Troubled Banks Weigh on U.S. Bancorp

U.S. Bancorp ( USB) missed Wall Street's third-quarter estimates Tuesday, as sliding profits were hit by an increased loan-loss cushion and losses tied to securities.

U.S. Bancorp reported third-quarter net income of $576 million, or 32 cents per diluted common share, missing the Thomson Reuters consensus estimate of 47 cents per share. The $247 billion Minneapolis-based holding company reported net income of $950 million last quarter and $1.1 billion in the third quarter of 2007.

Profits were impacted by $411 million in securities losses and an increase in the quarterly provision for loan loss reserves, to $748 million, from $596 million last quarter and $199 million in September 2008.

U.S. Bancorp shares were relatively flat Tuesday after the financial report, trading down fractionally to $31.14.

During its earnings conference call CFO Andrew Cecere said U.S. Bancorp lost $97 million on preferred shares in Fannie Mae ( FNM) and Freddie Mac ( FRE). Last week, federal bank regulators announced an important accounting change regarding losses tied to the government takeover of the mortgage giants.

Securities losses also included $42 million in impairment charges on other mortgage-backed securities held for sale, as well as $25 million on securities tied to the failed Washington Mutual (whose deposits were acquired by JPMorgan Chase ( JPM)) and $20 million from the bankruptcy of Lehman Brothers.

More positive aspects of the company's earnings performance included an increase in net interest income of 3.1% from the second quarter and 16.7% year over year, as the company expanded its loan portfolio 14% and improved its net interest margin.

Asset Quality

Bank holding companies usually exclude loans past due 90 days or more, but still accruing interest, from their reported nonperforming assets. We have included these loans in the table below, and in the nonperforming assets ratio, which was 0.92% as of Sept. 30, rising from 0.74% last quarter and 0.48% in September 2007.

Click here for larger image.

Net loan charges-offs in the third quarter totaled $498 million, up from $396 million last quarter and $199 million in the third quarter of 2007. Commercial construction loans represented the largest portion of the increase. The company's provision for loan loss reserves exceeded the net charge-offs by $250 million. The annualized ratio of net charge-offs to average loans was 1.19% for the third quarter, and the company's elevated provision kept it "ahead" of the charge-off rate, with reserves covering 1.71% of total loans as of Sept. 30.

" To be under 1% on nonperforming assets shows you how late we were to this party and how low we're going to be in this cycle," CEO Richard Davis said on a conference call. "That's probably the best measure of the core operating prudence."

Capital Strength

U.S. Bancorp's capital position remained strong, with leverage and risk-based capital ratios of 8.0% and 12.3% as of Sept. 30, compared to 7.9% and 12.5% last quarter and 8.0% and 12.7% in September 2007.

The company was not part of the initial group of nine large banks that received capital infusions by issuing preferred shares to the federal government last week. However, Davis implied that the company may participate in the Treasury's voluntary program, saying "the capital is quite attractive on those terms," and "we'll have to evaluate in terms of potential acquisitions."

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.

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