DBRS Confirms U.S. Bancorp Senior Debt at AA

DBRS has today confirmed all ratings of U.S. Bancorp (USB or the Company), including its Issuer & Senior Debt rating at AA; the trend on all ratings is Stable. At the same time, all ratings of its principal operating bank subsidiary, U.S. Bank National Association, including its Deposits & Senior Debt AA (high) rating, have been confirmed. The rating action follows the announcement of U.S. Bank National Association’s acquisition of FBOP Corporation’s nine banking subsidiaries in an FDIC-assisted transaction that closed on October 30, 2009.

The completed transaction encompassed only FBOP’s nine operating banks with 150 branches, $15.4 billion in deposits and a total of $18.4 billion in assets. No other additional holding company assets or liabilities were acquired. FBOP assembled its multi-bank franchise by acquiring institutions in the higher growth markets of California, Arizona, Texas and Illinois. The $13.8 billion in purchased loans are substantially all covered by a loss sharing agreement with the FDIC where the FDIC assumes 80% of the first $3.5 billion in losses and 95% of losses above $3.5 billion. The Company estimates cumulative losses to represent approximately 28% of loans or $3.9 billion which DBRS estimates to be a credit cost of approximately $700 million for USB per the loss sharing agreement. The Company also has agreed to implement mortgage loan modifications on certain of the assumed residential mortgages as part of the agreement. DBRS notes that this FDIC-assisted structure is reminiscent of the Downey Savings & Loan Association and PFF Bank & Trust deals completed one year ago.

The Company, historically a strong and stable performer, has now further differentiated itself through the most recent financial market crisis. USB, although absorbing much higher credit costs, has managed to generate record levels of interest and fee revenues while still managing expenses prudently. This strong and resilient performance, which supports it AA rating, has enabled the Company to build its business and repay TARP while many others are retreating and focusing inwardly. Over the past year, USB has expanded both its branch banking and fee businesses through the acquisition of banks, payment processors, processor portfolios, credit card portfolios, and trustee businesses. These acquisitions, if well-managed, will likely further enhance the Company’s core revenue and capital generation abilities.

The Company’s ratings and today’s rating confirmation recognize a strong and sustainable operating performance that arises from a diverse business mix that includes top-tier market shares in banking, corporate trust, payments processing and various other financial services. These franchise strengths, combined with an efficient operating platform and relatively inexpensive funding, produce profitability that is consistently higher than that of its peers.

The banks acquired in the FBOP transaction will be beneficial to USB in several markets but especially California’s major metropolitan markets (adding 113 branches) and the Chicago MSA (adding 31 branches).

USB has a good track record in achieving cost savings and market share from acquisitions. DBRS noted that there are likely to be some asset quality challenges in the FBOP subsidiary’s loan portfolios but the downside protection from the FDIC loss-sharing agreement should make those manageable. The transaction will modestly reduce Tier 1 capital by 45 basis points (bps) and 40bps to Tier 1 common equity. Those ratios were 9.50% and 6.80%, respectively as of September 30, 2009 which DBRS considers to be strong given the Company’s risk profile, capital generation ability and prior exit from TARP.

U.S. Bancorp, a financial holding company headquartered in Minneapolis, Minnesota, is the seventh largest bank in the U.S. with reported total assets of $265 billion at September 30, 2009.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at: info@dbrs.com.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Banks and Bank Holding Companies Operating in the United States and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.