U.S. Bancorp Reports Third Quarter 2018 Results

• Record net revenue of $5,699 million, record net income of $1,815 million and record diluted earnings per share of $1.06
• Industry leading return on average assets of 1.58% and return on average common equity of 15.5%

U.S. Bancorp USB:

3Q18 Key Financial Data

3Q18 Highlights

• Net income of $1,815 million and diluted earnings per common share of $1.06
• Industry leading return on average assets of 1.58% and return on average common equity of 15.5%
• Return on tangible common equity of 19.9%
• Returned 78% of 3Q earnings to shareholders through dividends and share buybacks
• Year-over-year positive operating leverage with net revenue increase of 2.4% and noninterest expense increase of 1.5%
• Net interest income grew 2.4% year-over-year (1.7% on a taxable-equivalent basis) and 1.7% linked quarter on both a reported and tax-equivalent basis
• Total noninterest income grew 3.3% year-over year
  • Payment services revenue grew 7.1%
  • Trust and investment management fees increased 8.2%
• Nonperforming assets decreased 19.7% on a year-over-year basis and 8.0% on a linked quarter basis

CEO Commentary

"Strong underlying momentum in each of our business lines drove record revenue, net income and EPS this quarter. We remain vigilant in our expense discipline while continuing to prudently invest in our core businesses as well as in our digital and payments capabilities. In the third quarter, we expanded our commercial banking presence, launched a new digital platform to serve our small business customers and acquired new capabilities in our payments business. At the same time, our focus on optimization allowed us to deliver positive operating leverage and a best-in-class efficiency ratio, while growing our industry leading return on tangible common equity ratio to 19.9%. I am thankful for our U.S. Bank team members who work every day to put the customer in the center with the goal of delivering outstanding results for each of our stakeholders."

— Andy Cecere, Chairman, President and CEO, U.S. Bancorp

In the Spotlight

Most Powerful Women in Banking and Finance
Three of our Vice Chairmen, Leslie Godridge, Corporate & Commercial Banking, Gunjan Kedia, Wealth Management and Investment Services and Kate Quinn, chief administrative officer at U.S. Bank, were honored by American Banker magazine among the "Most Powerful Women in Banking and Finance" for 2018.

Launch of Digital Small Business Lending
U.S. Bank has created a new, fully digital option for small businesses to apply for and receive a loan or line of credit. The entire process, from application to funding, can be completed same day, often within an hour or less, dramatically improving the experience for busy entrepreneurs.

Expansion of Commercial Banking Team
U.S. Bank has built a strong presence in the greater New York metropolitan area over the past 10 years, and has recently announced the expansion of its Commercial Banking team into this market, focusing on serving middle market clients in New York, New Jersey and Connecticut.

Meeting Customers' Short-Term Cash Needs
U.S. Bank recently launched a new small-dollar loan product called Simple Loan, designed to help customers deal with unexpected or short-term cash needs with a transparent, easy-to-understand installment loan. U.S. Bank worked closely with its regulators when developing this product and is the first national bank to offer this type of short-term loan solution.

Net income attributable to U.S. Bancorp was $1,815 million for the third quarter of 2018, which was 16.1 percent higher than the $1,563 million for the third quarter of 2017, and 3.7 percent higher than the $1,750 million for the second quarter of 2018. Diluted earnings per common share were $1.06 in the third quarter of 2018, compared with $0.88 in the third quarter of 2017 and $1.02 in the second quarter of 2018.

The increase in net income year-over-year was largely due to total net revenue growth of 2.4 percent partially offset by noninterest expense growth of 1.5 percent. Net interest income increased 2.4 percent (1.7 percent on a taxable-equivalent basis), mainly a result of the impact of rising interest rates, earning assets growth, and higher yields on reinvestment of securities, partially offset by higher rates on deposits and funding mix. Noninterest income increased 3.3 percent compared with a year ago, driven by strong growth in payment services revenue, trust and investment management fees, and other noninterest revenue, partially offset by decreases in mortgage banking revenue and commercial products revenue. Noninterest expense increased 1.5 percent primarily due to increased compensation expense related to supporting business growth and compliance programs, merit increases, and variable compensation related to revenue growth, higher employee benefits expense, and higher technology and communications expense in support of business growth. Partially offsetting these increases was lower other noninterest expense driven by lower costs related to tax-advantaged projects, lower FDIC insurance expense, a reduction in mortgage servicing costs, and lower pension related costs.

