U.S. Bancorp took a step into the subprime mortgage business on Monday, saying it will buy 17% of a California company that caters to homebuyers with tarnished credit.

The Minneapolis banking company said it would pay $20 million for preferred stock in New Century Financial Corp. of Irvine, which originated $914 million in the third quarter. The deal is expected to close in early December, pending regulatory approval.

"The deal with U.S. Bancorp provides validation that specialty finance has long-term value and growth potential," said Robert K. Cole, New Century's chairman and chief executive officer.

U.S. Bancorp is not the first banking company to move into subprime lending. KeyCorp and First Union Corp. have bought two of the best known names in the business-Champion Mortgage and Money Store Inc., respectively.

But unlike those companies, which struck their deals amid an earnings boom for subprime lenders, U.S. Bancorp is making its move at a time of intense strain for the sector. Investors have grown jittery about rising delinquencies, loan prepayments, and the subprime business' peculiar accounting practices, leaving the sector strapped for cash. Even some profitable companies have found themselves out of favor.

New Century is a case in point. The company, which went public in June 1997, saw its shares reach a high of $19.50 on Oct. 8, 1997, then tumble to a low of $3.75 on Oct. 7 of this year. Shares closed Monday at $8.6875, up $1.1875.

But New Century's earnings climbed to $8.6 million, or 57 cents per share, in the third quarter, up from $7.0 million, or 46 cents per share, in last year's third quarter.

U.S. Bancorp, which described the deal as a strategic alliance, sized up this situation and saw considerable potential, executives said. They said they were impressed with New Century's track record and had confidence in its management.

"We view this as an opportunity to extend our franchise into the home equity market for people with credit impairments," said Brian A. Smith, a senior vice president in the retail product division of U.S. Bank. "We do a tremendous amount of A-quality home equity lending and do nothing with the turndowns."

For New Century, teaming with the $74 billion-asset U.S. Bancorp means access to the capital it needs to grow. U.S. Bancorp said it would purchase loans generated by New Century over the next 12 months, paying an undisclosed amount of cash.

"Being able to sell off whole loans provides us liquidity and the ability to think about increasing loan production," Mr. Cole said.

U.S. Bancorp and New Century also would cross-sell mortgage and other financial products and services through each other's branch systems. New Century owns 140 branches in 30 states; the bank operates 1,000 in 17 states.

Though analysts praised the deal, they do not expect it to add noticeably to U.S. Bancorp's earnings per share.

"I expect other banks that have a long-term interest in the below-prime segment to use this period of carnage in subprime as an area of opportunity," said Ben Crabtree, an analyst with Dain Rauscher in Minneapolis. "It looks like an overall profitable deal, but you'll not notice the results much."

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