higher total noninterest expense. Total net revenue increased by $52 million (13.1 percent) year-over-year, driven by a $38 million (12.1 percent) increase in total noninterest income, reflecting the impact of account growth, improved market conditions, and business expansion. In addition, net interest income increased by $14 million (17.1 percent), principally due to higher average loan and deposit balances and an increase in the margin benefit of corporate trust deposits. Total noninterest expense increased by $10 million (3.0 percent) primarily as a result of higher compensation and employee benefits expense, including the impact of business expansion, partially offset by lower net shared services expense. The provision for credit losses remained flat compared to the prior year quarter, as lower net charge-offs were offset by an unfavorable change in the reserve allocation.

The business line’s contribution in the third quarter of 2014 was $6 million (10.5 percent) higher than the prior quarter. Total net revenue increased on a linked quarter basis, reflecting an increase in net interest income (5.5 percent), principally due to higher average deposit balances and the impact of higher rates on the margin benefit from corporate trust deposits. In addition, an increase in total noninterest income (1.4 percent) was due to higher trust and investment management fees, resulting from improved market conditions and account growth, including business expansion. Total noninterest expense was relatively flat compared with the prior quarter, as higher compensation and professional services expenses were offset by lower employee benefits expense. The provision for credit losses remained flat on a linked quarter basis, as lower net charge-offs were offset by an unfavorable change in the reserve allocation.

Payment Services includes consumer and business credit cards, stored-value cards, debit cards, corporate and purchasing card services, consumer lines of credit and merchant processing. Payment Services contributed $298 million of the Company’s net income in the third quarter of 2014, compared with $266 million in the third quarter of 2013 and $279 million in the second quarter of 2014. The $32 million (12.0 percent) increase in the business line’s contribution from the prior year was due to an increase in total net revenue, partially offset by an increase in total noninterest expense and a higher provision for credit losses. Total net revenue increased by $69 million (5.7 percent) year-over-year. Net interest income increased by $49 million (12.5 percent), primarily due to higher average loan balances and fees and improved loan rates. Total noninterest income was $20 million (2.4 percent) higher year-over-year, due to higher merchant processing services revenue due to increased product fees and transaction volumes, partially offset by lower rates, and an increase in credit and debit card revenue on higher transaction volumes. Total noninterest expense increased by $3 million (.5 percent) over the third quarter of 2013, primarily due to higher compensation and employee benefits expense, including the impact of business initiatives, partially offset by reductions in technology and communications expense and other intangibles expense. The provision for credit losses increased by $18 million (10.5 percent) due to an unfavorable change in the reserve allocation, partially offset by lower net charge-offs.

Payment Services’ contribution in the third quarter of 2014 increased $19 million (6.8 percent) over the second quarter of 2014. Total net revenue increased $37 million (3.0 percent) on a linked quarter basis driven by higher net interest income and higher total noninterest income. Net interest income increased by $27 million (6.5 percent) over the second quarter mainly due to improved loan rates. Total noninterest income increased by $10 million (1.2 percent), primarily reflecting an increase in corporate payment products revenue on seasonally higher volumes, partially offset by a reduction in credit and debit card revenue due to higher rewards expense. Total noninterest expense was flat on a linked quarter basis as increased marketing expenses were offset by lower net shared services expense. The provision for credit losses was $8 million (4.4 percent) higher on a linked quarter basis due to an unfavorable change in the reserve allocation, partially offset by lower net charge-offs.

