Friday, April 27, 2012

US Bancorp Earnings Dip, Growth Stalls

US Bancorp reported Q1 2012 financial results on Tuesday, April 17.

As expected, US Bancorp earnings per share dipped QoQ but were strong YoY. This comes after the record prior Q4 2011 financial results. However, CEO Richard Davis was able to slightly beat the EPS forecast. US Bancorp has been the star among the largest USA banks and is my highest rated major bank. They have performed incredibly well in a difficult banking environment (It's hard out here for a banker!). As noted in the preview, being able to spin more banking gold in 2012 will be difficult as the low hanging fruit appears to be harvested.

Yet another decrease, a small incremental decrease, in credit losses was accomplished. However, these are near the bottom, having been minimized through exceptional risk management. Little gain in loan loss reduction remains. Enough loans were booked, a rise YoY, to increase net loans (60.83%) as a percentage of total assets. Cash & investments correspondingly decreased to 24.60%. So the asset mix is trending profitably. Noninterest (operating) expense was contained and reduced, preventing a drag on earnings growth.

To continue the earnings growth rate more loans need to be booked, period. The above-noted tactics are losing effectiveness without more loan growth. This is the inevitable ceiling that high-growth bankers encounter. More loans require an economy generating loan growth or acquisitions of other lenders. Davis stated he has implemented "organic growth initiatives and acquisitions". Q1 is a slower quarter in banking, future quarters should generate some momentum.

U.S. Bancorp Income Statement Q1 2012 Net revenues were $4.87 billion, net income $1.83 billion, and earnings per share $0.67. From the prior quarter Q4 2011, these were -3%, -1%, and -3%, respectively. From the prior year Q1 2011, these were +9%, +28%, and +29%, respectively. Impressively, both the operating margin of 38% and the net margin of 27% increased slightly QoQ and strongly YoY to all-time highs. The operating expense ratio of 47% dipped QoQ and YoY, but is above the historical average.

U.S. Bancorp Balance Sheet Q1 2012 Total assets slightly increased to a record $340.76 billion. The capital to assets ratio rose to 10.83%, which is strong. Return on assets increased to an outstanding +1.57%. Gross loans increased QoQ and YoY and net loans are 61% of the asset mix. The Allowance for loan losses to loans ratio of 2.19% is a multi-year low.

Tuesday, April 24, 2012

Citigroup Earnings Rebound on Adequate Results

By Citigroup standards, Q1 financial results held the line and included a sigh of relief. CEO Vikram Pandit was able to stand on the parapet without being shot off again. Q1 earnings per share were slightly below estimates, but rebounded significantly QoQ from the multi-quarter lows of Q4 2011. EPS was down slightly YoY instead of the projected flat line. Financial performance was somewhat mixed: containing some good, some bad, mostly adequate.

The good is earnings per share, net revenues, operating income, net income, operating margin, and net margin rebounded strongly QoQ. Operating expenses decreased. The capital ratio decreased slightly, mostly the result of an increase in deposits.

The bad is foremost the wild card and game-changer: CVA/DVA1 was a -$1.3 billion loss, resulting from the tightening of credit spreads. Citigroup goes through the meaningless exercise of releasing schedules and qualifying statements with this  valuation adjustment excluded.  That's like showing a what-if box score excluding the other team's 5 home runs.

Other concerns are Citigroup is slightly below year-ago performance and lost a small piece of ground. This can however be regained in one stronger quarter. The asset mix is negatively trending, net loans are decreasing while cash & investments are increasing in proportion to total assets. Return on assets is flat. Credit losses and claims are historically low, but slightly increased after last quarter's multi-year low.

Citigroup Income Statement Q1 2012 Citigroup financial performance rebounded with net revenues of $19.41 billion, net income of $2.93 billion, and earnings per share of $0.95. From the prior quarter Q4 2011, these were +13%, +207%, and +206%, respectively. From the prior year Q1 2011, these were -2%, -2%, and -4%, respectively. Both the operating margin and net margin increased QoQ but decreased slightly YoY to 20.96% and 15.10%, respectively. The operating expense ratio dipped to 49% and is near the historical average.

Citigroup Balance Sheet Q1 2012 Citigroup total assets increased to $1.94 trillion. Return on assets was steady at +0.57%, which is low but adequate. The capital to assets ratio decreased slightly 9.45%. The regulatory Tier 1 capital ratio is 14.2% and the Tier 1 common ratio is 12.4%. All the capital ratios are adequate.

1 Credit valuation adjustment (CVA) on derivatives, net of hedges, and debt valuation adjustment (DVA) on Citigroup's fair value option debt.

