U.S. Bancorp Reports Record Earnings for the Second Quarter of 2013

U.S. Bancorp Reports Record Earnings for the Second Quarter of 2013

MINNEAPOLIS--(BUSINESS WIRE)-- U.S. Bancorp (NYSE: USB  ) today reported net income of $1,484 million for the second quarter of 2013, or $.76 per diluted common share. Earnings for the second quarter of 2013 were driven by a year-over-year reduction in noninterest expense and a lower provision for credit losses. Highlights for the second quarter of 2013 included:

  • Industry-leading performance ratios, including:
    • Return on average assets of 1.70 percent
    • Return on average common equity of 16.1 percent
    • Efficiency ratio of 51.7 percent
  • Strong new lending activity of $65.7 billion during the second quarter, including:
    • $37.6 billion of new and renewed commercial and commercial real estate commitments
    • $2.6 billion of lines related to new credit card accounts
    • $25.5 billion of mortgage and other retail loan originations
  • Growth in average total loans of 5.2 percent over the second quarter of 2012 (7.2 percent excluding covered loans) and 1.2 percent on a linked quarter basis (1.6 percent excluding covered loans)
    • Growth in average total commercial loans of 11.2 percent over the second quarter of 2012 and 2.2 percent over the first quarter of 2013
    • Growth in average total commercial real estate loans of 3.7 percent over the second quarter of 2012 and 1.8 percent over the first quarter of 2013
    • Growth in average commercial and commercial real estate commitments of 10.2 percent year-over-year and 2.2 percent over the prior quarter
  • Continued strong growth in average deposits of 7.0 percent over the second quarter of 2012
    • Average noninterest-bearing deposits growth of 3.6 percent and average total savings deposits growth of 13.1 percent year-over-year
    • Growth in average total savings deposits of 2.1 percent over the linked quarter, while noninterest-bearing deposits remained relatively stable with an increase of .7 percent
  • Lower net charge-offs on both a linked quarter and year-over-year basis. Provision for credit losses was $30 million less than net charge-offs
    • Net charge-offs were $41 million lower than the first quarter of 2013
    • Annualized net charge-offs to average total loans ratio declined to .70 percent
    • Allowance to period-end loans of 2.02 percent at June 30, 2013
  • Nonperforming assets declined on both a linked quarter and year-over-year basis
    • Nonperforming assets (excluding covered assets) decreased 5.3 percent from the first quarter of 2013
    • Allowance to nonperforming assets (excluding covered assets) was 231 percent at June 30, 2013, compared with 221 percent at March 31, 2013, and 210 percent at June 30, 2012
  • Capital generation continues to reinforce capital position. Ratios at June 30, 2013 were:
    • Tier 1 capital ratio of 11.1 percent
    • Total risk based capital ratio of 13.3 percent
    • Tier 1 common equity to risk-weighted assets ratio of 9.2 percent
    • Tier 1 common equity ratio of approximately 8.3 percent using proposed rules for the Basel III standardized approach released June 2012 and 8.6 percent estimated using final rules released July 2013
  • Returned 73 percent of second quarter earnings to shareholders through dividends and share buybacks
    • Repurchased 18 million shares of common stock during the second quarter
    • Annual dividend raised from $.78 to $.92, an 18 percent increase
                                   
EARNINGS SUMMARY                                 Table 1
($ in millions, except per-share data)           Percent   Percent      
Change Change
2Q 1Q 2Q 2Q13 vs 2Q13 vs YTD YTD Percent
2013   2013   2012   1Q13   2Q12   2013   2012   Change
 
Net income attributable to U.S. Bancorp $1,484 $1,428 $1,415 3.9 4.9 $2,912 $2,753 5.8
Diluted earnings per common share $.76 $.73 $.71 4.1 7.0 $1.49 $1.38 8.0
 
Return on average assets (%) 1.70 1.65 1.67 1.68 1.64
Return on average common equity (%) 16.1 16.0 16.5 16.1 16.3
Net interest margin (%) 3.43 3.48 3.58 3.46 3.59
Efficiency ratio (%) 51.7 50.7 51.1 51.2 51.5
Tangible efficiency ratio (%) (a) 50.6 49.6 49.8 50.1 50.1
 
Dividends declared per common share $.230 $.195 $.195 17.9 17.9 $.425 $.390 9.0
Book value per common share (period-end) $18.94 $18.71 $17.45 1.2 8.5
 

(a) 

Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding net securities gains (losses) and intangible amortization.

 

Net income attributable to U.S. Bancorp was $1,484 million for the second quarter of 2013, 4.9 percent higher than the $1,415 million for the second quarter of 2012, and 3.9 percent higher than the $1,428 million for the first quarter of 2013. Diluted earnings per common share of $.76 in the second quarter of 2013 were $.05 higher than the second quarter of 2012 and $.03 higher than the previous quarter. Return on average assets and return on average common equity were 1.70 percent and 16.1 percent, respectively, for the second quarter of 2013, compared with 1.67 percent and 16.5 percent, respectively, for the second quarter of 2012. The provision for credit losses was lower than net charge-offs by $30 million in the second quarter and first quarter of 2013 and $50 million lower in the second quarter of 2012.

U.S. Bancorp Chairman, President and Chief Executive Officer Richard K. Davis said, “Our Company earned record net income of $1,484 million in the second quarter, or $.76 per diluted common share. In addition, we achieved profitability metrics that remain among the very best in our industry, including a return on average assets of 1.70 percent, return on average common equity of 16.1 percent and an efficiency ratio of 51.7 percent. I take great pride in our Company’s ability to attain these record results, particularly given the current slow, albeit steady, growth we have seen in the markets we serve.

“The second quarter of each year is one of our Company’s strongest from a fee revenue growth perspective, and this year was no exception, as we experienced linked quarter growth in virtually all categories of fee income. We also experienced solid average loan and deposit growth year-over-year of 5.2 percent and 7.0 percent, respectively. Importantly, average total loans grew by 1.2 percent linked quarter, accelerating from the 1.0 percent linked quarter growth we experienced in the first quarter. Given early industry indicators, our linked quarter loan growth shows that we are continuing to gain market share. Average deposits increased by 1.0 percent over the first quarter - a rate fairly comparable to the growth in average loans. Commercial and commercial real estate utilization rates remain, however, fairly flat at approximately 25 percent.

“Credit quality remains strong, as the ratio of net charge-offs to average total loans fell to .70 percent this quarter from .79 percent in the prior quarter. Nonperforming assets declined by over 5 percent and late stage delinquencies also improved. Our provision for credit losses was $30 million less than net charge-offs for the quarter, reflecting the improvement in the credit metrics and overall quality of the Company’s loan portfolio.

“We continue to generate significant capital each quarter. At June 30th, the Company’s Tier 1 capital ratio was 11.1 percent, while the Tier 1 common equity ratio was 8.6 percent as estimated under the final Basel III rules released earlier this month. As anticipated, in June we announced an 18 percent increase in the dividend rate on our common stock, raising the rate to $.92 on an annualized basis. This higher dividend, combined with the repurchase of 18 million shares during the quarter, resulted in a 73 percent return of earnings to shareholders – in-line with our goal of returning 60-80 percent of our earnings to shareholders each year. The Company’s capital position remains strong and, importantly, has allowed us to return to a normal capital distribution mode.

“Last Friday, I had the privilege of joining a small group of our employees on stage at the NYSE to ring The Closing Bell in celebration of the 150th anniversary of the signing of our national bank charter. I want to thank employees who traveled to New York City to represent their co-workers as we commemorated this milestone, and also want to take this opportunity to thank all of our 66,000 employees whose hard work and dedication have contributed to the success of our Company. We have a rich 150 year heritage upon which we will build a very strong future for the benefit of our customers, our employees, our communities and our shareholders.”