Treasury and Corporate Support includes the Company’s investment portfolios, most covered commercial and commercial real estate loans and related other real estate owned, funding, capital management, interest rate risk management, the net effect of transfer pricing related to average balances, income taxes not allocated to business lines, including most investments in tax-advantaged projects, and the residual aggregate of those expenses associated with corporate activities that are managed on a consolidated basis. Treasury and Corporate Support recorded net income of $536 million in the third quarter of 2014, compared with $469 million in the third quarter of 2013 and $564 million in the second quarter of 2014. Net interest income increased by $38 million (6.6 percent) over the third quarter of 2013, principally due to an increase in average balances in the investment securities portfolio and lower rates on short-term borrowings, partially offset by lower income from the run-off of acquired assets. Total noninterest income increased by $85 million over the third quarter of last year, mainly due to gains on sales of equity investments and higher commercial products revenue. Total noninterest expense decreased by $26 million (13.1 percent), principally due to a decrease in employee benefits expense resulting from lower pension costs and lower costs for investments in tax-advantaged projects related to a change in accounting for affordable housing investments in the first quarter of 2014, partially offset by increased compensation expense. The provision for credit losses was $9 million higher year-over-year, due to an unfavorable change in the reserve allocation and higher net charge-offs.

Net income in the third quarter of 2014 was $28 million (5.0 percent) lower on a linked quarter basis, driven by lower total net revenue, partially offset by lower total noninterest expense. Total net revenue was $214 million (21.9 percent) lower than the prior quarter, driven by a second quarter sale of Visa, Inc. Class B common stock. A $167 million (49.1 percent) decrease in total noninterest expense was primarily due to the FHA DOJ settlement and charitable contributions in the second quarter, partially offset by Charter One merger integration costs and seasonally higher costs related to investments in tax-advantaged projects. The provision for credit losses was $6 million higher compared with the second quarter of 2014 due to higher net charge-offs and an unfavorable change in the reserve allocation.

Additional schedules containing more detailed information about the Company’s business line results are available on the web at usbank.com or by calling Investor Relations at 612-303-4328.

On Wednesday, October 22, 2014, at 8:00 a.m. (CDT) Richard K. Davis, chairman, president and chief executive officer, and Andrew Cecere, vice chairman and chief financial officer, will host a conference call to review the financial results. The conference call will be available by telephone or on the Internet. A presentation will be used during the call and will be available on the Company’s website at www.usbank.com. 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 97474478. For those unable to participate during the live call, a recording of the call will be available approximately two hours after the conference call ends on Wednesday, October 22nd, and will run through Wednesday, October 29th, 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 97474478. 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 of the bottom of the page.

Minneapolis-based U.S. Bancorp (“USB”), with $391 billion in assets as of September 30, 2014, is the parent company of U.S. Bank National Association, the 5th largest commercial bank in the United States. The Company operates 3,177 banking offices in 25 states and 5,026 ATMs and provides a comprehensive line of banking, brokerage, insurance, investment, mortgage, trust and payment services products to consumers, businesses and institutions. Visit U.S. Bancorp on the web at 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 moderate 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. Continued stress in the commercial real estate markets, as well as a delay or failure of recovery in the residential real estate markets could cause additional 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; 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, residual value 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, 2013, 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,
  • Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented advanced approaches, and for additional information,
  • Tier 1 common equity to risk-weighted assets using Basel I definition.

