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Wells Fargo & Co. depositors generally earn a lot less on their money than they could get elsewhere.
The bank’s shareholders should be very grateful: Those cheap deposits are buffering the company’s bottom line against loan losses.
San Francisco-based Wells on Wednesday reported better-than-expected second-quarter earnings and a 10% boost in the dividend on its stock.
 The news -- which reinforced the view that Wells is certain to be a survivor of the current banking industry mess -- sent the company’s shares rocketing $6.72, or 33%, to $27.23. It was a bad day for short sellers who’ve been betting against the stock. They picked the wrong horse to lose.
Wells’ net income in the quarter ended June 30 fell 23% from a year earlier, to $1.75 billion, or 53 cents a share. But that beat analysts’ average estimate of 50 cents a share.
And the company portrayed itself as benefiting from its rivals’ woes. "We are open for business and getting lots of it," CEO John Stumpf said in the earnings report.
Wells is facing higher loan losses, like nearly all banks. The company last quarter recorded a $3 billion provision for credit losses, which is what pulled earnings down. Non-performing assets totaled $5.23 billion at June 30, or 1.3% of all loans, up 16% from the level just three months earlier.
Within its substantial real-estate-loan portfolio, the bank warned that the quality of its $84-billion in home-equity loans "continued to deteriorate as property values search for a bottom." And Wells has unrealized losses of $2.1 billion on its portfolio of mortgage-backed securities, up from $598 million three months ago. Those could turn into real losses if the market doesn’t improve and Wells decides to sell out.
Still, the bank has a big advantage with its core deposit base of $318 billion: The cost of holding on to that money remains relatively low, which helps to give Wells a wider profit margin on its loans than many of its rivals earn.
Wells says it benefited last quarter from its "disciplined deposit pricing." Translation: It isn’t paying much for that cash. In California, the bank’s current yield on a one-year, $25,000 certificate of deposit is just 1.6%, compared with a national average of 2.48%, according to rate-tracker Informa Research Services.
If Wells’ depositors began to look elsewhere in large numbers, that would be a problem. But given the TV images of long lines of depositors outside the branches of failed IndyMac Bank -- which was notorious for paying high yields -- it could be that many Wells customers will be content to stay just where they are.
And they might soon have more company: "The hysteria being spread concerning bank safety is likely to result in deposits from smaller banks moving to Wells," said Richard Bove, an analyst at Ladenburg Thalmann.
Photo: Paul Sakuma/Associated Press
The Federal Deposit Insurance Corp. today provided more guidance for IndyMac Bank customers who are awaiting the bank’s reopening on Monday, after it was declared insolvent on Friday and seized by the government.
Some key points from a news conference the FDIC held today, as relayed by Times staff writer Kathy M. Kristof:
--Customers with home-equity credit lines will have their accounts frozen and "reviewed on a case-by-case basis," according to the FDIC. That’s a move by the agency to make sure its losses on the bank’s loan portfolio don’t balloon from the FDIC’s current estimates.
--Lines of credit to commercial construction contractors also will be frozen pending a review, but construction loans made to individual consumers won’t be affected.
--Customers of IndyMac’s reverse-mortgage subsidiary will continue to have access to their funds. Reverse mortgages provide elderly homeowners with either regular payments or a line of credit secured by their homes.
--For insured depositors, the bank will continue to honor existing terms on accounts, meaning the interest rates on outstanding certificates of deposit will be whatever IndyMac promised.
But that won’t apply to so-called brokered deposits -- funds brought in by Wall Street firms or other middlemen. Those deposits stopped accruing interest Friday, and once the FDIC identifies all the uninsured depositors the brokered deposits that are within insurance limits will be returned to their owners.
--Depositors with funds over the FDIC’s insurance limits will have access to 50% of the uninsured sum beginning on Monday. Whether they get any more of that money back will depend on how much the FDIC recovers in selling IndyMac assets in the next few months.
Struggling to hold on to depositors, IndyMac Bancorp now is offering the highest yields in the nation on six-month and one-year savings certificates.
And the troubled Pasadena-based thrift isn’t just edging competitors on yield -- it’s trouncing them.
That also raises some questions, of course -- including the moral-hazard question: Should a money-losing financial institution be permitted to pay well-above-market deposit rates under the protective umbrella of federal deposit insurance?
For a six-month CD with a $5,000 minimum deposit, IndyMac’s website on Tuesday was offering an annualized yield of 4.10% as an online "special."