                                 
INCOME STATEMENT HIGHLIGHTS                               Table 2
(Taxable-equivalent basis, $ in millions,         Percent   Percent      
except per-share data) Change Change
2Q 1Q 2Q 2Q13 vs 2Q13 vs YTD YTD Percent
2013   2013   2012   1Q13   2Q12   2013   2012   Change
 
Net interest income $2,672 $2,709 $2,713 (1.4 ) (1.5 ) $5,381 $5,403 (.4 )
Noninterest income 2,276   2,165   2,355 5.1 (3.4 ) 4,441   4,594 (3.3 )
Total net revenue 4,948 4,874 5,068 1.5 (2.4 ) 9,822 9,997 (1.8 )
Noninterest expense 2,557   2,470   2,601 3.5 (1.7 ) 5,027   5,161 (2.6 )
Income before provision and taxes 2,391 2,404 2,467 (.5 ) (3.1 ) 4,795 4,836 (.8 )
Provision for credit losses 362   403   470 (10.2 ) (23.0 ) 765   951 (19.6 )
Income before taxes 2,029 2,001 1,997 1.4 1.6 4,030 3,885 3.7
Taxable-equivalent adjustment 56 56 55 -- 1.8 112 111 .9
Applicable income taxes 529   558   564 (5.2 ) (6.2 ) 1,087   1,091 (.4 )
Net income 1,444 1,387 1,378 4.1 4.8 2,831 2,683 5.5
Net (income) loss attributable to
noncontrolling interests 40   41   37 (2.4 ) 8.1 81   70 15.7
Net income attributable to U.S. Bancorp $1,484   $1,428   $1,415 3.9 4.9 $2,912   $2,753 5.8
Net income applicable to U.S. Bancorp
common shareholders $1,405   $1,358   $1,345 3.5 4.5 $2,763   $2,630 5.1
Diluted earnings per common share $.76   $.73   $.71 4.1 7.0 $1.49   $1.38 8.0
                                       

Net income attributable to U.S. Bancorp for the second quarter of 2013 was $69 million (4.9 percent) higher than the second quarter of 2012, and $56 million (3.9 percent) higher than the first quarter of 2013. The increase in net income year-over-year was principally due to a reduction in noninterest expense and a lower provision for credit losses. On a linked quarter basis the increase in net income was due to growth in noninterest income and a reduction in the provision for credit losses.

Total net revenue on a taxable-equivalent basis for the second quarter of 2013 was $4,948 million; $120 million (2.4 percent) lower than the second quarter of 2012, reflecting a 1.5 percent decrease in net interest income and a 3.4 percent decrease in noninterest income. The decrease in net interest income year-over-year was the result of a decline in loan and investment portfolio rates, partially offset by higher average earning assets, continued growth in lower cost coredeposit funding and the positive impact from maturities of higher-rate long-term debt during 2012. Noninterest income decreased year-over-year, primarily due to lower mortgage banking revenue. Total net revenue on a taxable-equivalent basis was $74 million (1.5 percent) higher on a linked quarter basis due to a 5.1 percent increase in noninterest income driven by seasonally higher payments-related revenue and increases in the majority of other revenue categories, partially offset by a 1.4 percent decrease in net interest income, the result of declining loan and investment securities portfolio rates and lower average earning assets.

Total noninterest expense in the second quarter of 2013 was $2,557 million; $44 million (1.7 percent) lower than the second quarter of 2012 and $87 million (3.5 percent) higher than the first quarter of 2013. The decrease in total noninterest expense year-over-year was primarily the result of the impact of a second quarter 2012 accrual for the Company’s portion of an indemnification obligation associated with Visa Inc. (NYSE: V  ) litigation matters (“Visa accrual”) and lower professional services expense, partially offset by higher compensation and employee benefits expense. The increase in total noninterest expense on a linked quarter basis was primarily due to higher insurance and regulatory expense relative to the prior quarter and seasonally higher professional services and marketing and business development costs.

The Company’s provision for credit losses for the second quarter of 2013 was $362 million, $41 million lower than the prior quarter and $108 million lower than the second quarter of 2012. The provision for credit losses was lower than net charge-offs by $30 million in the second quarter and first quarter of 2013 and $50 million lower in the second quarter of 2012. Net charge-offs in the second quarter of 2013 were $392 million, compared with $433 million in the first quarter of 2013, and $520 million in the second quarter of 2012. Given current economic conditions, the Company expects the level of net charge-offs to be relatively stable in the third quarter of 2013.

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 $1,921 million at June 30, 2013, compared with $2,029 million at March 31, 2013, and $2,256 million at June 30, 2012. 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, total commercial and credit card loans. Covered nonperforming assets were $355 million at June 30, 2013, compared with $377 million at March 31, 2013, and $773 million at June 30, 2012. The ratio of the allowance for credit losses to period-end loans, including covered loans, was 2.02 percent at June 30, 2013, compared with 2.11 percent at March 31, 2013, and 2.25 percent at March 31, 2012. The Company expects total nonperforming assets to remain relatively stable in the third quarter of 2013.

                                 
NET INTEREST INCOME       Table 3
(Taxable-equivalent basis; $ in millions)
        Change   Change      
2Q 1Q 2Q 2Q13 vs 2Q13 vs YTD YTD
2013   2013   2012   1Q13   2Q12   2013   2012   Change
Components of net interest income
Income on earning assets $3,095 $3,168 $3,285 $(73 ) $(190 ) $6,263 $6,574 $(311 )
Expense on interest-bearing liabilities 423     459     572     (36 )   (149 )   882     1,171     (289 )
Net interest income $2,672     $2,709     $2,713     $(37 )   $(41 )   $5,381     $5,403     $(22 )
 
Average yields and rates paid
Earning assets yield 3.98 % 4.07 % 4.34 % (.09 )% (.36 )% 4.02 % 4.37 % (.35 )%
Rate paid on interest-bearing liabilities .74     .80     1.02     (.06 )   (.28 )   .77     1.04     (.27 )
Gross interest margin 3.24 %   3.27 %   3.32 %   (.03 )%   (.08 )%   3.25 %   3.33 %   (.08 )%
Net interest margin 3.43 %   3.48 %   3.58 %   (.05 )%   (.15 )%   3.46 %   3.59 %   (.13 )%
 
Average balances
Investment securities (a) $74,438 $73,467 $73,181 $971 $1,257 $73,955 $72,329 $1,626
Loans 225,186 222,421 214,069 2,765 11,117 223,811 212,115 11,696
Earning assets 311,927 313,992 303,754 (2,065 ) 8,173 312,954 301,899 11,055
Interest-bearing liabilities 229,419 232,186 226,229 (2,767 ) 3,190 230,795 225,771 5,024
 
(a) Excludes unrealized gain (loss)
 

Net Interest Income

Net interest income on a taxable-equivalent basis in the second quarter of 2013 was $2,672 million, a decrease of $41 million (1.5 percent) from the second quarter of 2012. The decrease was the result of lower loan and investment portfolio rates, partially offset by higher average earning assets, continued growth in lower cost coredeposit funding and the positive impact from maturities of higher-rate long-term debt during 2012. Average earning assets were $8.2 billion (2.7 percent) higher than the second quarter of 2012, driven by increases of $11.1 billion (5.2 percent) in average total loans and $1.3 billion (1.7 percent) in average investment securities, partially offset by decreases of $1.1 billion (14.4 percent) in average loans held for sale and $3.1 billion (34.3 percent) in other earning assets, principally due to the deconsolidation of certain community development and tax-advantaged investment variable interest entities (“VIEs”) during the current quarter. Net interest income decreased $37 million (1.4 percent) on a linked quarter basis, driven by a 5 basis point decline in the net interest margin and a $2.1 billion decrease in average earning assets, as growth in average loans was more than offset by declines in average loans held for sale and other earning assets. The net interest margin in the second quarter of 2013 was 3.43 percent, compared with 3.58 percent in the second quarter of 2012, and 3.48 percent in the first quarter of 2013. The decline in the net interest margin on a year-over-year and linked quarter basis primarily reflected lower rates on investment securities and loans. On a year-over-year basis, this impact was partially offset by lower rates on deposits and long-term debt.

