U.S. Bancorp (USB) has reported second quarter earnings of $766 million or 45 cents per share. Excluding the benefits related to the issuance of perpetual preferred stock in exchange for certain income trust securities, the company earned 40 cents, a penny ahead of the Zacks Consensus Estimate of 39 cents.
The results compare favorably with the prior quarter’s earnings of $669 million or 34 cents per share and the prior-year quarter’s earnings of $471 million or 12 cents per share.
The improvement in earnings primarily stemmed from a strong growth in revenues, reflecting the business growth initiatives taken by the company, including acquisitions. Though still at elevated levels, credit metrics improved sequentially. Net charge-offs and nonperforming assets declined sequentially as economic conditions moderated.
U.S. Bancorp also reported a decrease in provisions for credit losses, both sequentially and year over year. Provisions for credit losses reached $1.1 billion, down $171 million from the prior quarter and $256 million from the year-ago quarter.
Inside the Headline Numbers
Revenues were strong at $4.5 billion, up 4.6% sequentially and 8.7% year over year, reflecting growth in both interest income and fee income.
Tax-equivalent net interest income was $2.4 billion, up 0.2% sequentially and 14.5% from the prior-year quarter, driven by an increase in average earning assets and continued growth in lower-cost core deposit funding.
Net interest margin of 3.90% remained flat sequentially and was up 30 basis points (bps) year-over-year. Average loans were up 4.0% while average deposits increased 12.3% year over year, reflecting acquisitions.
Non-interest income increased 10.0% sequentially and 2.7% year over year to $2.1 billion. The increase reflects higher payments-related fee income and commercial products revenue as well as other income, partially offset by a decrease in deposit service charges.
However, non-interest expense increased 11.3% sequentially and 11.6% year over year to $2.4 billion. The increase reflects the impact of acquisitions, compensation and employee benefits expense and costs related to investments in affordable housing and other tax-advantaged projects.
Reflecting the increase in non-interest expenses, the tangible efficiency ratio deteriorated to 50.4% from 46.8% in the prior quarter and 48.7% in the year-ago quarter.
Credit Quality
Credit metrics improved from the prior quarter. Net charge-offs (excluding covered loans) were 261 bps of average loans outstanding, down 7 bps sequentially but up 46 bps year over year. Nonperforming assets as a percentage of related assets (excluding covered assets) were 2.17%, down 17 bps sequentially but up 23 bps year over year.
Management also expects net charge-offs and nonperforming assets to be lower in the third quarter than in the reported quarter.
Capital Ratios
U.S. Bancorp’s capital position remained strong. Capital generated from earnings resulted in improved metrics both sequentially and year over year.
Return on average assets and return on average common equity were 1.09% (up 13 bps sequentially and 38 bps year over year) and 13.4% (up 290 bps sequentially and 920 bps year over year), respectively.
U.S. Bancorp also posted an improvement in book value per share, which increased to $13.69 as of June 30, 2010, up from $13.16 at the end of the prior quarter and $11.86 at the end of the prior-year quarter.
U.S. Bancorp’s Tier 1 capital ratio also improved to 10.1% from 9.9% in the prior quarter while Tier 1 common equity ratio increased to 7.4% from 7.1% reported in the prior quarter.
However, the company made it clear that it would not increase the dividend until it experiences a stable economic recovery and approval from the regulators. Currently the company’s quarterly dividend is 5 cents per share.
Competitors
Management expects the passing of the regulatory reform bill to impact U.S. Bancorp by either lowering revenue, increasing expense and/or raising capital requirements, but such challenges would be manageable given the company’s size, risk profile and diversified business mix.
However, we note that the financial reform legislation is expected to partially restrict the proprietary trading of commercial banks. Additionally, dealing in derivatives, which are used to hedge risks or speculate the future value of assets, would also be limited.
We expect these actions to have a significant impact on the profitability of a number of other commercial banks including JPMorgan Chase & Company (JPM), Citigroup Inc. (C), Goldman Sachs (GS), Bank of America (BAC), Wells Fargo (WFC) and Morgan Stanley (MS), all of whom have such activities.
Business Update
In May, U.S. Bancorp successfully converted the 150 branches it acquired last October from FBOP Corporation in an FDIC-assisted deal. This acquisition significantly expanded the company’s presence in California and in the Chicago market.
Our Take
We expect U.S. Bancorp to post growth in core earnings and benefit from its diversified revenue base and strategic acquisitions. The company is one of the biggest retail banks in the U.S. and is one of the nation’s top 10 banks overall. It has weathered the economic downturn relatively well and was one of the first few companies to repay the TARP bailout money.
Nevertheless, we think that the stressed residential real estate markets and mortgage-related industries and the impact of the U.S. economic issues on commercial and retail customers will continue to weigh on the shares in the coming quarters. However, the sequential improvement in the credit quality was impressive.
Read the full analyst report on “USB”
Read the full analyst report on “JPM”
Read the full analyst report on “C”
Read the full analyst report on “WFC”
Read the full analyst report on “MS”
Read the full analyst report on “BAC”
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