US Bancorp
...and Touchstone Friday
by Dale Wettlaufer ([email protected])
Alexandria, VA (July 24, 1998) --Another large bank joins the group of finalists today, as we wrap up US Bancorp (NYSE: USB). The company is the product of the merger between Minneapolis, Minnesota-based First Bank System and Portland, Oregon-based US Bancorp. First Bank took the US Bank name and now the company is the 17th-largest bank holding company in the U.S.
US Bancorp is a highly profitable, diversified bank holding company serving highly desirable geographies of the Mountain states, Pacific Northwest, and California in addition to the upper Midwest. The company recently completed its acquisition of Piper Jaffray, a brokerage, asset manager, and underwriter. In addition, the company has a number of other subsidiaries, listed below (according to infoUSA):
US BANK TRUST OF CALIFORNIA ROCKY MOUNTAIN BANK CARD SYSTEMS FBS INVESTMENT SVC INC REPUBLIC ACCEPTANCE CORP US BANCORP LEASING US BANK NA ZAPPCO INC FIRST BANK MONTANA NA US BANK TRUST MONTANA NA US BANK TRUST OF NORTH DAKOTA FIRST ASSET MANAGEMENT US BANCORP INSURANCE US BANCORP LEASING FINANCIAL US BANCORP SECURITIES WEST ONE LIFE INSURANCE COA complete listing of all the company's units can be found at the Federal Reserve's National Information Center site at www.ffiec.gov/nic.
US Bank is very much like Norwest in that both are full-service companies with exceptionally strong franchises in selected areas. While Norwest is a giant in the mortgage business, US Bancorp is the largest bank issuer of commercial credit cards. The effect of this can be seen in the company's net interest margin*, which at approximately 5% puts it in the top decile of large bank holding companies. This reflects a good mix of higher interest rates on unsecured lending as well as a low-cost funding base. The company has an extremely high percentage of noninterest-bearing deposits to total deposits ratio of 31.9% and a high ratio of core deposits to purchased deposits. Its yield on earning assets is really the kicker, though. That is reflected in a rich mix of loans the company carried in its portfolio as of the second quarter:
AVERAGE LOANS
($ in millions)
Q2 Q2
1998 1997
Commercial................$24,264.....$22,431
Commercial real estate.10,712.....10,293
Total commercial..........34,976.....32,724
Home equity and
second mortgage........5,694.....5,072
Credit card..................3,941.....3,546
Other..........................6,636.....7,012
Total consumer,
excl. residential.........16,271.....15,630
Residential mortgage.....4,153.....5,161
Total loans.............$55,400.....$53,515
Total loans,
excluding
residential
mortgages.............$51,247.....$48,354
Notices there is a dearth of consumer mortgages in the portfolio compared to higher-yielding credit cards, second mortgages, and commercial loans. Noninterest income revenues also grew nicely and reflect a good diversity of business lines:
NONINTEREST INCOME
($ in millions)
Q2 Q2
1998 1997
Credit card
fee revenue.....$147.6.....$98.8
Trust and
investment
management
fees.....108.0.....87.2
Service charges
on deposit
accounts.....99.4.....97.4
Investment
products
fees and
commissions.....57.5.....16.7
Trading account
profits and
commissions.....28.0.....6.8
Investment
banking revenue.....29.0.....
Other.....91.6.....98.7
Subtotal**.....561.1.....405.6
Net securities gains .....--.....1.9
Nonrecurring gains.....--.....1.9
Total noninterest
income.....$561.1.....$407.5
Total noninterest income growth was 37.7%, which reflects good growth across the board but especially the addition of Piper Jaffray to the company. Without the contribution of that unit, noninterest income growth would have been nearly 14%, which would still be excellent.
The net effect of all of this is that US Bancorp has an excellent set of financials. What stands out are the company's low efficiency ratio and its resulting excellent capital efficiency. This will be a company that we will have to weigh heavily in our choice of investment.
