U.S. Bancorp: Find Safety In Its Conservative Business Model

| About: U.S. Bancorp (USB)

Humble, boring, traditional -- it doesn't matter which word you use to describe U.S. Bancorp (USB), it would be correct. But, it wouldn't be a pejorative. They take pride in doing things like increasing deposits and making loans - not venturing into things like investment banking. This hip-to-be-square approach, which has also been the path at Wells Fargo (WFC), has proved the most successful banking strategy since the 2008 financial crisis. U.S. Bancorp has consistently made money quarter after quarter since 2009. Bloomberg placed the Minneapolis-based bank on top of its Riskless Return Ranking after it earned the highest return on assets and return on equity of 15 major U.S. banks. And, business continues to look bright as U.S. Bancorp expands on its lending portfolio and grow through smart acquisitions of troubled banks. Such moves have resulted in its stock hitting 52-week highs.

In terms of lending, the recent barometer of success for banks, U.S. Bancorp reported a 7.7 increase in total loans in the second quarter of 2012 compared to a year ago. That's a 1.9 percent increase since last quarter and a total of $67.2. Mortgage banking revenue has more than doubled from last year, rising from $239 million to $490 million. Total mortgage originations as well as other retail loan originations hit $28.1 billion. U.S. Bancorp saw a drop in its non-performing assets, such as mortgages that fall into foreclosure, by 6.9 percent. This is in line with other major banks that have benefited from what some describe as an improving economy and refinancing opportunities. Loan loss reserves at JPMorgan Chase (JPM) dropped by $2.1 billion for the quarter, a big help in reducing the $4.4 billion derivatives trading loss that has been the most recent black eye at the bank. Those losses could rise to as much as $9 billion before all is said and done.

U.S. Bancorp's business model is focused on the kind of stuff that doesn't make headlines - an emphasis on consumer and business banking as well as trusts and payment processing. And it is getting pretty good at it. For instance, the bank's share of corporate trusts increased from 8 percent in 2007 to 24 percent in the first quarter of 2012, one of the safe financial areas for banks to swim. Its other areas of emphasis have also been moving ahead. In terms of non-interest revenue, from items like mortgage fees and debit card transactions, U.S. Bank tallied an increase of 9.7 percent from the second quarter of last year. More than $2.3 billion was reported this quarter, driven by origination fees and sales revenue. This offset a decrease in transaction fees from debit cards, which dropped $51 million, or 17.8 percent, as a result of legislation from 2011 that affected all banks. PNC (PNC), for instance, said a decrease in debit card fees was a factor in a drop in its non-interest income of $355 million in the second quarter of 2012. The regional bank also said a higher provision for residential mortgage repurchase obligations played a part. PNC reported a decrease in net income of $546 million in the second quarter of 2012, a decrease from the last quarter's $811 million. Looking at other aspects of U.S. Bancorp's business, wholesale banking and real estate banking posted an increase in income of $330 million, or 21 percent. Consumer and small-business banking income jumped to $378 million, a nearly 100-percent jump. Deposits, both interest-bearing and savings, moved ahead 10.5 percent. These were factors in beating earnings expectations in the second quarter of 2012. Sure, the bank only surpassed the projections by a penny but is in line with the company's steady-as-she-goes style.

U.S. Bancorp's acquisition program has been a contributing factor to its recent success. Since the financial crisis, it has grown its share of several U.S. markets banks, acquiring $37 billion worth of assets throughout its current 25-state footprint. This was as of the summer of 2011. Most acquisitions have been small, facilitated by the Federal Deposit Insurance Corporation and most of the banks they took over were distressed, victims of the financial crisis. For example, U.S. Bancorp acquired New Mexico-based First Community Bancorporation and its 38 branches in that state and Arizona. This was after the FDIC shut the company down. It also took on 350 branches in early acquisitions in California. U.S. Bancorp purchased pieces of larger organizations, such as Bank of America's (BAC) Europe-based securitization trust administration business. It acquired this piece back in early 2011 and took over $1.1 trillion in assets under administration and $8 billion in deposits. It also gave U.S. Bancorp a foothold in the European markets with offices in London and Ireland.

Though most areas of U.S. Bancorp are in the positive, expenses are an exception. In the second quarter of 2012, the bank's expenses reached $2.6 billion, marking a 1.6 percent increase from the previous quarter and a 7.3 percent increase from one year ago. Bank management said the increase was due to compensation and employee benefits primarily. For example, executives reported that compensation expenses increased 65.9 percent to primarily handle mortgage servicing review-related services. Expense control has been a significant concern for analysts looking at the bank as the figures have increased steadily. Large-bank competitors, however, are seeing the fruits of programs to cut expenses. This includes Bank of America, which slashed expenses by 25 percent in the second quarter of 2012. This was partly by cutting into its wealth management, capital markets and commercial banking departments. Citigroup (C), which beat estimates this quarter with a smaller-than-expected 12 percent decrease in profits, also credits expense cuts. Citi reported a six percent drop in this category. Wells Fargo, which most resembles U.S. Bancorp in its business model, also reported a decrease in expenses by $596 million as part of its Project Compass campaign.

U.S. Bancorp's boring baseline of business has steered its stock price to the top of the heap, up 31.5 percent compared to its industry peers in the past two years. And being on top may not be the best thing. There is not much farther to go and in these weak economic days there are a lot of other options, though riskier, with a better payoff in the end. On the other hand, U.S. Bancorp stock may be for you if safety is what you seek. The company provides a dividend. Already this year U.S. Bancorp is looking to increase the 2012 dividend 19.5 percent. It's a reward to investors believing in U.S. Bancorp's bland approach to banking, according to its CEO Richard Davis. Its stock may be a good dividend bet in the financial arena, but this is an industry still in choppy waters. There are many variants in the economy, from European woes to low interest rates to a still-crippled housing market, that could take a chunk out of earnings and as a result, dividends.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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