Minneapolis, MN – based major regional bank, U.S. Bancorp (USB) recently finalized a settlement with the U.S. Department of Justice (:DOJ) worth $200 million. The settlement is related to the bank’s misrepresentation of government-backed mortgages originated by it.
With this settlement, the company will resolve claims associated with origination of faulty mortgage loans insured by the Federal Housing Administration (:FHA). U.S. Bancorp provided full co-operation to the DOJ investigation and settled the matter to avoid further litigation charges affecting its financials. Notably, the bank did not admit to any liability.
The bank acknowledged having served as an underwriter for faulty mortgage-backed securities sold between 2006 and 2011 that did not meet the insurance criteria as laid down by the FHA. The company’s misrepresentation resulted in huge losses for the taxpayers.
Notably, in the second quarter and prior to the aforementioned settlement agreement with the DOJ, U.S. Bancorp sold 3.0 million shares of the Class B common stock of Visa Inc., which recorded a net pretax gain of $214 million. Therefore, the sale of Visa Class B shares is expected to neutralize the DOJ settlement charges, thereby not affecting earnings per share in the second quarter.
Most recently, another major regional bank, SunTrust Banks, Inc. (STI) finalized a similar settlement with the U.S. Department of Housing and Urban Development and the U.S. DOJ worth $968 million. Other Wall Street biggies embroiled in similar hassles include JPMorgan Chase & Co. (JPM), Bank of America Corporation, Citigroup Inc. and Morgan Stanley (MS).
Despite the legal issues related to U.S. Bancorp’s mortgage business, the company has witnessed a 2.2% sequential increase in mortgage banking revenue in first-quarter 2014. However, given the still low interest rate scenario and uncertain market conditions, we remain skeptical about the sustainability of the same.
On the bright side, the company’s improving credit quality and consistent growth in the loan and deposit portfolio will be growth drivers going forward.
Currently, U.S. Bancorp carries a Zacks Rank #3 (Hold).