US Bancorp
...and Touchstone Friday
by Dale Wettlaufer (DaleW@fool.com)


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 CO 
   
A 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.

FoolWatch -- It's what's going on at the Fool today.


7/24 Close

Stock Close Change CPB $53 7/8 + 3/4 INTC $83 1/16 + 1/2 JNJ $76 9/16 +1 9/16
Day Month Year History Drip 1.06% 6.62% 11.20% (5.30%) S&P 500 0.09% 0.61% 17.56% 19.92% Nasdaq (0.21%) 1.92% 22.97% 21.16% Last Rec'd Total # Security In At Current 06/30/98 3.017 CPB $54.259 $53.875 07/01/98 9.724 INTC $80.239 $83.063 07/07/98 6.010 JNJ $69.708 $76.563 Last Rec'd Total # Security In At Value Change 06/30/98 3.017 CPB $163.70 $162.54 ($1.16) 07/01/98 9.724 INTC $780.21 $807.66 $27.45 07/07/98 6.010 JNJ $418.95 $460.14 $41.20 Base: $1700.00 Cash: $286.05** Total: $1716.3

The Drip Portfolio has been divided into 72.501 shares with an average purchase price of $23.448 per share.

The portfolio began with $500 on July 28, 1997, adds $100 on the 1st of every month, and the goal is to have $150,000 in stock by August of the year 2017.

**Transactions in progress:
7/21/98: Sent $60 to buy more CPB, and $40 to buy more JNJ.