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Bank troubles continue but consumers seem unfazed

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AP Photos WATW101, 104, 105


AP Business Writer


CHARLOTTE, N.C. (AP) — In the nearly steady stream of bad news about banks, many consumers are likely wondering if any bank is really safe.

Those companies that did not go heavily into the subprime mortgage market are generally in better shape. But financial institutions of all sizes are nonetheless facing problems with souring debt in a weak economy, even if they haven’t been hit hard like Wachovia Corp., or like IndyMac Bancorp Inc., which was taken over by the government last Friday.

Even so, earnings reports and an analyst’s assessment of Wachovia Tuesday showed that financial companies are still suffering credit losses — and portended more bad news as more banks second-quarter results come out.

Yet analysts don’t see consumers fleeing en masse from their current banks in search of safety elsewhere. IndyMac customers were lining up for their money despite government assurances it was safe, but so far, that seems to be an isolated case.

"Yes, there was a bank failure. Yes, there was a lot of people wanting to get their money. But I don’t think there is any sort of distrust in our banking system," said Keefe Bruyette & Woods analyst Jefferson Harralson. "Some banks, as it is right now, are just more risky than others."

Bart Narter, senior analyst at Celent, a Boston-based financial research and consulting firm said, "If people pull out their money in one bank, they will put it in another bank."

"The FDIC works," Narter said, referring to the government’s Federal Deposit Insurance Corp. "I think that consumers can rest easy that their deposits are insured."

Wall Street, however, is considerably more anxious, and it continued pummeling bank stocks Monday after a run on IndyMac led to its becoming the largest regulated thrift to fail. Shares of U.S. banks and financial companies also swooned on concern over the government’s plan to shore up mortgage financiers Fannie Mae and Freddie Mac, which hold or guarantee more than $5 trillion in mortgages, would not be enough to keep them from failing.


Some bank stocks recovered ground Tuesday as investors calmed down somewhat, but there was still uneasiness in the market as investors wondered whether more banks, particularly regional banks, might be in jeopardy due to soured credit bets. And it’s likely that Tuesday’s gains were a small breather — it won’t take much bad news to get the selling momentum rising again.

Analysts have cited certain banks, including Washington Mutual Inc. and National City Corp., as being in trouble because of their exposure to failed mortgages.

Tuesday’s bank earnings reports showed that banks are still contending with bad debt. First Horizon National Corp. said it swung to a second-quarter loss as the Memphis, Tenn.-based bank set aside more provisions to cover bad loans. Its shares rallied nearly 20 percent after the results, however, to $6.03 in afternoon trading.

U.S. Bancorp posted an 18 percent drop in second-quarter profit as it tripled its provision for credit losses. The Minneapolis-based bank, which has avoided many of the mortgage and credit-related problems of some of its peers, saw its shares move down nearly 1 percent to $23.14.

But an analyst downgraded Wachovia early Tuesday, and said the outlook for the Charlotte-based bank’s shareholders is "bleak." Oppenheimer Co. analyst Meredith Whitney added that the bank’s mortgage portfolio will continue to lose value, "seriously jeopardizing" the company’s ability to generate earnings.

Wachovia spokeswoman Christy Phillips-Brown responded by saying the bank "is a fundamentally strong and stable company on solid footing."

Wachovia is scheduled to report second quarter earnings July 22. Its shares fell 31 cents, or 3.2 percent, to $9.53 in afternoon trading.

The size of a bank isn’t necessarily a factor in how well it’s doing — banks of all sizes made bad bets on subprime and other risky mortgages. Among the nation’s largest banks, Citigroup has been hit hard by billions of dollars in write-downs related to mortgages and mortgage-backed investments. But Narter noted that another big national bank, Wells Fargo & Co., has fared better because its subprime holdings were relatively small.


Another factor has been the markets where banks have most of their operations — banks serving markets like Florida, Ohio and Michigan, where the economies and housing have been quite depressed, have seen some of the greatest numbers of foreclosures, and, in turn, losses on their loans and investments.

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