U.S. Bancorp Offsets Most of Mortgage Decline

NEW YORK (TheStreet) -- U.S. Bancorp (USB) on Wednesday said fee income from various businesses offset quite a bit of its decline in mortgage income, as the home refinancing wave was curtailed.

The nation's eighth-largest bank, headquartered in Minneapolis, reported fourth-quarter earnings of $1.456 billion, or 76 cents a share, compared to $1.468 billion, or 76 cents a share, in the third quarter, and $1.420 billion, or 72 cents a share, during the fourth quarter of 2012.

Fourth-quarter earnings came in ahead of the consensus estimates of $1.394 billion, or 75 cents a share, among analysts polled by Thomson Reuters

Total net revenue for the fourth quarter was $4.889 billion, slightly below the consensus estimate of $4.890 billion, and declining from $4.891 billion the previous quarter and $5.112 billion a year earlier.

For all of 2013, USB earned $5.836 billion, or $3.00 a share, on net revenue of $19.602 billion.  Earnings increased from $5.647 billion, or $2.84 a share during 2012, while net revenue declined from $20.288 billion, in large part because of slowing mortgage application activity.

A major factor in the year-over-year earnings improvement was a decline in provisions for credit losses.  The company set aside $277 million for loan loss reserves during the fourth quarter, down from $298 million the previous quarter and $443 million a year earlier.  For all of 2013, the provisions totaled $1.340 billion, down from $1.882 billion during 2012.

The bank's net interest income for the fourth-quarter was $2.677 billion, increasing from $2.658 billion the previous quarter, but declining from $2.727 billion a year earlier.  The net interest margin contracted in line with the industry trend, to 3.40% in the fourth quarter from 3.43% in the third quarter and 3.55% during the fourth quarter of 2012.

U.S. Bancorp's average loans rose 1.5% during the fourth quarter and 5.6% year-over-year -- excluding loans acquired from failing institutions and covered by Federal Deposit Insurance Corp. loss-sharing agreements --  to $232.8 billion during the fourth quarter.  Non-real estate commercial loans and leases grew 1.3% sequentially and 10.6% year-over-year, to $68.9 billion during the fourth quarter.  USB saw growth in all loan categories, except for commercial leases and home equity loans.

Noninterest income for the fourth quarter totaled $2.156 billion during the fourth quarter, down from $2.177 billion in the third quarter and $2.329 billion during the fourth quarter of 2012.  Mortgage banking revenue dropped to $231 million in the fourth quarter from $328 million the previous quarter and $476 million a year earlier.  Partially offsetting the mortgage revenue decline were increases in commercial banking fees, as well as revenue from debit and credit cards, as transaction volume grew, as well as increases in merchant processing revenue and trust and investment management fees.

Noninterest expense totaled $2.682 billion during the fourth quarter, up from $2.565 billion the previous quarter, but down from $2.686 billion a year earlier.  The year-over-year improvement mainly resulted from an $80 million regulatory mortgage settlement accrual during the fourth quarter of 2012.  "The increase in total noninterest expense on a linked quarter basis was primarily due to higher costs related to investments in tax-advantaged projects, seasonally higher professional services expense and increased marketing and business development expense," according to U.S. Bancorp.

The company's fourth-quarter return on average assets (ROA) was a strong 1.62%, down slightly from 1.65% the previous quarter, but matching the ROA a year earlier.  The fourth-quarter return on average common equity (ROE) was 15.4%, down from 15.8% the previous quarter and 1.62% a year earlier.

The declining ROE in part reflects a higher level of capital. The company's tangible common equity ratio was 7.7% as of Dec. 31, increasing from 7.4% in September and 7.2% at the end of 2012.  U.S. Bancorp estimated its Basel III Tier 1 common equity ratio was 8.8% as of Dec. 31.

The company returned 71% of 2013 earnings to investors through dividends and share buybacks, with its fourth-quarter average share count declining by 3% year-over-year.

U.S. Bancorp's shares were down 0.7% in premarket trading to $41.30.

The following table shows the performance of U.S. Bancorp's stock against the KBW Bank Index (I:BKX) and the S&P 500 since the end of 2011:

USB Chart data by YCharts


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

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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