U.S. Bancorp’s mortgage growth a good sign for banking

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U.S. Bancorp’s third-quarter results serve as a reminder that a lower interest rate environment can have a silver lining: mortgage growth, especially in refinancings.

Executives at the Minneapolis bank say that the big boost delivered by its mortgage operation — in interest and fee income — stemmed from recent investments in people and technology to streamline the lending process itself.

Though U.S. Bancorp is the largest regional bank in the country, other banks can and will be able to follow its lead, analysts said. Lower long-term rates on U.S. Treasurys have driven a small boom in refinance activity, and low unemployment and a generally strong economy have been favorable for consumers. New mortgages are often preferred over refis, but absent a stronger housing market and greater certainty in the long term, investors may have to content themselves with stronger refinance activity.

“My own sentiment is that we’re entering a very challenging time for banks from the standpoint of net interest margins, so I’ll take whatever revenue momentum I can get,” said Scott Siefers, an analyst with Sandler O’Neill. “If that has to be mortgage refinancing, that is A-OK with me.”

John Mackerey, an analyst with DBRS Morningstar, said that U.S. Bancorp’s investments in its business had clearly paid off, but he added that “the other aspect is the rate environment was favorable for the refinance business, as well.”

Mortgage banking revenue at U.S. Bancorp increased 56% on a yearly basis to $272 million. Residential mortgage loans increased 10.6% to $68.6 billion. Refinancing accounted for roughly 40% of mortgage volume originated in the third quarter compared with 30% in the second quarter, Chief Financial Officer Terry Dolan said on a conference call with analysts Wednesday.

PNC Financial Services Group in Pittsburgh, which also reported earnings on Wednesday, originated $3.4 billion of mortgages in the third quarter, up 62% from a year earlier. Refinancing represented about 56% of that volume in the quarter, compared with 28% in the same period last year. Chairman and CEO Bill Demchak credited much of that increase to technological investments PNC had made in that business.

In an interview after U.S. Bancorp’s earnings call, Dolan said investments in its digital platform have helped to speed up decision times and cut down on paperwork, enabling bankers to spend more time with customers.

He said that 70% to 80% of U.S. Bancorp’s mortgage applications are done online and that the bank has reduced its loan processing times to about 45 days from 60 to 90 days.

He also cited several other factors behind the bank’s growth in mortgages, including its acquisition earlier this year of 25 mortgage production offices and about 200 mortgage loan officers from TIAA Bank.

“We shifted away from a focus on refinancing to purchase mortgages about two to three years ago,” he said. “We shifted away from correspondent to retail distribution and retail channels, focusing on home sales and Realtors and that whole network.”

U.S. Bancorp is anticipating further mortgage growth through the end of the year, but Dolan declined to get specific about how much growth he expected. More generally, the bank is anticipating its net interest margin will contract another 7 to 8 basis points in the fourth quarter, and last month it cut its profit growth forecast for the next three years. But the refinance business that gave U.S. Bancorp a boost this quarter is dependent upon long-term rates, making that harder to predict.

“Rates have moved down and up and down and up, and it’s really kind of hard to know where those will level out. We could see a shift in trade policy between China and the U.S., and rates could be in an entirely different spot three months from now or six months from now,” Dolan said. “At this point in time it’s really hard to predict where rates are going to go.”

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