Three Regional Banks to Watch in 2010

NEW YORK (TheStreet) -- U.S. Bancorp (USB), BB&T (BBT), and Fifth Third Bancorp (FITB) look like the prime picks from among the regional banks in 2010.

Admittedly, the group as a whole has a long way to go before the sector returns to normalcy, given continued asset troubles and typically less business line diversification. But because of initiatives like taking advantage of industry dislocation to make choice acquisitions and dealing with loan troubles aggressively early in the financial crisis, these three banks have consistently been mentioned as top picks by analysts covering the sector.

U.S. Bancorp

U.S. Bancorp kept its strategic focus after the credit bubble burst, pursuing appealing deals despite the economic uncertainty. To date, the Minneapolis-based bank has purchased four failed banks with the assistance of the Federal Deposit Insurance Corp.. (along with a set of branches in Nevada from BB&T and several other non-bank acquisitions), and many say it is likely to keep up with that fill-in approach next year.

The bank is viewed by many on both Wall Street and Main Street as a safe haven, and it's seen its core deposits grow accordingly. While many of its big bank brethren are just now moving to repay TARP, U.S. Bancorp had ample capital levels to clear out its $6.6 billion bailout tab back in June, and it repurchased warrants associated with the Treasury's investment a little more than a month later.

U.S. Bancorp has approximately $265 billion in assets and is the parent company of U.S. Bank, with operations in 24 states. It is probably most well known for its retail banking outfit, primarily located in the Midwest.

But the company is much more than a plain vanilla bank. It has a large payments services business and provides wealth management services for individuals and corporations. And while U.S. Bancorp's commercial and commercial real estate loans areas have been a source of weakness, the significant fee revenue that the company earns from the other businesses and a generally conservative lending strategy has offset a good measure of the pain stemming from the financial crisis.

U.S. Bancorp shares are down about 11% year-to-date, while the Keefe Bruyette & Woods bank index has fallen some 4% in 2009. The company has remained profitable throughout the crisis, albeit at a lower level than past years. Still, revenue in the third quarter alone jumped 26% compared to the year-earlier period, reflecting both acquisitions and organic measures of deposit-taking and lending.

"While any bank is admittedly a prisoner of the economy to a great degree ... the victors will be the de-TARP'ed, de-risked, well-managed, revenue-diversified major regional banks, with U.S. Bancorp at the top of this (admittedly small) heap," Bush wrote in her note.

U.S. Bancorp's recent acquisition of FBOP Corp. of Oak Park, Ill., with $18 billion in assets and 150 branches in states that are important to U.S. Bancorp's Midwestern and Western presence, seems to be the "penultimate U.S.Bancorp-type deal, and we expect to see more of these for U.S. Bancorp in the coming year," Bush added.

U.S. Bancorp, which expects loan losses to peak next year, has also indicated that it plans to increase its dividend in the coming months, one of the few banks besides JPMorgan Chase (JPM) that has gone on the record about its ability and willingness to do so, despite the uncertain economy.

Still it's no secret that U.S.. Bancorp's credit losses have intensified along with the broader sector. In 2007, losses were $792 million, or about 54 basis points of loans.. This year that number will be roughly $3.8 billion, or about 2.2% of its loans, according to Bush. But once losses return to a level near 2007, U.S. Bancorp could add roughly $1 after taxes to earnings on an annual basis and "a whole bunch more to its stock price," Bush wrote.