The Frightening Truth Behind Bank Of America's "Earnings"

Tyler Durden's picture


Over a year ago we noted that when it comes to Bank of America "earnings", items which traditionally are classified as non-recurring, one-time: primarily litigation and mortgage related charges, have now become recurring, and all the time, courtesy of the worst M&A transaction of all time - the purchase of Countrywide and its horrifying mortgage book. Today, this is finally being appreciated by the market where even the pompom carriers have said that it is time to start ignoring the endless addbacks and focus on actual earnings. The same cheerleaders have also, finally, understood that the primary source of "profitability" at this lawsuit magnet of a company, is nothing other than the accounting trick known as loan loss reserve releases - not actual profits but merely bottom line adjustments whose purpose is to mitigate the impact of quarterly charge offs on loans gone horrible bad. Remember that Bank of America has some $908 billion in total consumer loans and leases, and every day hundreds of millions of these go 'bad' and ultimately have to be discharged, offset by "hopes" that the future will improve. This hits both the balance sheet and the P&L. So, if one steps back and ignores the non-recurring, one-time noise, what emerges? A truly frightening picture.

The chart below shows Bank of America's earnings broken down to their most basic: the blue bar shows reported pre-tax net income excluding pro forma adjustments, as it is shown on the company's filings. This is the number that bank "analysts" then use as the baseline to grow using addbacks, getting to a final number which exists only in some excel spreadsheet, and which is used to sell BAC stock to clueless lemmings. However, what this number also includes, is the now infamous loan loss reserves. Luckily, the Bank breaks it all up. And the red bar in the chart shows what earnings would have been had Bank of America not taken the benefit of padding its Net Income with said accounting gimmick.

So what happens when one strips loss reserve releases from the Net Income? Well, the full year Bank of America Per-Tax earnings plunges by a whopping $6.7 billion (the total loan loss reserve releases taken in 2012) from $4 billion to a negative $2.8 billion.

One can simplify the chart above even more. Instead of looking at pre-tax income either with or without loan loss reserve releases, a just as good proxy of what is truly going on is to look at pre-tax, pre-provision earnings - an earnings number that isn't impact by how the collapsing balance sheet is impacting earnings, and alternatively to just compare the Total Net Charge Offs disclosed by the bank on a quarterly basis: i.e., parsing the debt on the balance sheet that is now worthless, and directly impacts retained earnings.

The result: $12.1 billion in pre-tax, pre-provision earnings. So far so good. However, offsetting this is a massive $14.9 billion in Net Charge Offs, a number which is likely underestimating the true loss resulting from debt on the balance sheet gone bad. The difference, as it must, foots to the delta above, or some $2.8 billion in losses incurred in 2012.

Finally, the purists may have noticed that the numbers used above are pre-tax for an apples to apples comparison. Which does however raise a good point: what taxes did Bank of America pay, at least for GAAP purposes, in 2012? This may come as a surprise but in 2012 Bank of America paid a grand total of...

... negative $215 million in tax. Yup, in 2012 Bank of America got money from the government (if only for pseudo GAAP purposes).

* * *

And this was the best performing stock of 2012?

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Thu, 01/17/2013 - 14:18 | 3163095 PSEUDOLOGOI

This train has many wheels... but they are coming off, one by one...

Thu, 01/17/2013 - 14:27 | 3163139 Xibalba
Xibalba's picture


Thu, 01/17/2013 - 14:52 | 3163252 knukles
knukles's picture

We are all conspiracy theorists now
     - "John Maynard" Knukles

Thu, 01/17/2013 - 15:36 | 3163453 pods
pods's picture

Judging by the downvotes above, it seems that BofA has allowed ZH through the firewall again.


Thu, 01/17/2013 - 14:34 | 3163175 toxic8
Thu, 01/17/2013 - 15:39 | 3163473 pods
pods's picture

I think it just moved.


Thu, 01/17/2013 - 14:49 | 3163247 AbelCatalyst
AbelCatalyst's picture

Why have any reserves at all if they are just going to be bailed out by taxpayers? The banks take the upside and we eat the downside... Free money... But only for the banksters as the taxpayer drowns in debt and higher taxes... Ugh!!

