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.