While headlines this morning are bemoaning

US Bancorp's

(USB) - Get Report

drop in year-over-year earnings, at this point in the credit cycle it is silly to dwell on comparison to much better times.

Shares were down 3.8% in late morning trading to $23.29, as the company came in slightly under consensus expectations. It is common knowledge that banks have suffered over the past year, but the real story for US Bancorp is what it has achieved under tough conditions. The company posted a 7.5% increase in net revenue year-over-year, as it grew its balance sheet 11% and improved its net interest margin to 3.61% for the second quarter, compared to 3.55% last quarter and 3.44% in the second quarter of 2007.

That's rather impressive. At least through the first quarter of 2008, many large regional holding companies reported narrowing net interest margins over the past year. These included


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National City



Regions Financial

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. We'll see how margins for this group fare when they release second quarter earnings results.

Also, so far, US Bancorp has set itself apart from many other regional holding companies by keeping well ahead of nonperforming loans and charge-offs, while maintaining decent earnings performance.

The company reported net income of $950 million, or 53 cents a diluted share in the first quarter. While that is a drop of 13% from the previous quarter and misses the consensus of 60 cents a share, the earnings have held up reasonably well for a large regional bank in this environment. The company's annualized return on average assets was 1.58% and the return on average common equity was 17.9%.

Net charge-offs totaled $396 million for the second quarter, or an annualized 0.98% of average loans. The company's quarterly provision for loan losses increased to $596 million, from $485 million last quarter and $191 million in the second quarter of 2007.

Elevated provisions for loan loss reserves are the major factor in the weakening earnings for most major regional banks.

Credit Quality

When bank holding companies release their financial statements, they play little games with nonperforming loan figures, by excluding loans past due 90 days (but not yet in nonaccrual status) from "nonperforming loans." We include them when analyzing banks and S&Ls.

When comparing asset quality for large banks in this environment, it is useful to look at nonperforming assets as a percentage of total assets. Here we include all nonperforming loans and other assets, plus repossessed real estate. We are excluding restructured loans that are still performing:

While details on loans past due 90 days but still considered performing were not released, the biggest increase in nonperforming loans was in the construction and development category. Nonperforming construction loans increased 54% from the first quarter, to $326 million as of June 30.

The largest percentage increase in net charge-offs was in residential loans, with $53 million charged-off during the second quarter, more than double last quarter. The biggest dollar increase in net charge-offs was in credit card loans. Net card charge-offs during the quarter were $139 million, up 29% from last quarter.

Capital Levels and Reserve Coverage

As we discussed Monday when we looked at US Bank NA as part of our discussion on

banks based in Ohio

, US Bancorp has fared well so far, since it has not had to cut dividends or make other moves to preserve or raise capital.

Here's a look at a few capital and reserve coverage ratios, as provided by US Bancorp or derived from the earnings release. Again, we are defining nonperforming loans as loans past due 90 days or more, plus the other loans the company reported as "nonperforming."

As you can see, US Bancorp's capital ratios haven't suffered over the past year. That's excellent, considering they have grown the balance sheet 11% and not raised capital.

Loan loss reserves covered 151.87% of nonperforming loans as of June 30, and the ratio of nonperforming loans to core capital and loan loss reserves was 7.84%. That last ratio has crept up, but for many of the regional banks, it was well above 20% last quarter.

The uptick in problem construction loans is a concern, as it is for so many banks at this point. While the company has a well-diversified loan portfolio, commercial mortgages and construction loans comprised 19% of total loans as of June 30. This is something to keep an eye on over subsequent quarters.

Philip W. van Doorn joined TheStreet.com Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.