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U.S. Bancorp (USB - Analyst Report) has yet again delivered an encouraging earnings performance in fourth-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 72 cents reported in the year-ago period. Moreover, results inched past the Zacks Consensus Estimate by a penny.

Shares of U.S. Bancorp declined around 1% in the pre-market session, indicating that investors have been bearish on the results. The price reaction during the trading session will give a better idea about whether U.S. Bancorp has been able to meet expectations.

For full-year 2013, earnings per share reached $3.00 per share, in line with the Zacks Consensus Estimate. However, earnings compared favorably with the prior-year earnings of $2.84 per share.

Net income attributable to U.S. Bancorp was $1.5 billion in the quarter, up 2.5% year over year. For full-year 2013, net income was $5.8 billion, up 3.3% from $5.6 billion in the prior year.

Furthermore, segment-wise, on a year-over-year basis, quarterly net income in Wholesale Banking and Commercial Real Estate and Payment Services segments fell 7.5% and 10.4%, respectively, while Consumer and Small Business Banking, Wealth Management and Securities Services and Treasury and Corporate Support segments reported a rise of 27.0%, 2.4% and 3.7%, respectively.

Performance in Detail

U.S. Bancorp’s net revenue came in at around $4.9 billion in the quarter, down 4.4% year over year but in line with the Zacks Consensus Estimate. Results were primarily impacted by decrease in net interest and non-interest income.

For full-year 2013, the company reported revenue of $19.6 billion, down 3.4% year over year and in line with the Zacks Consensus Estimate.

U.S. Bancorp’s tax-equivalent net interest income stood at $2.7 billion in the quarter, reflecting a 1.8% fall from the comparable last-year quarter. The dip was mainly due to reduced rates on loans and investment securities, partially offset by growth in corresponding average balances, continued growth in lower cost core deposit funding and the positive impact from maturities of higher-rate long-term debt.

Average earning assets were up 2.3% year over year, driven by growth in average total loans and average investment securities. Moreover, net interest margin of 3.40% fell 15 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 non-interest income moved down 7.4% year over year to $2.2 billion. Reduced mortgage banking revenues primarily led to the decline.

U.S. Bancorp’s average total loans climbed 5.7% year over year to $232.8 billion, owing to growth in commercial loans, residential mortgages, total commercial real estate, retail leasing and credit card 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 7.3% year over year.

Average total deposits were up 5.4% from the prior-year quarter to $256.9 billion. The upsurge stemmed from growth in non-interest-bearing deposits, savings deposits as well as interest-bearing deposits.

Non-interest expense declined slightly on a year-over-year basis to $2.7 billion at U.S. Bancorp. Reduced professional services expense along with lower other intangibles mainly resulted in the year-over-year decrease in non-interest expense. These positives were offset by higher compensation and employee benefits expense.

Credit Quality

Credit metrics improved at U.S. Bancorp in the reported quarter. Net charge-offs  (excluding covered loans) stood at $308 million, down 33.2% year over year. On a year-over-year basis, the company experienced improvement in net-charge-offs in the commercial, residential mortgage and other retail portfolios.

U.S. Bancorp’s nonperforming assets (excluding covered assets) were $1.8 billion, down 14.3% year over year. Provision for credit losses decreased 37.5% year over year to $277 million in the reported quarter.

Capital Position

During the quarter under review, U.S. Bancorp maintained a solid capital position. As of Dec 31, 2013, the company’s Tier 1 capital ratio came in at 11.2%, up from 10.8% reported in the prior-year quarter. The Tier 1 common equity to risk-weighted assets ratio under Basel I was 9.4% compared with 9.0% in the prior-year 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 8.8% as of Dec 31, 2013, up from 8.6% in the prior quarter.

U.S. Bancorp posted an improvement in book value per share, which increased to $19.92 as of Dec 31, 2013 from $19.31 at the end of the prior quarter and $18.31 at the end of the prior-year quarter.

Capital Deployment Update

Reflecting the company’s capital strength during the year 2013, U.S. Bancorp returned $4.0 billion or 71% of earnings to shareholders through dividends and the buyback of 65 million shares of stock.

Notably, during the fourth quarter, the company was able to return 65% of its earnings to shareholders as dividends and share repurchases within the range of its long-term goal of returning 60–80%. This included $420 million in common stock dividends and $493 million of repurchased common stock.

Other Developments

Recently, U.S. Bank National Association, the lead bank of U.S. Bancorp planned to double its deposit market share in Chicago to $11.3 billion by acquiring the Chicago branch network of Charter One Bank franchise owned by RBS Citizens Financial Group, a subsidiary of The Royal Bank of Scotland Group plc (RBS - Snapshot Report), for a 6% deposit premium that amounts to around $315 million. The deal is expected to close by mid-2014, subject to regulatory approvals.

According to the terms of the deal, U.S. Bancorp will acquire deposits of around $5.3 billion and loans worth $1.1 billion. Further, the company will assume Charter One Bank’s 94 branches in Chicago, small business operations and 800 employees.

The deal is expected to aid U.S. Bancorp to overcome the financial complexities in its internal rate of return and enhance earnings per share. Though the company has exposure in Chicago, the deal will pave the way for a stronger footprint.

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. Also, 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) is scheduled to report on Jan 23, while State Street Corp. (STT - Analyst Report) will report on Jan 24.

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