U.S. Bancorp Expense Decline Counters Mortgage Drop (Update 1)

  • First-quarter EPS of 73 cents a share matches the consensus estimate.
  • Mortgage revenue declines 16% from Q4, 11% year-over-year.
  • Mortgage revenue decline offset by decline in mortgage-related expenses.
  • Average core loans grow by 1.4% in Q1; average commercial loans grow 2.1%.
  • Net interest margins narrows by 7 basis points.

Updated from 8:31 a.m. ET with morning market action and comment from Credit Suisse analyst Moshe Orenbuch.

NEW YORK ( TheStreet) -- U.S. Bancorp ( USB) on Tuesday reported an expected decline in mortgage banking revenue, which was offset by lower credit costs and lower mortgage-related expenses.

The Minneapolis lender -- the nation's sixth-largest bank at the end of 2012 based on total assets -- reported first-quarter net income of $1.43 billion, or 73 cents a share, increasing from $1.42 billion, or 72 cents a share, in the fourth quarter, and $1.34 billion, or 67 cents a share, in the first quarter of 2012.

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

As expected for all major regional lenders heading into earnings season, U.S. Bancorp saw its mortgage revenue decline significantly, as mortgage loan refinance applications slowed and secondary market gain-on-sale margins narrowed. The company reported first-quarter mortgage banking revenue of $401 million, declining from $476 million the previous quarter, and $452 million a year earlier.

That decline was more than offset by a decline in noninterest expense to $348 million in the fourth quarter from $511 million the previous quarter and $489 million a year earlier. U.S. Bancorp said that first-quarter noninterest expense was lower "primarily due to the accrual for the mortgage foreclosure-related regulatory settlement recorded in the fourth quarter of 2012, along with lower mortgage servicing review-related professional services and litigation and insurance-related expense in the first quarter of 2013."

During the fourth quarter, U.S. Bancorp had booked $80 million in expenses related to the industry's regulatory foreclosure settlement, along with "a $130 million accrual related to mortgage servicing matters."

Also helping to boost first-quarter earnings was a decline in the provision for credit losses to $403 million, from $443 million the previous quarter, and $481 million a year earlier. The provision is the amount added to loan loss reserves each quarter. U.S. Bancorp's loans loss reserves declined by a modest $25 million in the first quarter.

During the first 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 3.48% from 3.55% in the fourth quarter, and 3.60% in the first quarter of 2012. This follows the industry trend, with short-term rates remaining in a range of zero to 0.25% since late 2008, and with the Federal Reserve continuing its monthly purchases of $85 billion in long-term securities, in an effort to hold down long-term rates.

First-quarter net interest income was $2.709 billion, declining from $2.783 billion the previous quarter, but increasing from $2.690 billion a year earlier. The year-over-year increase reflected loan growth of 8%, excluding acquired loans covered by Federal Deposit Insurance Corp. loss-sharing guarantees. The sequential decline in net interest income reflected "declining loan and investment portfolio rates and seasonally lower loan fees," according to the company.

U.S. Bancorp reported that its average loans -- again excluding covered loans -- grew by 1.4% during the first quarter, while average commercial loans grew by 2.1%.

The company continued to put up industry-leading numbers, including a first-quarter return on average assets of 1.65%, increasing from 1.62% in the fourth quarter and 1.60% in the first quarter of 2012. U.S. Bancorp's return on average equity for the first quarter was 16.0%, increasing from 15.6% the previous quarter, and 16.2% a year earlier.

Credit Suisse analyst Moshe Orenbuch later said in a note to clients that the company's first-quarter return on tangible equity was a very strong 22%.

Investors obviously weren't thrilled with U.S. Bancorp's first-quarter results, sending the bank's shares down over 2% in late morning trading, to $32.61. Most bank stocks were strong, in line the broad market. The KBW Bank Index ( I:BKX) was up 1% to 55.22, with 20 of the 24 index components showing late morning gains.

Orenbuch rates U.S. Bancorp "outperform," and on Tuesday lowered his price target for the bank's shares to $38 from $39, while lowering his 2013 EPS estimate to $3.07 from $3.15. The analyst also lowered his 2014 EPS estimate to $3.25 from $3.40 and his 2015 EPS estimate to $3.55 from $3.70.

In a note to clients, Orenbuch said the EPS estimate reductions were made "to reflect a lower revenue run-rate," since revenues "were light of our forecasts on mortgage banking."

On a brighter note, Orenbuch added that "some pressure on revenues was offset by expense control. The operating efficiency ratio improved to 50.7% versus 51.9% in the year ago period." A bank's efficiency ratio is, essentially, the number of pennies of overhead expenses it incurs for each dollar of revenue.

"We would expect USB to manage expense levels carefully in light of the revenue environment," Orenbuch wrote.

The analyst supported his positive long-term outlook for U.S. Bancorp. "Given the strong balance sheet and incremental investment spend, we expect U.S. Bancorp to continue to gain market share. The company is well-positioned to obtain its target for robust capital return in 2013," he wrote, adding that "we expect U.S. Bancorp to continue to gain market share."

U.S. Bancorp's shares closed at $44.78 Monday, returning 13% year-to-date, following a 21% return during 2012. The shares trade for 8.6 times the consensus 2014 EPS estimate of $5.20. The consensus 2013 EPS estimate is $4.61.

Following the completion of the Federal Reserve's annual stress tests, U.S. Bancorp on March 14 announced it had been approved to raise its second-quarter dividend to 23 cents a share from 19.5 cents, subject to board of directors approval. Based on the current payout, the shares have a dividend yield of 1.74%.

The company also received Fed approval for share repurchases of up to $2.25 billion, through the first quarter of 2014.

USB Chart USB data by YCharts

-- 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.

If you liked this article you might like

5 New Quotes by Major Banking Executives That Should Terrify Stock Market Bulls

5 New Quotes by Major Banking Executives That Should Terrify Stock Market Bulls

Bulls Back on Track; Bitcoin Breaks Above $10,000 -- ICYMI

Bulls Back on Track; Bitcoin Breaks Above $10,000 -- ICYMI

Dow Jumps Over 300 Points, Posting Its Fifth Straight Day of Gains

Dow Jumps Over 300 Points, Posting Its Fifth Straight Day of Gains



US Bancorp Fined $613 Million for Money-Laundering Violations

US Bancorp Fined $613 Million for Money-Laundering Violations