U.S. Bancorp grabs failed banks: The Minneapolis firm quietly became the nation's largest buyer of busted banks, while exposing itself to minimal downside risk.

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Nov 03, 2009 (Star Tribune - McClatchy-Tribune Information Services via COMTEX) -- USB | Quote | Chart | News | PowerRating -- As the federal government sells dozens of banks amid the worst financial crisis since the Great Depression, its biggest customer is right here in Minneapolis.

Indeed, U.S. Bancorp has over the past year acquired 12 failed banks and thrifts, from Southern California to Idaho, with assets totaling $35 billion. No other bank in the nation has purchased as many failed institutions and failed-bank assets over the same period. The bank's latest transaction occurred Friday when it agreed to buy nine failed banks that were part of FBOP Corp., a multibank holding company based in Oak Park, Ill.

In so doing, U.S. Bancorp has quietly set the model for how to buy troubled franchises that have landed in government hands, analysts say. In each transaction, U.S. Bancorp has picked up valuable deposits and branches while cushioning itself from loan losses through agreements with the Federal Deposit Insurance Corp. On Friday, the FDIC actually paid U.S. Bancorp about $500 million in cash to take the nine FBOP banks off its hands.

The deals have enabled U.S. Bancorp, the nation's sixth-largest bank with $264 billion in assets, to double its branch network in California and expand its presence in several key markets, including Chicago and Los Angeles, with little downside risk, say analysts. "It's called expanding your bank on the cheap," said Jaime Peters, a bank analyst with Morningstar. "These failed-bank deals enable U.S. Bancorp to build its franchise on very, very favorable terms."

Though U.S. Bancorp executives largely sat on the sidelines during the bank acquisition wave earlier this decade, they went on the offensive last year, just as many of the bank's larger rivals -- beset with rising loan losses and indigestion from difficult acquisitions -- backed away. However, in keeping with its tradition of conservative investing, U.S. Bancorp has focused on smaller institutions in markets where it already operates.

The buying spree began when U.S. Bancorp acquired all the deposits and some of the assets of two California savings and loans that failed on the same day last November. The thrifts, Downey Savings & Loan of Newport Beach and PFF Bank & Trust of Rancho Cucamonga, had assets totaling $16.5 billion and more than 200 branches. Those two deals were followed by the takeover of the failed First Bank of Idaho in Ketchum and the purchase of 20 branches in Nevada of Colonial Bank, a failed lender with headquarters in Alabama.

The bank's return to the acquisition fray comes at a time when the government is seeking buyers for failed institutions all over the country. The FDIC, which insures bank deposits, has closed 115 institutions this year, including five banks in Minnesota. FDIC officials have said they don't expect the pace of bank closings to taper off until sometime next year.

"The economics of these deals are attractive because what you're getting is a mature network of branches that have customers and real net income at the branch level," said Rick Hartnack, vice chairman of consumer banking for U.S. Bancorp. "The key is to cut out the things that don't work ... and let the good parts keep running."

However, competition for troubled banks is beginning to intensify as loan losses at larger banks begin to ebb and capital levels stabilize. An FDIC official said Monday that the agency received 41 bids for the nine FBOP banks, a hopeful sign that more banks are willing to take risks on troubled institutions. Many failed banks have received only one or two bids.

"I can't recall seeing that many bids coming in for one institution," said David Barr, an FDIC spokesman. "It is definitely encouraging."

But even with the spirited competition, U.S. Bancorp still walked away with a "very low-risk deal," said Peters of Morningstar in Chicago. The deal boosts U.S. Bancorp's asset base by about 7 percent while giving the bank about 150 branches in California, Illinois, Texas and Arizona.

U.S. Bancorp estimates that losses on the FBOP banks' loan portfolio will total about $3.9 billion; however, the FDIC agreed to cover 80 percent of the first $3.5 billion of losses and 95 percent of losses above $3.5 billion.

On Monday, the first day of trading after the deal was announced, two investment firms raised their recommendations on U.S. Bancorp, largely on the strength of the FBOP transaction.

"Of all the types of deals we have seen during the crisis, we most admire [U.S. Bancorp's] philosophy," wrote Sandler O' Neill & Partners analyst R. Scott Siefers, who upped his rating to "buy" on Monday. "The manageable-size methodology helps to keep powder dry for future opportunities, means that no individual deal carries inordinate integration risk, and also implies that investors are less likely to get surprised by a deal that is too big to handle."

Shares of U.S. Bancorp rose 62 cents to $23.84 on Monday.

Chris Serres --612-673-4308

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