Bank Of America Earnings Plagued By Legacy Countrywide Woes Offset By $900 Million In Loan Loss Reserve Releases

Tyler Durden's picture

As disclosed 10 days ago in its agreement with Fannie, Bank of America already warned that it would see a $2.7 billion pre-tax hit to earnings resulting from just one GSE reps and warrants settlement. Sure enough, this was the biggest one time adjustment to the company's earnings which came out at $700 million on a pre-adjustment basis, or some $0.03. Excluding all the various incurred "charges", the bank reported $0.29 in earnings.  Of course, the assumption is that the bulk of the charges highlighted below are "one time" - yet, since most of them relate to the ongoing reps and warrants litigation, it is rather safe to put them in the recurring cost of business as the total amount of outstanding claims on R&W warrant cases has soared to a record $28.3 billion, compared to just $12.6 billion a year ago. Netting out the $13.5 billion in GSE claims which are now settled there are still some $125 billion in private and monoline claims which will continue to be a drain on BAC cash and EPS for years to come.

The full breakdown of Q4 "earnings", including the rather odd $2.4 billion tax benefit, and all the charges is shown below. Oddly enough, a year ago it paid some $441 million in taxes.

In brief: $10.56 billion in net interest income, better than the $10.24 billion estimate, driven by the arbitrate $900 million in loan loss reserve releases for the quarter (see below). The far less adjustable non-interest income was just $8.34 billion, far below the estimated $11.7 billion. Of course, BofA's argument is that this is due to one-time charges. Yet are these truly one time charges? A quick look at the outstanding Reps and Warrants claims shows there is much more legacy Countrywide pain to come for the bank:

In one years total claims have increased from $12.6 billion to $28.3 billion. Of this the GSE claims are now settled, which means only some $5-10 billion to settle the outstanding Private and Monoline R&W claims. In other words, it is safe to assume that the same kinds of "one-time" charges will be seen for years to come.

Net interest margin declined from a year ago, from 2.45% to 2.35%, although it rose by a tiny 3 bps from last quarter. This resulted in some $10.6 billion in Net Interest Income in the quarter, or well over half of the total revenue of $18.9 billion reported in Q4.

The $10.6 billion in Net Interest Income, which was "better than estimates" of $10.24 billion, was offset by some $2.2 billion provision for credit losses. Of course, this being Bank of America, there was a lot of Loan Loss Reserve Releases. Sure enough, as the chart below shows of the $700 million in unadjusted Net Income, some $900 million, or more than all of it, came from everyone's accounting gimmick. Absent the release, the firm would have reported a negative pre-adjustment Net Income number.

The $900 million reserve reduction was accompanied by some $3.1 billion in charge offs, of which $2.9 billion in consumer and $251 million in commercial. Of the consumer charge offs, $714MM was in resi mortgage, $767 million in home equity and $978 million in credit cards. The total was $2.2 billion provision for credit losses.

The loan book did not improve much if at all, with some $15.3 billion in residential NPAs. This was driven by a reduction in the 180 day past dues from $10.1 billion to $9.2 billion, offset by an increase in the < 180 days from $5.7 billion to $6.1 billion. Home Equity NPAs was unchanged at $4.3 billion.

Then we look at sales and trading revenue, that other bastion of profitability of the New Normal bank hedge funds, where we find that it declined by $0.7 billion from Q3 to $2.5 billion ($1.8 billion in FICC and $0.7 billion in Equity Income), although rising from a year ago. A far cry from the blow out trading numbers reported by Goldman. What is odd, is that while the Goldman VaR plunged, BAC's soared:

Finally, there were quite a few pink slips at the bank in the quarter, with some 228.5K FTEs at the end of Q4, down from 230.9K last quarter, and 242.3K a year ago.

In short: yet another quarter marked by "one-time" charges which will likely never go away, and ongoing deterioration in business fundamentals offset by loan loss reserve releases.

Full presentation below

BAC Q3 by zerohedge

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GetZeeGold's picture



So just paper it last time.

lordbyroniv's picture

5 years without paying her mortgage and my sister in law still hasn't been foreclosed on by BOA.


