Reuters

U.S. Bancorp, which last month repaid $6.6 billion of federal bailout money, is eyeing expansion in the western United States, as it prepares to soon extinguish the government warrants to buy its stock, Chief Executive Richard Davis said.

In an interview in New York, Davis also said the bank expects to build reserves for loan losses 'for the rest of this year,' while the U.S. economy stays in recession through the middle of 2010, 'with a transition to improvement' thereafter.

While first-quarter reserves nearly tripled from a year earlier, U.S. Bancorp has weathered the credit crisis better than most large rivals.

The Minneapolis-based lender was among 19 large banks that underwent 'stress tests' of their ability to handle a recession, and was among nine found not to need more capital.

While 10 of the banks repaid their bailout money in June, warrants worth billions of dollars are outstanding. Davis said the disposal of those warrants will come soon.

'It's definitely a third-quarter event,' he said. 'A conclusion could mean a decision not to buy back the warrants. But you'll definitely have clarity around the first 10 banks.'

U.S. Bancorp ended March with $263.6 billion of assets, and 2,847 branches in 24 U.S. states, mostly in the western two-thirds of the country. Warren Buffett's Berkshire Hathaway Inc is one of its largest investors.

EXPANSION PLANS

In the last eight months, U.S. Bancorp bought the bank operations of failed California lenders Downey Financial Corp  and PFF Bancorp and the deposits of the failed Bank of Idaho, and Davis said he would 'absolutely' buy more failed lenders.

Forty-five banks failed in the first half of 2009, and Davis expects the failure rate to accelerate as more community banks succumb to commercial real estate losses. Nevertheless, he said the west coast, among the areas hardest hit by the housing and credit crises, is where he targets growth.

'California, Arizona, Nevada, the very same markets that have been harmed the most,' he said. 'They're first in, first out. It's a good time to continue to grow your market share.... My company is heavy midwest -- I've got two-thirds midwest, one-third west coast -- so for me to create more of a balance, I like the growth projection of the west coast.'

U.S. Bancorp is also adding jobs in its less-volatile payments business, and hopes to add market share, Davis said.

Expansion would come as the industry retrenches from often reckless expansion into risky debt and securitizations that led to the merger, collapse or effective government takeover of several large financial services companies.

BANKS CONSERVE CAPITAL

The Obama administration last month proposed revising U.S. financial regulation. Davis expressed 'very high confidence' the process will work out, even if changes leave banks less profitable than they once appeared.

'Banks after this cycle will make less money,' he said. 'We are going to put away money in good times for loan losses and for capital protection, and we're going to start paying our deposit insurance premiums, which we had stopped paying quite some time ago when there was an excess. Those are three arithmetic-based items that will take (banks') profits down. That is a singular negative event for an investor.'

He nevertheless said he was 'absolutely positive' that the ratio of banks' share prices to earnings 'will go up handsomely after this downturn. Because of these actions, we will not have the risk of this Armageddon fallout.'

That would help U.S. Bancorp, whose stock through Wednesday was down 38 percent over the last year, almost the same as the 39 percent drop in the KBW Bank Index .

Like many rivals, U.S. Bancorp in the last year eliminated most of its dividend and halted share buybacks. Davis would not comment on when the bank might restore its payout, which it lowered 88 percent in March, or restart buybacks.

'As we start to get a better line of sight of (our) loan losses, it would give me a much more core understanding of my earnings,' he said. Stock buybacks will not happen 'in the near term, because I don't have that line of sight yet,' he said.