Monday, April 23, 2012

Wells Fargo Earnings Grind Higher to Another Record on Slowing Growth

Wells Fargo reported another record financial performance, grinding higher on small incremental gains, as expected. CEO John Stumpf continues a conservative and viable strategy which has maintained strong levels of capital, low credit losses, and resulted in a very good return on assets. Though not exciting with quick returns for WFC long traders, the business plan has been successful.

Financial performance appears to be peaking as incremental quarterly gains are a result of lower credit losses, some periodic expense containment, and net loans are not increasing. That is, higher-yielding net loans (56% of total assets) are decreasing while lower-yielding cash and investments (30% of total assets) are increasing.

That leaves some profitability to be squeezed out of lower expenses or higher revenues such as fees. External acquisitions and/or increased loan demand are about the only avenues remaining for accelerating growth to a material degree. Credit losses decreased at a faster rate than net loans this quarter, reversing and eliminating a possible concern from the prior quarter.

Wells Fargo Income Statement Q1 2012 Wells Fargo reported net revenues of $21.64 billion, record net income of $4.25 billion, and record earnings per share of $0.75. For QoQ, these were +5%, +3%, and +3%, respectively. For YoY, these were +6%, +13%, and +12%, respectively. The operating margin of 31% increased to the second highest in several years and the net margin of about 20% was flat QoQ.

Wells Fargo Balance Sheet Q1 2012 Total assets increased to a record $1.33 trillion. The capital to assets ratio increased slightly to a strong 11.01%. Return on Assets improved slightly to a very strong 1.27%. The operating expense ratio is stable at 56%.

Wells Fargo Earnings per Share Current Earnings per Share of $1.31 is another record high, and have increased for 9 consecutive quarters.

Wells Fargo Net Revenues, Operating Income, Net Income Current Net Revenues of $21.64 billion are a 9-quarter high. Current Operating Income of $6.65 billion is an all-time high. Current Net Income of $4.25 billion is the 8th consecutive quarterly increase and another all-time high.

Wells Fargo Operating Margin and Net Margin Current Operating Margin of 30.73% is the second highest in several years. Current Net Margin of 19.63% decreased slightly QoQ but is historically above average.

Wells Fargo Return on Assets Current Return on Assets of 1.27% is a multi-year high and well above the banking benchmark of +1.00%. The historical (chart) average ROA is +1.08%.

Wells Fargo Return Growth Rates YoY The chart below shows the slowing incremental growth rates in earnings per share YoY. Current Net Revenues Growth YoY of +6.43% reverses the negative YoY declines. Current Earnings per Share Growth YoY of +11.94% continues the slow decrease.

Saturday, April 21, 2012

JPMorgan Earnings Rebound to Near-Record Levels, Deterioration Halted

Give the Devil his due, CEO Jamie Dimon and accomplices rebounded big-time in Q1 2012. The charts below reflect the upsurge. The financial deterioration has been reversed, at least for the time being. Dimon rolled the dice, they came up 7, and he celebrated, "We strengthened our fortress balance sheet". Just remember, as you have read in many financial disclaimers, past performance is not a predictor or indicator of future performance.

If noninterest (operating) expenses could have been contained, this would have been an even bigger quarter, a monster quarter. We're talking knocking the ball out of the park and bouncing it down the street. Alas, this was not to be and they will have play again next quarter. Noninterest revenues were the primary driver of surging earnings, dampened by skyrocketing expenses. I'll forego further details of the ongoing gains and losses that created this quarterly financial performance, except to say loan losses have decreased significantly and therefore core banking operations are a plus for the company.

The traditional banking business is a component, but not all of JPMorgan, no matter how much management talks about banking. About 30% of total assets are net loans and 36% are trading assets and investment securities. Cash, cash equivalents, securities, and trading assets combined are 60% of total assets. Ultimately that leaves 10% in non-earning assets such as goodwill and buildings. Just keep in mind when trading JPM stock, you are trading their traders for a portion of the quarterly earnings per share lotto.

JPMorgan Income Statement Q1 2012 Financial performance significantly improved QoQ, was flat YoY, and is respectable. Net Revenues were a very strong $26.71 billion, Net Income was a near-record $5.38 billion, and Earnings Per Share was a multi-year, if not all-time, high of $1.31. For QoQ, these were +24%, +44%, and +46%, respectively. For YoY, these were +6%, -3%, and +2%, respectively. Both the Operating Margin of 29% and Net Margin of 20% popped to 3-quarter highs. The operating expense ratio of 62% increased QoQ and YoY to a multi-year, if not all-time, high and is almost out of control.

JPMorgan Balance Sheet Q1 2012 JPMorgan's "fortress balance sheet" is now $2.32 trillion in total assets. Overall financial position is adequate and stable, that is, not much change QoQ and YoY. The capital ratio of 8.18% is lower than desirable, but adequate, as are the Tier 1 Capital and Tier 1 Common ratios. Return on assets is a respectable +0.83%.

