U.S. Bancorp Mortgage Income Rises 127% (Update 1)

  • U.S. Bancorp reports first-quarter earnings per share of 67 cents.
  • Analysts were expecting EPS of 64 cents.
  • Mortgage banking revenue more than doubles, to $452 million.

Updated with comments from Jefferies analyst Ken Usdin.

NEW YORK ( TheStreet) - U.S. Bancorp ( USB) on Tuesday reported a 127% year-over-year increase in mortgage banking revenue and another solid quarter for commercial loan growth.

The Minneapolis lender reported first-quarter net income available to common shareholders of $1.29 billion, or 67 cents a share, compared to $1.31 billion, or 69 cents a share, during the fourth quarter, and $1.00 billion, or 52 cents a share, during the first quarter of 2011.
U.S. Bancorp CEO Richard K. Davis

The first-quarter earnings came in ahead of the 64 cent estimate among analysts polled by Thomson Reuters.

The company said that "on a linked quarter basis, the slight decrease in net income was largely due to the net impact of the merchant settlement gain and the expense accrual for mortgage servicing matters, which added $92 million (after tax) to net income in the fourth quarter of 2011," and that "excluding the impact from these two notable items, results on a linked quarter basis were higher by 6.4 percent, primarily driven by higher total net revenue, lower provision for credit losses and seasonally lower noninterest expense."

First-quarter mortgage banking revenue was very strong, at $452 million, increasing from $303 million the previous quarter, and $199 million a year earlier. This followed the industry trend, with President Obama's expanded Home Affordable Refinance Program, or HARP 2, allowing certain mortgage borrowers to refinance their entire loan balances at today's low rates, no matter how much the value of the underlying homes have dropped.

In his comments Monday on JPMorgan Chase's ( JPM) earnings results, FBR analyst Paul Miller said that "HARP has not fully ramped up," so bank stock investors are likely to see continued mortgage strength in the second quarter.

Despite the mortgage revenue growth, U.S. Bancorp's total noninterest income declined to $2.2 billion during the first quarter, from $2.4 billion in the fourth quarter, mainly because the fourth quarter results included "$263 million from the settlement of litigation related to the termination of a merchant processing referral agreement ("merchant settlement gain"), partially offset by a $130 million expense accrual related to mortgage servicing matters."

U.S. Bancorp's average loans increased 6.4% year-over-year, and 1.5% sequentially, to $210.2 billion, during the first quarter. Average commercial loans were up 17.3% year-over-year and 3.4% quarter-over-quarter, to $57.1 billion.

The company-s net interest margin -- the difference between its average yield loan loans and investments and its average cost for deposits and wholesale borrowings -- was 2.60% during the first quarter, declining from 3.69% the previous quarter, and matching the margin from a year earlier. USB said "the expected decline in the net interest margin year-over-year reflected higher balances in lower yielding investment securities and a decline in loan yields, partially offset by a reduction in the cash balances held at the Federal Reserve compared with the first quarter of 2011, as well as the credit card balance transfer fees classification change."

Overall earnings performance remained strong, with a first-quarter return on average assets of 1.60%, compared to 1.62% the previous quarter and 1.38% a year earlier. The return on average common equity was 16.2% during the first quarter, compared to 16.8% in the fourth quarter, and 14.5% during the first quarter of 2011.

Jefferies analyst Ken Usdin said that mortgage banking drove USB's earnings beat, "as gain-on-sale margins were much better than expected," and that "excluding mortgage banking, results were more in line.

Usdin said that "all-in, estimates are likely stable-to-up on the results."

The analyst rates U.S. Bancorp a "Hold," with a $31 price target.

U.S. Bancorp's shares closed at $31.16 Monday, returning 16% year-to-date, following a 2% return during 2011.

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The shares trade for 10.5 times the consensus 2013 EPS estimate of $2.97. The consensus 2012 EPS estimate is $2.69.

The company on in March announced that it would increase its quarterly dividend to 19.5 cents from 12.5 cents, and that its board of directors had authorized the repurchase of up to 100 million common shares. Based on the new dividend payout, the shares have a dividend yield of 2.50%.

Interested in more on U.S. Bancorp? See TheStreet Ratings' report card for this stock.

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

To contact the writer, click here: Philip van Doorn.

To follow the writer on Twitter, go to http://twitter.com/PhilipvanDoorn.

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 TheStreet.com 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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