Articles on Issues: Prepare Businesses for Bank Funding/Banks bad debts

Bank Finance

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DRC has relationship with Local Community and Business Banks /Finance Related Services: • Determining Appropriate Finance • Determining Appropriate Financing Source • Loan Structuring All data is supplied and supported by Daniel, Russell & Charles Co. and made available to our clients to enhance their long term business goals. Daniel, Russell & Charles Co. believe a small business can be difficult, if not impossible to operate, when conditions in the business or the marketplace are not handled properly by its owner and/or management. If key rules and procedures, that initiate a process to operate and control the day to day activities of the business, have not been established;

DRC can provide the following as a basis for operating the business in a manner in which you have envisioned and planned.

• Establish a basic operating philosophy. It is essential for business owners, and entrepreneurs to conduct his/her day-to-day business affairs, from an internal as well as an external perspective; with personnel, customers, vendors, bankers, investors, etc.

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• An overview of the owner or entrepreneur to fully integrate its basic operating philosophy, mission, and objective into workable policies and procedures is necessary, to be legitimately followed by members of a company on a consistent basis.

Bank are Linking with bad debt

By DAVID REILLY Citigroup C -2.92% and Bank of America BAC -4.24% are seen by many as the weak links in the big-bank chain. Their fourth-quarter results did little to dispel the notion. Both were saddled with charges related to legal and mortgage costs that ate into net profit, underscoring that they remain works in progress. Until these two can show consistent profitability, and less noisy quarters, their valuations are likely to remain below tangible book value. That is in contrast to rivals J.P. Morgan JPM -0.81% Chase and Wells Fargo, WFC -0.17% which trade at a premium to this measure of net worth. Even after stripping out changes in the value of its own debt and restructuring charges, Citi missed earnings estimates: Adjusted for these items, they came in at 69 cents a share for the quarter versus expectations of 96 cents. Investors were also worried by higher-than-expected legal expenses that seemed to foreshadow some sort of looming action. At BofA, earnings of three cents a share were a penny ahead of estimates, but only modestly positive following its announcement a week earlier of a big settlement with Fannie Mae FNMA +2.57% over mortgages. And despite taking $3.8 billion in charges related to that deal and the national foreclosure-review settlement, BofA also took an additional $900 million in legal expense. Efforts by both Citi and BofA to deal with legacy issues led to woeful returns. Citi's return on equity for 2012 was just 4.1%. At BofA, it was 1.27%. J.P. Morgan and Wells made 13% and 11%, respectively. New Citi chief Michael Corbat, presenting his first set of results, said the bank was "not satisfied with these bottom-line earnings." But he also signaled it will take time to make progress. While declining as yet to set specific performance targets, Mr. Corbat walked back one set by his predecessor, Vikram Pandit. That was for a return on assets in Citi's core businesses of 1.25% to 1.5%. Mr. Corbat said this wasn't "practical" in the short term, adding "we'll be resetting that," without specifying when or by how much. For 2012, Citi's return on assets for its core businesses was 0.82%; for the bank as a whole, it was about 0.4% The good news is that both BofA and Citi are making progress on expense reduction. And the issues facing them center in large part on their earnings potential.

Their balance sheets, once the main worry for investors, continue to show improvement. BofA said its Tier 1 common ratio estimated under new Basel III rules rose to about 9.25%, compared with just below 9% the previous quarter. Citi said its ratio rose slightly from the prior quarter to 8.7%. Both banks also managed to buck the trend of falling net interest margins seen elsewhere. Generally, these margins—the difference between what banks make borrowing and lending money—have fallen in the face of superlow interest rates. Part of the reason Citi and BofA were able to increase their margins slightly is that both have aggressively cut the amount of long-term debt they have outstanding. This reduces their funding costs. Meanwhile, one contributing factor to Citi's miss, a release of loan-loss reserves of just $100 million, compared with $900 million the previous quarter, shows the bank is maintaining a conservative outlook on housing. That is a positive. Still, as the paltry returns show, both banks are coming up short. So the goal, as Mr. Corbat said, is quite clear: "We have to get to a point where we stop destroying our shareholders' capital." That such an obvious point has to be stated shows how much more work the banks need to do.

Charles Daniel BPS Book By Author Charles Daniel, DRC's Managing Partner

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