U.S. Bancorp Posts Q4 Profit With FDIC, Treasury Aid

U.S. Bancorp (USB) on Wednesday reported a net quarterly income of $330 million — or 15 cents per share — down from the 53-cents-per-share earnings reported in the previous-year period. The bank’s total residential mortgages increased 3.4 percent to $760 million in the quarter, according to its earnings statement. The bank’s mortgage-related revenue decreased more than 60 percent from the previous quarter to just $23 million in the fourth quarter due in part to “lower production income, partially offset by an increase in servicing revenue,” suggesting that, while origination were low, defaults were high. The bank reported it had allowed $84 million for residential mortgage credit losses in the quarter — an increase from the $71 million allowed in the previous quarter. It also allowed $52 million for losses related to home equity loans — or second mortgages — in the fourth quarter, also an increase from the previous quarter, when allowances for second mortgage-related losses came to $48 million. The increase in these losses were driven primarily by consumer loans and “reflected the impact of rising foreclosures on sub-prime mortgages and current economic conditions,” according to the statement. The bank reported average loan growth of 6.4 percent from the third quarter and average deposit growth of 15.2 percent from the year-ago period, showing a “benefit from the ‘flight to quality’ by customers seeking banks with strong capital,” according to the report. Nonperforming assets, however, ended the quarter at more than $2.6 billion, compared with the almost $1.5 billion reported for the third quarter. “The increase in nonperforming assets from a year ago including the Downey [Financial Corp.] and PFF [Bank & Trust] acquisitions was driven … [by] the residential mortgage  portfolio, an increase in foreclosed residential properties and the impact of the economic slowdown on other commercial customers,” the report read. The bank also said it expects the increase in nonperforming assets to continue “due to general economic conditions and continuing stress in the residential mortgage portfolio and residential construction industry. ” U.S. Bancorp in late-November absorbed Downey Financial and smaller Pomona-based PFF Bank when the Federal Deposit Insurance Corp. intervened as matchmaker, assuring it would assume the first $1.6 billion of losses on certain assets, and would then share in any further losses incurred from the absorption of Downey’s operations. In exchange for its portion of the loss sharing, U.S. Bank agreed in November to implement a loan modification program similar to the one the FDIC announced in August 2008 at IndyMac Federal Bank, that will see the bank attempt interest write-offs and principal deferment for troubled borrowers. Details were not provided on the implementation of this modification plan. Regarding the absorption of Downey and PFF, the bank said it would incur approximately $4.7 billion of cumulative credit losses, which would be offset by an estimated $2.4 billion benefit under the loss sharing agreements. Under the terms of the agreement, U.S. Bancorp said it will incur the first $1.6 billion of specified losses, “which was approximately the amount of the predecessors’ net assets.” After the first loss, the bank will incur 20 percent of the next $3.1 billion in losses and 5 percent of losses beyond that limit. U.S. Bancorp said in the quarterly report that it estimates its share of those losses will total some $700 million. “The impact of estimated credit losses on future cash flows from the acquired loan portfolios was included in the determination of the estimated value of the loans at the date of the acquisition,” bank officials said in the report. Before the Downey agreement, U.S. Bancorp had on Nov. 14, received more than $6.5 billion from the Treasury Department through the Troubled Asset Relief Program. “As our results and actions this quarter illustrated, we are actively lending to credit-worthy borrowers, we are investing in our businesses, we are supporting our communities and we are backing the efforts of the U.S. Treasury to stabilize the financial markets and increase the flow of credit to both consumers and businesses, all while creating long-term value for our shareholders,” president and CEO Richard Davis said in a media statement. Write to Diana Golobay at diana.golobay@housingwire.com. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.