Thu, 01/17/2013 - 15:23 | 3163406 WarHorse
WarHorse's picture

Which bank did the American taxpayers lose money on again?  Chrysler .. wait that's not a bank ... AIG?  ... hmmm, also not a bank

Thu, 01/17/2013 - 17:46 | 3163981 imapopulistnow
imapopulistnow's picture

Or is it: This train lost many (all?) wheels five years ago and we are now only learning how bad of a wreck it was as they report them, one by one...

Thu, 01/17/2013 - 14:21 | 3163106 madcows
madcows's picture

It couldn't happen to a more deserving bank.

Thu, 01/17/2013 - 14:27 | 3163141 AlaricBalth
AlaricBalth's picture

Yes it could - JPM

Thu, 01/17/2013 - 17:47 | 3163985 imapopulistnow
imapopulistnow's picture


Thu, 01/17/2013 - 14:23 | 3163115 Jason T
Jason T's picture

they are getting desparate.. not allowing folks to use their CCs' to buy guns ..

Thu, 01/17/2013 - 14:23 | 3163116 BaggerDon
BaggerDon's picture

Since when to INVESTORS want the truth??

Thu, 01/17/2013 - 14:39 | 3163194 tickhound
tickhound's picture

Since when does ANYBODY really want the truth in this society about ANYTHING.  Lie-strong, manti, dykstra, cramer, government, supplies, demands, products, services, wars, herbalife, madoff, insurance, philanthropy, marketing, advertising, tiger-the-woods.....

People don't buy anything unless there is a lie attached.  I don't want a baseball card... I want a baseball card that's ONE OF A KIND, when ONLY a gazillion were made... I want the BEST, one that's better than the guy's across the street somehow, LIE TO ME!!!... the car that comes in LIMITED editions, ONLY a gazillion were made, that comes in a color that NOBODY else has... I want the BEST vacation deal, with UNLIMITED booze after 5 pm, where they tell me EVERYBODY wants to be, but few are lucky to afford... unless I CALL NOW!

I want a LIMITED EDITION COIN!!!  plated in .9999 fine GOLD!  VALUED AT $1000!   But available for a LIMITED TIME for three easy payments of $19.95... BUT only to the FIRST 20,000 people who CALL NOW! 

Operators are standing by....

Thu, 01/17/2013 - 14:43 | 3163223 Bohm Squad
Bohm Squad's picture

If it's advertised, it's not worth buying...

Thu, 01/17/2013 - 14:46 | 3163234 tickhound
tickhound's picture

Sir, if you only understood just how SCARCE our product was... you'd pay much, much more.  It's truly the deal of the century.  ACT NOW!!!

Thu, 01/17/2013 - 15:34 | 3163446 macholatte
macholatte's picture



The conscious and intelligent manipulation of the organized habits and opinions of the masses is an important element in democratic society.
Edward Bernays


All over the place, from the popular culture to the propaganda system, there is constant pressure to make people feel that they are helpless, that the only role they can have is to ratify decisions and to consume.
Noam Chomsky


It is part of the general pattern of misguided policy that our country is now geared to an arms economy which was bred in an artificially induced psychosis of war hysteria and nurtured upon an incessant propaganda of fear.
Douglas MacArthur


Why is propaganda so much more successful when it stirs up hatred than when it tries to stir up friendly feeling?
Bertrand Russell


It is the absolute right of the State to supervise the formation of public opinion.
Joseph Goebbels

Thu, 01/17/2013 - 17:50 | 3163994 imapopulistnow
imapopulistnow's picture

Sir, if you only understood just how SCARCE our product was... you'd pay much, much more. It's truly the deal of the century. ACT NOW!!!

Sorta like assault rifle sales....

Thu, 01/17/2013 - 14:45 | 3163229 fonzannoon
fonzannoon's picture

If I were Clemens agent I would have him release a statement totally condemning Lance's actions. What happened to the good old days when people took their lies to their graves. All we have left is the fed and clemens fighting the good fight these days.