                                 
AVERAGE LOANS                               Table 4
($ in millions)         Percent   Percent      
Change Change
2Q 1Q 2Q 2Q13 vs 2Q13 vs YTD YTD Percent
2013   2013   2012   1Q13   2Q12   2013   2012   Change
 
Commercial $61,507 $59,921 $54,362 2.6 13.1 $60,718 $52,836 14.9
Lease financing 5,255   5,378   5,658 (2.3 ) (7.1 ) 5,316   5,740 (7.4 )
Total commercial 66,762 65,299 60,020 2.2 11.2 66,034 58,576 12.7
 
Commercial mortgages 31,371 31,011 30,624 1.2 2.4 31,192 30,259 3.1
Construction and development 6,513   6,207   5,925 4.9 9.9 6,361   6,008 5.9
Total commercial real estate 37,884 37,218 36,549 1.8 3.7 37,553 36,267 3.5
 
Residential mortgages 46,873 45,109 39,166 3.9 19.7 45,996 38,498 19.5
 
Credit card 16,416 16,528 16,696 (.7 ) (1.7 ) 16,472 16,737 (1.6 )
 
Retail leasing 5,653 5,448 5,151 3.8 9.7 5,551 5,123 8.4
Home equity and second mortgages 15,989 16,434 17,598 (2.7 ) (9.1 ) 16,210 17,765 (8.8 )
Other 25,224   25,364   25,151 (.6 ) .3 25,294   25,027 1.1
Total other retail 46,866   47,246   47,900 (.8 ) (2.2 ) 47,055   47,915 (1.8 )
 
Total loans, excluding covered loans 214,801   211,400   200,331 1.6 7.2 213,110   197,993 7.6
 
Covered loans 10,385   11,021   13,738 (5.8 ) (24.4 ) 10,701   14,122 (24.2 )
 
Total loans $225,186   $222,421   $214,069 1.2 5.2 $223,811   $212,115 5.5
                                       

Average total loans were $11.1 billion (5.2 percent) higher in the second quarter of 2013 than the second quarter of 2012, driven by growth in residential mortgages (19.7 percent), commercial loans (13.1 percent), retail leasing (9.7 percent), total commercial real estate (3.7 percent) and other retail loans (.3 percent). These increases were partially offset by declines in home equity and second mortgages (9.1 percent), lease financing (7.1 percent), credit card loans (1.7 percent) and covered loans (24.4 percent). Average total loans, excluding covered loans, were higher by 7.2 percent year-over-year. Average total loans were $2.8 billion (1.2 percent) higher in the second quarter of 2013 than the first quarter of 2013, driven by increases in residential mortgages (3.9 percent), retail leasing (3.8 percent), commercial loans (2.6 percent) and total commercial real estate (1.8 percent), partially offset by decreases in home equity and second mortgages (2.7 percent), lease financing (2.3 percent), credit card loans (.7 percent), other retail loans (.6 percent) and covered loans (5.8 percent). Excluding covered loans, average total loans grew by 1.6 percent on a linked quarter basis.

Average investment securities in the second quarter of 2013 were $1.3 billion (1.7 percent) higher year-over-year and $1.0 billion (1.3 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.

                                 
AVERAGE DEPOSITS                               Table 5
($ in millions)         Percent   Percent      
Change Change
2Q 1Q 2Q 2Q13 vs 2Q13 vs YTD YTD Percent
2013   2013   2012   1Q13   2Q12   2013   2012   Change
 
Noninterest-bearing deposits $66,866 $66,400 $64,531 .7 3.6 $66,634 $64,057 4.0
Interest-bearing savings deposits
Interest checking 48,403 48,404 45,928 -- 5.4 48,404 46,693 3.7
Money market savings 55,368 53,096 44,456 4.3 24.5 54,238 45,191 20.0
Savings accounts 31,929   31,409   29,556 1.7 8.0 31,670   29,201 8.5
Total of savings deposits 135,700 132,909 119,940 2.1 13.1 134,312 121,085 10.9
Time certificates of deposit less
than $100,000 13,152 13,610 14,768 (3.4 ) (10.9 ) 13,380 14,862 (10.0 )
Time deposits greater than $100,000 31,667   32,099   32,062 (1.3 ) (1.2 ) 31,882   29,788 7.0
Total interest-bearing deposits 180,519   178,618   166,770 1.1 8.2 179,574   165,735 8.4
Total deposits $247,385   $245,018   $231,301 1.0 7.0 $246,208   $229,792 7.1
                                       

Average total deposits for the second quarter of 2013 were $16.1 billion (7.0 percent) higher than the second quarter of 2012. Average noninterest-bearing deposits increased $2.3 billion (3.6 percent) year-over-year, driven by growth in Consumer and Small Business Banking. Average total savings deposits were $15.8 billion (13.1 percent) higher year-over-year, the result of growth in Consumer and Small Business Banking, as well as in corporate trust and broker-dealer balances. Average time certificates of deposit less than $100,000 were $1.6 billion (10.9 percent) lower due to maturities, while time deposits greater than $100,000 were relatively stable, decreasing $.4 billion (1.2 percent). 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 $2.4 billion (1.0 percent) over the first quarter of 2013. Average noninterest-bearing deposits increased modestly by $.5 billion (.7 percent) on a linked quarter basis, mainly in Consumer and Small Business Banking. Average total savings deposits increased $2.8 billion (2.1 percent) due to higher Consumer and Small Business Banking, Wholesale Banking and Commercial Real Estate and corporate trust balances. Compared with the first quarter of 2013, average time certificates of deposit less than $100,000 and average time deposits greater than $100,000 were relatively stable, declining $.9 billion (1.9 percent).

                                 
NONINTEREST INCOME                               Table 6
($ in millions)         Percent   Percent      
Change Change
2Q 1Q 2Q 2Q13 vs 2Q13 vs YTD YTD Percent
2013   2013   2012   1Q13   2Q12   2013   2012   Change
 
Credit and debit card revenue $244 $214 $235 14.0 3.8 $458 $437 4.8
Corporate payment products revenue 176 172 190 2.3 (7.4 ) 348 365 (4.7 )
Merchant processing services 373 347 359 7.5 3.9 720 696 3.4
ATM processing services 83 82 89 1.2 (6.7 ) 165 176 (6.3 )
Trust and investment management fees 284 278 262 2.2 8.4 562 514 9.3
Deposit service charges 160 153 156 4.6 2.6 313 309 1.3
Treasury management fees 140 134 142 4.5 (1.4 ) 274 276 (.7 )
Commercial products revenue 209 200 216 4.5 (3.2 ) 409 427 (4.2 )
Mortgage banking revenue 396 401 490 (1.2 ) (19.2 ) 797 942 (15.4 )
Investment products fees 46 41 38 12.2 21.1 87 73 19.2
Securities gains (losses), net 6 5 (19 ) 20.0

nm  

11 (19 )

nm  

Other 159   138   197   15.2 (19.3 ) 297   398   (25.4 )
 
Total noninterest income $2,276   $2,165   $2,355   5.1 (3.4 ) $4,441   $4,594   (3.3 )
                                           

Noninterest Income

Second quarter noninterest income was $2,276 million; $79 million (3.4 percent) lower than the second quarter of 2012 and $111 million (5.1 percent) higher than the first quarter of 2013. The year-over-year decrease in noninterest income was principally due to a $94 million (19.2 percent) reduction in mortgage banking revenue due to lower origination and sales revenue. Credit and debit card revenue increased $9 million (3.8 percent) over the prior year due to higher volumes, including the impact of business expansion, partially offset by the impact of a credit recorded in the second quarter of 2012 related to the final expiration of debit card customer rewards. Merchant processing services revenue was $14 million (3.9 percent) higher as a result of an increase in product fees and higher volumes. Trust and investment management fees increased $22 million (8.4 percent) year-over-year, reflecting improved market conditions and business expansion, while investment products fees increased $8 million (21.1 percent) over the prior year, due to higher sales volumes and fees. In addition, the second quarter of 2013 included a $25 million favorable variance in net securities gains (losses), principally due to impairments recorded in the prior year on a number of money center bank securities following rating agency downgrades. In addition to lower mortgage banking revenue, offsetting these positive variances was a $14 million (7.4 percent) decline in corporate payment products revenue, the result of lower government and transportation-related transactions, and a $6 million (6.7 percent) decline in ATM processing services revenue due to lower volumes. Commercial products revenue was $7 million (3.2 percent) lower year-over-year, due to lower standby letters of credit, bond underwriting and syndication fees, partially offset by an increase in other capital markets revenue and commercial loan fees. In addition, other revenue declined by $38 million (19.3 percent), driven by lower equity investment and retail lease revenue.

