Oct 17 - Standard & Poor’s Ratings Services today said its ratings on U.S. Bancorp (USB; A+/Stable/A-1) are not affected by the company’s strong third-quarter earnings, which were within our expectations given the current operating conditions. The company posted pretax earnings of $2.03 billion, up from $1.94 billion the previous quarter and $1.74 billion the prior year. We expect earnings to continue to rise in the fourth quarter, largely because of loan growth, continued strong mortgage banking revenue, and modest reserve releases. In the third quarter, revenue increased 2.2% from the previous quarter and 8.0% year over year because of an increase in average earning assets and fee-based income, particularly mortgage banking. Positively, the net interest margin (NIM) was up 1 basis point from the second quarter to 3.59%, largely as a result of lower funding costs. We believe that the NIM will decline modestly in the coming quarter, mainly because of the maturity of higher-yielding securities. Still, net interest income should increase as a result of higher average earning assets, particularly ongoing loan growth. Average total loans rose 1.3% in the third quarter on a sequential basis as USB gained market share. Loan underwriting standards remained strong, as reflected by an average weighted loan-to-value ratio of 67% for new retained residential loan originations. Standard & Poor‘s-adjusted noninterest income rose 1.7% versus the previous quarter, bolstered by higher mortgage banking revenue. Based on the low rates, we believe mortgage banking revenue will remain strong, at least through year-end. Expenses were basically flat relative to the previous quarter, while operating leverage improved. We expect expenses to rise modestly in the fourth quarter, though at a slower pace than our projected increase in revenue. Net charge-offs increased 3.5% from the previous quarter to $538 million. Excluding new regulatory guidance, which increased net charge-offs by $54 million, net charge-offs would have declined on a quarterly basis. USB released roughly $50 million in reserves, primarily reflecting improving credit quality. Notably, allowance to nonperforming loans (excluding covered loans) was 244% at the end of the third quarter, versus 247% the previous quarter. Based on declining nonperforming loans, we believe net charge-offs will decrease modestly in the fourth quarter. We also expect additional modest reserve releases in the coming quarters. The company estimates its Basel III Tier 1 common ratio at 8.2%, up 30 basis points from its previous estimate. Share repurchases and dividends totaled 67% of earnings in the third quarter. We expect share repurchases and dividends to comprise up to 60%-80% of USB’s earnings on an ongoing basis. Still, we believe that USB’s risk-adjusted capital (RAC) ratio, based on our measurement, will rise modestly to 8.2%-8.7% during the next 12-18 months, which continues to support the ratings. The outlook on USB is stable, reflecting our belief that the company will continue to generate consistent above-peer revenue and earnings and that credit quality should improve further.