U.S. Bancorp Jumps on ‘Once in a Lifetime’ Servicing Chance

U.S. Bancorp, the nation’s fifth- largest lender by deposits, said it is pouncing on the opportunity to expand mortgage operations after the retreat of rivals including Bank of America Corp. (BAC)

“We see a market shift you only get once in a lifetime, and intend to enjoy it now,” Chief Executive Officer Richard Davis said today in a conference call. “Because the market, the dynamics have changed, we’ll continue to enjoy even greater growth than maybe we might’ve thought.”

Davis, who has run U.S. Bancorp since 2006 and hasn’t ever reported a quarterly loss, reinvested capital during the financial crisis as larger banks were saddled with surging loan losses. The Minneapolis-based lender has been building its mortgage-servicing business, while Bank of America said last year it will handle billing and collection on fewer home loans and sell some rights to competitors.

U.S. Bancorp (USB) has “gained so much credibility throughout the crisis and the credit cycle that when they go into something you can sleep pretty well feeling that they’re going to do it in a prudent fashion,” said Scott Siefers, an analyst at Sandler O’Neill & Partners LP in New York.

Minnesota’s largest lender serviced $200.2 billion of residential mortgage loans for others at March 31, up from $191.1 billion at Dec. 31 and $173.9 billion at the end of 2010. Bank of America’s servicing portfolio fell to $1.76 trillion at the end of 2011 from $2.06 trillion in 2010, according to the lender’s annual report, and Ally Financial Inc. (ALLY)’s dropped 1.2 percent to $356.4 billion.

Taking Market Share

“We’re taking it from some of the larger guys ahead of us,” Davis said on the conference call. “I don’t have to name names. You know who’s in it big and who’s growing, and you know who’s either backing down or not very present. We’re getting it from there.”

Servicers collect payments from borrowers and pass them on to mortgage lenders or investors, minus fees. They also handle foreclosures when borrowers don’t pay. The value of the rights depends largely on the expected life of the mortgage, which ends when a borrower pays off the loan, refinances or defaults. When rates drop and more borrowers refinance, mortgage-servicing rights decline.

With interest rates near record lows and demand for loans increasing, U.S. Bancorp has “upside on every single cylinder,” Davis said. “If you like what you see, wait until things get better.”

Net Income Increases

Davis said “exceptionally strong” mortgage banking drove an increase in fees in the first quarter this year. Mortgage banking revenue more than doubled to $452 million in the period from $199 million last year, according to a statement today. A 19 percent increase in residential mortgages helped raise total loans to $210.2 billion from $197.6 billion last year.

U.S. Bancorp said today first-quarter net income rose 28 percent to $1.34 billion, or 67 cents a share, beating the 64- cent average estimate of 31 analysts surveyed by Bloomberg.

The lender’s shares rose 39 cents, or 1.3 percent, to close at $31.55 in New York trading. The stock has gained 17 percent this year, compared with a 23 percent increase in the KBW Bank Index of 24 U.S. lenders.

“They don’t have any legacy issues that they’re contending with,” Siefers said. “As long as you don’t have that legacy baggage, you go in with the upper hand with some flexibility that others may lack.”

To contact the reporter on this story: Laura Marcinek in New York at lmarcinek3@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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