Tickers in this Article: USB, JPM, C, WFC
Bank stock investors don't seem so concerned with quality these days as they do near-term growth prospects, and that's bad news for U.S. Bancorp (NYSE: USB). Nothing changed this quarter with respect to the quality of one of the best-run large banks in the country, but the company came up short in net interest income, expenses, and operating income – a constellation that is likely to only fuel the “they can't grow” concerns for this year. I do believe that U.S. Bancorp is still cheap enough to own profitably for the long-term, but I know what it's like to own an unpopular bank stock and U.S. Bancorp shareholders need to realize that these shares may not get much love in the short term.

Disappointing On Multiple Fronts In Q2
That U.S. Bancorp management doesn't run the bank for quarter-to-quarter outperformance is secondary to the fact that that's exactly how Wall Street typically values and trades these stocks. Accordingly, there was nothing exceptionally bad in U.S. Bancorp's results, but it is likely to prompt a certain degree of malaise in the shares.

Revenue declined 3% relative to last year and rose 1% from the first quarter – while the sequential performance is consistent with JPMorgan (NYSE: JPM), Wells Fargo (NYSE:WFC) and Citigroup (NYSE:C), the year-on-year decline was not and is testament to the fact that USB has been doing better for longer (and has harder comps).

SEE: 3 Strategies To Profit This Earnings Season

Net interest income fell 2% and 1%, which was worse than its peers and below expectations. Net interest margin was basically as expected (down 15bp from last year and 5bp from the first quarter), but average earning assets declined 1% and that was meaningfully lower than expected. Fee income rose 5% sequentially, which was pretty good, with growth across major contributors like merchant processing, trust fees, and cards offsetting a small decline in mortgage banking.

Expenses rose 4% sequentially, fueling a roughly three-cent miss relative to expectations. Although U.S. Bancorp didn't do as well as expected on expenses (management is reticent to close branches), U.S. Bancorp still has a very attractive efficiency ratio – at just under 52%, U.S. Bancorp is well ahead of JPMorgan (59%), Wells Fargo (57%), and Citi (59%). Even still, pre-provision profits declined about 7% from last year and 1% from the first quarter (and down about 10% yoy on a “core” basis), leading to a four-cent miss and adding fuel to the fire that U.S. Bancorp just can't grow in the current environment.

Solid Loans And Credit
U.S. Bancorp did do a little better than expected on lending, with 2.5% growth in non-covered end-of-period loans. Just as important, all of the major categories were positive – mortgage was up the most (up 4%, which is pretty good for this quarter so far), with card and commercial up 3% and CRE up 2%. Deposits rose 1% for the quarter.

Not surprisingly, U.S. Bancorp's credit numbers look solid. Non-performing loans declined slightly less than peers (down 19% and 6%), but that was to be expected. More importantly, the company's non-performing asset ratio is very strong dropping another 24bp/12bp to 0.87% (against a range of about 1.2% to 2.9% for its peers that have reported so far). Likewise, the company is well-reserved against its non-performing loans, with a ratio of over 279%.

The Bottom Line
Although U.S. Bancorp has the wherewithal to return more capital to shareholders (through dividends and buybacks), USB isn't particularly rate-sensitive as regional banks go and isn't likely to see a big turnaround in growth this year even if rates start heading higher. That's the trade-off that this bank generally offers – it doesn't go down as much in the bad times, but it doesn't go up as much during the rebounds. While the well above-average quality of the operations make it a good long-term hold, it's not likely to generate as much attention (or capital appreciation) in the short term unless things get bad again.

SEE: Positive Start To Q2 Earnings Season

From a valuation standpoint, U.S. Bancorp still looks generally attractive. Using a long-term return on equity estimate of 17% points to a fair value of about $40.50, making the shares about as cheap as JPMorgan or Wells Fargo from a long-term ROE perspective. The stock doesn't seem quite as undervalued on a tangible book value basis, but it's worth remembering that companies that sit on the extremes of the return on tangible assets/price-to-tangible book curve (like U.S. Bancorp on the high end and Citi and Synovus (NYSE: SNV) on the low end) tend to have more “weirdness” in implied/fair value. All in all, I think there's still money to be made for long-term investors in U.S. Bancorp, but anybody buying today needs to understand the risk that Wall Street sentiment may stay against this stock for a few more quarters.

Disclosure – As of this writing, the author owns shares of JPMorgan.

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