Net income increased on a linked quarter basis primarily due to total net revenue growth of 1.0 percent and a decrease in noninterest expense of 1.3 percent. The increase in total net revenue reflected an increase in net interest income of 1.7 percent due to the impact of rising interest rates, earning assets growth, and an additional day in the third quarter, partially offset by higher rates on deposits and funding mix. Noninterest income increased 0.2 percent driven by seasonally higher payment services revenue and deposit services charges, along with higher trust and investment management fees and other noninterest income. These increases were partially offset by decreases in commercial products revenue and mortgage banking revenue. The decrease in noninterest expense of 1.3 percent was primarily driven by lower other noninterest expense due to lower costs related to tax-advantaged projects driven by syndicating tax credits following tax reform and the change in accruals related to legal and insurance matters, as well as a reduction in compensation expense due to lower incentives and seasonally lower contract labor costs.

Net interest income on a taxable-equivalent basis in the third quarter of 2018 was $3,281 million, an increase of $54 million (1.7 percent) over the third quarter of 2017. The increase was principally driven by the impact of rising interest rates, earning assets growth, and higher yields on securities, partially offset by lower spread due to loan mix, higher rates on deposits and funding mix shift as well as the impact of tax reform which reduced the taxable-equivalent adjustment benefit related to tax exempt assets and higher interest recoveries in the prior year quarter. Average earning assets were $6.4 billion (1.6 percent) higher than the third quarter of 2017, reflecting increases of $3.4 billion (1.2 percent) in average total loans, $1.7 billion (1.5 percent) in average investment securities, and $2.0 billion (13.1 percent) in average other earning assets.

Net interest income on a taxable-equivalent basis increased $55 million (1.7 percent) on a linked quarter basis primarily driven by the impact of higher interest rates on assets, earning asset growth, and an additional day in the third quarter, partially offset by deposits and funding mix shift. Average earning assets were $2.5 billion (0.6 percent) higher on a linked quarter basis, reflecting increases of $2.4 billion (0.9 percent) in average total loans and $1.5 billion (9.6 percent) in average other earning assets. Average investment securities decreased $1.0 billion (0.9 percent).

The net interest margin in the third quarter of 2018 was 3.15 percent, compared with 3.14 percent in the third quarter of 2017 and 3.13 percent in the second quarter of 2018. The increase in the net interest margin year-over-year was primarily due to higher interest rates, partially offset by deposit and funding mix, lower loan spreads due to mix, and the impact of tax reform. The increase in net interest margin on a linked quarter basis was primarily due to the impact of higher rates on assets, partially offset by deposit and funding mix, as well as higher cash balances.

Average investment securities in the third quarter of 2018 increased $1.7 billion (1.5 percent) from the third quarter of 2017, due to purchases of U.S. Treasury, mortgage-backed and state and political securities, net of prepayments and maturities. Average investment securities decreased $1.0 billion (0.9 percent) from the second quarter of 2018 as a portion of the proceeds received on maturities of securities in the current quarter were not reinvested.

Average total loans were $3.4 billion (1.2 percent) higher than the third quarter of 2017 (1.8 percent excluding the impact of the second quarter of 2018 student loan portfolio sale). The increase was due to growth in residential mortgages (5.1 percent), total commercial loans (2.5 percent), credit card loans (4.1 percent), and retail leasing (8.0 percent). These increases were partially offset by a decrease in total commercial real estate loans (5.0 percent) due to disciplined underwriting and customers paying down balances over the past year. Loan growth was also impacted by continued run-off of the covered loans portfolio (17.7 percent) and the sale of the student loan portfolio in the second quarter of 2018. Average total loans were $2.4 billion (0.9 percent) higher than the second quarter of 2018 driven by growth in residential mortgages (2.0 percent), total commercial loans (0.7 percent), credit card loans (2.6 percent) and retail leasing (2.9 percent), partially offset by continued pay-offs of commercial real estate loans (0.8 percent) and run-off of covered loans (4.9 percent). At the end of the third quarter, approximately $1.3 billion of covered loans were transferred from the loan portfolio to loans held for sale.

