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Bank Of America Misses Despite Surge In Reserve Releases Amounting To Over Quarter Of Q3 "Earnings"

Tyler Durden's picture




 

On the surface, the latest Q3 bank numbers to come out of Bank of America today, were not quite as bad as those previously reported by the other TBTFs, namely JPM, Wells and Citi. At a (massively adjuste4d) EPS of $0.20, this was just 1 cent below the expected $0.21, even as net revenue of $21.74 billion missed expectations of $21.95 billion. So far so good. At least so good until one realizes that of the $5.1 billion in pretax income, some 1.4 billion, or over a quarter, was from the usual accounting magic well of gimmicks: loan loss reserve releases! In fact, the $1.391 billion in reserve reduction driven by $1.7 billion in charge offs offset by a tiny $0.3 billion in provisions, was the highest reserve release in the past year, only lower than last Q3's $2.3 billion, when the bank - just like today - was in desperate need of any source of fake earnings. Why? Because the bank's loan origination group, just like all other banks', cratered, and saw non-interest income in its real estate services division implode by $1.5 billion to just $844 million. So much for whatever housing recovery the rose-colored glasses ones had envisioned...

This is how the bank, in a brief note in its earnings, observed this ongoing aberration:

The provision for credit losses was $296 million in the third quarter of 2013, down $915 million from the second quarter of 2013 and $1.5 billion less than the third quarter of 2012. The provision for credit losses was lower than net charge-offs, resulting in a $1.4 billion reduction in the allowance for credit losses in the third quarter of 2013. This compares to a $900 million reduction in the allowance in second quarter of 2013, and a $2.3 billion reduction in the third quarter of 2012.

And that was it: 27% of pretax net income getting 4 lines of explanation. Certainly some sellside analyst will inquire into this?

Reserve releases:

Where the magic "earnings" came from: somehow in a quarter in which everyone else was puking credit losses, Bank of America was wearing so many shades, it barely saw a reason to take any credit loss provisions. Brilliant.

Looking at actual organic lines of business, it is no surprise that just like all the other banks, Bank of America was pummeled in the key, FICC, line item.

But the real pain, as expected, was in the mortgage banking division, where as is widely known, business ground to a halt in Q3. Sure enough, noninterest income in the Consumer Real Estate Services segment imploded by a whopping $1.5 billion from a year ago to only $844 million

This is what BAC had to say about it.

  • Net loss increased slightly from 2Q13, as LAS cost savings and provision improvement were more than offset by lower mortgage banking income and increased litigation costs
  • Total Corporation first-lien retail mortgage originations were $22.6B, down 11% from 2Q13
  • Mortgage pipeline at the end of 3Q13 was down 59% from 2Q13
  • Core production revenue declined $395MM from 2Q13, due to a 23% reduction in rate lock volumes and lower sale margins
  • Servicing income declined $116MM from 2Q13 as the size of the servicing portfolio continued to decline
  • Total staffing declined 11% from 2Q13, due primarily to continued reductions in LAS, as well as actions taken in sales and fulfillment as refinance demand slowed

But not even BAC is brazen enough to keep pumping the bottom line with fake earnings without cutting at least some fat. Sure enough, On the expense side, the firm's recurring expenses (ex LAS and litigation) dropped from $13.2 billion to $13.1 billion mostly due to a 9.2K (3.6%) reduction in FTEs to 247,943, the lowest in years as the bank took the axe to its mortgage origination employees

On the balance sheet, total deposits increased by $30 billion from $1080.8 billion to $1,110.1 billion: a record high, not nearly offset by the mere $10 billion increase in loans from $914.2 billion to $924 billion, as like JPM, BAC uses the excess cash to buy risk directly.

The key loan quality indicators of note is that LTVs for both average and 90% loans continues to drop, and hit 71% and 21% respectively. In the % of loans below 620 FICO, BAC reported a total of 12% in notional.

 

And so on: accounting gimmicks, deteriorating organic business lines, reduction of key employees as the consumer refuses to originate loans, sticking head in sand and reducing quality of loans made even as deposits soar far ahead thanks to QE, allowing the bank to become ever more into a prop trading desk. All the makings of an inevitable disaster.

Full presentation below

 

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Wed, 10/16/2013 - 07:56 | 4059761 ZippyBananaPants
ZippyBananaPants's picture

If you looked closely, you can see some of Warren's dried nut sac salt on Becky's chin!

Wed, 10/16/2013 - 08:03 | 4059775 GetZeeGold
GetZeeGold's picture

 

 

Becky is a miracle worker!

Wed, 10/16/2013 - 08:05 | 4059779 negative rates
negative rates's picture

Vigalante justice at it's best.