The next-highest-paying bank in the nation for six-month CDs was Corus Bank of Chicago, with a 3.7% annualized yield, according to Bankrate.com.
 IndyMac on Tuesday was paying significantly more than it was on Sunday, according to Informa Research Services of Calabasas, which tracks savings rates. The six-month CD yield had been 3.75% on Sunday.
IndyMac’s one-year CD yield was 4.45% on Tuesday for a $5,000 deposit, up from 4.10% on Sunday. Its top competitor banks were paying in the 4% range on Tuesday, Bankrate.com showed.
On Monday, IndyMac announced a major retrenching, all but halting traditional mortgage lending as it seeks to conserve capital. The company’s stock closed at a record low of 44 cents Tuesday, and some Wall Street analysts say the shares will almost certainly end up worthless.
But IndyMac’s plan, at least for the moment, is to survive -- despite what its share price is suggesting. To stay afloat it has to keep a chunk of its $18 billion in deposits, even as some customers naturally are fleeing because all of the bad publicity.
Ergo the high yields it’s offering.
The thrift’s regulators obviously know what it’s paying. A Federal Deposit Insurance Corp. spokesman, citing standard policy, declined to comment on IndyMac’s rates.
There’s a bit of irony here: The company’s regulators are partly responsible for IndyMac’s high yields, because as part of their increased oversight of the firm’s operations they’ve banned it from accepting so-called brokered deposits. Those deposits are brought in by intermediaries searching for the best yields for big-money clients.
With that source of funds gone, IndyMac looks like it’s turning more toward individual depositors.
Should they bite? For savers, the beauty of federal deposit insurance is that they can’t lose money if they stay within the insurance limits. Even if IndyMac should fail, the worst that could happen is that your CD would be cashed out early by the FDIC.
That just leaves the moral question: Should people be taking advantage of high, federally insured yields at an institution that has lent money as badly as IndyMac has?
Photo: Tim Rue/Bloomberg News
Yes, you have gotten poorer. And at an accelerated pace.
The net worth of U.S. households fell in the first quarter, the second straight decline, thanks to the double-whammy of sliding home values and the plunge in stock prices, the Federal Reserve said in a report today.
The central bank’s so-called flow of funds report estimated the net worth of American households at $55.97 trillion as of March 31, down $1.7 trillion, or 2.9%, from year-end. That was more than three times the $530-billion drop in the fourth quarter.
Home values fell by $329 billion in the first quarter after a $196-billion drop in the fourth quarter.
But it was the slump in stocks that really hammered Americans’ net worth: The value of their stock accounts and mutual funds sank by $956 billion in the first quarter, after a $598-billion decline in the previous quarter. (The market has recovered quite a bit since, of course.)
Still, at least by the Fed’s estimation, Americans’ overall balance sheet remains quite healthy. Net worth, remember, is assets minus liabilities. Households’ assets, at $70.46 trillion, dwarf their liabilities of $14.49 trillion, which mainly consist of mortgage and consumer debt.
What the totals don't show, however, is how net worth is distributed. A huge chunk of it is in the hands of the wealthiest people. Down the income chain there have to be plenty of people with negative net worth, especially in light of the housing bust.
Some minor encouraging news in the Fed’s report: Households continued to build up cash savings, which reached $7.59 trillion at the end of March, up from $7.08 trillion at the end of the third quarter.
On the other hand, as every saver knows, you’re earning next-to-nothing on cash accounts now, thanks to the Fed’s interest-rate cuts.
Can’t stand that paltry yield you’re earning on your money market mutual fund, but you want to keep your cash safe? Maybe it’s time to consider U.S. Treasury bills.
While the average annualized yield on taxable money funds has slumped to 1.95% this week from 2.73% in mid-March (according to the Money Fund Report), three- and six-month T-bill yields have surged in the same period.
The three-month T-bill now pays about 1.83%, up from a low of 0.57% in mid-March. The six-month T-bill yield, about 1.87% now, is up from a low of 1.19% in mid-March.
 Although T-bill yields still are below the average money fund yield, note that Treasury interest is exempt from state income tax. In high-tax California, that may make T-bills a better deal now, compared with money funds, for higher-income investors. (Money fund and bank interest is subject to federal and state income tax; Treasury interest is subject only to federal tax.)
T-bill yields were severely depressed in mid-March as people rushed into government paper amid the financial panic of that period. Yields have rebounded as investors’ fear level has receded.
