U.S. Bancorp (USB) has topped the Zacks Consensus Estimate. The company reported first quarter 2011 earnings attributable to common shareholders of $1,003 million or 52 cents per share, ahead of the Zacks Consensus Estimate of 49 cents. Results also compare favorably with earnings of 49 cents in the prior quarter and 34 cents in the year-ago quarter.
Notably, first quarter 2011 results included a $46 million gain related to the acquisition of First Community Bank of New Mexico (FCB) in a transaction with the Federal Deposit Insurance Corporation (FDIC). Excluding that gain, earnings came in at 50 cents per share.
Quarterly results at U.S. Bancorp reflected an improvement in credit metrics. Provision for credit losses declined in the quarter. The company also posted a growth in revenue, which, however, narrowly missed the Zacks Consensus Estimate. The positives were partially offset by an increase in expenses.
U.S. Bancorp’s revenues came in at $4.5 billion, up 4.6% year over year. The year-over-year increase was primarily driven by growth in both net interest income and fee-based revenue. The revenue figure was slightly below the Zacks Consensus Estimate of $4.6 billion.
U.S. Bancorp’s provision for credit losses decreased both sequentially and year over year, with net charge-offs revealing a declining trend. Provision for credit losses was $755 million, down 17.2% sequentially and 42.4% year over year.
Behind the Headline Numbers
U.S. Bancorp’s tax-equivalent net interest income was $2.5 billion, up 4.3% from the prior-year quarter, primarily driven by an increase in average earning assets and growth in lower cost core deposit funding. Average earnings assets were up 10.1% year over year.
However, net interest margin of 3.69% was down 21 basis points year over year, primarily due to higher balances in lower yielding investment securities and growth in cash balances held at the Federal Reserve.
Average loans at U.S. Bancorp were up 2.4% year over year, owing to growth in residential mortgages, commercial loans, commercial real estate loans and retail loans. These increases were partially offset by a decline in average covered loans. Average total deposits were up 11.9% from the prior year quarter, reflecting growth in noninterest-bearing deposits and savings deposits.
U.S. Bancorp’s non-interest income increased 4.9% year over year to $2.0 billion. The year-over-year increase was primarily due to higher payments-related revenue, commercial products revenue and other income, as well as lower net securities losses.
However, non-interest expense increased 8.3% year over year to $2.3 billion. The year-over-year increase was primarily due to higher compensation and employee benefits expense.
Credit Quality
Credit metrics improved at U.S. Bancorp. Net charge-offs (excluding covered loans) were 181 bps of average loans outstanding, down 28 bps sequentially and 87 bps year over year. The decrease in charge-offs was principally attributable to improvement in the commercial real estate, credit card and other retail portfolios.
Nonperforming assets as a percentage of related assets (excluding covered assets) were 1.92%, down 42 bps year over year. This was driven primarily by the construction and land development portfolios, as well as improvement in other commercial portfolios, partially offset by the FCB acquisition.
Given the current economic conditions, U.S. Bancorp expects nonperforming assets, excluding covered assets, to trend lower in the second quarter of 2011.
Capital Position
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 was 1.38%, up 7 bps sequentially and 42 bps year over year. Return on average common equity was 14.5%, up 80 bps sequentially and 400 bps year over year.
U.S. Bancorp also posted an improvement in book value per share, which increased to $14.83 as of March 31, 2011, from $14.36 at the end of the prior quarter and $13.16 at the end of the prior-year quarter.
Tier 1 capital ratio also improved to 10.8% from 10.5% in the prior quarter and 9.9% in the year-ago quarter. Tier 1 common equity ratio increased to 8.2% from 7.8% reported in the prior quarter and 7.1% in the year-ago quarter.
Dividend Raise and Share Buyback
On March 18, 2011, U.S. Bancorp’s board of directors approved a 150% increase of in the dividend rate on its common stock. The dividend will now be 50 cents per share on an annual basis and 12.5 cents per share on a quarterly basis as against 20 cents per share annually or 5 cents per share on a quarterly basis, paid previously. The increased dividend for the quarter was paid on April 15 to shareholders of record as of March 31.
The board also approved U.S. Bancorp’s share repurchase authorization of 50 million of its outstanding common stock, replacing the 20 million shares repurchase authorization announced in December 2010. Through December 2011, the shares can be repurchased in the open market or in privately negotiated transactions.
U.S. Bancorp was one of the 19 banks including JPMorgan Chase & Co. (JPM), Bank of America Corporation (BAC) and Wells Fargo & Company (WFC), subjected to “stress tests” conducted by the Federal Reserve. Due to the recession, the Fed had put restrictions on increasing banks’ dividends and share buybacks in exchange of the bailout money. Following the repayment of the bailout money, many banks started pushing the regulators to let them restore their dividends.
This long-expected decision was a major milestone for the banking sector, signaling that the notified banks have finally emerged from the effects of the financial crisis. This paved the way for these banks to reinstate dividends and buy back shares.
Competitive Landscape
Similar to U.S. Bancorp, results at Citigroup Inc. (C), JPMorgan and Bank of America Corp. benefited from credit quality improvement. We believe lower credit costs will be the trend in first quarter results.
Conclusion
We believe recent acquisitions of First Community Bank (New Mexico) and Bank of America’s U.S. and European-based securitization trust administration businesses position U.S. Bancorp well for future growth. It has weathered the economic downturn relatively well. Recent dividend increase and share buyback plan also augur well. Yet, regulatory issues and top-line headwinds continue to restrict any robust development at the company.
U.S. Bancorp shares retain a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are maintaining a long-term Neutral recommendation on the stock.
BANK OF AMER CP (BAC): Free Stock Analysis Report
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US BANCORP (USB): Free Stock Analysis Report
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