Noninterest income was $111 million (5.1 percent) higher in the second quarter of 2013 than the first quarter of 2013, driven by seasonally higher payments-related revenue and linked quarter growth in the majority of the fee income categories. Credit and debit card revenue increased $30 million (14.0 percent), corporate payment products revenue increased $4 million (2.3 percent) and merchant processing revenue increased $26 million (7.5 percent) on a linked quarter basis, primarily due to seasonally higher transaction volumes. Trust and investment management fees increased $6 million (2.2 percent) over the first quarter of 2013 due to the impact of improved market conditions and account growth. Deposit service charges increased $7 million (4.6 percent) and treasury management fees increased $6 million (4.5 percent) over the prior quarter, principally due to seasonally higher transaction volumes. Commercial products revenue was $9 million (4.5 percent) higher due to an increase in syndication fees, other commercial loan fees and foreign exchange and other capital markets revenue, partially offset by lower bond underwriting fees. Investment products fees increased $5 million (12.2 percent) due to higher sales volumes and fees. In addition, other revenue increased $21 million (15.2 percent), including higher equity investment and other revenue, partially offset by lower retail lease revenue. Offsetting these positive variances was a $5 million (1.2 percent) decrease in mortgage banking revenue, as higher origination and sales revenue was offset by an unfavorable change in the valuation of mortgage servicing rights (“MSRs”), net of hedging activities.

                                 
NONINTEREST EXPENSE                               Table 7
($ in millions)         Percent   Percent      
Change Change
2Q 1Q 2Q 2Q13 vs 2Q13 vs YTD YTD Percent
2013   2013   2012   1Q13   2Q12   2013   2012   Change
 
Compensation $1,098 $1,082 $1,076 1.5 2.0 $2,180 $2,128 2.4
Employee benefits 277 310 229 (10.6 ) 21.0 587 489 20.0
Net occupancy and equipment 234 235 230 (.4 ) 1.7 469 450 4.2
Professional services 91 78 136 16.7 (33.1 ) 169 220 (23.2 )
Marketing and business development 96 73 80 31.5 20.0 169 189 (10.6 )
Technology and communications 214 211 201 1.4 6.5 425 402 5.7
Postage, printing and supplies 78 76 77 2.6 1.3 154 151 2.0
Other intangibles 55 57 70 (3.5 ) (21.4 ) 112 141 (20.6 )
Other 414   348   502 19.0 (17.5 ) 762   991 (23.1 )
 
Total noninterest expense $2,557   $2,470   $2,601 3.5 (1.7 ) $5,027   $5,161 (2.6 )
                                       

Noninterest Expense

Noninterest expense in the second quarter of 2013 totaled $2,557 million, a decrease of $44 million (1.7 percent) from the second quarter of 2012, and an $87 million (3.5 percent) increase over the first quarter of 2013. The decrease in total noninterest expense year-over-year was primarily the result of the impact of a second quarter 2012 Visa accrual and lower professional services expense, partially offset by higher compensation and employee benefits expense. Other expense decreased by $88 million (17.5 percent) due to the prior year Visa accrual, lower FDIC insurance expense and costs related to other real estate owned, partially offset by higher costs related to investments in affordable housing and other tax-advantaged projects. Professional services expense was $45 million (33.1 percent) lower than the same quarter of last year, due to a reduction in mortgage servicing review-related costs. Other intangible expense decreased $15 million (21.4 percent) year-over-year as a result of the reduction or completion of the amortization of certain intangibles. These reductions were partially offset by higher compensation and employee benefits expense of $22 million (2.0 percent) and $48 million (21.0 percent), respectively. The increase in compensation expense was primarily attributable to the growth in staffing for business initiatives and business expansion, in addition to merit increases. Employee benefits expense increased principally due to higher pension costs and staffing levels. Marketing and business development expense was $16 million (20.0 percent) higher year-over-year, primarily due to payments-related initiatives. Technology and communications expense was $13 million (6.5 percent) higher than last year, reflecting business expansion and technology projects.

Noninterest expense increased $87 million (3.5 percent) on a linked quarter basis. The majority of the variance was in other expense, which increased $66 million (19.0 percent) due to higher insurance and regulatory expense relative to the prior quarter, partially offset by lower costs related to other real estate owned. In addition, compensation expense was $16 million (1.5 percent) higher, primarily due the impact of merit increases. Professional services expense and marketing and business development expense increased $13 million (16.7 percent) and $23 million (31.5 percent) respectively, driven by the timing of projects and initiatives across a majority of the business lines. Partially offsetting these unfavorable variances was a $33 million (10.6 percent) decrease in employee benefits expense, which was largely due to seasonally lower payroll taxes.

Provision for Income Taxes

The provision for income taxes for the second quarter of 2013 resulted in a tax rate on a taxable-equivalent basis of 28.8 percent (effective tax rate of 26.8 percent), compared with 31.0 percent (effective tax rate of 29.0 percent) in the second quarter of 2012, and 30.7 percent (effective tax rate of 28.7 percent) in the first quarter of 2013.

                     
ALLOWANCE FOR CREDIT LOSSES               Table 8
($ in millions)   2Q   1Q   4Q   3Q   2Q
2013   2013   2012   2012   2012
 
Balance, beginning of period $4,708 $4,733 $4,771 $4,864 $4,919
 
Net charge-offs
Commercial 34 32 47 59 56
Lease financing 4     3   5     7     15  
Total commercial 38 35 52 66 71
Commercial mortgages 8 15 12 20 47
Construction and development (25 )   4   5     5     6  
Total commercial real estate (17 ) 19 17 25 53
 
Residential mortgages 74 92 96 121 109
 
Credit card 173 160 161 167 170
 
Retail leasing (1 ) 1 1 -- --
Home equity and second mortgages 58 73 75 89 63
Other 48     52   59     68     54  
Total other retail 105     126   135     157     117  
Total net charge-offs, excluding covered loans 373 432 461 536 520
Covered loans 19     1   7     2     --  
Total net charge-offs 392 433 468 538 520
Provision for credit losses 362 403 443 488 470
Net change for credit losses to be reimbursed by the FDIC (38 ) 5 (13 ) (10 ) (5 )
Other changes (a) (28 )   --   --     (33 )   --  
Balance, end of period $4,612     $4,708   $4,733     $4,771     $4,864  
 
Components

Allowance for loan losses, excluding losses to be reimbursed by the FDIC

$4,303 $4,343 $4,382 $4,426 $4,507

Allowance for credit losses to be reimbursed by the FDIC

9 47 42 55 65
Liability for unfunded credit commitments 300     318   309     290     292  
Total allowance for credit losses $4,612     $4,708   $4,733     $4,771     $4,864  
 
Gross charge-offs $506 $549 $576 $639 $631
Gross recoveries $114 $116 $108 $101 $111
 
Allowance for credit losses as a percentage of
Period-end loans, excluding covered loans 2.03 2.11 2.15 2.26 2.34
Nonperforming loans, excluding covered loans 287 274 269 244 247
Nonperforming assets, excluding covered assets 231 221 218 213 210
 
Period-end loans 2.02 2.11 2.12 2.19 2.25
Nonperforming loans 269 255 228 202 196
Nonperforming assets 203 196 177 168 161
 

(a) 

Second quarter 2013 amount represents reductions in the allowance for covered loans where the reversal of provision expense was offset by an associated decrease in the indemnification asset. Third quarter 2012 amount related to the sale of a credit card portfolio.

 

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. On a linked quarter basis, net charge-offs decreased $41 million (9.5 percent), and nonperforming assets, excluding covered assets, decreased $108 million (5.3 percent). The allowance for credit losses was $4,612 million at June 30, 2013, compared with $4,708 million at March 31, 2013, and $4,864 million at June 30, 2012. Total net charge-offs in the second quarter of 2013 were $392 million, compared with $433 million in the first quarter of 2013, and $520 million in the second quarter of 2012. The decrease in total net charge-offs on a linked quarter basis primarily reflected improvement in the commercial real estate portfolios, which recorded a net recovery in the current quarter, as well as improvement in the residential mortgages and home equity and second mortgages portfolios. The $128 million (24.6 percent) decline in net charge-offs year-over-year was primarily due to improvement in the commercial, commercial real estate and residential mortgages portfolios. The Company recorded $362 million of provision for credit losses, $30 million less than net charge-offs for the second quarter of 2013.