Average total deposits for the third quarter of 2018 were $5.0 billion (1.5 percent) lower than the third quarter of 2017. Average noninterest-bearing deposits decreased $4.8 billion (5.8 percent) year-over-year primarily due to decreases in business deposits within Corporate and Commercial Banking and corporate trust balances within Wealth Management and Investment Services. Average total savings deposits were $1.9 billion (0.9 percent) lower year-over-year driven by decreases in Wealth Management and Investment Services and Corporate and Commercial Banking, partially offset by an increase in Consumer and Business Banking. Average time deposits were $1.7 billion (4.6 percent) higher than the prior year quarter. Changes in time deposits are largely related to those deposits managed as an alternative to other funding sources such as wholesale borrowing, based largely on relative pricing and liquidity characteristics.

Average total deposits decreased $4.7 billion (1.4 percent) from the second quarter of 2018. On a linked quarter basis, average noninterest-bearing deposits decreased $1.8 billion (2.3 percent) primarily due to decreases in Wealth Management and Investment Services and Corporate and Commercial Banking, partially offset by an increase in consumer balances within Consumer and Business Banking. Noninterest bearing deposit declines were primarily a result of business customers deploying deposit balances to support business growth, the migration of balances to alternative investment vehicles, and the change in deposit balances associated with the timing of receipt and distribution of funds in the corporate trust business.

Average total savings deposits decreased $3.5 billion (1.6 percent) on a linked quarter basis primarily due to decreases in Corporate and Commercial Banking as well as Wealth Management and Investment Services. The decline in Corporate and Commercial Banking savings balances reflects expected run-off related to the business merger of a large financial customer. The decline is expected to moderate in future quarters. Average time deposits, which are managed based on funding needs, relative pricing and liquidity characteristics, increased $548 million (1.5 percent). Time deposits are experiencing some growth as customers search for higher yield.

Third quarter noninterest income of $2,418 million was $78 million (3.3 percent) higher than the third quarter of 2017 led by strong growth in payment services revenue and trust and investment management fees. Other noninterest income also increased year-over-year primarily due to higher equity investment income and tax-advantaged syndication revenue. These increases were partially offset by lower mortgage banking revenue and commercial products revenue, which were impacted by industry trends in these revenue categories. Payment services revenue increased $60 million (7.1 percent) due to higher credit and debit card revenue of $26 million (8.2 percent), an increase in corporate payment products revenue of $19 million (12.7 percent), and higher merchant processing services of $15 million (4.0 percent) all driven by higher sales volumes. Trust and investment management fees increased $31 million (8.2 percent) due to business growth and favorable market conditions. The decrease in mortgage banking revenue of $39 million (18.3 percent) was primarily due to lower mortgage production and the adverse impact on gain on sale margins due to excess capacity in the industry in the near term. Commercial products revenue decreased $24 million (10.0 percent) primarily due to lower corporate bond underwriting fees and loan syndication fees.

Noninterest income was $4 million (0.2 percent) higher in the third quarter of 2018 compared with the second quarter of 2018 reflecting higher payment services revenue as corporate payment products revenue grew $11 million (7.0 percent) due to seasonally higher sales volumes and merchant processing services increased $5 million (1.3 percent) primarily due to seasonally higher fee revenue, partially offset by a seasonal decrease of $7 million (2.0 percent) in credit and debit card revenue. Deposit service charges increased $15 million (8.2 percent) as a result of seasonally higher incidence rates and other noninterest income increased $19 million (9.2 percent) primarily due to higher equity investment income and tax-advantaged syndication revenue. Partially offsetting these increases were a decrease in commercial products revenue of $18 million (7.7 percent) due mainly to lower corporate bond underwriting fees and a decrease in mortgage banking revenue of $17 million (8.9 percent) driven by an unfavorable change in the valuation of mortgage servicing rights, net of hedging activities.

