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U.S. Bancorp Profit Climbs 51% on Lower Loan Costs

U.S. Bancorp. CEO Richard Davis
Richard Davis, chairman, president and chief executive officer of U.S. Bancorp. Photographer: Louis Lanzano/Bloomberg

U.S. Bancorp, the fifth-biggest U.S. commercial bank by deposits, said third-quarter profit rose 51 percent, beating analysts’ estimates, as costs declined for delinquent loans.

Net income increased to $908 million, or 45 cents a share, from $603 million, or 30 cents, a year earlier, the Minneapolis- based bank said today in a statement. The average estimate was for 43 cents, according to a Bloomberg survey of 28 analysts.

Chief Executive Officer Richard Davis, 52, has vowed to counter slow industry growth by taking market share. The bank expanded during the credit crisis, adding employees, upgrading technology and buying failed lenders in government-backed deals.

“Record total net revenue and reduced credit costs drove third-quarter net income,” Davis said in the statement. Gains in fee-based businesses “were partly offset by expected headwinds from recent legislative actions and current economic conditions.”

The bank’s $995 million in new provisions for loan losses were equal to net charge-offs, leaving the allowance for losses at 3.1 percent of loans at the end of the period. In the same quarter a year ago, the bank recorded $1.46 billion in provisions, building reserves by $415 million. Credit quality “continued to show noticeable improvement this quarter,” Davis said in the statement.

Purchases Boost Lending

Revenue grew 7.9 percent to $4.59 billion over the same period last year, according to the statement. Net interest income climbed 15 percent to $2.48 billion. Net interest margin, the difference between what the bank pays for funds and what it gets for loans, increased to 3.91 percent from 3.67 percent a year earlier. The margin was 3.9 percent in the second quarter.

Davis oversaw the lender’s government-assisted purchases of failed banks and thrifts in 2008 and 2009, in which it added $35 billion of assets and more than 200 offices. As of June, the company had $283 billion in assets and 3,002 branches, primarily in the U.S. Midwest and West, data compiled by Bloomberg show.

Average total loans outstanding increased 5.8 percent in the third quarter to $192.5 billion from the year-earlier period, according to the statement. Without acquisitions, all loans would have declined 0.4 percent, the bank said.

Demand from creditworthy businesses is getting stronger, Davis said. “We are seeing it across the board, slowly, just a little bit and just about everywhere,” he said. The bank’s average commercial loans outstanding increased 1.6 percent from the second quarter, according to the report.

‘Forged Ahead’

The lender made $54.8 billion in new loans and financing commitments to businesses and individuals in the quarter, the statement shows. That is 18 percent more than what it reported in the second quarter.

“They forged ahead when others were backing down,” Jason Goldberg, an analyst at Barclays Capital Inc. in New York, said in an interview before today’s announcement.

The bank is likely to acquire weaker lenders as the industry consolidates, analysts including Richard Bove of Rochdale Securities LLC in Lutz, Florida have said.

U.S. Bancorp rose 0.1 percent to $22.83 in New York Stock Exchange composite trading today. The shares are up 1.4 percent this year.

The company, which remained profitable during the credit crisis, generally outperforms peers, credit-rating company Standard & Poor’s wrote in an Aug. 4 report. Almost half the bank’s revenue comes from fees and other non-interest sources, S&P said. It is the fourth-biggest U.S. processor of card transactions for merchants, ranked by sales, according to S&P.

Foreclosure Practices

U.S. lenders are reviewing foreclosure practices and delaying some seizures amid claims they made misstatements in court filings. U.S. Bancorp’s controls are working, and an industrywide moratorium on proceedings “should be avoided in the interest of the national economic recovery,” Davis said in the statement.

New government limits on overdraft fees have cost the bank about $140 million in revenue so far this year and will cost about $450 million annually in the future, Chief Financial Officer Andrew Cecere said on a conference call. The burden is “slightly lower” than the bank’s previous estimate, he said. A new credit-card law will cost $250 million a year, he said.

Expenses from buying back mortgages from investors will run $50 million to $70 million “over the next few quarters,” Cecere said. The bank added $70 million to repurchase reserves in the quarter and realized $24 million in losses from warranties on mortgages it had sold, according to its website.

Dividend a ‘Top Priority’

“Increasing the dividend remains a top priority,” Davis said. The firm cut its quarterly payment in March 2009 to 5 cents a share from 42.5 cents. Regulators must first clarify pending capital requirements and will probably look at banks individually when signaling support for increases, he said. “We fully expect to be one of the first banks to gain approval to raise our dividend once the guidelines have been determined.”

Davis said he aims to boost deposits and lending for growth that outpaces the economy. Average deposits grew 9.8 percent to $183 billion in the quarter, compared with a year earlier, the company said. Without acquisitions, deposits grew 2.7 percent.

“I have instructed my team to be aggressive on deposit gathering,” he said. The bank that ends the economic slump with the most deposits to fund lending “will end up winning the next cycle,” he said.

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