Commercial and commercial real estate loan net charge-offs decreased to $21 million (.08 percent of average loans outstanding) in the second quarter of 2013, compared with $54 million (.21 percent of average loans outstanding) in the first quarter of 2013, and $124 million (.52 percent of average loans outstanding) in the second quarter of 2012.

Residential mortgage loan net charge-offs were $74 million (.63 percent of average loans outstanding) in the second quarter of 2013, compared with $92 million (.83 percent of average loans outstanding) in the first quarter of 2013, and $109 million (1.12 percent of average loans outstanding) in the second quarter of 2012. Credit card loan net charge-offs were $173 million (4.23 percent of average loans outstanding) in the second quarter of 2013, compared with $160 million (3.93 percent of average loans outstanding) in the first quarter of 2013, and $170 million (4.10 percent of average loans outstanding) in the second quarter of 2012. Total other retail loan net charge-offs were $105 million (.90 percent of average loans outstanding) in the second quarter of 2013, compared with $126 million (1.08 percent of average loans outstanding) in the first quarter of 2013, and $117 million (.98 percent of average loans outstanding) in the second quarter of 2012.

The ratio of the allowance for credit losses to period-end loans was 2.02 percent (2.03 percent excluding covered loans) at June 30, 2013, compared with 2.11 percent (2.11 percent excluding covered loans) at March 31, 2013, and 2.25 percent (2.34 percent excluding covered loans) at June 30, 2012. The ratio of the allowance for credit losses to nonperforming loans was 269 percent (287 percent excluding covered loans) at June 30, 2013, compared with 255 percent (274 percent excluding covered loans) at March 31, 2013, and 196 percent (247 percent excluding covered loans) at June 30, 2012.

                             
CREDIT RATIOS                     Table 9
(Percent)   2Q     1Q     4Q     3Q     2Q
2013     2013     2012     2012     2012
Net charge-offs ratios (a)
Commercial .22 .22 .32 .41 .41
Lease financing .31 .23 .37 .50 1.07
Total commercial .23 .22 .32 .42 .48
 
Commercial mortgages .10 .20 .16 .26 .62
Construction and development (1.54 ) .26 .33 .33 .41
Total commercial real estate (.18 ) .21 .18 .27 .58
 
Residential mortgages .63 .83 .88 1.17 1.12
 
Credit card (b) 4.23 3.93 3.86 4.01 4.10
 
Retail leasing (.07 ) .07 .07 -- --
Home equity and second mortgages 1.45 1.80 1.76 2.04 1.44
Other .76 .83 .92 1.06 .86
Total other retail .90 1.08 1.12 1.30 .98
 
Total net charge-offs, excluding covered loans .70 .83 .88 1.04 1.04
 
Covered loans .73 .04 .24 .06 --
 
Total net charge-offs .70 .79 .85 .99 .98
 
Delinquent loan ratios - 90 days or more past due excluding nonperforming loans (c)
Commercial .09 .09 .09 .06 .07
Commercial real estate .03 .02 .02 .03 .03
Residential mortgages .53 .54 .64 .72 .80
Credit card 1.10 1.26 1.27 1.18 1.17
Other retail .16 .18 .20 .20 .19
Total loans, excluding covered loans .27 .29 .31 .31 .33
Covered loans 5.40 5.18 5.86 5.61 4.96
Total loans .49 .52 .59 .61 .61
 
Delinquent loan ratios - 90 days or more past due including nonperforming loans (c)
Commercial .24 .25 .27 .31 .38
Commercial real estate 1.13 1.38 1.50 1.75 1.92
Residential mortgages 1.96 2.01 2.14 2.52 2.46
Credit card 1.75 2.04 2.12 2.18 2.29
Other retail .63 .67 .66 .64 .57
Total loans, excluding covered loans .97 1.06 1.11 1.24 1.27
Covered loans 7.08 7.13 9.28 9.30 9.30
Total loans 1.24 1.35 1.52 1.69 1.76
 

(a) 

Annualized and calculated on average loan balances

(b) 

Net charge-offs as a percent of average loans outstanding, excluding portfolio purchases where the acquired loans were recorded at fair value at the purchase date were 4.23 percent for the second quarter of 2013, 4.00 percent for the first quarter of 2013, 4.00 percent for the fourth quarter of 2012, 4.17 percent for the third quarter of 2012 and 4.25 percent for the second quarter of 2012.

(c) 

Ratios are expressed as a percent of ending loan balances.

 
                     
ASSET QUALITY               Table 10
($ in millions)          
Jun 30 Mar 31 Dec 31 Sep 30 Jun 30
2013   2013   2012   2012   2012
Nonperforming loans
Commercial $91 $85 $107 $133 $172
Lease financing 14   16   16   19   23
Total commercial 105 101 123 152 195
 
Commercial mortgages 263 289 308 392 376
Construction and development 161   218   238   239   314
Total commercial real estate 424 507 546 631 690
 
Residential mortgages 685 673 661 757 660
Credit card 109 127 146 163 189
Other retail 222   228   217   210   182
Total nonperforming loans, excluding covered loans 1,545 1,636 1,693 1,913 1,916
 
Covered loans 168   209   386   449   570
Total nonperforming loans 1,713 1,845 2,079 2,362 2,486
 
Other real estate (a) 364 379 381 259 324
Covered other real estate (a) 187 168 197 198 203
Other nonperforming assets 12   14   14   16   16

 

 

 

 

Total nonperforming assets (b) $2,276   $2,406   $2,671   $2,835   $3,029
 
Total nonperforming assets, excluding covered assets $1,921   $2,029   $2,088   $2,188   $2,256
 
Accruing loans 90 days or more
past due, excluding covered loans $580   $609   $660   $644   $663
 
Accruing loans 90 days or more past due $1,119   $1,165   $1,323   $1,326   $1,315
 
Performing restructured loans, excluding GNMA
and covered loans $3,311   $3,318   $3,421   $3,387   $3,310
 
Performing restructured GNMA and covered loans $2,217   $2,294   $2,159   $2,002   $1,727
 
Nonperforming assets to loans
plus ORE, excluding covered assets (%) .88 .95 .98 1.06 1.11

 

Nonperforming assets to loans
plus ORE (%) 1.00 1.07 1.19 1.30 1.40
 

(a) 

Includes equity investments in entities whose only asset is other real estate owned.

(b) 

Does not include accruing loans 90 days or more past due or restructured loans that continue to accrue interest.

 

Nonperforming assets at June 30, 2013, totaled $2,276 million, compared with $2,406 million at March 31, 2013, and $3,029 million at June 30, 2012. Total nonperforming assets at June 30, 2013, included $355 million of covered assets. The ratio of nonperforming assets to loans and other real estate was 1.00 percent (.88 percent excluding covered assets) at June 30, 2013, compared with 1.07 percent (.95 percent excluding covered assets) at March 31, 2013, and 1.40 percent (1.11 percent excluding covered assets) at June 30, 2012. Commercial nonperforming assets were $90 million (46.2 percent) lower than a year ago, while remaining relatively stable on a linked quarter basis. Commercial mortgage and construction and development nonperforming assets declined by $266 million (38.6 percent) year-over-year and $83 million (16.4 percent) on a linked quarter basis. Credit card nonperforming assets were $80 million (42.3 percent) lower on a year-over-year basis and $18 million (14.2 percent) lower on a linked quarter basis. Residential mortgage nonperforming assets increased $25 million (3.8 percent) from the second quarter of 2012 and $12 million (1.8 percent) from the prior quarter. Other retail nonperforming assets increased $40 million (22.0 percent) year-over-year but decreased slightly (2.6 percent) on a linked quarter basis. Residential mortgage and other retail loan portfolios were impacted by the third quarter of 2012 regulatory clarification in the treatment of consumer borrowers who have had debt discharged through bankruptcy but continue to make payments on their loans.

