DBRS Comments on U.S. Bancorp’s 4Q10 Earnings – Senior at AA Unchanged

DBRS Inc. (DBRS) has today commented that the ratings of U.S. Bancorp (USB or the Company), including its Issuer & Senior Debt rating of AA, are unchanged following the release of the Company’s 4Q10 earnings. For the quarter, USB reported net income of $974 million, up from $908 million in the third quarter.

USB’s fourth quarter results reflected further improvement in credit and solid underlying balance sheet trends, including linked-quarter deposit and loan growth. In DBRS’s view, the Company’s franchise strength and its ability to generate consistent revenues with well-managed expenses were again evident in quarterly results. Benefitting from a $103 million pre-tax gain on the exchange of the long-term asset management business of FAF Advisors for an equity interest in Nuveen Investments, 4Q10 revenues were a record $4.7 billion, up 2.9% from 3Q10. Excluding the Nuveen gain, fourth quarter revenues were split 54%/46% between net interest income and noninterest income, the same as 3Q10. USB’s high ratings recognize its strong and sustainable operating performance that arises from its diverse business mix, strong deposit franchise and a relatively low risk profile. Therefore, DBRS sees 4Q10 results as consistent with the Company’s Issuer & Senior Debt ratings of AA with a Stable trend.

Net interest income increased 0.9% from 3Q10 to $2.5 billion as higher levels of earning assets offset a declining NIM. The Company reported a second consecutive quarter of average loan growth despite historically low levels of wholesale line utilization, with balances up 1.5% from 3Q10. Average deposit growth was a solid 4.2% (unannualized) in the quarter as growth in noninterest-bearing and lower cost balances offset declines in time deposits. Period end deposits were up by more, 9.0% to $204.3 billion, largely due to the acquisition of Bank of America’s securitization trust administration business, which closed very late in the quarter. NIM declined by 8 basis points linked quarter to 3.83% as higher levels of investment securities and residential mortgages more than offset the decline in their yields.

The Company’s diverse set of fee businesses exhibited another solid performance in the fourth quarter in DBRS’s view, despite pressure from recent legislative and regulatory changes. Excluding the Nuveen gain, 4Q10 noninterest income was $2.1 billion, up slightly ($9 million) from 3Q10. Trust and investment management fees and payments-related fees, two key fee businesses, both increased from 3Q10, while Mortgage Banking revenues were down from the very strong third quarter reflecting interest rate movements in the quarter as well as typical seasonality. As expected, changes to overdraft fee policies continued to weigh on service charge revenues in the quarter as these revenues fell 10.0% from 3Q10 and 39.5% from 4Q09 to $144 million. Regarding proposed legislation limiting debit interchange fees, which were approximately $515 million in 2010, USB noted that in its current form, the proposed changes would reduce these revenues by approximately 75% beginning in 2H11. The Company estimates that in 2011 and 2012, it can recapture approximately 50% of the lost revenue through changes in product feature and pricing.

Credit quality continued to trend better in the quarter. Nonperforming assets (NPAs) and net charge-offs (NCOs) declined in 4Q10 and 90+ day delinquencies and criticized asset levels (excluding covered loans) improved for a fourth consecutive quarter, indicating likely continued improvement in credit costs in coming quarters. Given these trends, for the first quarter since the start of the downturn, USB reduced its reserves in the quarter. Fourth quarter NCOs, excluding covered loans, fell $54 million to $934 million, while the provision credit losses was $912 million. DBRS notes that at 3.03% of total loans, excluding covered loans, and 192% of nonperforming loans, excluding covered loans, the Company’s $5.5 billion allowance for credit losses remains solid.

USB’s financial fundamentals and capital position remain sound and support the Company’s rating levels and Stable trend. Reflecting its capital strength and internal capital generation ability, the Company’s Tier 1 and Tier 1 Common capital ratios improved to 10.5% (3Q10: 10.3%) and 7.8% (3Q10: 7.6%), respectively, at year end. In addition, the Company estimates that its Tier 1 Common ratio under Basel III was 7.3% at December 31, 2010, above the level required by 2019 under current guidelines. DBRS believes that the Company’s capital position provides substantial loss absorption capacity.

Currently, USB is one of the 19 banks subject to a second round of Federal Reserve stress tests to ensure capital adequacy. The stress tests will test a bank’s ability to absorb losses over the next two years under at least two scenarios (baseline and adverse) and will take the proposed Basel III capital requirements into account. Test results will also determine whether an institution may resume capital distributions (stock dividends and/or repurchases). The stress test results are expected to be communicated to BHCs (not publicly) no later than March 21, 2011. Given its generally strong capital levels, DBRS expects a positive result.

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

The applicable methodologies are Global Methodology for Rating Banks and Banking Organizations,
Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, Rating Bank
Subordinated Debt and Hybrid Instruments with Discretionary Payments, and Rating Bank Preferred
Shares and Equivalent Hybrids which can be found on the DBRS website under Methodologies.

The sources of information used for this rating include the company documents, the Federal Deposit
Insurance Corporation and SNL Financial. DBRS considers the information available to it for the
purposes of providing this rating was of satisfactory quality.

Lead Analyst: William Schwartz
Initial Rating Date: 4 April 2005
Most Recent Rating Update: 8 June 2010

For additional information on this rating, please see the linking document below.