Thu, 01/17/2013 - 15:03 | 3163306 tickhound
tickhound's picture

haha... There's no money is the 'good fight.'  The honest shopkeeper is a phenomenon.  He CAN'T stay in businees long.  And if he does, it'll stay a mom & pop because the store will have limited upside and no scalability.  We've placed ICONIC $ values on BRANDING.  Mom has no brand.   

Thu, 01/17/2013 - 17:11 | 3163851 Shizzmoney
Shizzmoney's picture

Sounds like my company.

It advertises that our products have the finest quality.....yet are made by a pimple faced 19 year old in China, working on a $2 per hour, 10 hr shift.

Thu, 01/17/2013 - 17:29 | 3163918 tickhound
tickhound's picture

Business can't be honest anymore.  It can't afford to be.

BTW, that speck on your face looks like cancer.  I'd have it removed just to be sure.  You have Medicare?  And make sure to call my financial advisor... He's the best and he's looking forward to speaking with you. 

Thu, 01/17/2013 - 17:41 | 3163965 Super Broccoli
Super Broccoli's picture

you're right mate, that's how people are, they don't want what's good for them, they figure out they want what others want (or what you have them believing as such) ... but you know what ? People are so dumb they deserve what's happening to them.


Too bad for us the dumbasses votes against freedom

Thu, 01/17/2013 - 14:24 | 3163121 apberusdisvet
apberusdisvet's picture

I told all my friends 2 years ago to get out of the TBTFs, especially if they have money market accounts not covered by FDIC (which is bankrupt, btw).  Now I wouldn't keep even enough for bill pay at these institutions; the possibility of "corzining" has become too great.

Thu, 01/17/2013 - 14:40 | 3163199 Winston Churchill
Winston Churchill's picture

Very wise.I have to keep some fiat in the bank for business ,

and monthly bills.My mattress takes the rest of the paper savings.

I don't know how the ZHers still in the Ponzi scheme called the

market, sleep at night.Big crowds ,and small ,algo sized, doors ahead.

Thu, 01/17/2013 - 14:46 | 3163232 Rearranging Dec...
Rearranging Deckchairs's picture

I know one seemingly smart guy from the neighborhood who invests in TBTF bank stocks becase he feels they will never be allowed to fail. I guess he doesn't understand earnings dilution.

Also told various people including my parents that they shouldn't keep money at BOFA and am met with a but how will we bank when we're out of town kind of response. Its nonsense because of debit cards and if you really had to you could still use travellers checks.

Even if it is FDIC insured it will take months if not years to get paid if an insitution as large as BOFA had to be put into receivership.Congress would probably nationalize them if there was ever a danger first. In the meantime before you get your money the dollar will have likely crashed in purchasing power.

You know these people see us as the "boy who cried wolf" As I like to remind people eventually the boy who cried wolf was accurate and not lying. But I have a decent enough track record calling things. Geting out of Citi at 46 and warning everyone else to do the same. Getting into gold at $550 an ounce etc. Getting your loved ones to take concrete action is difficult! 



Thu, 01/17/2013 - 14:52 | 3163257 fonzannoon
fonzannoon's picture

your friend does not care about earnings dilution. Your friend understands QE4eva.

Thu, 01/17/2013 - 14:25 | 3163123 Cursive
Cursive's picture

It's OK, it's a bank and the Ben has the bank's back.  Nothing will be allowed to go wrong.  /sarc

Thu, 01/17/2013 - 14:31 | 3163125 Cognitive Dissonance
Cognitive Dissonance's picture

Nothing a few hundred more Billion Trillion in "riskless" reserves sitting in their vault computers won't cure.


Thu, 01/17/2013 - 14:54 | 3163266 knukles
knukles's picture

Why is that a "sarc"?

Thu, 01/17/2013 - 14:35 | 3163126 LeisureSmith
LeisureSmith's picture

If you work at Bank Of America you should not be reading this.

The Boss.

Edit. If you work at Bank Of America you should not be able to read this. I'm super serial!

Al from IT.

Thu, 01/17/2013 - 14:24 | 3163127 Inthemix96
Inthemix96's picture

I wonder if any of BoA staff read ZH?

If you do take heed, the world is waking up on an exponential level.  If I were one of you, I would perhaps look for another job because the day of reckoning is drawing near.

