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Stocks to Watch: U.S. Bancorp (USB)

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U.S. Bancorp (USB) recently stated net income of $1,682.00M for the 4th-quarter of 2k17, or $0.970 per diluted common share, contrast with $1,478.00M, or $0.820 per diluted common share, in the 4th-quarter of 2K16. The 4th-quarter of 2k17 included notable items related to the impacts of tax reform, a special workers bonus, a charitable contribution to the U.S. Bank Foundation, and a regulatory and legal accrual that, combined, inclined diluted earnings per common share by $0.090.

Net Interest Income:

Net interest income on a taxable-equivalent basis in the 4th-quarter of 2k17 was $3,197.00M, an incline of $193.00M (6.40%) over the 4th-quarter of 2K16. The incline was principally driven by the impact of rising interest rates and loan growth. Average earning assets were $11.50B (2.90%) higher than the 4th-quarter of 2K16, reflecting inclines of $7.10B (2.60%) in average total loans, $2.90B (2.60%) in average investment securities and $2.70B (19.40%) in average other earning assets. Net interest income on a taxable-equivalent basis inclined $110M (0.30%) on a linked quarter basis mainly driven by loan growth and higher interest rates. Average earning assets were $4.70B (1.10%) higher on a linked quarter basis, reflecting inclines of $2.10B (0.80%) in average total loans, $1.50B (1.30%) in average investment securities and $1.10B (7.30%) in average other earning assets.

Investment Securities:

Average investment securities in the 4th-quarter of 2k17 were $2.90B (2.60%) higher year-over-year and $1.50B (1.30%) higher than the prior quarter. These inclines were mainly because of purchases of U.S. Treasury and U.S. government mortgage-backed securities, net of prepayments and maturities, in support of liquidity administration.

Loans:

Average total loans were $7.10B (2.60%) higher than the 4th-quarter of 2K16. The incline was because of growth in total commercial loans (4.00%), residential mortgages (5.20%), retail leasing (28.90%) and other retail loans (5.20%). These inclines were partially offset by a decline in total commercial real estate loans (5.50%) because of disciplined underwriting of construction and development loans and payoffs of commercial mortgages given recent capital market financing by customers. Loan growth was also muted by run-off in the covered loans portfolio (18.90%). Average total loans were $2.10B (0.80%) higher than the 3rd-quarter of 2k17. This incline was mainly driven by linked quarter growth in total other retail loans (1.90%), total commercial loans (1.00%) and residential mortgages (1.00%), partially offset by declines in total commercial real estate loans (1.50%) and covered loans (4.7%).

Deposits:

Average total deposits for the 4th-quarter of 2k17 were $10.00B (3.00%) higher than the 4th-quarter of 2K16. Average noninterest-bearing deposits reduced $2.60B (3.00%) year-over-year mainly because of a decline in Corporate and Commercial Banking. Average total savings deposits were $7.20B (3.40%) higher year-over-year driven by growth in Consumer and Business Banking and Wealth Administration and Investment Services, partially offset by a decline in Corporate and Commercial Banking. Average time deposits were $5.30B (16.80%) higher than the prior year quarter. Changes in time deposits are mostly related to those deposits managed as an alternative to other funding sources such as wholesale borrowing, based mostly on relative pricing and liquidity characteristics.

Average total deposits inclined $4.00B (1.20%) over the 3rd-quarter of 2k17. On a linked quarter basis, average noninterest-bearing deposits inclined slightly and average total savings deposits grew $3.10B (1.40%) reflecting inclines in customer and Business Banking and Wealth Administration and Investment Services. Average time deposits, which are managed based on funding needs, relative pricing and liquidity characteristics, inclined $622.00M (1.70%) on a linked quarter basis.

Noninterest Income:

4th-quarter noninterest income of $2,441.00M was $10.00M (0.40%) higher than the 4th-quarter of 2K16 principally because of higher payment services revenue, trust and investment administration fees, and deposit service charges, partially offset by lower mortgage banking and other revenue. Payment services revenue was higher because of an incline in corporate payment goods revenue of $18.00M (10.50%) and an incline in credit and debit card revenue of $17.0M (5.40%), both driven by higher sales volumes. These inclines were partially offset by a decline in merchant processing services revenue of $4.0M (1.00%) mainly because of exiting certain joint ventures in the 2nd-quarter of 2k17. Trust and investment administration fees inclined $26.0M (7.10%) principally because of favorable market conditions and net asset and account growth.

Deposit service charges inclined $12.00M (6.50%) mainly because of higher transaction volumes and account growth. Mortgage banking revenue reduced $38.00M (15.80%) mainly because of lower origination and sales volumes from home refinancing activities which were higher in the prior year quarter and lower margins on mortgage loan sales. Other revenue reduced $37.00M (14.70%) mainly because of lower equity investment income in the current quarter.

Noninterest income was $19.00M (0.80%) higher in the 4th-quarter of 2k17 than the 3rd-quarter of 2k17 reflecting growth in trust and investment administration fees, payment services revenue and deposit service charges, partially offset by lower mortgage banking revenue and commercial goods revenue. Trust and investment administration fees inclined $14.00M (3.70%) driven by account growth and favorable market conditions. Payment services revenue was higher because of an incline in credit and debit card revenue of $25.00M (8.10%) mainly because of seasonally higher sales volumes.

This incline was partially offset by an expected seasonal decline in corporate payment goods revenue of $12.00M (6.00%) and merchant processing services revenue of $5.00M (1.20%) because of seasonally lower sales volumes. Deposit service charges inclined $6.00M (3.10%) because of higher transaction volumes. Mortgage banking revenue reduced $11.00M (5.20%) mainly because of the valuation of mortgage servicing rights, net of hedging activities, together with lower origination and sales volumes and lower margins on related sales. Commercial goods revenue reduced $10.00M (4.50%) mainly driven by lower corporate bond fees.

Noninterest Cost:

4th-quarter noninterest cost of $3,939.00M was $935.00M (31.10%) higher than the 4th-quarter of 2K16 mainly because of notable items which totaled $825.00M. This amount consisted of a special bonus to eligible workers, a charitable contribution to the U.S. Bank Foundation, and a $608.00M accrual for formerly revealed regulatory and legal matters related to Bank Secrecy Act/anti-money laundering compliance program adequacy and investigations by the United States Attorney’s Office in Manhattan into that program and U.S. Bank National Association’s legacy relationship with payday lending businesses associated with a former customer. The Company is working on a definitive settlement of these matters, which is expected to finalize soon.

Apart from the notable items, 4th-quarter noninterest cost inclined $110.00M (3.60%) year-over-year mainly because of higher compensation and workers advantages cost, partially offset by lower professional services cost. Compensation cost inclined principally because of the impact of hiring to support business growth and compliance programs, merit inclines, and higher variable compensation related to business production. The incline in workers advantages cost was mainly driven by inclined medical costs. Professional services cost reduced $42.00M (26.90%) mainly because of fewer consulting services as compliance programs near maturity.

Noninterest cost inclined $900.00M (29.60percent) on a linked quarter basis mainly because of the notable items. Apart from the notable items, the noninterest cost was $75.00M (2.50%) higher in the 4th-quarter of 2k17 than the 3rd-quarter of 2k17 driven by seasonally higher costs related to investments in tax-advantaged projects and seasonally higher professional services cost in addition to an incline in workers advantages cost because of inclined medical costs.