Bad loans hinder U.S. Bancorp

U.S. Bancorp may have just squashed any lingering hope that there is such a thing as a "safe haven" in financial stocks.

The Minneapolis-based regional bank, long known for its conservative lending and investing policies, is limping under the weight of a growing burden of bad loans -- a burden that will only become heavier as the year progresses, industry analysts say.

Despite making extra efforts to help borrowers stay current with their loans, U.S. Bancorp reported Wednesday that its so-called "nonperforming assets" -- loans on which a bank no longer is collecting interest -- nearly quadrupled last year to $2.62 billion from $690 million. While the company still is profitable, the surge in bad loans has rattled investors who once may have thought that U.S. Bancorp was a safe stock in turbulent financial times because it lacked high concentrations of subprime mortgages and other risky assets.

"We've had years and years of poor underwriting standards, and now we have a severe recession," said Jaime Peters, a bank analyst at Morningstar. "It's a mess. And even as cautious a bank as U.S. Bancorp will not avoid that."

Indeed, U.S. Bancorp's withering loan portfolio may be a window into just how severe the credit crisis has become, and how long it may take for bad loans to work their way through the system, analysts say. Every major category of loans in U.S. Bancorp's portfolio -- from credit cards to home equity lines of credit to commercial mortgages -- has soured.

Although many bank executives and industry analysts predicted a surge in bad loans, the severity and duration of the crisis still caught many of them off guard. Few believe any longer that bank problems would be confined to subprime mortgages or more complicated financial institutions on the East Coast that invested heavily in exotic securities. Across the Midwest, banks are reporting higher-than-expected loan losses and are adding to their reserves to cover future losses.

"The economic stress that we're seeing is more severe than we had anticipated," Andrew Cecere, U.S. Bancorp chief financial officer, said in an interview Wednesday.

But while the outlook may be bleak, the nation's fourth-largest bank is still faring much better than its peers in other parts of the country. It does not have the huge portfolio of subprime or adjustable rate mortgages of banks such as Wachovia, which recently was acquired by Wells Fargo & Co. And while it has incurred some securities losses, it wasn't heavily invested in the sort of newfangled securities tied to the mortgage market that led to the collapse of Bear Stearns and others. Its percentage of nonperforming and delinquent loans to total assets is a relatively modest 1.2 percent, compared with 1.4 percent for the industry as a whole, according to Foresight Analytics, a research firm in Oakland, Calif.

The bank reported a 65 percent drop in fourth-quarter profit Wednesday, as it took a $253 million securities write-down and set aside an additional $635 million to cover credit losses. The company's net income of $330 million, compared with $942 million a year earlier, was the lowest in more than seven years. Revenue rose 1.4 percent to $3.62 billion.

Still, posting a profit is an achievement in a quarter when many of its big-bank peers are posting losses. Last Thursday, shares of Marshall & Isley Corp. of Milwaukee plunged 26 percent in a single day after it reported a fourth-quarter loss of $404 million.

U.S. Bancorp warned investors last month that it expected to build reserves for bad loans. On Wednesday, after reporting earnings, the bank's stock seesawed until finally closing up 75 cents, or nearly 5 percent, at $16.09 a share. The stock is down 48 percent over the past year.

"They have been ahead of the curve in boosting their reserves and [are] more transparent than their peers," said Jon Arfstrom, a bank analyst at RBC Capital Markets.

Indeed, U.S. Bancorp made $16 billion in new loans to businesses and consumers in the fourth quarter, ended Dec. 31. Its commercial loan portfolio grew nearly 15 percent, led by loans to corporations. "We never stopped making loans," Cecere said.

Even so, it's unclear when the credit crisis will stabilize and the loan losses will stop increasing. In a conference call with analysts, U.S. Bancorp chief executive Richard Davis was unspecific.

"We are looking forward ... to that moment, when all of a sudden loan losses appear to start flattening out and then eventually settling," Davis said in the call. "When those days happen, those are going to be great days. ... But in the meantime, I think we're going to project the rest of this year as probably more of that traditional increase in losses for us."