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
Three Months Ended Nine Months Ended
(Dollars and Shares in Millions, Except Per Share Data) September 30,     September 30,
(Unaudited)     2014     2013     2014     2013
Interest Income
Loans $ 2,518 $ 2,568 $ 7,572 $ 7,682
Loans held for sale 36 46 87 172
Investment securities 476 420 1,378 1,222
Other interest income   27         34         89         141
Total interest income 3,057 3,068 9,126 9,217
Interest Expense
Deposits 115 134 348 433
Short-term borrowings 72 98 204 270
Long-term debt   178         178         543         587
Total interest expense   365         410         1,095         1,290
Net interest income 2,692 2,658 8,031 7,927
Provision for credit losses   311         298         941         1,063
Net interest income after provision for credit losses 2,381 2,360 7,090 6,864
Noninterest Income
Credit and debit card revenue 251 244 749 702
Corporate payment products revenue 195 192 550 540
Merchant processing services 387 371 1,127 1,091
ATM processing services 81 83 241 248
Trust and investment management fees 315 280 930 842
Deposit service charges 185 180 513 493
Treasury management fees 136 134 409 408
Commercial products revenue 209 207 635 616
Mortgage banking revenue 260 328 774 1,125
Investment products fees 49 46 142 133
Securities gains (losses), net (3 ) (3 ) 2 8
Other   177         115         722         412
Total noninterest income 2,242 2,177 6,794 6,618
Noninterest Expense
Compensation 1,132 1,088 3,372 3,268
Employee benefits 250 278 796 865
Net occupancy and equipment 249 240 739 709
Professional services 102 94 282 263
Marketing and business development 78 85 253 254
Technology and communications 219 214 644 639
Postage, printing and supplies 81 76 242 230
Other intangibles 51 55 148 167
Other   452         435         1,435         1,197
Total noninterest expense   2,614         2,565         7,911         7,592
Income before income taxes 2,009 1,972 5,973 5,890
Applicable income taxes   523         542         1,566         1,629
Net income 1,486 1,430 4,407 4,261
Net (income) loss attributable to noncontrolling interests   (15 )       38         (44 )       119
Net income attributable to U.S. Bancorp $ 1,471       $ 1,468       $ 4,363       $ 4,380
Net income applicable to U.S. Bancorp common shareholders $ 1,405       $ 1,400       $ 4,163       $ 4,163
 
Earnings per common share $ .78 $ .76 $ 2.30 $ 2.26
Diluted earnings per common share $ .78 $ .76 $ 2.29 $ 2.25
Dividends declared per common share $ .245 $ .230 $ .720 $ .655
Average common shares outstanding 1,798 1,832 1,809 1,844
Average diluted common shares outstanding       1,807         1,843         1,819         1,854
 
           
U.S. Bancorp
Consolidated Ending Balance Sheet
 
September 30, December 31, September 30,
(Dollars in Millions)     2014     2013     2013
Assets (Unaudited) (Unaudited)
Cash and due from banks $ 6,183 $ 8,477 $ 11,615
Investment securities
Held-to-maturity 44,231 38,920 36,904
Available-for-sale 52,674 40,935 39,307
Loans held for sale 3,939 3,268 3,858
Loans
Commercial 78,878 70,033 68,958
Commercial real estate 40,909 39,885 38,678
Residential mortgages 51,957 51,156 50,170
Credit card 17,858 18,021 17,063
Other retail   48,935         47,678         47,114  
Total loans, excluding covered loans 238,537 226,773 221,983
Covered loans   7,054         8,462         9,396  
Total loans 245,591 235,235 231,379
Less allowance for loan losses   (4,065 )       (4,250 )       (4,258 )
Net loans 241,526 230,985 227,121
Premises and equipment 2,608 2,606 2,608
Goodwill 9,401 9,205 9,173
Other intangible assets 3,338 3,529 3,455
Other assets   27,384         26,096         26,640  
Total assets $ 391,284       $ 364,021       $ 360,681  
 
Liabilities and Shareholders' Equity
Deposits
Noninterest-bearing $ 78,641 $ 76,941 $ 72,333
Interest-bearing 165,070 156,165 152,861
Time deposits greater than $100,000   29,386         29,017         36,522  
Total deposits 273,097 262,123 261,716
Short-term borrowings 30,045 27,608 26,128
Long-term debt 30,768 20,049 18,750
Other liabilities   13,545         12,434         12,535  
Total liabilities 347,455 322,214 319,129
Shareholders' equity
Preferred stock 4,756 4,756 4,756
Common stock 21 21 21
Capital surplus 8,293 8,216 8,188
Retained earnings 41,543 38,667 37,692
Less treasury stock (10,836 ) (9,476 ) (9,174 )
Accumulated other comprehensive income (loss)   (636 )       (1,071 )       (1,351 )
Total U.S. Bancorp shareholders' equity 43,141 41,113 40,132
Noncontrolling interests   688         694         1,420  
Total equity   43,829         41,807         41,552  
Total liabilities and equity     $ 391,284       $ 364,021       $ 360,681  
 
