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U.S. Bancorp Slides on Net Interest Income Decline

  • First-quarter EPS of 76 cents matches consensus estimates
  • Mortgage revenue declines only slightly from the first quarter, but is down 19% from a year earlier
  • Mortgage revenue decline offset by lower expenses and lower credit costs
  • Average core loans grow by 1.6% in the second quarter; average commercial loans grow 2.6%
  • Net interest margins narrows by 5 basis points

Updated from 8:13 a.m. ET with market reaction, capital ratios and comment from Jefferies analyst Ken Usdin.

NEW YORK ( TheStreet) -- U.S. Bancorp (USB - Get Report) of Minneapolis on Wednesday reported record earnings, with lower credit costs offsetting a continued decline in mortgage revenue.

The bank reported second-quarter net income of $1.484 billion, or 76 cents a share, increasing from $1.428 billion, or 73 cents a share, in the first quarter, and $1.415 billion, or 71 cents a share, during the second quarter of 2012.

The first-quarter results matched the consensus estimate among analysts polled by Thomson Reuters.

U.S. Bancorp's shares were down 2% in early trading to $36.59, after Jefferies analyst Ken Usdin in a note to clients wrote "despite the headline meet, preprovision earnings will likely be seen as disappointing."

A major factor in U.S. Bancorp's earnings improvement was a decline in the provision for credit losses to $362 million during the second quarter, from $403 million the previous quarter and $470 million a year earlier.

Second-quarter mortgage banking totaled $396 million, down only 1% from $401 million in the first quarter, but declining 19% from $490 million in the second quarter of 2012, in line with the industry trend.

The year-over-year decline in mortgage revenue was partially offset by a decline in noninterest expenses, although expenses were up sequentially. Second-quarter noninterest expenses totaled $2.557 billion, compared to $2.470 billion the previous quarter and $2.601 billion a year earlier.

The year-over-year expense decline mainly reflected "the impact of a second quarter 2012 Visa accrual and lower professional services expense." Those savings were partially offset by increased staffing costs, which also led to the sequential increase in noninterest expense, "primarily attributable to the growth in staffing for business initiatives and business expansion, in addition to merit increases."

During the second quarter, U.S. Bancorp's net interest margin -- the spread between the average yield on loans and investments and the average cost for deposits and borrowings -- narrowed to 3.43% from 3.48% in the first quarter and 3.58% during the second quarter of 2012. Net interest income declined to $2.672 billion in the second quarter from $2.709 billion the previous quarter and $2.713 billion a year earlier.

According to Usdin, "earning assets were down $2B to $312B."

"The decline in earning assets could catch investors off guard, as growth has been otherwise uninterrupted since 2010. The decline is a result of the deconsolidation of variable interest entities, as end-of-period loans were up 2.1% in the quarter," he wrote.

U.S. Bancorp's noninterest income totaled $2.276 billion in the second quarter, increasing from $2.165 billion the previous quarter, but declining from $2.355 billion a year earlier, because of the decline in mortgage revenue. The sequential increase in noninterest income was "driven by seasonally higher payments-related revenue and linked quarter growth in the majority of the fee income categories," according to the company.

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