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Leigh Baldwin & Co.

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Stock of the Week

US Bancorp

June 12th 2009 U.S. Bancorp
Industry: Banking
NYSE Symbol: USB
Price as of June 12th: $18.58


In the last year, the government was forced to get directly involved in the banking system, creating a $700 billion fund called, TARP, to providing the system with enough money to ease concerns and provide liquidity during this financial crisis. More than 600 banks have received TARP money. Twenty-two smaller banks already repaid their funds. This week the government granted 10 of the largest banks permission to repay their TARP money because they were adequately capitalized. The list includes JPMorgan Chase, American Express, Goldman Sachs, U.S. Bancorp, Capital One Financial, Bank of New York Mellon, State Street, and BB&T. This week we'll feature one of these 10 banks, U.S. Bancorp.
In April, U.S. Bancorp reported first-quarter profits of $419 million, or 24 cents per share. The bank earned $1.08 billion, or 62 cents per share, during the same quarter a year ago. Like many banks amid the on going recession, U.S. Bancorp is facing more loan losses as customers fall behind on payments. U.S. Bancorp says it set aside $1.32 billion for loan losses during the first quarter. The bank's provision for loan losses totaled $485 million during the first quarter in 2008. Despite the rising charges, U.S. Bancorp's profit was buoyed by record mortgage banking revenue. U.S. Bancorp received $25 billion in loan applications during the quarter and mortgage loan production volume reached $13.4 billion. That production allowed U.S. Bancorp to more than double its mortgage banking revenue. It generated $233 million in mortgage banking revenue during the first quarter, compared with $105 million during the same period last year.
Net interest income, the difference between how much it costs a bank to borrow money and how much it receives from lending money, increased 15% to $2.1 billion in the first quarter from $1.83 billion during the same quarter a year earlier.
In the second quarter business has remained solid. On a recent analyst call, U.S. Bancorp says the mortgage business in April and May has performed well, similar to March. The company remains commmitted to holding most of the loans they originate. U.S. Bancorp doesn't expect commercial real estate to perform anywhere near as bad as the government's stress test scenario. If it does, U.S. Bancorp said they can handle it. The company notes that their loans tend to be very well collateralized. With respect to recent public offering, notes it was well-subscribed and went out at only a minor discount to market. The money was raised to repay TARP.
The valuation of U.S. Bancorp should only get better over the next several years. Currently the stock trades for 2 times sales, 12 times next years earnings, and 1.6 times book value of $11 a share. The dividend is small for now. The company lowered the dividend after taking TARP money. However, now that they are returning the money, the company will be able to raise the dividend once again, hopefully next year. The analyst community is warming up to the financials. US Bancorp has received four upgrades in the last several weeks from Morgan Stanley, Citigroup, RBC, and BMO Capital. The highest price target is from Morgan Stanley with a $30 price target. Warren Buffet raised his stake in the company back in the first quarter by 1.5 million shares to 69 million or a 4% stake. It's always good to be on the same side as Warren Buffet.