Accruing loans 90 days or more past due were $1,119 million ($580 million excluding covered loans) at June 30, 2013, lower than the $1,165 million ($609 million excluding covered loans) at March 31, 2013, and the $1,315 million ($663 million excluding covered loans) at June 30, 2012.

                               
CAPITAL POSITION                     Table 11  
($ in millions)   Jun 30   Mar 31   Dec 31   Sep 30   Jun 30
2013     2013     2012     2012     2012
 
Total U.S. Bancorp shareholders' equity $39,683 $39,531 $38,998 $38,661 $37,792
Tier 1 capital 32,219 31,774 31,203 30,766 30,044
Total risk-based capital 38,378 38,099 37,780 37,559 36,429
 
Tier 1 capital ratio 11.1

 %

11.0

 %

10.8

 %

10.9

 %

10.7

 %

Total risk-based capital ratio 13.3 13.2 13.1 13.3 13.0
Leverage ratio 9.5 9.3 9.2 9.2 9.1
Tangible common equity to tangible assets 7.5 7.4 7.2 7.2 6.9
Tangible common equity to risk-weighted assets 8.9 8.8 8.6 8.8 8.5
Tier 1 common equity to risk-weighted assets
using Basel I definition 9.2 9.1 9.0 9.0 8.8
Tier 1 common equity to risk-weighted assets
approximated using proposed rules for the Basel III
standardized approach released June 2012 8.3 8.2 8.1 8.2 7.9
Tier 1 common equity to risk-weighted assets
estimated using final rules for the Basel III
standardized approach released July 2013 8.6 -- -- -- --
                               

Total U.S. Bancorp shareholders’ equity was $39.7 billion at June 30, 2013, compared with $39.5 billion at March 31, 2013, and $37.8 billion at June 30, 2012. On June 18, 2013, the Company announced an 18 percent increase in the dividend rate on common stock to $.92 on an annualized basis, or $.23 on a quarterly basis. During the second quarter, the Company returned 73 percent of second quarter earnings to shareholders, including $425 million in common stock dividends and $610 million of repurchased common stock. The Tier 1 capital ratio was 11.1 percent at June 30, 2013, compared with 11.0 percent at March 31, 2013, and 10.7 percent at June 30, 2012. The tangible common equity to tangible assets ratio was 7.5 percent at June 30, 2013, compared with 7.4 percent at March 31, 2013, and 6.9 percent at June 30, 2012. The Tier 1 common equity to risk-weighted assets ratio was 9.2 percent at June 30, 2013, compared with 9.1 percent at March 31, 2013, and 8.8 percent at June 30, 2012. All regulatory ratios continue to be in excess of “well-capitalized” requirements. The Tier 1 common equity to risk-weighted assets ratio using proposed rules for the Basel III standardized approach released June 2012 was approximately 8.3 percent at June 30, 2013, compared with 8.2 percent at March 31, 2013. The Tier 1 common equity to risk-weighted assets ratio estimated using final rules for the Basel III standardized approach released July 2013 was approximately 8.6 percent at June 30, 2013.

                     
COMMON SHARES               Table 12
(Millions)   2Q   1Q   4Q   3Q   2Q
2013   2013   2012   2012   2012
 
Beginning shares outstanding 1,858 1,869 1,880 1,892 1,901
Shares issued for stock option and stock purchase
plans, acquisitions and other corporate purposes 4 6 2 5 4
Shares repurchased (18 )   (17 )   (13 )   (17 )   (13 )
Ending shares outstanding 1,844     1,858     1,869     1,880     1,892  
                               
                           
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 2Q 2013
2Q 1Q 2Q 2Q13 vs 2Q13 vs YTD YTD Percent Earnings
Business Line   2013   2013   2012   1Q13   2Q12   2013   2012   Change   Composition  
Wholesale Banking and
Commercial Real Estate $323 $328 $328 (1.5 ) (1.5 ) $651 $659 (1.2 ) 22

 %

Consumer and Small Business
Banking 349 317 374 10.1 (6.7 ) 666 754 (11.7 ) 24
Wealth Management and
Securities Services 46 35 41 31.4 12.2 81 86 (5.8 ) 3
Payment Services 313 256 313 22.3 -- 569 566 .5 21
Treasury and Corporate Support 453   492   359 (7.9 ) 26.2 945   688 37.4 30
 
Consolidated Company $1,484   $1,428   $1,415 3.9 4.9 $2,912   $2,753 5.8 100

 %

 
(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 2013, 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 $323 million of the Company’s net income in the second quarter of 2013, compared with $328 million in the second quarter of 2012 and in the first quarter of 2013. Wholesale Banking and Commercial Real Estate’s net income decreased $5 million (1.5 percent) from the same quarter of 2012 due to lower total net revenue, partially offset by a lower provision for credit losses and a reduction in total noninterest expense. Total net revenue declined by $49 million (5.8 percent). Net interest income decreased modestly, $2 million (.4 percent) year-over-year, primarily due to 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 and higher loan fees. Total noninterest income decreased $47 million (14.7 percent), driven by lower commercial products revenue, including standby letters of credit fees, loan-related fees and bond underwriting fees, partially offset by higher loan syndication fees and other capital markets revenue. In addition, there was a year-over-year decline in equity investment revenue. Total noninterest expense decreased $10 million (3.1 percent) from a year ago, primarily due to lower costs related to other real estate owned and FDIC insurance expense. The provision for credit losses was $30 million lower year-over-year, due to lower net charge-offs, partially offset by an unfavorable change in the reserve allocation.

Wholesale Banking and Commercial Real Estate’s contribution to net income in the second quarter of 2013 was also $5 million (1.5 percent) lower than the first quarter of 2013. Total net revenue increased modestly, $2 million (.3 percent), compared with the prior quarter. Net interest income increased $8 million (1.6 percent) on a linked quarter basis, primarily due to increased average loan balances and higher loan fees, partially offset by lower loan rates and the impact of lower rates on the margin benefit from deposits. Total noninterest income decreased by $6 million (2.2 percent), primarily due to lower equity investment and trading account revenue and bond underwriting and loan-related fees, partially offset by higher loan syndication fees. Total noninterest expense decreased $4 million (1.3 percent) driven by lower costs related to other real estate owned. The provision for credit losses increased $15 million (33.3 percent) due to an unfavorable change in the reserve allocation, partially offset by lower 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 over 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 $349 million of the Company’s net income in the second quarter of 2013, a $25 million (6.7 percent) decrease from the second quarter of 2012, and a $32 million (10.1 percent) increase over the prior quarter. Within Consumer and Small Business Banking, the retail banking division reported a 1.8 percent decrease in its contribution from the same quarter of last year. Retail banking’s total net revenue was 4.8 percent lower than the second quarter of 2012. Net interest income decreased 3.5 percent, primarily due to lower loan rates 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 decreased 7.9 percent from a year ago, principally due to lower retail lease revenue. Total noninterest expense for the retail banking division in the second quarter of 2013 increased 1.0 percent from the same quarter of the prior year, largely due to increases in net shared services and marketing costs, partially offset by a reduction in FDIC insurance expense, costs related to other real estate owned and other intangibles expense. The provision for credit losses for the retail banking division decreased 38.0 percent on a year-over-year basis due to lower net charge-offs and a favorable change in the reserve allocation. The contribution of the mortgage banking division decreased 10.8 percent from the second quarter of 2012 due to a decrease in total net revenue, partially offset by a reduction in total noninterest expense and a lower provision for credit losses. The division’s 16.4 percent decrease in total net revenue was due to a 19.7 percent decrease in total noninterest income, driven by lower mortgage origination and sales revenue, and a 7.3 percent decrease in net interest income, primarily the result of lower average loans held for sale. Total noninterest expense was 15.6 percent lower, reflecting a reduction in mortgage servicing review-related professional services costs, partially offset by an increase in net shared services expense. The provision for credit losses for the mortgage banking division decreased 40.2 percent due to a favorable change in the reserve allocation and lower net charge-offs.