Third quarter noninterest expense of $3,044 million was $46 million (1.5 percent) higher than the third quarter of 2017 primarily due to higher personnel costs and technology investment, partially offset by lower other noninterest expense. Compensation expense increased $89 million (6.2 percent) principally due to the impact of hiring to support business growth and compliance programs, merit increases, and higher variable compensation related to business production. Employee benefits expense increased $26 million (9.7 percent) primarily driven by increased medical costs and staffing. Other noninterest expense decreased $106 million (21.9 percent) due to lower costs related to tax-advantaged projects, lower FDIC insurance expense, a reduction in mortgage servicing costs, and lower pension related costs.

Noninterest expense decreased $41 million (1.3 percent) on a linked quarter basis primarily due to a reduction in compensation expense including lower incentives and a seasonal decline in contract labor costs as well as lower other noninterest expense as a result of lower costs related to tax-advantaged projects driven by syndicating tax credits following tax reform and the change in accruals related to legal and insurance matters.

Provision for Income Taxes

The provision for income taxes for the third quarter of 2018 resulted in a tax rate of 21.2 percent on a taxable-equivalent basis (effective tax rate of 20.2 percent), compared with 29.0 percent (effective tax rate of 27.3 percent) in the third quarter of 2017, and 21.1 percent on a taxable-equivalent basis (effective tax rate of 20.1 percent) in the second quarter of 2018. The lower 2018 tax rates reflect the tax reform legislation enacted during the fourth quarter of 2017.

Credit quality was relatively stable on a linked quarter and year-over-year basis. The Company's provision for credit losses for the third quarter of 2018 was $343 million, which was $16 million (4.9 percent) higher than the prior quarter and $17 million (4.7 percent) lower than the third quarter of 2017.

Total net charge-offs in the third quarter of 2018 were $328 million, compared with $332 million in the second quarter of 2018, and $330 million in the third quarter of 2017. Net charge-offs decreased $4 million (1.2 percent) compared with the second quarter of 2018 mainly due to lower total commercial real estate net charge-offs, partially offset by higher total commercial net charge-offs. Net charge-offs decreased $2 million (0.6 percent) compared with the third quarter of 2017 primarily due to lower total commercial net charge-offs and lower residential mortgage net charge-offs mostly offset by higher credit card net charge-offs. The net charge-off ratio was 0.46 percent in the third quarter of 2018, compared with 0.48 percent in the second quarter of 2018 and 0.47 percent in the third quarter of 2017.

The allowance for credit losses was $4,426 million at September 30, 2018, compared with $4,411 million at June 30, 2018, and $4,407 million at September 30, 2017. The ratio of the allowance for credit losses to period-end loans was 1.57 percent at September 30, 2018, and at June 30, 2018, compared with 1.58 percent at September 30, 2017. The ratio of the allowance for credit losses to nonperforming loans was 544 percent at September 30, 2018, compared with 484 percent at June 30, 2018, and 426 percent at September 30, 2017.

Nonperforming assets were $1,004 million at September 30, 2018, compared with $1,091 million at June 30, 2018, and $1,251 million at September 30, 2017. The ratio of nonperforming assets to loans and other real estate was 0.36 percent at September 30, 2018, compared with 0.39 percent at June 30, 2018, and 0.45 percent at September 30, 2017. The year-over-year decrease in nonperforming assets was driven by improvements in nonperforming residential mortgages, total commercial loans, and other real estate owned, partially offset by increases in nonperforming other retail loans and other nonperforming assets. Accruing loans 90 days or more past due were $551 million at September 30, 2018, compared with $640 million at June 30, 2018, and $649 million at September 30, 2017.

Total U.S. Bancorp shareholders' equity was $50.4 billion at September 30, 2018, compared with $49.6 billion at June 30, 2018, and $48.7 billion at September 30, 2017. During the third quarter, the Company returned 78 percent of earnings to shareholders through dividends and share buybacks.

