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U.S. Bancorp Expense Decline Counters Mortgage Drop (Update 1)

First-quarter net interest income was $2.709 billion, declining from $2.783 billion the previous quarter, but increasing from $2.690 billion a year earlier. The year-over-year increase reflected loan growth of 8%, excluding acquired loans covered by Federal Deposit Insurance Corp. loss-sharing guarantees. The sequential decline in net interest income reflected "declining loan and investment portfolio rates and seasonally lower loan fees," according to the company.

U.S. Bancorp reported that its average loans -- again excluding covered loans -- grew by 1.4% during the first quarter, while average commercial loans grew by 2.1%.

The company continued to put up industry-leading numbers, including a first-quarter return on average assets of 1.65%, increasing from 1.62% in the fourth quarter and 1.60% in the first quarter of 2012. U.S. Bancorp's return on average equity for the first quarter was 16.0%, increasing from 15.6% the previous quarter, and 16.2% a year earlier.

Credit Suisse analyst Moshe Orenbuch later said in a note to clients that the company's first-quarter return on tangible equity was a very strong 22%.

Investors obviously weren't thrilled with U.S. Bancorp's first-quarter results, sending the bank's shares down over 2% in late morning trading, to $32.61. Most bank stocks were strong, in line the broad market. The KBW Bank Index (I:BKX) was up 1% to 55.22, with 20 of the 24 index components showing late morning gains.

Orenbuch rates U.S. Bancorp "outperform," and on Tuesday lowered his price target for the bank's shares to $38 from $39, while lowering his 2013 EPS estimate to $3.07 from $3.15. The analyst also lowered his 2014 EPS estimate to $3.25 from $3.40 and his 2015 EPS estimate to $3.55 from $3.70.

In a note to clients, Orenbuch said the EPS estimate reductions were made "to reflect a lower revenue run-rate," since revenues "were light of our forecasts on mortgage banking."

On a brighter note, Orenbuch added that "some pressure on revenues was offset by expense control. The operating efficiency ratio improved to 50.7% versus 51.9% in the year ago period." A bank's efficiency ratio is, essentially, the number of pennies of overhead expenses it incurs for each dollar of revenue.

"We would expect USB to manage expense levels carefully in light of the revenue environment," Orenbuch wrote.

The analyst supported his positive long-term outlook for U.S. Bancorp. "Given the strong balance sheet and incremental investment spend, we expect U.S. Bancorp to continue to gain market share. The company is well-positioned to obtain its target for robust capital return in 2013," he wrote, adding that "we expect U.S. Bancorp to continue to gain market share."

U.S. Bancorp's shares closed at $44.78 Monday, returning 13% year-to-date, following a 21% return during 2012. The shares trade for 8.6 times the consensus 2014 EPS estimate of $5.20. The consensus 2013 EPS estimate is $4.61.

Following the completion of the Federal Reserve's annual stress tests, U.S. Bancorp on March 14 announced it had been approved to raise its second-quarter dividend to 23 cents a share from 19.5 cents, subject to board of directors approval. Based on the current payout, the shares have a dividend yield of 1.74%.

The company also received Fed approval for share repurchases of up to $2.25 billion, through the first quarter of 2014.

USB Chart USB data by YCharts

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.


Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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