Tickers in this Article: USB, ZION, BPOP, TCB, PJC, C, BAC
The banking sector is still a big hot mess. Banks are still going under every Friday and good news usually consists of things getting less-bad. In this sort of environment, banks that were not very well run going into the crisis are looking better than the best-run banks ... mostly just because that recovery from "bad to less-bad" is much more pronounced for them.

TUTORIAL: Banking

With that in mind, I would not expect any huzzahs and handsprings over the results posted by U.S. Bancorp (NYSE:USB) on Tuesday morning. Yes, USB is still one of the best-run large banks in the country and its conservative lending policies and diverse income streams will serve it well as loan demand rebounds. But all of that is already known by the market and the quarter-to-quarter improvements from bank companies like USB just do not look as impressive when stacked up against the likes of Zions Bancorp (Nasdaq: ZION), Popular (Nasdaq: BPOP) or TCF Financial (NYSE:TCB).

A Good Quarter All the Same
U.S. Bancorp's first quarter may not meet the standards for "great," but it was no worse than good enough. On an operating basis, the company did beat expectations, though not by much. Revenue slipped almost 4% from the fourth quarter, largely because of a sizable drop in fee income. Net interest income performance was alright - net interest margin fell (due to deposit growth), but earning assets grew and loan growth was up a bit as well.

USB saw much lower provisioning this quarter, falling 17% from the fourth quarter and more than 40% from the year-ago level. Within the balance sheet, NPLs were basically flat, though total non-performing assets (minus covered loans) did increase about 4% on a sequential basis. Expense control was also solid, as expenses fell about 7% on a sequential basis.

Still Building for the Next Leg
USB saw deposits grow 7% sequentially, with non-interest deposits growing 3%. That's pretty sizable balance sheet growth, particularly in the context of less than 1% growth in loans (excluding acquisitions). USB is putting these assets to work in securities, but those do not offer the same sort of net interest margin boost as loan growth. On the plus side, the commercial lending market is getting better and management commentary suggests that they are looking to grow the loan book.

The fee side of the business is more challenging. Mortgage banking, trust fees, and credit and debit card fees slipped significantly on a quarter-over-quarter basis. It is probably going to be hard for the company to get fee growth from the card business with regulators looking to limit banks' power to charge fees, but there are still a lot of cross-selling opportunities for the bank with its commercial customers. Moreover, although the bank's attempted diversification into investment banking (the acquisition of Piper Jaffray (NYSE:PJC)) failed long ago, the company could still have room to grow in asset management.

The Bottom Line
U.S. Bancorp looks like a good option for investors who want to play the recovery in financial services without taking the plunge on more complicated turnarounds like Citigroup (NYSE:C) and Bank Of America (NYSE:BAC). U.S. Bancorp is certainly neither perfect nor bulletproof, but does not have the overhangs of either of those companies, and Wall Street generally trusts this management team.

U.S. Bancorp does not look especially cheap by metrics like price/book or P/E, but those are blunt instruments when it comes to valuation. Using a model powered by return on equity projections, U.S. Bancorp could be as much as 30% undervalued if it can regain and maintain an ROE of 15%, and the company produced a 14.5% ROE in this quarter. Given the quality of the business and the potential for organic growth, this is a bank worth checking out. (For additional reading, take a look at How To Cut Your Banking Fees.)

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