As for money fund yields, they’re likely to continue drifting lower, says Connie Bugbee, managing editor of Money Fund Report. If the Federal Reserve keeps its benchmark short-term rate at 2% for the time being, as expected, the average money fund yield probably will bottom around 1.5%, Bugbee says.
Bank savings certificates are always another option. The average three-month CD yield is 1.89% currently, according to Informa Research Services. The average six-month CD yield is 2.21%. But you can find better yields by shopping around. Try www.bankrate.com. Tax-free municipal money market funds are another idea (current average yield: 1.91%) though yields on those funds are notoriously volatile.
The U.S. Treasury was expected to cut the fixed interest rate on inflation-indexed savings bonds today. And cut they did -- all the way to zero.
I-bonds, as they’re called, earn a combination of a fixed rate, which holds steady for the 30-year life of the bond, and the inflation rate as measured by the Consumer Price Index. The inflation component is adjusted each May 1 and Nov. 1, and the Treasury also has the option of changing the fixed rate on new bonds on those dates.
 Today’s announcement was a shocker: I-bonds sold between now and Oct. 31 will have a zero fixed rate, down from 1.2% on I-bonds sold in the last six months.
The inflation component of the return still is attractive: It will be an annualized 4.84% for the next six months, thanks to the recent surge in the CPI. But imagine that inflation ebbs again in the next few years. With a zero fixed rate on new I-bonds, your return could dwindle, even to nothing at all.
A Treasury spokeswoman in Washington said the fixed rate on I-bonds was cut based on a formula that takes into account rates on the government’s inflation-indexed Treasury notes. "It’s just the way the formula works out," she said.
Series EE bonds, which pay a fixed rate, also took a big haircut today: Newly purchased EE bonds will pay just 1.4% a year, down from 3.0% on bonds bought in the last six months. So new EE bonds are paying less than six-month T-bills, which yield 1.61%.
Dan Pederson, author of "Savings Bonds: When to Hold, When to Fold," sees a disturbing trend here. "I think the government has been looking for some time to push people away from Savings Bonds and into regular Treasuries," he says. As for I-bonds in particular, Pederson says that with a zero fixed rate, they’re now only appealing "if you think inflation is going to spiral out of control."
Photo: U.S. Treasury Building in Washington
Posted May 1, 2008
The Federal Reserve meets this week to dish out another break to borrowers -- and more misery to savers.
Fed policymakers on Wednesday are almost certain to trim their benchmark short-term rate to 2% from the current 2.25% (announcement expected Wednesday at 11:15 a.m. PDT). But with this cut Chairman Bernanke & Co. are expected to go on hold for awhile, as I explain in this column. They’re still worried about the financial system and the economy, but they may be more worried at the moment about inflation pressures.
Another Fed cut will only mean deflation for savers, who have seen their interest earnings wither since the central bank began hacking its key rate late last summer. The average seven-day yield on money market mutual funds now is 2.08%, according to ImoneyNet Inc. With another Fed cut it’ll be under 2% soon.
One place to look for higher returns on a portion of your long-term savings: inflation-indexed U.S. Savings bonds, known as I-bonds. And Wednesday is the last day to buy them before the Treasury’s semi-annual rate adjustment.
I-bonds earn a combination of a fixed rate, which holds steady for the 30-year life of the bond, and the inflation rate as measured by the Consumer Price Index. The inflation component is adjusted each May 1 and Nov. 1. The current annualized yield on the bonds is 4.28%.
Why would you want to buy I-bonds before Wednesday? As this Bankrate.com article explains, the Treasury may opt to cut the fixed rate on I-bonds issued starting May 1, from the current 1.2%. Any cut would make the bonds less attractive for the long run. For information on buying I-bonds directly from the Treasury, go here. (Many banks and credit unions also sell the bonds.) For a long-term history of I-bond rates and other specifics on the bonds, go here.
Photo: Fed Chairman Ben S. Bernanke. Susan Walsh/Associated Press
Posted April 27, 2008
Fremont General Corp., once one of Southern California’s biggest sub-prime mortgage lenders, made a deal today to shed most of its deposit-taking bank -- a place where Southland savers have long earned some sweet interest rates.
Fremont, already a shadow of its old self, agreed to sell its 22 Fremont Investment & Loan branches, and their $5.6 billion in deposits, to CapitalSource Inc. of Chevy Chase, Md.