What the Fuck are they waiting for?



adr's picture

They know they don't have the paper, so they won't foreclose. My uncle hasn't paid his mortgage for 2 years, the bank has denied three short sales already. I'm pretty sure the bank is holding out for a few thousand dollars more on the paper they sell to Bernanke.

It makes no sense because the short offer was only $8k less than what my uncle owes. The bank has lost more than that in payments waiting to kick him out.

lordbyroniv's picture

Its such Bullshit.


My sister in law is living in a 3 bedroom house worth 250k and a rental value of est $1500 a month.


Not paying for 5 years....thats 90k worth of free money for a bad decision of buying a house with my dumb brother that they couldnt afford.

I on the other hand didnt buy because I couldnt afford to....and pay my rent every month.




This is such such BULLSHIT!!!!!!!!


TMoney's picture

Your SiL needs to hold out for 2 more years, then the Statue of Limitations expires (your state may vary) and the house can't be repo-ed. Free House. Don't be mad at your SiL and brother though. Be happy if they "win".

    It is not their fault the bank is/was sloppy with it's paperwork. If the bank was on the up-up your brother and SiL woud have been kicked out long ago.

waterhorse's picture

"Sloppy"?  How about "fraudulant" as in willful and intentional control fraud.

Bohm Squad's picture

One explanation may be this:  I've been looking for a rental property and come across a bunch of foreclosures where property was foreclosed by lender at [say] $125,000 and put on the market for $21,000.  They're probably trying to avoid a realized loss.  Good luck with that.


Also, my understanding is that HUD rules force the lender to bid the assessed value of a foreclosure which is way over the market clearing price - so why bother listing HUD's at all... >

buzzsaw99's picture

The Orange Man laugheth.

LongSoupLine's picture

This fucking piece of shit bank should have been put through the fucking shredder years ago, and it's criminal asshole leadership locked up in bleeding ass fucking prison. Fuck you BAC and fuck you Fed and Congress for your complicit support. Fuck off and die all of you fuckers.

Sudden Debt's picture

what would Obama do....

GetZeeGold's picture



Whatever the children ask him to do.


So I guess we're all getting a pony.

Sudden Debt's picture

... I'm not a American....

don't I get a pony?....

the English got all the American Mustang horses.... okay... they turned them into hamdburgers... but I should also get something.

I like to eat Bald Eagle eggs in the morning.... with cheese!!! H H H HMMMMmmmmm!!!

I'll buy some dollars if I get a 6 pack.

pherron2's picture

All of your ponies are belong to us!?

Bohm Squad's picture

Of course you'll get your pony...oh wait, you're not German are you?  ...There's a precedent for how quickly your pony can be delivered if that's the case.

Mr. Magoo's picture

Time for another $9.1 trillion dollar bailout disguised as a 750 billion dollar package

francis_sawyer's picture

Crank up the printing presses ~ $85 billion [oh neverminds] a month just won't cut it...

PUD's picture

Banks have a solitary mission statement...To get as many in debt as possible as much as possible for as long as possible at as high a cost as possible. This is an anti social function no different than a weapons manufacturer. Until banks are simple utilities all their gains are your losses.

Seasmoke's picture

Ken Lewis must be jealous of Brian Moynahan.

SuperDeDuper's picture

i think we should all go into the banks and ask for all our money in $1 bills, all at once, just to piss them off.

adr's picture

Well, they are one time charges. They just happen to be used one time, four times a year.

Honestly, BofA has been better to deal with than 5/3rd Bank. The local tellers are fine. The corporate office is a diseased cesspool. I would say they are the worst bank in the country by a large margin.

BofA might go for an arm or leg first. 5/3 goes straight for the head.

adr's picture

Nobody cares how you beat EPS anymore as long as you beat. Cheat, lie, steal, fire everyone you can. As long as you beat so the algos can ramp your stock, all is good with the world.

We are so divorced from honesty that if you tell the truth, somehow you are the liar. You present smoking gun evidence, somehow you made it all up.

The honest man is now the cheater. The new normal.

Let The Wurlitzer Play's picture

I noticed that BAC tier 1 CE (BI and BIII) is better than Wells Fargo and comparable to JPM Chase.  Does that mean that BAC also has a "fortress balance sheet"?  Can their CEO advertise that also?