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U.S. Bancorp (USB - Analyst Report) has yet again delivered an encouraging earnings performance in third-quarter 2013. Aided by reduced non-interest expenses and a lower provision for credit losses, the company reported earnings per share of 76 cents, up from 74 cents reported in the year-ago period. However, results came in line with the Zacks Consensus Estimate.

Net income attributable to U.S. Bancorp was $1.47 billion in the quarter, down 0.4% year over year.

U.S. Bancorp’s net revenue came in at around $4.89 billion in the quarter, down 5.6% year over year and also lagged the Zacks Consensus Estimate of $4.93 billion. Results were primarily impacted by decreases in net interest and non-interest income.

Performance in Detail

U.S. Bancorp’s tax-equivalent net interest income stood at $2.7 billion in the quarter, reflecting a 2.5% fall from the comparable last-year quarter. The dip was mainly due to reduced loan and investment portfolio rates, partially mitigated by elevated average earning assets, persistent growth in lower cost core deposit funding along with the positive impact from maturities of higher-rate long-term debt.

U.S. Bancorp’s non-interest income moved down 9.1% year over year to $2.2 billion. Reduced mortgage banking revenues and lower origination and sales revenues led to this decline. These decreases were partially offset by higher credit and debit card revenues, increased trust and investment management fees and elevated investment products fees.

Average earning assets were up 2.0% year over year, driven by growth in average total loans and average investment securities. Moreover, net interest margin of 3.43% fell 16 basis points (bps) year over year and mainly reflected reduced rates on investment securities and loans, partly mitigated by lower rates on deposits and reduced higher cost long-term debt.

U.S. Bancorp’s average total loans climbed 5.7% year over year to $229.4 billion, owing to growth in commercial loans, residential mortgages, total commercial real estate, retail leasing, credit card and other retail loans. These increases were partially offset by a drop in home equity and second mortgages, lease financing and covered loans. Excluding covered loans, average total loans rose 7.5% year over year.

Average total deposits were up 5.5% from the prior-year quarter to $252.4 billion, primarily reflecting growth in non-interest-bearing deposits, savings deposits as well as interest-bearing deposits.

Non-interest expense declined 1.7% year over year to $2.6 billion at U.S. Bancorp. Reduced professional services expense along with lower marketing and business development costs mainly resulted in the year-over-year decrease in non-interest expense. These positives were partially offset by higher employee benefits expense.

Credit Quality

Credit metrics improved at U.S. Bancorp in the reported quarter. Net charge-offs (excluding covered loans) stood at $320 million, down 14.2% sequentially and 40.3% year over year. On both a sequential and year-over-year basis, the company experienced improvement in net-charge-offs in the commercial and residential mortgage portfolios.

U.S. Bancorp’s nonperforming assets (excluding covered assets) were $1.9 billion, down 2.1% sequentially and 14.1% year over year. Provision for credit losses decreased 17.7% sequentially and 38.9% year over year to $298 million in the reported quarter.

Capital Position

During the quarter under review, U.S. Bancorp maintained a solid capital position. As of Sep 30, 2013, the company’s Tier 1 capital ratio came in at 11.2%, up from 11.1% reported in the prior quarter. The Tier 1 common equity to risk-weighted assets ratio under Basel I was 9.3% compared with 9.2% in the prior quarter.

All regulatory ratios of U.S. Bancorp continued to be in excess of “well-capitalized” requirements. Moreover, using final rules for the Basel III standardized approach released in Jul 2013, the Tier 1 common equity to risk-weighted assets ratio was estimated at 8.6% as of Sep 30, 2013, in line with the prior quarter.

U.S. Bancorp posted an improvement in book value per share, which increased to $19.31 as of Sep 30, 2013 from $18.94 at the end of the prior quarter and $18.03 at the end of the prior-year quarter.

Capital Deployment Update

During third-quarter 2013, U.S. Bancorp paid $422 million as common stock dividends and repurchased common stock worth $659 million. Reflecting the company’s capital strength during the third quarter, the company was able to return 77% of its earnings to shareholders as dividends and share repurchases within the range of its long-term goal of returning 60–80%.

In Conclusion

We believe that U.S. Bancorp’s attractive core franchisee, diverse revenue streams and strong performance in the past years are impressive. A solid capital position, improving credit quality and increase in lending activities augur well for the company. It adheres to a conservative growth stratagem and has made small but strategic acquisitions. Exposure to mortgage buybacks and legal hassles are also minimal.

However, the top-line headwinds are expected to persist, given the protracted economic recovery. Plus, a low interest-rate environment would keep U.S. Bancorp’s margins under pressure. With the thrust on banking regulations, there will be pressure on fees and loan growth.

Though there are concerns related to the impact of legal issues and its global exposures, equity-centric activities in the U.S. are expected to support U.S. Bancorp’s results in the upcoming quarters with continued recovery in the capital markets. The shares of U.S. Bancorp currently carry a Zacks Rank #3 (Hold).

Among major regional banks, Fifth Third Bancorp (FITB - Analyst Report) and BB&T Corporation (BBT - Analyst Report) are scheduled to report on Oct 17, while State Street Corporation (STT - Analyst Report) will report on Oct 22.

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