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85% Of Bank Of America's "Net Income" Comes From Reserve Release And MSR Adjustment, Capitalization Ratios Plunge

Tyler Durden's picture




 

Another horrendous quarter for Bank of America. While the company reported an adjusted EPS of $0.33 which shockingly came at the "at the high end of the prior guidance on June 29, 2011 when the company said net income excluding mortgage items and other selected items would be between $0.28 and $0.33 per share" the truth is that of the $5.6 billion in adjusted pretax net income, $3.3 billion was the result of credit loss releases. In other words 59% of the firm's "adjusted EPS" came from an accounting treatment and the CFO's interpretation of improving credit trends. As for the balance: another $1.5 billion came from a write-down in Mortgage Servicing Rights or another accounting gimmick. So take away the reserve release and MSRs, and one gets an EPS number that is 86% lower than the disclosed or about $0.05. The problem is that on an andjusted basis, the EPS was ($0.90) or a loss of $12.6 billion pre tax, driven by the previously disclosed settlements and a surge in provisions for Rep and Warranty settlements to $14 billion. Keep in mind this number will be far, far higher when all the Countrywide litigation is said and done. After all, the firm itself said that  the "Estimated range of possible loss related to non-GSE representations and warranties exposure could be up to $5B over existing accruals at June 30, 2011. This estimate does not include reasonably possible litigation losses." So what about litigation losses? Well at $1.9 billion this was a huge surge from the $0.8 billion in Q1 and $0.6 billion Q4 2010. This number will also only go up as everyone and the kitchen sink sues Bank of America. And while one can play accounting games to paint the EPS tape, the cash that leaves the company is all too real: the firm's Common Equity Ratio plunged from 9.42% in Q1 to 9.09% in Q2, the lowest since Q2 2010, and the result was a plunge in the firm's (very much meaningless courtesy of Mark to Market being illegal - thank you FASB) Book Value per Share to $20.29: the lowest in well... ever since the firm's bailout by the US taxpayer.

Note the reserve release contribution to Adjusted EPS:

Here is how you take an abysmal number in the firm's worst performing segment: the Consumer Real Estate Services and make it nice and shiny. Thank you $1.5 billion in MSRs.

Litigation expense: no comment necessary:

All of the above means cash is whooshing out of the front door. Exhibit A: capital ratios. Next up: equity offerings.

And who can forget "Can You Spell U-N-D-E-R-R-E-S-E-R-V-E-D? If Not, Here Is A Visualization Aid"... Sure enough:

Bottom line: absent all the now traditional gimmicks, the company's adjusted EPS would have been $0.05. And this number will be negative once the litigation settlement with Goldman is pushed back by the NY AG and much, much more money is demanded from the firm. We still expect a follow on equity issuance event in the next 3-6 months.

Full release:

Q2 BofA Earning Presentation

 

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Tue, 07/19/2011 - 09:29 | 1469759 SparkySC
SparkySC's picture

Watch for any last insiders puking up their shares.

Tue, 07/19/2011 - 08:19 | 1469544 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Sorry Goldman Sachs fans!

Tue, 07/19/2011 - 08:22 | 1469546 Archimedes
Archimedes's picture

And Goldman missed huge! And this is with daily POMOS every day in Q2. Now that the free money has been taken away what do you think will happen to banks in the Q3 / Q4? Time to short! That's right I said it...time to short the banks!

Tue, 07/19/2011 - 08:43 | 1469602 buzzsaw99
buzzsaw99's picture

you can shear a sheep many times but you can only skin it once.

Tue, 07/19/2011 - 08:23 | 1469547 MonkeySmoke
MonkeySmoke's picture

BoA Constrictor = broke, unless they are allowed to steal from from us, again.

Tue, 07/19/2011 - 08:24 | 1469549 Hondo
Hondo's picture

Great job.........between crap like this and currency gains (even before taking inflation into effect) true economic earnings (based on unit volume and final demand) are much, much lower.  Analyst today are terrible and have been bought off.  This kind of crap would have never passed 30 years ago.....MBA crap heads.

Tue, 07/19/2011 - 08:25 | 1469550 A Man without Q...
A Man without Qualities's picture

Ok, so we are supposed to focus on the adjusted net income of 33c, which is mostly down to a release of reserves (i.e. the finger in the air stuff), but ignore the (90c) actual income, which is the result of the sucking sound of $14bn in cash leaving the building to settle real losses?

We've entered the realm of the absurd...

Tue, 07/19/2011 - 08:25 | 1469553 TideFighter
TideFighter's picture

BAC is the mellon, we just need a big hammer and some plastic for the front row.

Tue, 07/19/2011 - 08:26 | 1469554 bigwavedave
bigwavedave's picture

too big to fail does not mean too big to zombie. this company is the walking dead

Tue, 07/19/2011 - 08:27 | 1469556 PaperBear
PaperBear's picture

"EPS number that is 86% lower than the disclosed or about $0.05"

That has to hurt a lot.

Tue, 07/19/2011 - 08:28 | 1469558 Cdad
Cdad's picture

Would someone please just close the entire Blight on America bank.  Good grief, what an abysmal thing it was to have bailed out this operation.  What a shame that Ben Bernanke and Congress did not simply allow this thing to die.  We would be so much better off at this point in time had capitalism, real free market capitalism, simply taken care of this company.

Tue, 07/19/2011 - 08:37 | 1469582 snowball777
snowball777's picture

+$800B

Tue, 07/19/2011 - 09:07 | 1469685 Deepskyy
Deepskyy's picture

It would decimate the economy of Charlotte NC if BoA went belly up.  However I agree with you Cdad.  That place is a plague.  Just die already.

Tue, 07/19/2011 - 08:29 | 1469560 ziggy59
ziggy59's picture

i need the accountants they use. so 'reserves' are considered income?  paying taxes on them reserves?

Tue, 07/19/2011 - 08:33 | 1469571 buzzsaw99
buzzsaw99's picture

an old jpm trick. bonus time.

Tue, 07/19/2011 - 08:51 | 1469627 Widowmaker
Widowmaker's picture

Silly citizen, taxes are for the average joe that actually works for a living.

Tue, 07/19/2011 - 08:35 | 1469575 apberusdisvet
apberusdisvet's picture

In the end there will be JPM, and JPM alone.

Tue, 07/19/2011 - 08:36 | 1469578 printmemoney
printmemoney's picture

This article is misleading.  They took a MSR writedown (which is an asset that is valued based on the future cash flows they receive from sold mortgages).  This is a non-cash hit to the p&l, just like adding to the allowance.  Since, they subtracted from the allowance - the MSR writedown is an offsetting non-cash adjustment to EPS. 

Furthermore, they took a goodwill impairment (goodwill is all bs anyway), but that's another non-cash adjustment to EPS. 

Now, what they report as one time items (I think it's possible the allowance adjustment belongs there too) for adjusted EPS and non-adjusted is a different matter all together and things don't look rosy for BofA.

Ziggy - the tax issue is another complex calculation.  They book 35% of their EPS, but based on what their tax accountants calculate after deductions and rules are put into place a deferred tax asset or deferred tax liability will then be booked.

Tue, 07/19/2011 - 08:37 | 1469579 oogs66
oogs66's picture

amazing that that bad reserves are one time, but reserve releases are continuing ops?  close your eyes and swallow, it won't hurt you

Tue, 07/19/2011 - 08:38 | 1469583 Saxxon
Saxxon's picture

Wow, just wow. Great quarter for BAC, should help the XLF lead the rally the rest of the week.  AAPL should be terrific after hours.

Between this and the stick-save yesterday afternoon, all losses will be erased for the week by noon Wednesday.

You don't think this Administration is going to let the market run afoul of anything; the DOW is B.O.'s proudest achievement and everyone looks to the DOW for confidence.

Long and winning; or short and frustrated.

Tue, 07/19/2011 - 08:41 | 1469592 Cognitive Dissonance
Cognitive Dissonance's picture

Calvin Ball  -  There are no rules.

Tue, 07/19/2011 - 09:15 | 1469706 LawsofPhysics
LawsofPhysics's picture

Precisely why nothing changes until everyone simply leaves the game.

Tue, 07/19/2011 - 08:42 | 1469601 sabra1
sabra1's picture

i've always believed the HFT's gave the illusion of a market, whilst the insiders were selling. wait 'till they unplug those bots!

Tue, 07/19/2011 - 09:03 | 1469615 Widowmaker
Widowmaker's picture

What is all this bullshit about "BAC's losses?"

These are US TAXPAYER losses.

Record fraud = record bonuses.

