Just a few days ago, Money magazine named U.S. Bancorp (USB) the best national bank in America for its basic checking and savings, student checking, and senior checking accounts. There were several factors behind this recognition. Money credited U.S. Bank's retail banking network (the fourth-largest in the country) and how easy it is for customers to waive the monthly maintenance fee. The magazine also credited the bank for offering advanced facilities, such as the ability to deposit a check from mobile phones and tablets. Other areas where the bank topped the charts were services for students, such as zero maintenance fee checking accounts, strong mobile banking services, and a large network of ATMs, which are especially important for students. Checking services for seniors also received high praise.
U.S. Bancorp reported better-than-expected results for the second quarter. Total revenues of $5.1 billion marked an 8% increase on a year-on-year basis and 3% increase over the preceding quarter. Earnings per share (EPS) of $0.71 showed increases over the prior quarter and prior year by 6% and 18%, respectively. This is an impressive performance in light of the low interest rate conditions, and can be explained by the fact that over 45% of the revenues came from fee income related to credit and debit card services and mortgage related fees. Non-interest income, at $2.36 billion, rose by 5% sequentially and 10% on a year-on-year basis. It would be fair to expect that the bank will continue to offset the effects of low interest rates by increasing these earnings to compensate. Much of the growth in fee-based income came from fees from mortgages, which grew 8.4% sequentially because of a higher volume of originations and sales. The low interest rate environment is expected to continue through 2014, and the signs of recovery that we are seeing in the U.S. housing market should drive continued growth. Despite the decline in interest margins arising from low interest rates, the bank was able to achieve a modest increase in net interest income from $2.69 billion to $2.71 billion, and the net interest spread of 3.58% was only eight basis points below the first quarter.
U.S. Bancorp's balance sheet continues to be strong, and loans of $214 billion were 2% higher compared to the end of the first quarter, and 8% on a year-on-year basis, driven by increases in commercial loans and mortgages as well as residential mortgages. Deposits increased by 1.3% over the first quarter to $231 billion. But the bank could not improve its Tier-1 capital position, which stayed at 10.7%, 30 basis points below the same quarter of the preceding year. However, there was an improvement in liquidity in the loans to deposits ratio, which has traditionally been over 100%. This declined to just above 89% at the end of the second quarter.
Standard & Poor's (S&P) has upgraded U.S. Bancorp's long-term credit issuer rating from A+ to AA-, and its short-term credit issuer rating from A-1 to A-1+. Analysts at S&P believe that U.S. Bancorp will continue to outperform its peers, and that the bank will follow a conservative strategy and value solid capitalization. S&P also approved of the aversion to acquisition and the relatively low exposure to mortgage risk. This could make U.S. Bancorp a better banking investment than Wells Fargo (WFC), which is heavily exposed to the mortgage market. This may also explain why Warren Buffett's Berkshire Hathaway (BRK.B) owns 66 million shares of U.S. Bancorp, valued at around $2.6 billion.
I agree with most experts who approve of U.S. Bancorp's focus on traditional banking, such as mortgages and small lending as its core business. Instead of making money by trading, often in exotic derivatives, like its peers JP Morgan Chase (JPM), Citigroup (C), and Bank of America (BAC), U.S. Bancorp is doing well by sticking to traditional and conservative banking. This conservative approach has not prevented it from taking advantage of its strengths, as it is currently one of the top three mortgage lenders in the country along with JPMorgan Chase and Wells Fargo. Additionally, its credit card business is doing well, and it has diversified its non-mortgage lending by growing its commercial real estate lending portfolio by more than $36 billion, or 5% more than its loans in the first quarter. At the same time, loan losses were down and net charge-offs in the second quarter were about 9% lower than the same period in 2011. Delinquencies have also fallen in the second quarter. All this suggests that the bank is making money in everything it does without the need to take hair-raising risks and potential losses like the JPMorgan derivatives fiasco.
The performance of U.S. Bancorp in a bad period for banks generally has been impressive and reflects the quality of its management and the soundness of its business model. Though I believe that the bank is a superior long-term value investment, I think investors should buy on dips. Moody's has announced a review for a one notch long-term downgrade due to peer banks recovering and an anticipated increase in competition. U.S. Bancorp is currently trading around $34.45, between a 52-week range of $22.76 and $35.15. In this situation, I think investors will benefit by buying dips to the $33.50 to $34.00 level.
Disclosure: I am long USB.