All regulatory ratios continue to be in excess of "well-capitalized" requirements. The common equity tier 1 capital to risk-weighted assets ratio using the Basel III standardized approach was 9.0 percent at September 30, 2018, compared with 9.1 percent at June 30, 2018, and 9.6 percent at September 30, 2017. The common equity tier 1 capital to risk-weighted assets ratio using the Basel III advanced approaches method was 11.8 percent at September 30, 2018, compared with 11.6 percent at June 30, 2018, and 12.1 percent at September 30, 2017.

Investor Conference Call

On Wednesday, October 17, 2018, at 8:00 a.m. CDT, Andy Cecere, chairman, president and chief executive officer, and Terry Dolan, vice chairman and chief financial officer, will host a conference call to review the financial results. The conference call will be available online or by telephone. To access the webcast and presentation, visit U.S. Bancorp's website at usbank.com and click on "About US", "Investor Relations" and "Webcasts & Presentations." 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 7338239. For those unable to participate during the live call, a recording will be available at approximately 11:00 a.m. CDT on Wednesday, October 17 and will be accessible until Wednesday, October 24 at 11:00 p.m. CDT. To access the recorded message within the United States and Canada, please dial 855-859-2056. If calling from outside the United States and Canada, please dial 404-537-3406 to access the recording. The conference ID is 7338239.

About U.S. Bancorp

U.S. Bancorp, with 74,000 employees and $465 billion in assets as of September 30, 2018, is the parent company of U.S. Bank, the fifth-largest commercial bank in the United States. The Minneapolis-based bank blends its relationship teams, branches and ATM network with mobile and online tools that allow customers to bank how, when and where they prefer. U.S. Bank is committed to serving its millions of retail, business, wealth management, payment, commercial and corporate, and investment services customers across the country and around the world as a trusted financial partner, a commitment recognized by the Ethisphere Institute naming the bank a 2018 World's Most Ethical Company. Visit U.S. Bank at www.usbank.com or follow on social media to stay up to date with company news.

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. Deterioration in general business and economic conditions or turbulence in domestic or global financial markets could adversely affect U.S. Bancorp's revenues and the values of its assets and liabilities, reduce the availability of funding to certain financial institutions, lead to a tightening of credit, and increase stock price volatility. Stress in the commercial real estate markets, as well as a downturn in the residential real estate markets, could cause credit losses and deterioration in asset values. In addition, changes to statutes, regulations, or regulatory policies or practices could affect U.S. Bancorp in substantial and unpredictable ways. U.S. Bancorp's results could also be adversely affected by 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 its investment securities; legal and regulatory developments; litigation; increased competition from both banks and non-banks; changes in customer behavior and preferences; breaches in data security; effects of mergers and acquisitions and related integration; effects of critical accounting policies and judgments; and management's ability to effectively manage credit risk, market risk, operational risk, compliance risk, strategic risk, interest rate risk, liquidity risk and reputational risk.

For discussion of these and other risks that may cause actual results to differ from expectations, refer to U.S. Bancorp's Annual Report on Form 10-K for the year ended December 31, 2017, on file with the Securities and Exchange Commission, including the sections entitled "Corporate Risk Profile" and "Risk Factors" 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
• Return on tangible common equity

These capital measures are viewed by management as useful additional methods of evaluating the Company's utilization of its capital held and the level of capital available to withstand unexpected negative market or economic conditions. Additionally, presentation of these measures allows investors, analysts and banking regulators to assess the Company's capital position relative to other financial services companies. These capital measures are not defined in generally accepted accounting principles ("GAAP"), or are not defined in banking regulations. As a result, these capital measures disclosed by the Company may be considered non-GAAP financial measures. In addition, certain capital measures related to prior periods are presented on the same basis as those capital measures in the current period. The effective capital ratios defined by banking regulations for these periods were subject to certain transitional provisions. Management believes this information helps investors assess trends in the Company's capital adequacy.

The Company also discloses net interest income and related ratios and analysis on a taxable-equivalent basis, which may also be considered non-GAAP financial measures. The Company believes this presentation to be the preferred industry measurement of net interest income as it provides a relevant comparison of net interest income arising from taxable and tax-exempt sources. In addition, certain performance measures, including the efficiency ratio and net interest margin utilize net interest income on a taxable-equivalent basis.

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.