U.S. Bank reports slump in earnings
Some high profile troubles have raised concerns about the soundness of banks.
This week, the Federal Reserve and Treasury Department came to the rescue of Fannie Mae and Freddie Mac, hoping to shore up confidence in the mortgage lending giants. The Fannie and Freddie troubles came on the heels of the failure of IndyMac, a big California bank that has been taken over by federal regulators.
U.S. Bank, the sixth largest bank in the country, is also having troubles. Loans the bank doesn't expect to be repaid have doubled to about $400 million and loans behind in payment have doubled to $1.1 billion.
But U.S. Bank CEO Richard Davis insists the bank has the financial wherewithal to weather the economic downturn.
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"I'm very, very comfortable with how this company is managing through this difficult environment," said Davis. "I'm very, very confident about our ability to be on the other side of this as a stronger company. This is a cycle. We'll come out of it."
Compared to a year ago, U.S. Bank has tripled the amount set aside to cover credit losses. The bank says the increased reserves are prudent given the woes of the housing, automotive and other sectors of the economy.
Davis ' confidence in U.S. Bank's staying power is echoed by firms that rate financial institutions. U.S. Bank gets average or above average ratings, for instance, from two of the leading bank rating agencies: BankRate and Bauer Financial.
More banks are getting into trouble as an increasing number of loans go bad. But banking consultant Bert Ely says banks are going through an inevitable bad cycle.
"It's normal with an economic or credit cycle. We've actually been blessed in recent years with very few failures. And I think that's one thing that's probably upsetting a lot of folks right now. They are not used to seeing this news in recent years," said Ely.
But Ely believes most banks are in good shape.
"Almost all of them [banks] are in pretty sound condition and will come through this just fine, even if they do report some few quarters of down earnings, or even have a loss in a quarter or two. They have capital to fall back on," Ely explained.
Capital is a cash cushion to get them through tough times.
Karen Dorway of Bauer Financial agrees with Ely about the overall health of the industry.
Bauer Financial says just three to four percent of banks nationally and in Minnesota fall into its problematic or troubled categories. That basically means bad loans are becoming a burden.
Dorway says most depositors don't lose any money when banks do fail. That's because each depositor is insured up to $100,000 for savings per institution. As well as up to $250,000 coverage for retirement accounts. And with some account juggling, protection can be even greater.
But Dorway warns small businesses should be careful not to exceed those insurance limits. And Dorway notes some consumers could inadvertently exceed insurance coverage, for instance, if they sell a home and park all the money on one bank.
"With the recent failure of IndyMac, the last I heard was there were about 10,000 depositors who had uninsured funds there, so I think the vast majority of Americans are covered. If one is not covered , I would suggest they do look in and make sure they are being rewarded for the risk they are taking," said Dorway.
If you're worried about your bank, you should investigate. That's Ely's advice.
"Talk to people who are in the business and deal with banks. Say what do you think about XYZ," said Ely. "I have found that bankers are very knowledgeable about their competitors, particularly competitors that have been doing risky lending. Kind of everybody knows it."
U.S. Bank CEO Richard Davis figures the turmoil in the banking industry favors it and other big strong banks, which will attract credit-worthy customers.
Shares of U.S. Bank fell as much as 11 percent during the day, but rebounded along with the banking sector. They rose further after Davis said he intends to raise the bank's dividend for a 37th straight year. U.S. Bank shares closed down almost 3 percent at $22.70.
