This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

5 Bank Stock Red Flags

Stocks in this article: BAC C JPM COF WFC GSBC FPFC

NEW YORK ( TheStreet) -- It can pay for bank investors to look a little deeper at financial statements.

While you are not able to see everything going on behind the scenes at a bank holding company, there are some items that can serve as red flags for trouble down the road.

We've selected five areas for bank stock investors to consider that can distort the bottom line, lead to future write-downs or -- in the worst of cases -- a dreaded restatement of financial results.

Provisions for Loan Losses

Over the past several quarters, many of the largest U.S. banks have seen a direct boost to earnings through the release of loan loss reserves. This is no surprise, since the obvious reaction to a souring loan portfolio is to sock away extra reserves. Then, after working through a significant portion of the problem loans, most of the large players have found that they had more reserves than they needed.

Each quarter, a bank will typically add to its allowance for loan losses by making a provision for loan loss reserves, which lowers its earnings. If the provision outweighs a bank's net charge-offs -- its loan losses less recoveries on previously charged-off loans -- its allowance for loan losses increases.

Since messing with the quarterly provision is an obvious way for banks to manage earnings, regulators frown upon banks "over-reserving" when the economy is strong. This, of course, is counter-intuitive, because a period of strong economic growth is when a bank will be better prepared to build reserves. No matter. What happens is they scramble to build reserves in the midst of a recession, thus front-loading their net losses, leading to the large release of reserves we are seeing now.

During the second quarter, JPMorgan Chase (JPM - Get Report) reported net income of $5.4 billion, partially fed by a $1.2 billion reserve release.

1 of 5

Check Out Our Best Services for Investors

Action Alerts PLUS

Jim Cramer and Stephanie Link reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

Jim Cramer's protégé, David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
Try it NOW
Try it NOW
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

Jim Cramer's protégé, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,672.60 -141.38 -0.79%
S&P 500 2,051.82 -11.33 -0.55%
NASDAQ 4,757.8790 +7.4820 0.16%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs