U.S. Bancorp (USB) has reported first quarter earnings of $669 million or 34 cents per share, in line with the Zacks Consensus Estimate. The results compare favorably with the prior quarter’s earnings of $602 million or 30 cents per share and the prior-year quarter’s earnings of $529 million or 24 cents per share.

The improvement in earnings from the prior-year quarter primarily stemmed from a strong growth in revenues. However, credit losses and non-performing assets continued to trend higher in the quarter, reflecting continued stress in the commercial, commercial real estate, residential real estate and consumer loan portfolios. Nevertheless, it was notable that the rate of deterioration has somewhat moderated in the quarter.

Quarterly results were impacted by $175 million of provision for credit losses in excess of net charge-offs, net securities losses of $34 million including $46 million of impairments, partially offset by gains of $12 million on securities. These items reduced first quarter earnings by approximately 8 cents per share.

U.S. Bancorp reported loan losses of $1.1 billion, unchanged from the prior quarter and up from $788 million in the year-ago period. However, provision for credit losses decreased 5.6% sequentially and 0.6% year-over-year to $1.3 billion. This represents the second consecutive quarterly decrease in the provision for credit losses and the lowest level since the fourth quarter of 2008.

Inside the Headline Numbers

Revenues were strong at $4.3 billion, up 11.3% year-over-year, reflecting growth in interest income and fee income. However, on a sequential basis, revenues were just down 1.3%, driven by a sequential drop in fee income.

Tax-equivalent net interest income was $2.4 billion, up 1.8% sequentially and 14.7% from the prior-year quarter, driven by an increase in average earning assets and a growth in lower-cost core deposit funding. Net interest margin was up 7 bps sequentially and 31 bps year-over-year to 3.90%.

Average loans were up 0.6% sequentially and 3.9% year-over-year. Average deposits increased 0.9% sequentially and 13.7% year-over-year, reflecting acquisitions.

Non-interest income decreased 4.9% sequentially but was up 7.3% year-over-year to $2.0 billion. The sequential decline was primarily due to seasonally lower payments-related revenue and deposit service charges, lower mortgage banking revenue and other income. However, the year-over-year increase was driven by higher payment-related and commercial products revenue and a decrease in net securities losses.

Non-interest expense decreased 4.1% sequentially but was up 14.2% year-over-year. The year-over-year increase reflects the impact of acquisitions and higher FDIC deposit insurance expense. However, the sequential decrease was primarily due to the impact of seasonally higher costs in the fourth quarter of 2009.

The tangible efficiency ratio remained flat sequentially but deteriorated to 46.8% from 43.6% in the year-ago quarter.

Credit Quality

Credit metrics continued to deteriorate in the quarter, though the rate of deterioration has moderated. Net charge-offs (excluding covered loans) were 268 basis points (bps) of average loans outstanding, up 14 bps sequentially and 86 bps year-over-year.

Non-performing assets as a percentage of related assets (excluding covered assets) were 2.34%, up 9 bps sequentially and 78 bps year-over-year.

Capital Ratios

Profitability metrics improved both sequentially and year-over-year. Return on average assets and return on average common equity were 0.96% (up 10 bps sequentially and 15 bps year-over-year) and 10.5% (up 90 bps sequentially and 150 bps year-over-year), respectively. The company also posted an improvement in book value per share, which increased to $13.16 as of March 31, 2010, up from $12.79 at the end of the prior quarter and $10.96 at the end of the prior-year quarter.

U.S. Bancorp’s Tier 1 capital ratio improved to 9.9% from 9.6% in the prior quarter while Tier 1 common equity ratio increased to 7.1% from 6.8% reported in the prior quarter.

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. 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.

The other major banks that have reported yesterday or last week are Citigroup Inc. (C), Bank Of America Corporation (BAC) and JPMorgan Chase (JPM). All three reported earnings that were significantly ahead of the Zacks Consensus Estimates. The better-than-expected earnings were primarily driven by solid investment banking performances and lower loan losses.

Though the result was in line, there were no major surprises in its earnings. While management expects a relatively stable second quarter, the company made it clear that it would not increase dividend until it experiences a stable economic recovery and approval from the regulators.
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