Tue, 07/19/2011 - 11:08 | 1470238 Tater Salad
Tater Salad's picture

"These are US TAXPAYER losses"

 

Really? How could a bail out, paid back with interest equate to a tax payer loss?  Be objective here, GM is a loss, the banks were a slam dunk for Uncle Sam.  Largest gain on record for the guberment.  Problem is, you won't see shit for a return on those bail outs as your boy on the hill spent it before he made it on shovel ready projects and i-pads for inner-city minority kids.

Tue, 07/19/2011 - 11:08 | 1470241 Tater Salad
Tater Salad's picture

"These are US TAXPAYER losses"

 

Really? How could a bail out, paid back with interest equate to a tax payer loss?  Be objective here, GM is a loss, the banks were a slam dunk for Uncle Sam.  Largest gain on record for the guberment.  Problem is, you won't see shit for a return on those bail outs as your boy on the hill spent it before he made it on shovel ready projects and i-pads for inner-city minority kids.

Tue, 07/19/2011 - 08:48 | 1469620 snowball777
snowball777's picture

Couldn't happen to a more useless bunch of shitbags.

Tue, 07/19/2011 - 08:54 | 1469638 Sudden Debt
Sudden Debt's picture

I just read the yahoo board :)

Those suckers all still believe BAC will go back to 12/13 anytime soon.

Idiots :)

Tue, 07/19/2011 - 08:56 | 1469646 slaughterer
slaughterer's picture

You sure Yahoo BAC board is not infiltrated by Dick Bove interns? 

Tue, 07/19/2011 - 08:55 | 1469642 slaughterer
slaughterer's picture

Moynihan insists: we do not have to raise capital.  Do you believe him?      

Tue, 07/19/2011 - 09:14 | 1469703 Problem Is
Problem Is's picture

And we thought Ken Lewis looked like a stiff...

Tue, 07/19/2011 - 09:18 | 1469717 slaughterer
slaughterer's picture

At least Ken knew how to drink (mostly white wine).

Tue, 07/19/2011 - 09:17 | 1469714 LawsofPhysics
LawsofPhysics's picture

Do people still have accounts with BofA?  Then I guess he is correct.  Hard to rape the willing.

Tue, 07/19/2011 - 09:13 | 1469699 SOLnow
SOLnow's picture

RAN Squawk - "Bank of America sees home prices increasing 1% in 2H 11".

 

LOL

Tue, 07/19/2011 - 09:16 | 1469712 Problem Is
Problem Is's picture

If by home prices "increasing 1%" BofA means down 6.7% nationwide... Then yes we agree...

Tue, 07/19/2011 - 09:15 | 1469705 rsnoble
rsnoble's picture

Does all this mean we can count on future tax revenue from the years 2065-2082 to bailout BAC? Again? 

Tue, 07/19/2011 - 09:22 | 1469735 lizzy36
lizzy36's picture

Desperate times boys and girls.

After all Goldman ads are now appearing on ZH.

Odd how much pleasure i take in that fact.

Tue, 07/19/2011 - 09:37 | 1469786 42 is the answer
42 is the answer's picture

I feel like with all the bad news about BoA, that they are being intenionally left out to hang. It seems like all the other banks and Fed agreed to let BoA go down in flames as the sacrificial lamb. It brings back memories of Lehman and Bear.

Tue, 07/19/2011 - 09:39 | 1469792 djsmps
djsmps's picture

I caught a minute of CNBS this morning. Their sole comment on BofA was, "Bank of America earnings came right within expectations." There's not even an article on the CNBS website about BofA earnings.

Tue, 07/19/2011 - 10:28 | 1469996 poor fella
poor fella's picture

Amazing how important the Murdock hearings are to cnbs and boomberg - not one interuption all morning - while the market is ramped up on vaporous earnings like BoA , currency adjustments, 'the cloud', and ?

Tue, 07/19/2011 - 10:42 | 1470058 CulturalEngineer
CulturalEngineer's picture

Creative Accounting is the most unrecognized Weapon of Mass Destruction on the planet!

And most victims don't even know where the attack came from... or who's waging the war against them...

(Pssst... as a masterful example of Orwellian newspeak the attackers call themselves purveyers of financial services.)

Tue, 07/19/2011 - 11:16 | 1470253 PulauHantu29
PulauHantu29's picture

"another horrendous quarter" for shareholders of bank stocks...yes.

A Bank Bonus Bananza for Banker CEOs getting $15 Million per quarter not so "horrendous" for their outstanding performance...LMAO.

