Fundamentals improving at U.S. Bancorp

Strong growth in loans and fees and improved credit quality helped U.S. Bancorp post a solid second quarter Wednesday that exceeded analysts' expectations and pushed the stock up 4.4 percent.

The Minneapolis-based bank reported a 57 percent jump in second-quarter earnings to $1.2 billion, or 60 cents a share. On average, analysts expected 53 cents a share.

"I am quite pleased with this quarter," CEO Richard Davis told analysts during a Wednesday conference call. "It is starting to get very close to something more normal."

Davis noted that credit quality continued to improve during the second quarter, reducing the bank's net charge-offs, nonperforming assets and delinquencies. As a result, the bank was able to release $175 million in reserves in the second quarter, compared with a $50 million release of reserves in the first quarter.

"Overall, we expect net charge-offs and nonperforming assets to be lower in the third quarter of 2011 and would expect to, once again, release reserves if the current trends and our longer-term credit outlook remain positive," Davis said in prepared statement.

R. Scott Siefers, an analyst with Sandler O'Neill & Partners in New York, told Bloomberg News that improving credit quality has been helping boost earnings at other big banks, as well.

"Everybody built up these enormous reserves during the crisis and despite the macroeconomic recovery being pretty weak, credit trends, especially at the largest banks, are improving," Siefers said Wednesday.

U.S. Bancorp shares closed at $26.14 in Wednesday's trading, up $1.11, or 4.43 percent.

In an interview with the Star Tribune, Chief Financial Officer Andy Cecere noted that although the ill effects of the weak economy still linger, "we are growing and doing better than most. We generate revenue two ways, through net interest income and through fee revenue. Importantly, both of those categories grew very nicely this quarter. We had loan growth. We had deposit growth which drove our margin growth. And we had fee growth driven by payments and commercial product revenue."

Net revenue grew 3.8 percent over the second quarter of 2010, to $4.69 billion. Average deposits grew 14.2 percent with some help from the recent acquisition of First Community Bank in New Mexico.

Loans grew 11.2 percent to $52.7 billion during the second quarter with help from a $16.1 billion bump in new commercial and commercial real estate loans and $21.6 billion in renewals.

The bank also had $13 billion of mortgage loan originations and $2 billion in new credit card accounts.

Like most banks, U.S. Bank expects to be affected by the Federal Reserve's recent cap on debit card swipe fees. The new cap holds fees at 21 cents a transaction, which is much lower than the 44 cent industry average.

U.S. Bank officials said the change could cost the bank as much as $300 million a year, including an estimated $75 million for the fourth quarter. They are looking to new fees in other areas to make up that income.

U.S. Bank's Tier 1 common equity, Tier 1 capital, and total risk-based capital ratios -- key measures of a bank's financial health -- closed the quarter strong at 8.4 percent, 11.0 percent, and 13.9 percent, respectively. Davis said he expects the bank to easily meet new capital requirements being formulated for large banks.

"Regardless of the final amount of buffer assigned, we expect to easily meet the new guidelines through internal capital generation, allowing us to move forward with our long-term goal of distributing a majority of our earnings to shareholders through dividends and share buybacks. In fact, we began to buy back stock late in the second quarter and expect to continue to repurchase shares throughout the remainder of the year," Davis said.

Dan Browning • 612-673-4493 • dbrowning@startribune.com • Dee DePass • 612-673-7725 • dee.depass@startribune.com