                   
U.S. Bancorp
Non-GAAP Financial Measures
 
September 30, June 30, March 31, December 31, September 30,
(Dollars in Millions, Unaudited)     2014       2014       2014       2013       2013  
Total equity $ 43,829 $ 43,386 $ 42,743 $ 41,807 $ 41,552
Preferred stock (4,756 ) (4,756 ) (4,756 ) (4,756 ) (4,756 )
Noncontrolling interests (688 ) (686 ) (689 ) (694 ) (1,420 )
Goodwill (net of deferred tax liability) (1) (8,503 ) (8,548 ) (8,352 ) (8,343 ) (8,319 )
Intangible assets, other than mortgage servicing rights   (877 )         (925 )         (804 )         (849 )         (878 )  
Tangible common equity (a) 29,005 28,471 28,142 27,165 26,179
 
Tangible common equity (as calculated above) 29,005 28,471 28,142 27,165 26,179
Adjustments (2)   187           224           239           224           258    

Common equity tier 1 capital estimated for the Basel III fully implemented standardized and advanced approaches (b)

29,192 28,695 28,381 27,389 26,437

Tier 1 capital, determined in accordance with prescribed regulatory requirements using Basel I definition

33,386 32,707
Preferred stock (4,756 ) (4,756 )

Noncontrolling interests, less preferred stock not eligible for Tier 1 capital

  (688 )         (686 )  
Tier 1 common equity using Basel I definition (c) 27,942 27,265
 
Total assets 391,284 389,065 371,289 364,021 360,681
Goodwill (net of deferred tax liability) (1) (8,503 ) (8,548 ) (8,352 ) (8,343 ) (8,319 )
Intangible assets, other than mortgage servicing rights   (877 )         (925 )         (804 )         (849 )         (878 )  
Tangible assets (d) 381,904 379,592 362,133 354,829 351,484
 

Risk-weighted assets, determined in accordance with prescribed regulatory requirements (3) (e)

311,914 * 309,929 302,841 297,919 293,155
Adjustments (4)   12,837   *       12,753           13,238           13,712           13,473    

Risk-weighted assets estimated for the Basel III fully implemented standardized approach (f)

324,751 * 322,682 316,079 311,631 306,628
 

Risk-weighted assets, determined in accordance with prescribed transitional advanced approaches regulatory requirements

243,905 * 241,929
Adjustments (5)   3,443   *       3,383  

Risk-weighted assets estimated for the Basel III fully implemented advanced approaches (g)

247,348 * 245,312
 
Ratios *
Tangible common equity to tangible assets (a)/(d) 7.6 % 7.5 % 7.8 % 7.7 % 7.4 %
Tangible common equity to risk-weighted assets (a)/(e) 9.3 9.2 9.3 9.1 8.9
Tier 1 common equity to risk-weighted assets using Basel I definition (c)/(e) -- -- -- 9.4 9.3

Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented standardized approach (b)/(f)

9.0 8.9 9.0 8.8 8.6

Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented advanced approaches (b)/(g)

      11.8           11.7                            
*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 beginning March 31, 2014.
(2) Includes net losses on cash flow hedges included in accumulated other comprehensive income and other adjustments.

(3) Beginning March 31, 2014, calculated under the Basel III transitional standardized approach; all other periods calculated under Basel I.

(4) Includes higher risk-weighting for unfunded loan commitments, investment securities, residential mortgages, mortgage servicing rights and other adjustments.
(5)Primarily reflects higher risk-weighting for mortgage servicing rights.
 

Source: U.S. Bancorp

U.S. Bancorp
Media:
Dana Ripley, 612-303-3167
or
Investors/Analysts:
Sean O'Connor, 612-303-0778

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Statements in this press release regarding U.S. Bancorp's business which are not historical facts are "forward-looking statements" that involve risks and uncertainties. For a discussion of such risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see "Risk Factors" in the Company's Annual Report or Form 10-K for the most recently ended fiscal year.



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