Tue, 07/19/2011 - 11:39 | 1470386 topshelfstuff
topshelfstuff's picture

I already knew that GE & GM paid no taxes and somehow managed to actually get money back. So, this search I just did isn't a surprise. I wonder if anyone has ever calculated what DOW and S&P Earnings would be using the same tax structure we had pre 2001

Bank of America Tax Avoidance
• BofA is the largest bank and 5th largest corporation in America
• BofA holds over $2.2 Trillion in assets
• BofA in 2009 earned a pretax income of $4.4 Billion.
• BofA received $45 Billion in tax payer bailout funds in 2008 and 2009
BofA paid ZERO federal income tax in 2009
• BofA actually received at least a $1.9 Billion tax benefit from the government in 2009
• BofA took deductions of at least $2.1 Billion in 2009
• Bank of America operates 371 tax-sheltered subsidiaries, more than any other big bank studied, and 204 subsidiaries in the Cayman Islands alone, according to its latest regulatory filings.

In its 2010 annual report, Bank of America reported a total combined (federal, state, foreign) cash income tax refund of $6.3 billion. This offers further evidence of the bank’s significant federal income tax refund for 2009.

Two-thirds of all US corporations do not pay federal income tax, many are the largest in the US

 

Tue, 07/19/2011 - 11:41 | 1470403 JW n FL
JW n FL's picture

Bank of America

 

The two biggest recipients of taxpayer bailout funds are, by no coincidence, huge users of the offshore system: Citigroup has 427 subsidies in tax havens, and Bank of America has 115.

BANK OF AMERICA: In 2009 and 2010, Bank of America didn't pay a single penny in federal income taxes, exploiting the tax code so as to avoid paying its fair share. They argue this is because they lost money. But we really don't know, thanks to over 115 subsidiaries in tax secrecy jurisdictions. There are 59 BoA subsidiaries in the Cayman Islands, 15 in Luxembourg, and 14 in Ireland. Bank of America received $336 billion in government bailout funds (second only to Citigroup).3 When it comes to paying their top managers and influencing elections and government, they don't hold back. Between 2007 and 2010, during the economic meltdown triggered in part by their reckless actions, Bank of America's PAC and employees donated $5.184 million to federal campaigns. During these same years, they spent $17.3 million lobbying the federal government.4 Bank of America paid their CEO Thomas Montag $29 million in 2009.

 

http://blog.sojo.net/2011/07/15/poverty-treasure-islands-and-global-tax-dodgers/

 

Why Banks Are Investing More In Tax Liens

In May and early June, Bank of America and a Wall Street hedge fund, Fortress Investment Group, bought hundreds of millions of dollars of tax liens in Florida from a series of online auctions. Both BofA and Fortress bought their liens under different aliases — and sometimes bid on the same parcels more than 8,000 times.

 

http://www.npr.org/2010/12/14/132030011/wall-street-finds-lucrative-market-in-tax-liens

 

The Big Business Wall Street Won't Discuss

http://www.youtube.com/watch?v=-HRmSlP49mc

 

 

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Tue, 07/19/2011 - 11:51 | 1470458 topshelfstuff
topshelfstuff's picture

The Lobby Merry-Go-Round

Congress gives Corporations, Companies, and Countries a big Money Pie and Slices get passed around

Tue, 07/19/2011 - 11:45 | 1470422 topshelfstuff
topshelfstuff's picture

2010 also

Feb 28, 2011 – Tax Justice Network. Why tax havens cause poverty ... Protests in over 50 cities focused on Bank of America, which paid no taxes in 2009 or 2010

In its 2010 annual report, Bank of America reported a total combined (federal, state, foreign) cash income tax refund of $6.3 billion. This offers further evidence of the bank’s significant federal income tax refund for 2009.

Tue, 07/19/2011 - 16:33 | 1471733 cool_fool
cool_fool's picture

Hold your horses Tyler - did you skip coffee this morning? The company took a 3.3bn PROVISION for losses not a reserve release. Check the math. You got the sign wrong...

And why so much hate on this board, 30 bashing posts and no one actually looked at the math? Quality people used to post here, investors, but they are gone now

Tue, 07/19/2011 - 16:33 | 1471735 cool_fool
cool_fool's picture

Hold your horses Tyler - did you skip coffee this morning? The company took a 3.3bn PROVISION for losses not a reserve release. Check the math. You got the sign wrong...

And why so much hate on this board, 30 bashing posts and no one actually looked at the math? Quality people used to post here, investors, but they are gone now

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