Consumer and Small Business Banking’s contribution in the second quarter of 2013 was $32 million (10.1 percent) higher than the first quarter of 2013, driven by a lower provision for credit losses. Within Consumer and Small Business Banking, the retail banking division’s contribution increased 57.5 percent. Total net revenue for the retail banking division was relatively flat with a .4 percent decrease from the previous quarter. Net interest income decreased by .3 percent due to lower loan rates and the impact of lower rates on the margin benefit from deposits, partially offset by higher average loan and deposit balances. Total noninterest income was .5 percent lower on a linked quarter basis, driven by lower retail lease revenue, partially offset by higher deposit service charges, reflecting seasonally higher transaction volumes. Total noninterest expense for the retail banking division was relatively flat on a linked quarter basis as higher marketing expense was offset by lower compensation and employee benefits expense, principally due to seasonally lower payroll taxes. The provision for credit losses decreased 45.4 percent on a linked quarter basis due to a favorable change in the reserve allocation and lower net-charge-offs. The contribution of the mortgage banking division decreased 13.7 percent from the first quarter of 2013 due to lower total net revenue and an increase in the provision for credit losses, partially offset by a decline in total noninterest expense. Total net revenue decreased 3.8 percent due to a 9.3 percent decline in net interest income, driven by lower average loans held for sale, and a 1.3 percent decrease in total noninterest income, primarily due to an unfavorable change in the valuation of MSRs, net of hedging activities, partially offset by an increase in origination and sales revenue. Total noninterest expense decreased 3.1 percent, driven by lower compensation and employee benefits expense and costs related to other real estate owned. The mortgage banking division’s provision for credit losses increased on a linked quarter basis, principally due to an unfavorable 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 $46 million of the Company’s net income in the second quarter of 2013, compared with $41 million in the second quarter of 2012 and $35 million in the first quarter of 2013. The business line’s contribution was $5 million (12.2 percent) higher compared to the same quarter of 2012 due to higher total net revenue, partially offset by an increase in total noninterest expense. Total net revenue increased by $40 million (11.1 percent) year-over-year, driven by a $32 million (11.5 percent) increase in total noninterest income, primarily due to the impact of improved market conditions, business expansion and higher investment products fees. Net interest income increased $8 million (9.6 percent), principally due to higher average deposit and loans balances, partially offset by the impact of lower rates on the margin benefit from deposits. Total noninterest expense increased by $33 million (11.2 percent) due to higher compensation and employee benefits expense and an increase in net shared services costs, including the impact of business expansion.

The business line’s contribution in the second quarter of 2013 was $11 million (31.4 percent) higher than the prior quarter. Total net revenue increased $15 million (3.9 percent) on a linked quarter basis, driven by improved market conditions and account growth, along with higher investment products fees, while total noninterest expense decreased $3 million (.9 percent) due to lower litigation-related costs, partially offset by an increase in compensation expense.

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 $313 million of the Company’s net income in the second quarter of 2013, equal to the $313 million for the same period of 2012, but higher than the $256 million in the first quarter of 2013. Total net revenue increased $23 million (1.9 percent) year-over-year. Net interest income increased $11 million (2.9 percent), primarily due to improved loan rates and lower rebate costs on the government card program. Total noninterest income increased $12 million (1.5 percent) year-over-year. Credit and debit card revenue was $9 million (3.8 percent) higher than the prior year, primarily the result of higher volumes, including the impact of business expansion, partially offset by the impact of a credit recorded in the second quarter of 2012 related to the final expiration of debit card customer rewards. Merchant processing services revenue grew by $14 million (3.9 percent) due to higher product fees and volumes. Total noninterest expense increased $37 million (7.6 percent) compared with the second quarter of 2012, primarily due to higher compensation and employee benefits expense and net shared services expense, including the impact of business expansion, and an increase in marketing expense, partially offset by a reduction in other intangibles expense. The provision for credit losses decreased $14 million (7.1 percent), principally due to a favorable change in the reserve allocation.

Payment Services’ contribution in the second quarter of 2013 was $57 million (22.3 percent) higher than the first quarter of 2013 due to an increase in total net revenue and a lower provision for credit losses, partially offset by an increase in total noninterest expense. Total net revenue increased by $80 million (7.0 percent) from the first quarter of 2013. Net interest income was flat on a linked quarter basis, while total noninterest income was $81 million (10.8 percent) higher than the first quarter of 2013. This increase was due to a 14.0 percent increase in credit and debit card revenue, a 2.3 percent increase in corporate payment products revenue and a 7.5 percent increase in merchant processing revenue, primarily due to seasonally higher transaction volumes. Total noninterest expense increased $11 million (2.1 percent) on a linked quarter basis, principally due to the timing of marketing and professional services projects. The provision for credit losses decreased $22 million (10.7 percent) primarily due to a change in the reserve allocation, partially offset by an increase in 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 tax advantaged investments 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 $453 million in the second quarter of 2013, compared with net income of $359 million in the second quarter of 2012 and net income of $492 million in the first quarter of 2013. Net interest income decreased $10 million (1.8 percent) from the second quarter of 2012, principally due to lower rates on the investment portfolio, partially offset by lower funding costs. Total noninterest income increased $53 million over the second quarter of last year, driven by a favorable variance in net securities gains (losses), principally due to impairments recorded in the prior year, and higher commercial products revenue. Total noninterest expense decreased by $73 million (27.0 percent), principally reflecting the prior year Visa accrual and a reduction in net shared services expense, partially offset by an increase in compensation and employee benefits expense and costs related to investments in affordable housing and other tax-advantaged projects. The provision for credit losses was $43 million higher than the second quarter of 2012, due to an increase in net charge-offs and an increase in the allowance allocation related to acquired loans.

Net income in the second quarter of 2013 was $39 million (7.9 percent) lower on a linked quarter basis due to higher total noninterest expense and an increase in the provision for credit losses. Total net revenue increased modestly on a linked quarter basis, as a $23 million (4.1 percent) decrease in net interest income, a result of lower rates on the investment portfolio, was more than offset by a $27 million (43.5 percent) increase in total noninterest income driven primarily by higher equity investment and trading account revenue. A $92 million (87.6 percent) increase in total noninterest expense primarily reflected higher insurance and regulatory expense relative to the prior quarter. The provision for credit losses was $33 million higher due to an increase in net charge-offs and an increase in the allowance allocation related to acquired loans.

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 612-303-0781.

On Wednesday, July 17, 2013, 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 91458345. 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, July 17th, and will run through Wednesday, July 24th, 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 91458345. 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 $353 billion in assets as of June 30, 2013, is the parent company of U.S. Bank National Association, the 5th largest commercial bank in the United States. The Company operates 3,087 banking offices in 25 states and 5,032 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. Global and domestic economies could fail to recover from the recent economic downturn or could experience another severe contraction, which 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; 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, interest rate risk and liquidity 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, 2012, 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 under the FDIC Improvement Act prompt corrective action provisions applicable to all banks, 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 using Basel I definition,
  • Tier 1 common equity to risk-weighted assets using Basel I definition,
  • Tier 1 common equity to risk-weighted assets approximated using proposed rules for the Basel III standardized approach released June 2012, and
  • Tier 1 common equity to risk-weighted assets estimated using final rules for the Basel III standardized approach released July 2013.