 The buyer, a lender to small- and mid-size businesses, has been trying for some time to get into the general banking business. It had planned to buy a Nebraska-based bank but ended the agreement last month as the credit crunch worsened.
Brea-based Fremont last year was forced out of the sub-prime business by regulators who were trying to protect the bank from ruin. In March the Federal Deposit Insurance Corp. went a step further, telling Fremont either to raise capital or sell its banking unit.
At this point the loss-ridden company looks like it’s just winding down its affairs. With the stock trading for about 50 cents, the New York Stock Exchange today said the shares were "no longer suitable for listing on the NYSE."
Fremont made a lot of loans its shareholders now regret, but its depositors made out. A year ago, for example, Fremont was paying 5.6% on a one-year CD -- far above the national average rate of 4.16% at the time, according to rate-tracker Informa Research Services.
With federal deposit insurance, savers never have to say they’re sorry for funding bad loans.
The bank still is paying better-than-average rates on shorter-term money. Its website today was advertising six-month CDs at 3.40% for $10,000 or more. That compares with a national average of 2.29%, Informa says. But Fremont’s one-year CD yield now is 2.05%, well below the national average of 2.4%.
As for CapitalSource, the market must think the company is getting a good deal in the complicated transaction: The company's shares jumped $1.44, or nearly 14%, to $11.92.
Photo: An employee of Fremont Investment & Loan carries his belongings from the company's Anaheim office in March 2007. Tim Rue/Bloomberg News
 Fed Chairman Ben Bernanke's testimony before Congress today is downbeat on the economy. So where's the commitment to more interest-rate cuts?
The Treasury bond market doesn't see one, and that is causing yields on short-term Treasuries to back up sharply. The two-year T-note yield has jumped to 1.94% from 1.80% on Tuesday, and now is the highest since Feb. 27.
Goldman Sachs & Co. economists note in a flash commentary this morning: "Despite views that are more downbeat on growth than expected and more relaxed on inflation than expected, there is a conspicuous absence of policy commitment."
Goldman notes that in recent months the Fed has used codewords or phrases meant to impart that more rate cuts would be forthcoming to bolster the economy. "That is missing here," the firm says. "Instead, [Bernanke] appears to be relying on measures taken to date to be sufficient to do the job."
The Fed has slashed its benchmark short-term rate from 5.25% in September to the current 2.25%. The most recent cut was a 0.75-point reduction on March 18.
But many investors, particularly those who've been buying shorter-term Treasury securities, have been betting on still more Fed cuts.
The Treasury market "has done nothing in the last few weeks but overshoot" to the downside on yields, says Brian Edmonds, head of interest rates at bond dealer Cantor Fitzgerald & Co. in New York. The two-year T-note got as low as 1.46% on March 19.
Edmonds believes the Fed isn't done: He sees the central bank's key rate going to 1.5% this year.
Other than maybe the stock market, he says, "I just don't think anyone thinks we're out of the woods" with the economy.
Photo: Fed Chairman Ben Bernanke testifies before Congress' Joint Economic Committee. Credit: Win McNamee / Getty Images
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That didn't take long: The Federal Reserve's latest interest rate cut, on March 18, already has done some major damage to yields on money market mutual funds and bank savings certificates.
The average annualized taxable money fund yield sank to 2.17% in the seven days ended Tuesday from 2.62% a week earlier, according to Money Fund Report in Westborough, Mass.
As for bank CDs, the average nationwide yield on six-month certificates slid to 2.43% this week from 2.64% a week earlier, according to Informa Research Services in Calabasas. The one-year CD average fell to 2.54% from 2.75%.
Expect money fund yields and CD yields to keep falling down the stairs and into the basement in the next few weeks. The Fed's latest cut, its sixth since mid-September, slashed its benchmark short-term rate by three-quarters of a percentage point, to 2.25%.
As The Times noted here, one of the Fed's goals with lower short-term rates is to make cash accounts less attractive to investors as a place to hide -- and thus, they hope, to make stocks and bonds more attractive. That could get money flowing in the economy's pipes again, easing the credit crunch.
So far, though, many investors are still preferring to play it safe: Money fund assets surged $53.6 billion in the latest week to a record $3.46 trillion, Money Fund Report said.
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Tom Petruno
Tom Petruno has been chronicling financial markets' highs and lows since 1979, and has been the Times' financial columnist since 1990. He writes on markets, corporate finance and the economy, and how it all ties in to individual investors' portfolios.
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