U.S. Bancorp (USB) will increase its reserves on mortgages because of the threat of more buybacks, Chief Executive Richard Davis warned Tuesday.
Freddie Mac called U.S. Bancorp late Friday and said it would review mortgages that the Minneapolis bank had made as far back as 2004 for possible repurchases, Davis said. Previous reviews had focused on loans made since 2006, and the look back at older mortgages will force U.S. Bancorp to raise reserves slightly in the fourth quarter, he said.
"That was unexpected," Davis said at the Goldman Sachs Financial Services Conference in New York. "That is the reason the mortgage business gets harder to love because you don't know whether or not you're done with" the interpretation of rules.
Fannie Mae and Freddie have the authority to force banks to buy back loans that do not meet their requirements. Freddie has started telling several banks including U.S. Bancorp that file reviews next year will include nonperforming loans originated in 2004 and 2005, Freddie spokesman Brad German said, though the company "fully anticipates requesting fewer total nonperforming loan files in 2013 than we did in 2012." Freddie has not made any major changes to its repurchase policies on nonperforming loans, nor are any planned next year, he assured.
U.S. Bancorp, which has $352 million of assets, was less active in mortgages eight years ago, so the reserve increase will only cost "one or two pennies" of its earnings per share in the fourth quarter, Davis said.
Davis also signaled caution on mergers and acquisitions, and was pessimistic about next year.
U.S. Bancorp has been busy in M&A in recent years, doing 25 deals since the financial crisis, but it is "just slowly moving along" now and would remain "quiet" next year, Davis said of its deal-related plans.
It will "not run out and buy a huge payments company" or "buy a huge bank and then end up wondering where all the fee businesses went," he said.
Still, the company has struck several niche deals this year, including its agreement to buy FSV Payment Systems last month to expand into the prepaid card processing business. All of the deals are part of U.S. Bancorp's goal to diversify earnings and increase fee-based revenues. Davis said he wants fee-based revenue to reach more than 55% of the company's total revenue. Fees made up 46% of revenue at Sept. 30.
There will be an "exponential growth opportunity in the fee business in the next year," he said.
Lending at U.S. Bancorp will increase from the third to the fourth quarter, but its net interest margin will fall four to six basis points largely because customers are staying highly liquid, Davis says.
Davis was even more cautious about overall economic and banking growth next year. He joked that in a recent meeting with two separate groups of analysts, the first group warned the second group that his outlook was "pretty negative." Davis said he was being "pretty realistic."
"We're actually quite concerned about the next year. We think it's going to be very, very difficult for banks," he said. But "we're prepared for it."
U.S. Bancorp will keep expenses lower than revenues next year, even if the pace of revenue growth is less, he vowed. He cautioned that does not mean the company would lay off people or close branches; but that they would be "careful" in growing.
"We won't open as many branches" next year, he said. "We're just going to be very careful … so much so, that even things like our merit [program] increases in our company are going to be limited to people who don't enjoy a bonus."