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 capital ratios defined by current banking regulations principally in that the numerator excludes trust preferred securities and 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 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 Six Months Ended
(Dollars and Shares in Millions, Except Per Share Data) June 30,     June 30,
(Unaudited)   2013  

2012 

    2013  

2012 

Interest Income
Loans $2,552 $2,631 $5,114 $5,269
Loans held for sale 54 67 126 132
Investment securities 392 470 802 938
Other interest income 40   60       107   121  
Total interest income 3,038 3,228 6,149 6,460
Interest Expense
Deposits 144 177 299 358
Short-term borrowings 87 127 172 250
Long-term debt 191   266       409   560  
Total interest expense 422   570       880   1,168  
Net interest income 2,616 2,658 5,269 5,292
Provision for credit losses 362   470       765   951  
Net interest income after provision for credit losses 2,254 2,188 4,504 4,341
Noninterest Income
Credit and debit card revenue 244 235 458 437
Corporate payment products revenue 176 190 348 365
Merchant processing services 373 359 720 696
ATM processing services 83 89 165 176
Trust and investment management fees 284 262 562 514
Deposit service charges 160 156 313 309
Treasury management fees 140 142 274 276
Commercial products revenue 209 216 409 427
Mortgage banking revenue 396 490 797 942
Investment products fees 46 38 87 73
Securities gains (losses), net 6 (19 ) 11 (19 )
Other 159   197       297   398  
Total noninterest income 2,276 2,355 4,441 4,594
Noninterest Expense
Compensation 1,098 1,076 2,180 2,128
Employee benefits 277 229 587 489
Net occupancy and equipment 234 230 469 450
Professional services 91 136 169 220
Marketing and business development 96 80 169 189
Technology and communications 214 201 425 402
Postage, printing and supplies 78 77 154 151
Other intangibles 55 70 112 141
Other 414   502       762   991  
Total noninterest expense 2,557   2,601       5,027   5,161  
Income before income taxes 1,973 1,942 3,918 3,774
Applicable income taxes 529   564       1,087   1,091  
Net income 1,444 1,378 2,831 2,683
Net (income) loss attributable to noncontrolling interests 40   37       81   70  
Net income attributable to U.S. Bancorp $1,484   $1,415       $2,912   $2,753  
Net income applicable to U.S. Bancorp common shareholders $1,405   $1,345       $2,763   $2,630  
 
Earnings per common share $.76 $.71 $1.49 $1.39
Diluted earnings per common share $.76 $.71 $1.49 $1.38
Dividends declared per common share $.230 $.195 $.425 $.390
Average common shares outstanding 1,843 1,888 1,851 1,895
Average diluted common shares outstanding   1,853   1,898       1,860   1,904  
 
     
U.S. Bancorp
Consolidated Ending Balance Sheet
 
June 30, December 31, June 30,
(Dollars in Millions)  

2013 

 

2012 

 

2012 

Assets (Unaudited) (Unaudited)
Cash and due from banks $6,618 $8,252 $15,403
Investment securities
Held-to-maturity 34,668 34,389 34,635
Available-for-sale 40,307 40,139 39,313
Loans held for sale 4,766 7,976 8,257
Loans
Commercial 68,185 66,223 61,534
Commercial real estate 38,298 36,953 36,557
Residential mortgages 47,753 44,018 39,920
Credit card 16,649 17,115 16,905
Other retail 47,105     47,712     48,035  
Total loans, excluding covered loans 217,990 212,021 202,951
Covered loans 9,985     11,308     13,137  
Total loans 227,975 223,329 216,088
Less allowance for loan losses (4,312 )   (4,424 )   (4,572 )
Net loans 223,663 218,905 211,516
Premises and equipment 2,622 2,670 2,638
Goodwill 9,156 9,143 8,934
Other intangible assets 3,287 2,706 2,712
Other assets 28,328     29,675     29,728  
Total assets $353,415     $353,855     $353,136  
 
Liabilities and Shareholders' Equity
Deposits
Noninterest-bearing $70,632 $74,172 $69,905
Interest-bearing 147,693 145,972 133,936
Time deposits greater than $100,000 33,243     29,039     37,475  
Total deposits 251,568 249,183 241,316
Short-term borrowings 26,179 26,302 30,684
Long-term debt 19,724 25,516 28,821
Other liabilities 14,894     12,587     13,441  
Total liabilities 312,365 313,588 314,262
Shareholders' equity
Preferred stock 4,756 4,769 4,769
Common stock 21 21 21
Capital surplus 8,167 8,201 8,176
Retained earnings 36,707 34,720 32,687
Less treasury stock (8,680 ) (7,790 ) (7,031 )
Accumulated other comprehensive income (loss) (1,288 )   (923 )   (830 )
Total U.S. Bancorp shareholders' equity 39,683 38,998 37,792
Noncontrolling interests 1,367     1,269     1,082  
Total equity 41,050     40,267     38,874  
Total liabilities and equity   $353,415     $353,855     $353,136  
 
         
U.S. Bancorp
Non-GAAP Financial Measures
 
June 30, March 31, December 31, September 30, June 30,
(Dollars in Millions, Unaudited)  

2013 

   

2013 

   

2012 

   

2012 

   

2012 

Total equity $41,050 $40,847 $40,267 $39,825 $38,874
Preferred stock (4,756 ) (4,769 ) (4,769 ) (4,769 ) (4,769 )
Noncontrolling interests (1,367 ) (1,316 ) (1,269 ) (1,164 ) (1,082 )
Goodwill (net of deferred tax liability) (8,317 ) (8,333 ) (8,351 ) (8,194 ) (8,205 )
Intangible assets, other than mortgage servicing rights   (910 )     (963 )     (1,006 )     (980 )     (1,118 )
Tangible common equity (a) 25,700 25,466 24,872 24,718 23,700
 

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

32,219 31,774 31,203 30,766 30,044
Preferred stock (4,756 ) (4,769 ) (4,769 ) (4,769 ) (4,769 )

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

  (685 )     (684 )     (685 )     (685 )     (685 )
Tier 1 common equity using Basel I definition (b) 26,778 26,321 25,749 25,312 24,590
 
Tangible common equity (as calculated above) 25,700 25,466 24,872 24,718 23,700
Adjustments (1)   (43 )     81       126       157       153  

Tier 1 common equity approximated using proposed rules for the Basel III standardized approach released June 2012 (c)

25,657 25,547 24,998 24,875 23,853
 
Tangible common equity (as calculated above) 25,700
Adjustments (2)   195  

Tier 1 common equity estimated using final rules for the Basel III standardized approach released July 2013 (d)

25,895
 
Total assets 353,415 355,447 353,855 352,253 353,136
Goodwill (net of deferred tax liability) (8,317 ) (8,333 ) (8,351 ) (8,194 ) (8,205 )
Intangible assets, other than mortgage servicing rights   (910 )     (963 )     (1,006 )     (980 )     (1,118 )
Tangible assets (e) 344,188 346,151 344,498 343,079 343,813
 

Risk-weighted assets, determined in accordance with prescribed regulatory requirements using Basel I definition (f)

289,613 * 289,672 287,611 282,033 279,972
Adjustments (3)   20,866   *   21,021       21,233       22,167       23,240  

Risk-weighted assets approximated using proposed rules for the Basel III standardized approach released June 2012 (g)

310,479 * 310,693 308,844 304,200 303,212
 

Risk-weighted assets, determined in accordance with prescribed regulatory requirements using Basel I definition

289,613 *
Adjustments (4)   12,476   *

Risk-weighted assets estimated using final rules for the Basel III standardized approach released July 2013 (h)

302,089 *
 
Ratios *
Tangible common equity to tangible assets (a)/(e) 7.5 % 7.4 % 7.2 % 7.2 % 6.9 %
Tangible common equity to risk-weighted assets using Basel I definition (a)/(f) 8.9 8.8 8.6 8.8 8.5
Tier 1 common equity to risk-weighted assets using Basel I definition (b)/(f) 9.2 9.1 9.0 9.0 8.8

Tier 1 common equity to risk-weighted assets approximated using proposed rules for the Basel III standardized approach released June 2012 (c)/(g)

8.3 8.2 8.1 8.2 7.9

Tier 1 common equity to risk-weighted assets estimated using final rules for the Basel III standardized approach released July 2013 (d)/(h)

  8.6       --       --       --       --  
 

Preliminary data. Subject to change prior to filings with applicable regulatory agencies.

(1) 

Includes net losses on cash flow hedges included in accumulated other comprehensive income, unrealized losses on securities transferred from available-for-sale to held-to-maturity included in accumulated other comprehensive income and disallowed mortgage servicing rights.

(2) 

Includes net losses on cash flow hedges included in accumulated other comprehensive income and unrealized losses on securities transferred from available-for-sale to held-to-maturity included in accumulated other comprehensive income.

(3) 

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

(4) 

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

 



U.S. Bancorp
Thomas Joyce
Media
(612) 303-3167
or
Judith T. Murphy
Investors/Analysts
(612) 303-0783

KEYWORDS:   United States  North America  Minnesota

INDUSTRY KEYWORDS:

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