Fucking pond life.

Thu, 01/17/2013 - 14:32 | 3163162 Rainman
Rainman's picture

BAC employees are unable to pull up ZH at work....truth is bad for morale.

Thu, 01/17/2013 - 14:37 | 3163189 NoDebt
NoDebt's picture

Those BofA employees own iPhones and iPads, too, ya know.

Banning ZH is akin to banning a book or calling for a boycott.  It usually ends up driving MORE interest rather than it's intended effect of cutting it off.

If you have kids you understand this.  Tell them "you can have any candy in the store..... except this one."  See what happens.

Thu, 01/17/2013 - 14:42 | 3163208 Inthemix96
Inthemix96's picture

Next thing you know it'll be the reichstag fires.

Burning hard-drives in massive bonfires of ZH tainted material.  Vee hav vays ov makin you talke.

Fuck wits

Thu, 01/17/2013 - 14:30 | 3163152 dbTX
dbTX's picture

Surely Warren and Charlie have a plausible explanation.

Thu, 01/17/2013 - 14:34 | 3163178 Milton Waddams
Milton Waddams's picture

fast forward to approximately 1:58:20 for Warren's explanation

Thu, 01/17/2013 - 14:31 | 3163159 fonzannoon
fonzannoon's picture

maybe it will be ford this year.

america, fuck yeah.

Thu, 01/17/2013 - 14:33 | 3163167 mrdenis
mrdenis's picture

It's called the ORANGE MAN's revenge .......

Thu, 01/17/2013 - 14:45 | 3163169 NoDebt
NoDebt's picture

Bank "earnings" have always been a byzantine mess.  They have been run as a never-ending string of "one time charges" my entire adult life.  I'm no Meredith Whitney when it comes to alalyzing banks but their earnings are probably the most "massaged" of any industry group you could name. 

That being said.... this looks pretty ugly.  Are they going to run out of loan losses first or run out of loan loss reserves (which existing specifically for these situations) to throw at it?  I have not a damned clue.

What I DO know is that if they declared they were in trouble after the close TODAY, the Fed and Treasury would be there to put them back in business by market open tomorrow.  As an investor, you'd be wiped out, but the bank would be fine.

Thu, 01/17/2013 - 14:35 | 3163179 Squid Vicious
Squid Vicious's picture

the Shalom has their back, feel free to BTFD

Thu, 01/17/2013 - 14:53 | 3163262 Seasmoke
Seasmoke's picture

Manti Te'o may have a lost the Heisman, but he has a job at BOA for life

Thu, 01/17/2013 - 20:20 | 3164568 ersatzteil
ersatzteil's picture

Lost the Heisman, but won the Corzine, bitchez!

Thu, 01/17/2013 - 15:00 | 3163293 SmittyinLA
SmittyinLA's picture

I was looking forward to an auction of California homes, starting this week, for some strange reason hundreds(thousands) of homes that were to b e auctioned off were either cancelled or postponed with no explaination.


Nearly every auction of CA homes was "postponed or cancelled" 

Thu, 01/17/2013 - 15:11 | 3163353 hooligan2009
hooligan2009's picture

hmm..i get 12,168 properties of all types here:

including this one today held at 9 am? for c. 377,000, doesn't say it was cancelled


Thu, 01/17/2013 - 15:51 | 3163517 azzhatter
azzhatter's picture

I lived in LA for 3 years. There are so pretty dumpy homes in shitty neighborhoods with big opener bids on them. And some dickhead will pay it too

Thu, 01/17/2013 - 15:08 | 3163337 jubber
jubber's picture

and there we have it a Five year high on the Dow, unbelievable

Thu, 01/17/2013 - 15:10 | 3163343 lunaticfringe
lunaticfringe's picture

Guillotine, new in box. Best offer. Call 555-5555. 

Thu, 01/17/2013 - 15:10 | 3163344 jojomama
jojomama's picture

That's what happens when banks rely on "Trading Income" and "Client Accommodation Income" instead of actually, oh, I don't know, um, relying on "Lending" and "Making Loans" like they are supposed to. 

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