Price/Valuation
Share Price.....$45 1/16
Market Cap.....$33,905.48
Price/Book.....5.53
Price/ Tangible Book.....8.15
BVPS.....$8.14
Price/Assets.....45.97%
Price/Net Loans.....61.88%
Price/Deposits.....68.76%
Price/Tangible Assets.....47.23%
Price/Revenues.....6.93
P/E.....26.74
Amortization-Adjusted P/E.....24.26
Discount/Premium to Group.....15.0%
EPS.....$1.69
Cash EPS.....$1.86
Diluted Sharecount.....752.41
1998 EPS Estimate.....$2.05
1999 EPS Estimate.....$2.45
Multiple on 1998 Est......21.98
Multiple on 1999 Est......18.39
Amort-Adjusted Multiple on 1999.....17.19
Discount/Premium to Group.....3.1%
Capital Productivity/Efficiency
Asset Turnover2.....6.89%
Asset Turnover.....6.73%
ROE2.....23.33%
ROE.....21.17%
Amortization Adjusted ROE.....32.51%
ROA.....1.92%
ROA2.....1.968%
Net margin2.....28.56%
Net Margin.....25.92%
Efficiency Ratio.....45.59%
Interest Income/AEA.....8.59%
Interest Expense/AEA.....3.69%
Net Interest Margin.....4.90%
Balance Sheet
Cash & Nonearning Assets.....$7,405.0
Cash & Nonearning Last Year.....$6,679.0
Long Term Debt.....$11,381.0
Shareholder's Equity.....$6,127.0
Last Year Equity.....$5,853.0
Tangible Equity.....$4,160.0
Last Year Tangible Equity.....$4,436.0
Tangible Assets.....$71,783.0
Last Year Tangible Assets.....$70,258.00
Total Assets.....$73,750.0
Earning Assets.....$63,138.0
Last Year Earning Assets.....$61,538.5
Last Year Assets.....$71,675.0
Total Liabilities.....$67,623.0
Goodwill.....$1,967.0
Last Year's Goodwill.....$1,417.0
Gross Loans.....$55,778.0
Loan Loss Reserves.....$982.00
Loan Loss Reserves %.....1.76%
Leverage
Equity/Tangible Assets.....8.54%
Average Equity/Average Assets.....8.24%
Average Equity/Average Assets (Tangible).....6.05%
Assets/Equity.....12.14
Avg. Assets/Avg. Equity (Tangible).....16.52
Loans to Deposits.....113.12%
LT Debt/Equity.....185.75%
Leveraged Capital Ratio.....7.40%
Tier 1 Capital Ratio.....7.20%
Total Risk Based Capital Ratio.....11.50%
Income Statement
Revenues.....$4,893.00
Interest Income (TTM).....$5,355.3
Interest Expense (TTM).....$2,299.1
Net Interest Income.....$3,056.2
Provision for Loan Losses.....$458.00
Noninterest Income (TTM).....$1,836.8
Noninterest Expense (TTM).....$2,359.90
Net Income for Common (TTM).....$1,268.19
Amortization Adjusted Earnings.....$1,397.49
Noninterest income/interest income.....34.3%
Noninterest income/revenues.....37.54%
Noninterest income/NII.....60.10%
Amort. Adjusted Net/Revs......28.56%
Amortization of Goodwill.....$129.30
Credit Quality
Nonperforming Loans.....$273.50
Nonperforming Assets.....$300.4
Loan Loss Provision/Net Interest Income.....14.99%
Loan Loss Provision/Gross Loans.....0.82%
Net Charge Offs.....$453.90
Nonperforming Assets Ratio.....0.54%
Reserves/Nonperforming Loans.....326.90%
Months Net Charge-Offs in Reserves.....26.0
Loan Loss Provision/Net Charge Offs.....100.90%
Deposits
Deposits.....$49,307.0
Noninterest bearing deposits.....$15,745.0
Noninterest bearing deposits last year.....$15,978.0
Noninterest deposits/deposits.....31.93%
Deposits/Liabilities.....72.91%
Non Jumbo/Jumbo CDs.....3.7
Risk-Based Capital Productivity
ROE2*Tier1.....16.80
Leverage*Turns*Net Margin2.....1.69
* Net interest margin is calculated roughly as (taxable equivalent interest income before credit loss provision minus interest expense) divided into earnings assets. Earning assets is roughly equal to assets minus cash minus property and equipment minus goodwill. The Fed defines earning assets as: Earning assets (including those that are in nonaccrual status) consist of interest-bearing balances due from depository institutions, investment securities, federal funds sold and securities purchased under agreements to resell, loans and leases (net of unearned income), and trading assets.
Touchstone Friday. This week the Drip Port sent $60 to buy more Campbell and $40 to buy more J&J. There's time on Johnson & Johnson, as that won't be bought until the first week of August, but Campbell will be purchased next week by the transfer agent. This week the portfolio enjoyed strength while the S&P fell nearly 4%.
On Monday, we considered the new Campbell Soup DRIP offerings and shortcomings. On Tuesday, we introduced Mellon Bank and on Wednesday we wrapped up the big ripe Mellon. It's a good lookin' bank. On Thursday, we wrapped up First Tennessee. Have a great weekend.
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