Published: March 17, 2008

U.S. Bancorp (NYSE: USB, $31.56) is the nation's sixth-largest bank in terms of assets -- with nearly $238 billion at last count. The Minneapolis-based firm operates over 2,500 branches in 24 states, mostly in the western and mid-western parts of the country, including an established presence in key markets such as St. Louis, Denver and Seattle.

As of last quarter, the bank had a growing portfolio of credit card, commercial, residential mortgage, automobile, construction, and other loans totaling $151 billion. To support those loan activities, the firm has attracted more than $125 billion in deposits, roughly one-fifth of which are non-interest-bearing -- essentially free money.

Over the past year, the company has seen solid increases in both loans and deposits. More importantly, it paid out just 3.8% on those interest-bearing liabilities, far below what it earned on loans and other investments -- with the net interest margin expanding to 3.91%. That rate could move even higher in the coming months thanks to a more favorable interest rate environment.

Unlike the disastrous fourth-quarter results that most in the industry suffered, U.S. Bank managed to report increased revenues and flat adjusted earnings for the period. Part of the credit goes to a healthy $8 billion increase in loans outstanding, which led to a respectable jump in interest income. At the same time, non-interest revenue sources such as debit card transactions, ATM processing charges, and trust/investment management fees also ticked higher and now represent 51% of the total -- up from just 44% a few years ago.

As for credit quality, U.S. Bank remains at the very top of its peer group. Non-performing assets and charge-offs for bad loans have dropped precipitously in recent years and now stand at around 0.60% and 0.45%, respectively. While the company is not immune to current conditions, it only reported a +7% increase in non-performing assets from the third quarter -- versus an average spike of +42% for the rest of the industry.

And if the firm can hold up this well under an extraordinarily challenging operating climate, it's easy to see why it has performed so well when times are good. With stellar returns on equity (ROE) north of +22% on average, U.S. Bank is easily the most profitable among its immediate peers. And its efficiency ratio (non-interest expenses/total revenues) of 49% is one of the best in the industry.

Due to this performance, shareholders have certainly reaped the rewards. U.S. Bank (and the company's predecessors) has dished out annual dividends for 145 consecutive years -- with payments increasing every year for almost the past four decades. Over the past few years, management has returned every penny of earnings plus some in the form of dividends and share repurchases, and the ongoing goal is to give back 80% of each year's profits.

Despite the company's diversified revenue sources, highly efficient network, strong credit quality and limited exposure to the troubled subprime sector, the shares have still lost ground -- although they have rebounded powerfully in recent weeks. Still, those who act now can lock in a robust yield of 5.4% and look forward to ample capital gains.

With all this in mind, now might be a good time to at least put this market leader on your radar screen. And you don't have to take my word for it. Warren Buffett's Berkshire Hathaway (NYSE: BRK-B) has just scooped up another 2.2 million shares of the stock, raising its total stake in the company to nearly 70 million shares.

Nathan Slaughter
Editor
Half-Priced Stocks

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About Nathan Slaughter

Nathan Slaughter has developed a long and successful track record over the years by investing primarily in deeply discounted securities. He uses advanced discounted cash flow techniques, along with a host of fundamental research, to uncover quality stocks that are trading well below their actual intrinsic value.

Nathan's previous experience includes a long tenure at AXA/Equitable Advisors, where he provided comprehensive investment advisory services to small businesses and high net-worth clients. He also honed his research skills at Morgan Keegan, where he performed asset allocation, retirement planning, and consultative portfolio management services.

Several years ago Nathan switched gears and decided to devote his time exclusively to financial analysis and writing. He has since published hundreds of articles for a variety of prominent online and print publications, and he now writes exclusively for StreetAuthority.com.

Nathan's educational background includes NASD series 6, 7, 63, & 65 certifications, as well as a degree in Finance/Investment Management. He currently resides in Shreveport, LA with wife Julie and sons Aidan and Riley. 

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