Pure and simple.
That was the type of earnings snapshot U.S. Bancorp provided Tuesday, in stark contrast to other big banks and to its benefit.
The numbers may not have been pretty, but analysts praised the bank's "clean" results, uncomplicated by the trading desk profits and fair-value accounting maneuvers seen at rival lenders with big investment banking arms.
"I think it's more about clarity than anything else," said Michael Yoshikami, president and chief investment strategist at YCMNet Advisors in Walnut Creek, Calif., which holds U.S. Bancorp shares among its $800 million of assets. "People are thinking these guys actually might be telling the truth, and I don't think people care [about the 51% drop in earnings] so long as the words are resonating."
On a conference call with analysts, Richard K. Davis, U.S. Bancorp's chairman and chief executive, gave a glimmer of hope to investors looking for an end date to the financial crisis, saying, "We think we're probably in the middle of the full cycle."
As the crisis continues, U.S. Bancorp is picking up market share from weaker competitors. The company reported deposit growth of nearly 23% for the quarter, or 12%, excluding the impact of acquisitions; loan growth topped 19%, or 11%.
To Davis, those growth rates provide "clear evidence that our company is benefiting from the uncertainty in the financial market and the flight to quality by consumers and businesses that are looking for a safe, stable and sound financial institution."
Since the start of the financial crisis, U.S. Bancorp has been held up as a model of prudent banking, with a conservative loan book that has helped shield it from the sharp losses suffered by rival lenders. The caution was not always seen as an advantage.
"We had not been growing our loan book quite as rapidly as some of our peer group had," chief financial officer Andrew Cecere said in an interview. "For many years, that was something we were often challenged on, as to why we weren't growing as rapidly."
But with gutsier banks badly burned by the risks accumulated in their portfolios, U.S. Bancorp now stands out from its rivals with some of the highest credit ratings in the industry. Even with loan losses on the rise, the company's AA rating from Standard & Poor's appears safe, though the ratings firm warned in a research note that loan deterioration could continue into 2010 "so that subsequent quarters could become weaker."
Reserves for loan losses at U.S. Bancorp nearly tripled from last year's first quarter, to $1.3 billion, and net income fell more than half, to $529 million, or 24 cents a share. At quarter's end, the tangible common equity ratio stood at 3.7%, up from 3.2% last quarter but down from 4.7% a year earlier.
"All things considered, U.S. Bancorp will not be immune to the pressures of the macroeconomic environment, and we would prefer to see the TCE a little higher," Sandler O'Neill & Partners LP analyst R. Scott Siefers wrote in a research note. "But the company's ability to remain profitable and generate capital in this challenging environment is a strong testament" to its "strong earnings power and returns."
Revenue in the first quarter inched up 0.2%, to a record $3.9 billion. Like many of its peers, U.S. Bancorp saw a surge in its mortgage banking business and higher deposits while more favorable credit spreads boosted the net interest margin to 3.59% from a year-earlier 3.55%. Unlike many banks its size, the company, which spun off its Piper Jaffray investment bank in 2003, got no extra help from a surge in capital markets revenue.
"It's good, old-fashioned loan and deposit revenue, payments revenue from our cards and treasury management and mortgage revenue," Cecere said.
He also said the company has been pleased with the early results from its Downey Savings and Loan and PFF Bank and Trust acquisitions — deals brokered by the Federal Deposit Insurance Corp. in November with credit-loss protections. Some analysts say U.S. Bancorp needs to get even more aggressive in scooping up rivals, to expand market share and to further diversify itself away from its Midwest base.
"The challenge for U.S. Bancorp is to take share from its weak-at-the-moment competitors before they rebound as well," Calyon Securities Inc. analyst Mike Mayo wrote in a note to clients this week. "This may require U.S. Bancorp to go past its comfort zone, perhaps by expanding its retail bank footprint into new markets, such as the Southeast, or expanding its capital markets-related businesses" by enlarging its asset management operations or adding a retail broker.
Mayo, who has a "sell" rating on U.S. Bancorp shares — which rose 20% Tuesday — praised the company's success in building businesses with low capital requirements and big fee-generating potential. But he warned that, "while these businesses are not likely to cause capital depletion, they are sensitive to the economic cycle and will likely incur slower if not lower revenue growth over the near term."
U.S. Bancorp's exposure to commercial real estate remains a concern, and the stock may suffer along with the rest of the industry as investors sort through a sector badly tainted by the financial crisis, YCMNet's Yoshikami said. But he praised Davis for offering what he said was credible guidance on loan-loss reserves.
"The separation you'll see between good and bad banks will benefit those that actually have credibility, those with earnings that are not overly optimistic and have no surprises," Yoshikami said. U.S. Bancorp "is just not known for surprises."
That's a point not lost on Davis.
Wrapping up the company's conference call Tuesday, he acknowledged the market's concern about mounting loan losses but played to his bank's strengths.
"I hope you appreciate the simple, transparent nature of our earnings," he told the analysts on the call. "We're going to declare once again that, without a lot of noise and fanfare, we're just kind of a basic, old-fashioned bank going through the cycle and are able to earn through it under any circumstances."