Wed, 10/16/2013 - 08:04 | 4059769 Quinvarius
Quinvarius's picture

That is what happens when you load up leveraged 200 to 1 on US Treasuries...while they are in a bubble...for safety...before a default...  The funny thing is, you know all these clowns are still lying.  Of course they are hiding their real losses.  Time for more QE because those Treasuries have gone toxic.  Someone needs to pay full price and bail these bubbletraders out again.

Wed, 10/16/2013 - 08:07 | 4059782 negative rates
negative rates's picture

Not me, my lungs are exhausted from blowing up those 99 red ballons, I've had enough, I quit.

Wed, 10/16/2013 - 08:03 | 4059776 SilverIsKing
SilverIsKing's picture

When they run out of loan loss reserves to reverse into earnings, they'll sell physical assets, i.e. Real estate, until they run out of balance sheet and saleable items. Their last move will be opening a chain of brothels since that's a viable business in good times and bad. Who doesn't like a good whore now and then?

Wed, 10/16/2013 - 22:25 | 4063592 Xrated
Xrated's picture

If that happens, Chase is fucked bigtime, and BOA and Wells should be in good shape. Chase owns nothing, and leases everything. More magical accounting for the balance sheet?

Wed, 10/16/2013 - 22:29 | 4063614 Xrated
Xrated's picture

Can Chase walk from billions of $ worth of Leaseholds and Leases, and write them off as loan loss reserves? Bet the IRS couldn't give a shit

Wed, 10/16/2013 - 08:05 | 4059780 Hedgetard55
Hedgetard55's picture

Janet Felon can just print up whatever the TBTFs need and deposit it directly to them, no need to buy their Treasuries or MBS.

Wed, 10/16/2013 - 08:23 | 4059809 Seasmoke
Seasmoke's picture

What seems to be the problem? I'm sure they all passed the stress test. 

Wed, 10/16/2013 - 08:24 | 4059812 wattsnotsaid
wattsnotsaid's picture

off subject but in the news-

Last night's news said that 50% of americans over 50 plan to delay retirememt. Low interest rates are adding 4% unemployment as the baby boomers enter retirement:

1) 2% more unemployment due to 15 million people aged 60-64 and if 1/2 are working and 40% of those delay retirement, it adds 2% unemployment (workforce is 150 million).

2) 2% more unemployment due to 96 million people over 50 who are starting to think about retirement and if they cut back spending $3000 it creates 2% unemployment based on $100k spending per job.

The above isn't just theory as most people I know are cutting back and delaying retirement as in last night's news story.

The fed is increasing unemployment.

Let the marketplace set interest rates and problems will solve themselves.

Wed, 10/16/2013 - 09:24 | 4059974 Bobbyrib
Bobbyrib's picture

Interest rates are killing seniors and savers, but that is not the only problem when it comes to the labor market there is "a huge oversupply."

Wed, 10/16/2013 - 08:26 | 4059817 nyquil762
nyquil762's picture

As if these numbers are real?

Wed, 10/16/2013 - 08:32 | 4059827 Sudden Debt
Sudden Debt's picture

I LOVE MAGIC!!!

I WISH... I WISH I HAD A TRILLION DOLLARS!!!

...

?

...

how do you mean that kind of magic is only for the FED lords?

Wed, 10/16/2013 - 08:40 | 4059841 NoWayJose
NoWayJose's picture

You do (or will) have a trillion dollars on your books - your share of the upcoming hyperinflated national debt. Just like the banks, you should move some of these over to your income tax forms. I am sure the IRS will let you.

Wed, 10/16/2013 - 08:35 | 4059831 NoWayJose
NoWayJose's picture

Don't kid yourself. The poor performance of loan origination group is intentional. Banks know exactly what is going on - and they see the rise in interest rates coming. They don't want a bunch of low interest rate loans on their books when the Fed loses control.

Wed, 10/16/2013 - 09:41 | 4060026 El Vaquero
El Vaquero's picture

I'll believe the rise in interest rates when I see it.  As they start to go up, I expect even higher levels of insanity from the Fed to combat them, and I expect this to go on until something breaks. 

Wed, 10/16/2013 - 22:17 | 4063564 Xrated
Xrated's picture

If it cost me 3% to loan you money at 4%, how much will I make if I pay 7% and loan it to you at 8?

If there is no mortgage market, renters like you are going to be fucked, I might double the rent on my apartments

Wed, 10/16/2013 - 21:46 | 4063440 Xrated
Xrated's picture

58,200 BOA Mtg LAS employees in 10/12 and now we are down to 32,200 today, one year later, and I still have a job? 10 years ago we had a million mortgage brokers who table funded their loans thru correspondent banks, 85% of all loans went thru people like me, licensed, educated, insured, independent.

Now the Bankster got rid of every damn one of us, I now am one of the 32k who work for the enemy.

I feel for the 970,000 of ya'll who lost their jobs, and the fools who will pay stupid high fees and high interest rate to purchase or refi  today due to the loss of competive shopping.

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