JPMorgan Earnings Per Share Current Earnings Per Share of $1.31 is a multi-year, if not all-time, high. The EPS historical (chart) average is $0.78.

JPMorgan Net Revenues, Operating Income, and Net Income All are 3-quarter highs: Net Revenues of $26.71 billion, Operating Income of $7.64 billion, and Net Income of $5.38 billion.

JPMorgan Operating Margin, Net Margin, and Capital to Assets Ratio Current Operating Margin of 28.61% is a 3-quarter high. Current Net Margin of 20.15% is also a 3-quarter high. Current Capital-to-Assets ratio (Capital Ratio) of 8.18% is adequate.

JPMorgan Return on Assets Current Return on Assets of +0.83% is respectable, but a 5-quarter low. The ROA historical (chart) average is +0.65%.

I nominate CEO Jamie Dimon's statement in the earnings press release as some of the greatest propaganda ever written: "JPMorgan Chase positively impacts the lives of millions of people and the communities in which they live. We are serving them each day, putting our resources and our voices to work on their behalf". This would be second place to Goldman Sachs CEO Lloyd Blankfein saying, "I'm doing God's work".

Wednesday, April 4, 2012

Bank Failure Friday: FDIC Seizes 1 Bank, NCUA Seizes 1 Credit Union

The FDIC closed 1 bank on Friday, March 30, 2012. Total bank failures for 2012 increased to 16. The NCUA seized 1 credit unions this week. Total credit union failures for 2012 increased to 6.

States where banks have been seized by the FDIC in 2012 (in alphabetical order): Florida 2, Georgia 4, Illinois 3, Indiana 1, Michigan 1, Minnesota 2, Pennsylvania 1, Tennessee 2. Georgia and Florida accounted for 36 total or 39% of all bank failures in 2011.

States where credit unions have been seized by the NCUA in 2012 (in alphabetical order): California 1, Colorado 1, New York 1, North Carolina 1, Pennsylvania 1, Wisconsin 1.

Banks Closed This Week

#16 Fidelity Bank, Dearborn, MI
* The Huntington National Bank, Columbus, OH assumes all of the deposits
* As of December 31, 2011, Fidelity Bank & Trust had approximately $818.2 million in total assets
* FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $92.8 million

USA Failed Banks by Year Bank failures skyrocketed in 2009 and 2010 to 140 and 157, respectively - a 2-year total of 297 compared to 32 from 2004 through 2008. Bank failures in 2011 continued at a high rate of 92. The 2012 annual bank failures are extrapolated from the weeks reported and failures year-to-date. The 2012 closings are currently estimated at 64.

FDIC Deposit Insurance Fund Cost of Failed Banks The total estimated cost to the FDIC Deposit Insurance Fund for the 2012 bank closures year-to-date is $1.23 billion. The most costly banks to the Deposit Insurance Fund (DIF) in 2012 year-to-date:
1 Tennessee Commerce Bank, Franklin, TN $416.8 million
2 The First State Bank, Stockbridge, GA $216.2 million
3 Fidelity Bank, Dearborn, MI $92.8 million
4 First Guaranty Bank & Trust Company of Jacksonville, Jacksonville, FL $82.0 million
5 BankEast, Knoxville, TN $75.6 million
6 Central Bank of Georgia, Ellaville, GA $67.5 million
7 Premier Bank, Wilmette, IL $64.1 million
8 Home Savings of America, Little Falls, MN $38.8 million
9 SCB Bank, Shelbyville, IN $33.9 million
0 Patriot Bank Minnesota, Forest Lake, MN $32.6 million

The next FDIC bank closings and NCUA credit union closings, if any, will most likely be announced on Friday, April 6, 2012. For a recap of 2011 bank failures, see Bank Failure Friday: 2011 Closings Final at 92 & Cost $7.18 Billion.

Failed Credit Unions The latest NCUA actions were:

#6 Shepherd’s Federal Credit Union of Charlotte, N.C.
* NCUA liquidated and closed on March 26, 2012

The National Credit Union Association (NCUA) has seized 6 credit unions in 2012:
2 are in conservatorship and managed by the NCUA
* Telesis Community Credit Union of Chatsworth, CA
* A M Community Credit Union of Kenosha, WI
2 have been liquidated and sold
* Saguache County Credit Union of Moffat, CO
* People Community Development Credit Union of Philadelphia, PA
1 has been liquidated and merged
* Eastern New York Federal Credit Union of Napanoch, NY
1 has been liquidated and closed
* Shepherd’s Federal Credit Union of Charlotte, N.C.

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