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U.S. Bancorp (USB - Analyst Report) has yet again delivered impressive earnings in the first-quarter 2013. Aided by reduced non-interest expenses and a lower provision for credit losses, the company reported earnings per share of 73 cents, up from 67 cents reported in the year-ago period. However, results were in line with the Zacks Consensus Estimate.

Net income attributable to U.S. Bancorp was $1.4 billion in the quarter, up 6.7% year over year.

U.S. Bancorp’s net revenues came in at around $4.9 billion in the quarter, down 1.1% year over year and also lagged the Zacks Consensus Estimate of $5.1 billion. Results were primarily impacted by decreases in non-interest income, partly offset by elevated net interest income. The company recorded positive operating leverage on a year-over-year basis.

Performance in Detail

U.S. Bancorp’s tax-equivalent net interest income stood at $2.7 billion in the quarter, reflecting a 0.7% rise from the comparable last year quarter. This upside was spurred by an elevation in average earning assets, growth in lower cost core deposit funding and the positive impact from lower cost long-term debt. Average earning assets were up 4.6% year over year driven by growth in average total loans, average loans held for sale and average investment securities.

However, net interest margin of 3.48% fell 12 basis points (bps) year over year and mainly reflected increased balances in lower yielding investment securities and loans, partly offset by lower rates on deposits and long-term debt.

U.S. Bancorp’s average total loans climbed 5.8% year over year to $12.3 billion, owing to growth in commercial loans, residential mortgages, total commercial real estate, retail leasing and other retail loans. These increases were partially offset by a drop in home equity and second mortgages, lease financing, credit card loans and covered loans. Excluding covered loans, average total loans accelerated 8% year over year.

Average total deposits were up 7.3% from the prior-year quarter to $16.7 billion, primarily reflecting growth in non-interest-bearing deposits, savings deposits as well as interest-bearing deposits.

Non-interest expense declined 3.5% year over year to $2.5 billion at U.S. Bancorp. Reduced professional services expenses and lower marketing and business development expenses primarily resulted in the year-over-year decrease in non-interest expense. These declines were partially offset by higher compensation, employee benefits and net occupancy and equipment expenses.

On the negative side, U.S. Bancorp’s non-interest income moved down 3.3% year over year to $2.2 billion. Lower ATM processing services revenues, reduced mortgage banking revenues and lower securities gains 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 and commissions.

Credit Quality

Credit metrics improved at U.S. Bancorp in the reported quarter. Net charge-offs (excluding covered loans) were 0.83% of average loans outstanding, down 5 bps sequentially and 34 bps year over year. On both sequential and a year-over-year basis, the company experienced improvement in net-charge-offs in the commercial portfolio.

U.S. Bancorp’s nonperforming assets as a percentage of related assets (excluding covered assets) were 0.95%, down 3 bps sequentially and 27 bps year over year. This year-over-year downside was mainly due to the fall in the construction and development portfolio, as well as owing to the improvement in commercial mortgages and other commercial loan and credit card portfolios.

Provision for credit losses at U.S. Bancorp decreased 9.0% sequentially and 16.2% year over year to $403 million in the reported quarter.

Capital Position

During the quarter under review, U.S. Bancorp maintained a solid capital position.
Moreover, the company received the Fed’s approval for its 2013 Capital Plan under the Comprehensive Capital Analysis and Review (CCAR).

The capital plan for the company included a dividend rate of 23 cents per share (up 18%) for second quarter 2013, subject to the board’s approval. Additionally, the board of directors approved a one-year authorization to repurchase up to $2.25 billion of its outstanding stock, effective from Apr 1, 2013. U.S. Bancorp’s common stock may be repurchased through Mar 2014 in the open market or in privately negotiated transactions.

As of Mar 31, 2013, U.S. Bancorp’s Tier 1 capital ratio came in at 11.0%, up from 10.8% reported in the prior quarter and 10.9% in the year-ago quarter. The Tier 1 common equity to risk-weighted assets ratio under Basel I was 9.1% compared with 9.0% in the prior quarter and 8.7% as of Mar 31, 2011.

All regulatory ratios of U.S. Bancorp continued to be in excess of “well-capitalized” requirements. Moreover, using proposed rules for the Basel III standardized approach released in Jun 2012, the Tier 1 common equity to risk-weighted assets ratio was around 8.2% as of Mar 31, 2013 compared with 8.1% as of Dec 31, 2012.

U.S. Bancorp posted an improvement in book value per share, which increased to $18.71 as of Mar 31, 2013 from $18.31 at the end of the prior quarter and $16.94 at the end of the prior-year quarter.

Capital Deployment Update

During first-quarter 2013, U.S. Bancorp declared $364 million in common stock dividends and repurchased shares worth $574 million. Reflecting U.S. Bancorp’s capital strength during the first quarter, the company was able to return 69% 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 stream and strong performance in the past years are impressive. 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 could remain feeble.

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 retain a Zacks Rank #3 (Hold).

Among other Wall Street big shots, Wells Fargo & Company (WFC - Analyst Report) achieved the thirteenth consecutive quarter of bottom-line growth by reporting earnings of 92 cents per share in first quarter 2013. Results improved from earnings per share of 91 cents in the prior quarter and 75 cents in the year-ago quarter. Also, it beat the Zacks Consensus Estimate by a nickel.

Results at Wells Fargo reflected growth in total loans and deposits amid a challenging economy and prudent expense management. Moreover, a strong capital position and returns on assets and equity acted as positives. It also reported $200 million in reserve release (pre-tax), attributable to improved portfolio performance. However, the company experienced a fall in top line.

We look forward to the results of Bank of America Corporation (BAC - Analyst Report) on Apr 17 and Morgan Stanley (MS - Analyst Report) on Apr 18.

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