OREANDA-NEWS. U.S. Bancorp's (USB) first quarter 2016 (1Q16) earnings continued to be strong and near the top of the industry despite some higher provision expenses related to the company's energy loan portfolio, which Fitch Ratings notes represents only 1.3% of the company's total loans outstanding.

Overall, USB's annualized return on average assets (ROAA) was a good 1.32% in 1Q16, though down from 1.41% in the sequential quarter and 1.44% relative to the year-ago quarter. Similarly, the company's annualized return on average equity (ROAE) was 13.0% in 1Q16, down from 13.7% in the sequential quarter and 14.1% in the year-ago quarter.

While USB's earnings performance continues to remain strong the sequential and year-over-year declines were due largely to higher provision expense to the company's energy related credits. Provision for credit losses was $330 million in 1Q16, which was $15 million more than net charge-offs (NCOs).

Additionally, provisioning was 8.2% higher than in the sequential quarter and 25.0% higher than in the year-ago quarter primarily due to a $257 million increase in energy-related commercial non-performing assets relative to the sequential quarter. USB's reserves for energy related credits were 9.1% of outstanding balances at the end of 1Q16, up from 5.4% at year-end 2015 (YE15).

Given the strong reserve and the relatively small percentage of the overall loan portfolio related to energy, Fitch considers USB's energy exposure to likely be manageable should energy prices remain volatile, though it could potentially continue to impact provision expenses, and therefore earnings.

In 1Q16, USB's net interest income (NII) increased 0.6% from the sequential quarter and 4.9% from the year-ago quarter due largely to higher loan balances and a benefit from incrementally higher interest rates.

Additionally, the company's net interest margin (NIM) remained relatively stable at 3.06%, unchanged from the sequential quarter and down just two basis points from the year-ago quarter.

USB's non-interest income was down 8.2% from the sequential quarter and essentially flat from the year ago quarter. The sequential declines were due largely to seasonally lower credit and debit care revenues, merchant processing services revenue, and deposit service charges. Additionally, mortgage banking revenue was down relative to the sequential quarter due to an unfavorable change in the valuation of mortgage servicing rights.

Overall, non-interest expenses were down 2.1% relative to the sequential quarter due to lower professional services and marketing and business development expenses partially offset by higher compensation and benefits expenses. Relative to the year-ago quarter non-interest expenses were up 3.2%.

It is surprising that USB did not achieve positive operating leverage relative to either the sequential or year-ago quarters, as benefits from higher rates were offset by some continued loan portfolio mix changes. Nevertheless, the company's efficiency ratio remains strong and near industry leaders at 54.6% in 1Q16.

Credit quality was impacted by the energy related credits noted above, though USB's ratio of non-performing assets to loans plus other real estate owned (OREO; excluding covered assets) was still good at 0.64 in 1Q16, up from 0.58 in the sequential, but down from 0.68 in the year-ago quarter.

USB has continued to exhibit good loan growth, with average loans (excluding covered loans) up 2.3% relative to the sequential quarter and 6.2% relative to the year-ago quarter. The growth was generally broad based including higher commercial loan balances, higher construction and development loan balances, and higher credit card receivables which were aided by the closing of a small acquisition.

In 1Q16, USB's Basel III Common Equity Tier 1 (CET1) ratio was relatively unchanged both under the standardized and advanced approaches. The fully phased-in Basel III CET1 ratio under the standardized approach was 9.2% and under the advanced approach was 11.9%.

Given USB's outstanding capital generation, it continues to return capital to owners through both share buybacks and dividends. In 1Q16, the company returned 80% of earnings to owners.