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U.S. Bancorp boosted its profit in part by setting aside $50 million less to cover soured loans, an industry practice drawing attention from regulators.

Nati Harnik, Associated Press

Refi boom propels U.S. Bank

  • Article by: JENNIFER BJORHUS
  • Star Tribune
  • October 18, 2012 - 12:10 PM

The mortgage refinancing wave still sweeping the country helped lift U.S. Bancorp to another record-breaking quarter.

The ride is "unsustainable," CEO Richard Davis acknowledged to analysts Wednesday, but the bank will take it as far as it will go, which should be "well into next year."

The Minneapolis-based lender on Wednesday posted its 12th consecutive quarter of double-digit, year-over-year profit growth. Net income jumped nearly 16 percent in the third quarter, or 74 cents per share, to $1.5 billion on growth in commercial loans and residential mortgages, hitting Wall Street's consensus estimate.

The bank boosted profits by setting aside $50 million less to cover soured loans, a common industry practice drawing attention from regulators. Total net revenue at the nation's fifth-largest bank was up 8 percent from a year ago, to $5.2 billion.

Davis, who has run U.S. Bank since 2006, summed it up for industry analysts as "a pretty standard, almost boring quarter in a boring bank."

Davis said that when the mortgage boom exhausts itself, likely when interest rates rise, the bank's other lines, such as corporate trusts and payments, will pick up the slack.

"We know this is not a sustainable, forever kind of position," he said. "But we're not going to forgive it or give it away. While we're in it, we're going to keep growing it."

U.S. Bank shares closed Wednesday at $34.20, up 1.76 percent.

"This is a bank that's hitting on all cylinders," said Dan Werner, equity analyst at Morningstar Inc.

Still, Werner noted that the pace of the bank's double-digit profit growth is slowing.

"You do have to kind of wonder where the additional revenue is going to come from," he said. "I would suspect that they have some plans in mind with regard to the payment-processing business."

Mortgage-making aside, banks have been struggling to put deposits to work, squeezed by ultra-low interest rates and weak demand.

U.S. Bank's critical net interest margin -- a key gauge that measures the difference between what a bank makes on loans and what it must pay out in interest -- shrank by 0.06 percentage point from a year ago to 3.59 percent, although it was largely unchanged from the previous quarter.

The drop was primarily driven by higher balances in lower-yielding investment securities, the company said.

The bank's net interest income from loans and investments rose 6.1 percent from a year earlier and 2.6 percent from the previous quarter on loan growth, lower-cost core-deposit funding and lower rates on long-term debt.

Mortgages weren't the whole story. Commercial loans, too, were up about 22 percent from a year ago, although growth has cooled and such loans were up just 4.2 percent from the previous quarter.

Davis attributed the slowing to uncertainties over the upcoming presidential elections, the fiscal cliff, European recession and generally subpar economic recovery.

"I do think it is emblematic of customers feeling less comfortable," he said.

Noninterest income, such as fees for various services, rose 10.4 percent from a year earlier and 1.7 percent from the previous quarter, largely on strong mortgage banking. Overall, mortgage production nearly doubled from a year ago to $21.5 billion, although it slipped a bit from the previous quarter.

The majority of that production is from conforming loans the bank originates and sells, retaining the servicing rights, U.S. Bank CFO Andrew Cecere said in an interview. The remaining $5 billion or so is from non-conforming loans, such as shorter-term jumbo mortgages the bank originates out of its branches and keeps on its books.

"We've seen good growth in both categories," Cecere said.

Wells Fargo, J.P. Morgan Chase & Co. and U.S. Bank together now control about half of the U.S. market for new residential mortgages, an issue drawing scrutiny from lawmakers.

Jennifer Bjorhus • 612-673-4683

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