U.S. Bancorp Posts Solid Revenue Growth (Update 2)

  • USB reports second-quarter earnings of 71 cents a share, beating the consensus estimate of 70 cents.
  • Net interest income increases, but second-quarter net interest margin declines slightly from the first quarter, to 3.58%.
  • Noninterest income increases 5% sequentially, with strong mortgage, card, and merchant processing revenue.

Updated with comments from Jefferies analyst Ken Usdin and FBR analyst Paul Miller, and also with market close information.

NEW YORK ( TheStreet) -- U.S. Bancorp ( USB) of Minneapolis on Wednesday reported that its second-quarter noninterest income grew by over 5% from the second quarter, as the company saw revenue increase across the board.

The company reported second-quarter earnings of $1.4 billion, or 71 cents a share, beating the consensus estimate among analysts polled by Thomson Reuters by one cent. Earnings increased from $1.3 billion, or 67 cents a share, in the first quarter, and $1.2 billion, or 60 cents a share, during the second quarter of 2011.

USB's shares rose 2% to close at $33.48.

U.S. Bancorp reported net second-quarter revenue of $5.1 billion, increasing 3% from the previous quarter, and 8% from a year earlier. Second-quarter net interest income grew 1% from the first quarter and 7% year-over-year, to $2.7 billion, although the net interest margin -- the bank's average yield from loans and investments less its average cost for deposits and borrowings -- narrowed to 3.58% during the second quarter, from 3.60% the previous quarter and 3.67% a year earlier, in line with the industry trend in the prolonged low-rate environment.

The company's total noninterest income increased 5% sequentially and 10% year-over-year, to $2.4 billion during the second quarter. Credit and debit card revenue was down 18% year, because of the implementation of the Durbin Amendment's caps on debit card interchange fees during the fourth quarter of last year, but these revenues grew 16% sequentially during the second quarter, to $235 million. Mortgage banking revenue showed continued strength as the wave of mortgage loan refinancing continued, increasing to $490 million during the second quarter, from $452 million in the first quarter, and $239 million during the second quarter of 2011.

U.S. Bancorp also saw its merchant processing fee revenue grow to $359 million during the second quarter, from $337 million the previous quarter, and $338 million a year earlier.

Average total loans increased 2% sequentially and 8% year-over-year to $214.1 billion during the second quarter. Average commercial loans grew 6% during the second quarter, with annual growth of over 23% to $54.4 billion. Average second-quarter commercial mortgage loan balances increased 2% during the second quarter and 8% from a year earlier, to $30.6 billion.

USB also said that its "quarterly average commercial and commercial real estate commitments of 24.3 percent year-over-year and 3.7 percent over the prior quarter."

Average residential mortgage loan balances increased 3.5% during the second quarter and 20% year-over-year, to $39.2 billion.

The above loan increases were partially offset by declines in home equity loans, construction loans, and acquired loans covered by Federal Deposit Insurance Corp. loss-sharing agreements.

U.S. Bancorp reported a second-quarter return on average assets of 1.67%, increasing from 1.60% in the first quarter and 1.54% in the second quarter of 2011. The return on average equity was 16.5% during the second quarter, increasing from 16.2% the previous quarter and 15.9% a year earlier.

The company estimated that under federal regulators' risk-based capital rules proposed in June, its ratio of Tier 1 common equity to risk-weighted assets under Basel III would be 7.9% as of June 30, declining from the previous quarter's 8.4% estimate, under the original Basel III proposal.

The company repurchased $401 million in common shares during the second quarter, and CEO Richard Davis said that "year-to-date we have returned 62 percent of our earnings to our shareholders in the form of dividends and share repurchases."

U.S. Bancorp's shares have now returned 25% year-to-date, following a 2% return during 2011.3

USB Chart USB data by YCharts

Based on quarterly payout of 19.5 cents, the shares have a dividend yield of 2.33%.

The shares trade for 11 times the consensus 2013 EPS estimate of $3.00. The consensus 2012 EPS estimate is $2.79.

Jefferies analyst Ken Usdin rates U.S. Bancorp a "Hold," with a $35 price target, and said after the earning announcement that "overall results should support future estimates," and that "highlights of the quarter include better-than-expected fee performance, strong loan growth, and continued deployment of capital."

The analyst called U.S. Bancorp's "efficiency still best-in-class," because even though the company's expenses increased by $41 million during the second quarter, "efficiency actually improved in the quarter (51% vs. 52% in 1Q)."

The efficiency ratio is, essentially, the number of pennies of overhead expense incurred for every dollar of revenue generated.

FBR analyst Paul Miller rates U.S. Bancorp "Outperform," with a $36 price target, saying Wednesday that "while USB is relatively expensive compared with peers on a tangible book value per share basis, we believe that the company's high return on equity , strong credit metrics, and defensive profile will allow it to outperform."

Miller added that "this was another strong quarter for the company as mortgage banking income increased again, loans grew, net interest margin held up, and operating expenses declined. U.S. Bancorp continues to recognize an increase in mortgage production volumes, and we expect this to remain a tailwind to earnings over the next few quarters."

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


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

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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.