Is U.S. Bancorp becoming too big to fail? Probably not

Last Friday, regulators seized nine banks, the most on a single day since the financial crisis began more than two years ago. Sure, it was a sign of just how sick many financial institutions have become, but it wasn't all bad news. That's especially true for U.S. Bancorp (USB), the Minnesota-based regional bank picked by the Federal Deposit Insurance Corp. to take over all nine of the failed banks' branches and deposits.

U.S. Bancorp has emerged as the past year's biggest buyer of failed banks. And Friday's haul was its largest yet. It took over California, Texas, Illinois and Arizona-based subsidiaries of FBOP Corp., a privately owned bank holding company with headquarters outside Chicago. The deals bring U.S. Bancorp some $18 billion in assets and 150 branches -- and raise an interesting question: Just how big can it grow by feeding on failed banks' remains?

Investors seem to be happy with last week's deals, pushing U.S. Bancorp's stock up 1.64 percent on a day when the S&P 500 is basically flat. And most analysts who follow the company are applauding the acquisitions, which will give it 3,000 branches across 25 states. That's the fourth-biggest network among U.S. banks.

All told, deals to take over failed banks from the FDIC have brought U.S. Bancorp some $27 billion in deposits in the past year. Some quick arithmetic suggests its total deposits, including the FBOP banks, are somewhere in the vicinity of $168 billion, sixth most after Bank of America (BAC), Wells Fargo (WFC), JPMorgan Chase (JPM), Citigroup (C) and PNC Financial (PNC).

So is U.S. Bancorp flirting with becoming too big to fail?

Probably not. The company "is not looking for transformational deals, but will focus on FDIC-assisted transactions for fill-in opportunities" in markets it already serves, according to BMO Capital Markets analyst Peter J. Winters, who has an outperform rating on the stock. In other words, it's doubling down on bets it has already made.

Not So Deeply Intertwined

And remember, being "too big to fail" isn't just a matter of size. Much rests on how interconnected a bank is with other financial institutions via credit default swaps and other complex instruments, for example. U.S. Bancorp isn't really involved in those kinds of transactions, so its well-being isn't as tied to the health of the entire financial system as, say, JPMorgan's is.

That's not to say everyone is enthusiastic about U.S. Bancorp's prospects. Veteran analyst Richard Bove at Rochdale Securities says it isn't setting enough money aside to cover loan losses, which are mounting. And its stock doesn't reflect the risk that Washington will tighten financial regulations in ways that will make it and other banks less profitable, he wrote in a note to clients.

Still, U.S. Bancorp is neither as big as troubled giants BoA and Citi (which control 12 percent and 4.24 percent of U.S. deposits, respectively, according to SNL Financial). Nor has it been nearly as battered by the turmoil that's been buffeting the financial industry for the past two years. That means it's probably well positioned to keep benefiting by buying on the cheap as regulators cull weak banks.

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