U.S. Bancorp Meets Operating Estimate, Mortgage Revenue Declines (Update 2)

Corrected to show that average loans grew by 1.3% during the third quarter, and that the company met the consensus operating EPS estiimate, excluding its portion of the regulatory foreclosure settlement. Also updated with comments from Jefferies analyst Ken Usdin.

NEW YORK ( TheStreet) -- U.S. Bancorp ( USB) on Wednesday reported another strong quarter, but the company's loan growth was slowing down.

The Minneapolis lender reported fourth-quarter net income of $1.420 billion, or 72 cents a share, declining from $1.474 billion, or 74 cents a share, in the third quarter, but increasing from $1.350 billion, or 69 cents a share, in the fourth quarter of 2011.

The fourth-quarter results included $80 million for its portion of the $8.5 billion mortgage foreclosure settlement between federal regulators and the nation's largest loan servicers, reducing earnings by three cents a share. Excluding the mortgage settlement, U.S. Bancorp met the consensus fourth-quarter earnings estimate of 75 cents, among analysts polled by Thomson Reuters.

The company also said that "earnings in the fourth quarter of 2011 included a $263 million merchant settlement gain, partially offset by a $130 million accrual related to mortgage servicing matters," which together boosted earnings by five cents a share.

Average total loans grew by 1.5% during the fourth quarter, slowing slighlty from 1.3% during the third quarter. Average loans were up 6.4% year-over-year, with the annual growth pace slowing from 7.3% the previous quarter.

Fourth-quarter net interest income was $2.783 billion, which was the same level as in the third quarter, and increased from $2.763 billion a year earlier, as loan growth of 6.4% year-over-year outweighed the narrowing of the net interest margin, which is the spread between the average yield on loans and investments and the average cost for deposits and borrowings.

The fourth-quarter net interest margin was 3.55%, narrowing from 3.60% the previous quarter and 3.59% a year earlier. The company's net interest margin has actually held up quite well over the past year when compared to many other large banks, as the Federal Reserve's target range for the short-term federal funds rate has remained in a range of zero to 0.25% since late 2008, and the Central Bank has been making monthly purchases of $40 billion in mortgage backed securities and $45 billion in long-term Treasury securities, in an effort to hold long-term rates down. There is hope for banks' rates spreads over coming quarters, however, as long-term treasury rates have rapidly increased over the past several weeks.

Fourth-quarter noninterest income totaled $2.329 billion, declining from $2.396 billion in the third quarter and $2.431 billion in the fourth quarter of 2011. USB said the sequential decline was "primarily due to lower mortgage origination and sales revenue, including the impact of an increase in the representations and warranties repurchase reserve."

Mortgage revenue totaled $476 million in the fourth quarter, declining from $519 billion the previous quarter, but increasing from $303 million a year earlier. Mortgage loan originations actually increased, to $29.1 billion during the fourth quarter, from $28.5 billion in the third quarter and $24.5 billion in the fourth quarter of 2011.

The company's return on average assets for the fourth quarter was 1.62%, declining from 1.70% the previous quarter but matching the ROA a year earlier. The fourth-quarter return on average common equity was a strong 15.6%, although it was down from 16.5% in the third quarter and 16.8% in the fourth quarter of 2011.

U.S. Bancorp CEO Richard Davis said, "2012 was a great year for our Company, as we achieved record annual earnings of $5.6 billion, or $2.84 per diluted common share. Further, our 2012 full year results included record total net revenue of $20.3 billion, representing growth in net interest income and fee revenues, as well as controlled expenses."

Jefferies analyst Ken Usdin said after the earnings results were announced that "While results generally look supportive of forward estimates, we do not expect to see the positive revisions that we are used to from USB."

Usdin added that net interest income "is a little weaker than we had expected as we thought deposit growth would be stronger. Forward run-ratesshould not change too much, however." He also said that despite the decline in mortgage revenue, "Fees as a whole looked pretty good, especially the payments lines. Expense discipline was good, holding tight in a quarter that typically sees seasonal growth."

The analyst was also impressed with USB's continued improvement in credit quality, as the company's quarterly provision for credit losses declined by $45 million sequentially to $443 million in the fourth quarter. "Forward guidance calls for charge-offs to be stable-to-down modestly in 1Q."

Usdin rates USB a "Hold," with a $35 price target.

U.S. Bancorp's shares closed at $33.28 Tuesday, trading for 1.8 times their reported Dec. 31 book value of $18.31, and for 10.8 times the consensus 2013 EPS estimate of $3.08. The consensus 2014 EPS estimate is $3.31.

Based on a quarterly payout of 19.5 cents, the shares have a dividend yield of 2.34%. The company repurchased roughly 59 million common shares during 2012.

The shares were down slightly in morning trading to $33.18.

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


-- 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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