This Bank Made a Record Profit. Did Anyone Notice?

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The theme of this earnings season for banks is higher profitability, and for those fortunate enough to be well entrenched in the mortgage lending business, surging revenues from that activity. Such is the case with megaregional player US Bancorp (NYSE: USB  ) , which reported a strong 3Q that set records. In line with recent trends, though, the bank's shares didn't benefit all that much from the good news.

Money from houses
During the quarter, US Bancorp posted net revenue and profit figures of $5.2 billion and $1.5 billion. These were 8% and 16% higher, respectively, than in the same period last year. Both of which, by the way, were quarterly records for the company.

Those gains wouldn't be nearly as strong without mortgage lending. Revenue from that activity popped to nearly $520 million, more than double the level of 3Q 2011, and a 6% advance from the previous quarter.

It's not that people are suddenly rushing to buy houses. Rather, much of that activity is due to refinancing; thanks to our friend the Fed, interest rates are at historic lows and seem as if they'll stay there for at least a little while. So for consumers, this is the ideal time to refinance big loans -- such as mortgages -- at rates that probably won't go much lower.

The numbers tell the tale; at the end of the quarter, out of its $217 billion total loan book the bank had nearly $41 billion in residential mortgages. The latter figure represented a powerful 20% year-on-year increase. "Re-fi," as bankers call it, was the motor driving the car -- according to CEO Richard Davis, it constituted around two-thirds of the bank's 3Q residential mortgage lending.

Unfortunately for the world's borrowers, thin interest rates don't last forever, and of course at some point, they'll rise again. Before then, many lenders will have already refinanced, and there will be fewer low-hanging fruit for banks to pluck. Perhaps with these two factors firmly in mind, Davis admitted that the current mortgage banking boom is going to end before long, characterizing it as "unsustainable."

That gives the bank a cushion of several quarters before any slowdown starts to bite. But when that happens, it'll start to benefit from higher lending rates overall.

Money from businesses
Mortgage lending wasn't the only corner of US Bancorp's business to surge during 3Q. In a further sign that the economy (hopefully) is continuing to find its sea legs, the firm's commercial loan book surged by 22% year-over-year to $57 billion. American businesses need capital and, if the company's growth in commercial lending is any indication, they were pretty successful in asking for it last quarter.

That might not be the case in the very near future, though. Davis opined that borrowers are becoming "less comfortable" with the current environment. Those low rates are sweet, but many are concerned about what'll happen if the dreaded fiscal cliff becomes a reality at the turn of the year. A weaker-than-desired economy and the continued crisis in Europe contribute to that anxiety.

Davis' pronouncements might be the cautious words of a careful CEO. Some of the bank's numbers indicate a more optimistic view. Credit loss provisions, for example, were down on an annual basis, dropping by more than $30 million to land at $488 million. Maybe those borrowers aren't as anxious as some think they are.

Anyone wanna borrow some cash?
Yet one key metric indicates that they are indeed becoming gun-shy. US Bancorp's deposits advanced 11% year-over-year to total just under $240 million. More deposits mean more money to lend, of course, but loans grew by only 7% during that time. In short, the bank's getting fat with money, but it's lacking for customers to borrow it.

Regardless,the company actually managed to grow its net interest income. Its take for 3Q was $2.78 billion, up from 2Q's $2.71 billion and 3Q 2011's $2.62 billion. According to the bank, that was a bit of a fluke: Its proprietary debt matured, boosting take from investments. It won't have as much paper reaching maturity in 4Q, so perhaps the numbers will come more in line with those of the competition.

No one loves a banker
On a trading day that was modest but nevertheless recorded gains in the broader market, US Bancorp shares traded up a little under 2% after the results were announced. For this market at present, that's a strongly bullish reaction. JPMorgan Chase (NYSE: JPM  ) and Wells Fargo (NYSE: WFC  ) both reported record-breaking quarters, yet traded down in the wake of their results.

Bank of America's (NYSE: BAC  ) results weren't anywhere near as good, but the company showed gains in key segments. The market, however, just isn't in a mood to buy the stock, and its share price went nowhere.

Citigroup (NYSE: C  ) stock did gain noticeably in the days following its results announcement. That probably had more to do with the resignation of crisis-era CEO Vikram Pandit than the bank's fundamentals, though.

So the fact that any bank stock gained in price at all, even just by a few cents, in the current atmosphere can be considered a big victory. The market is generally bearish on financials these days given the depth and lasting effects of last decade's crisis and a recent high-profile trading disaster or two (hello, JPMorgan Chase!).

All in all, despite a few areas of concern, US Bancorp had a pretty good quarter. So it probably deserves a little more respect from the market than a few cents in share price gains. Let's see if it wins some of that respect, or if investors continue to turn their backs to the sector.

Eric Volkman has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo. Motley Fool newsletter services recommend Wells Fargo. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 18, 2012, at 12:39 PM, ekun12 wrote:

    The stock market has peaked and will retreat sharply fairly soon.

    No more big FED announcement, QE, Bailout to prop the market up.

    Earnings are the ultimate test - I mean real REVENUE, not EPS, Wall street estimates or all that nonsense - The estimates pale compare to year ago and the true message is in the revenue

    MS earned 28 c/share, but yar ago earned 120c/share .........with revunues there is no where to hide ........well unless you cook the books.

    If IBM cannot make money, FEDEX warns, Caterpillar warns, Intel warns, why do you beleive the banks...........

  • Report this Comment On October 18, 2012, at 1:21 PM, TMFVolkman wrote:

    ekun12, I'm not sure I'm with you there. Revenue matters, sure, but with banks there are other important metrics. So far this earnings season, there have been some rather impressive line item gains for financials like US Bancorp. That won't necessarily lead to a big market rally, but it's a good sign that there's life and health in this most critical of all economic sectors.

  • Report this Comment On October 19, 2012, at 12:16 PM, mesadave73 wrote:

    Does anyone relate bank profits to refi's and MIP? The banks have DOUBLED their MIP charges from .55% to 1.2%/yr. in the last 4 years. A $300K mortgage will require $300/mo. MIP ... that's OUTRAGIOUS !!! $300/month straight to the banks profits. So, while we all think the banks are being nice giving the world low interest rates ... don't be fooled. They are getting MORE than they would if interest rates were 15%. That's why the bank profits soared in the 3rd quarter with refi's. People unknowingly refinance and commit to paying DOUBLE the amount of MIP.

  • Report this Comment On October 22, 2012, at 3:19 PM, TMFVolkman wrote:

    mesadave73, I think any upward developments in MIPs are directly related to low interest rates. No matter how popular any type of mortgage financing may be, it's hard for banks to make a lot of money with rates being so thin. Hence the temptation to raise fees -- we've seen this in retail banking too.

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