U.S. Bancorp Hits Record Profit (Update 1)

  • Third-quarter EPS of 74 cents, meeting the consensus estimate.
  • Net revenue of $5.179 billion beats consensus estimate of $5.145 billion.
  • Another strong quarter for mortgage originations, with revenue of $519 million.
  • Strong ROA of 1.70%, Return on average common equity of 16.5%.

Updated with comments from Stifel Nicolaus analyst Christopher Mutascio and afternoon market action.

NEW YORK ( TheStreet) -- U.S. Bancorp ( USB) on Wednesday continued its strong earnings streak, as mortgage origination volume remained very strong.

The Minneapolis lender reported third-quarter net income of $1.474 billion, or 74 cents a share, meeting the consensus estimate among analysts polled by Thomson Reuters, with earnings increasing from $1.415 billion, or 71 cents a share, during the second quarter, and $1.273 billion, or 64 cents a share, during the third quarter of 2011.

U.S. Bancorp's total third-quarter net revenue was $5.179 billion, beating the consensus estimate of $5.145 billion, and increasing from $5.068 billion the previous quarter, and $4.795 billion, a year earlier.

The third-quarter bottom line was boosted by a $272 million release of loan loss reserves.

U.S. Bancorp's shares were up 2% in afternoon trading, to $24.19.

Third-quarter net interest income totaled $2.783 billion, increasing 3% sequentially and 6% year-over-year. Average loans grew by 2% sequentially, and 8% year-over-year, with average commercial loans growing by 4% quarter-over-quarter, and 19% year-over-year.

The strong loan growth, along with a 16% year-over-year increase in coveted noninterest bearing deposits, has enabled the company to make up for the pressure on its net interest margin, which is the difference between the average yield on loans and investments and the average cost for deposits and borrowings. Most banks are facing pressure on their net interest margins, with the Federal Reserve keeping its target federal funds rate in a range of zero to 0.25% since the end of 2008, while the central bank in September significantly increased its purchases of long-term mortgage-backed securities, in an effort to keep long-term rates at historically low levels.

USB's third-quarter net interest margin was 3.59% in the third quarter, increasing slightly from 3.58% in the second quarter, but narrowing from 3.65% a year earlier.

The company's noninterest income grew 2% quarter-over-quarter and 10% year-over-year, to $2.396 billion during the third quarter, "primarily due to higher mortgage banking revenue, partially offset by legislative-related reductions in credit and debit card revenue and a reclassification of ATM processing services revenue."

Third-quarter mortgage banking revenue totaled $519 million, increasing from $490 million the previous quarter, and $245 million a year earlier, as the mortgage refinancing wave continued.

The company also managed to hold down its noninterest expenses, which totaled $2.609 billion during the third quarter, compared to $2.601 billion the previous quarter, and $2.476 billion a year earlier. The efficiency ratio -- essentially the number of pennies of overhead expense for each dollar of revenue -- improved to 50.4 during the third quarter, from 51.1 in the second quarter, and 51.5 during the third quarter of 2011.

U.S Bancorp's third-quarter return on average assets (ROA) was 1.70%, increasing from 1.67% in the second quarter, and 1.57% during the third quarter of last year. USB's third-quarter return on average common equity (ROE) was 16.5%, matching its ROE the previous quarter, while increasing from 16.1% a year earlier.

The company bought back $581 million in common shares during the third quarter, and ended the quarter with an estimated Tier 1 common equity ratio of 8.2%.

CEO Richard Davis said that the company "posted positive operating leverage on both a year-over-year and linked quarter basis, and we achieved these results despite an economy described as only modestly growing and burdened by uncertainty. "

Davis added that "solid new lending activity outside of mortgage also helped to grow our balance sheet, particularly in commercial loans, which grew on average by 21.9 percent year-over-year and 4.2 percent on a linked quarter basis," while "on the retail side, automobile loans and leases, a national business for our Company, also continued to show good growth in the quarter. "

Stifel Nicolaus analyst Christopher Mutascio said that USB's third-quarter net interest margin of 3.59% "was above our estimate of 3.55%, representing a highly favorable result relative to the company's peer group. Expansion was driven by a 24 basis point decline in funding costs due to lower cost on long term debt, which offset lower yields on the company's investment securities portfolio."

The analyst also called U.S. Bancorp's loan growth "the most impressive result we have seen thus far in 3Q12 from our large cap coverage group."

Mutascio rates U.S. Bancorp a "Hold."

U.S. Bancorp's shares returned 27% year-to-date, through Tuesday's close at $33.61.

The shares trade for 11 times the consensus 2013 EPS estimate of $3.05.

Based on a quarterly payout of 19.55 cents, the shares have a dividend yield of 2.32%.

USB Chart USB data by YCharts

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-- 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 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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