Loans Help Boost 2Q for USB

U.S. Bancorp USB reported net income of attributable to common shareholders of $1.4 billion, or $0.76 per diluted share, for the second quarter of 2013 compared with $1.3 billion, or $0.71 per diluted share, for the second quarter of 2012. Loans grew 7.4% compared with a year ago, primarily in commercial and residential loans. Low interest rates, primarily in investment securities, continued to pressure yields and thus pressured the net interest margin. Credit quality continued to improve as net charge-offs fell to 0.70% and nonperforming loans represented 0.76% of total loans.

Net loan growth equaled 10.1% annualized as the bank realized strong loan growth from its commercial, commercial real estate, and residential mortgage lending. Nevertheless, customers’ line utilization rates remain low at approximately 25%. Many anticipate loan growth will increase during the third quarter as the overall economy continues to improve. Net interest income was almost flat after loan-loss provisions as asset yields, primarily investment securities, continued to pressure interest income. On the funding side, deposit growth slowed to 4.2% year over year despite the slight decline in deposits for the first quarter of 2013 and 5.7% annualized on a sequential basis.

Net interest margin equaled 3.43% for the quarter compared with 3.48% last quarter and last year’s 3.58%. At this time, U.S. Bancorp expects the net interest margin to stabilize for the third quarter. Combined with continued solid loan growth, we expect the net interest income for next quarter to modestly improve. Mortgage banking revenue continued to decline as applications fell approximately 10% compared with the first quarter of 2013 and total refinancing activity declined to 59% of total mortgage activity compared with 71% last quarter.

Overall, mortgage banking revenue has declined 23% on a quarterly basis from its peak in the third quarter of 2012. We anticipate that mortgage banking revenue will continue to decline, given higher rates for 30-year mortgages over the remainder of 2013. Credit performance continued to show improvement as net charge-offs equaled 0.70% of loans compared with 0.97% for the year-ago quarter. Nonperforming loans decreased to 0.76% of total loans compared with 1.15% year ago. The improved credit quality allowed U.S. Bancorp to modestly release additional loan-loss reserves, as loan-loss provisions equaled $362 million for the quarter compared with $393 million of net charge-offs.

At this point, we expect net charge-offs and nonperforming loans to stabilize for the third quarter. Overall, U.S. Bancorp continues to perform well, posting a 51.7% efficiency ratio and a 16.1% return on equity. The bank repurchased 18 million common shares during the quarter for a total of 35 million shares for 2013. It believes that it is now in compliance with the Federal Reserve’s proposed strict interpretation of the international agreement for higher capital standards known as Basel III. Based on those rules, its fully loaded Basel III common equity/risk-weighted asset ratio equaled 8.6%. Given U.S. Bancorp’s consistent strong performance, we think the bank will continue to meet all regulatory capital requirements.

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