Bank of America Earnings: Cutting Through The Noise

Tyler Durden's picture

Bank of America reported results earlier, which were somewhat amusing: reported earnings were $653 million or $0.03 per share. Yet the number that the market is fascinated by is the one arising from "negative valuation adjustments" of $4.8 billion, which included $1.5 billion in DVA "resulting from the narrowing of the company's credit spread", and resulted in a $0.28 per share addition. This is the same number that we were told to ignore when it did not help the bottom line. We will be told to ignore it again next quarter when spreads once again balloon, but for now it leads the market to see a $0.31 adjusted EPS number. In other words, one time items are to be ignored when negative, and praised when providing a "one-time benefit." These also included $0.8 billion in litigation expenses, which are also supposed to be excluded, even though the bank has now been sued by virtually everyone due to its Countrywide legacy portfolio. Yet all of this is accountant fudge heaven: there are only three things that matter. 1) The approaching refi cliff, in terms of tens of billions in maturities, including FDIC-funded TLGP, which are as follows: "$34B of parent company maturities in 2Q12 including the remaining $24B related to the Temporary Liquidity Guarantee Program" 2) sliding sales and trading revenues which dropped from Q1 by $546 million from a year ago to $2.844 billion in FICC, and by $332 million in Equity income to $907 million; and finally 3) and reserve release gimmicks: specifically BAC took a $1.6 billion reserve release even as the net chargeoff percentage increased. Specifically look at the first chart below showing the $1.8 billion surge surge in junior-lien Non-Performing Home Equity Loans due to regulations finally catching up to reality. Also, the bank charged off more in Reps and Warranties than it reserved, even as everyone is now suing the bank for precisely this issue. And this is the environment in which the firm books profits from reserve releases?

First the surge in NPAs (non-performing loans). The huge spike in home equity is described as follows: "During 1Q12, the bank regulatory agencies jointly issued interagency supervisory guidance on nonaccrual policies for junior-lien consumer real estate loans. In accordance with this new guidance, beginning in 1Q12, we classify junior-lien home equity loans as nonperforming when the first-lien loan becomes 90 days past due even if the junior-lien loan is performing. As a result of this change, we reclassified $1.85B of performing home equity loans to nonperforming." Bottom line - the bank finally has to adopt to reality.

Robosigning may be dead, but the bank's troubles with reps and warranties litigation is only starting. And yet, BAC made just a $282 million provision in this category as it charged-off $300 million. Same accounting gimmickry, all the time. Note the surge in repurchase demands from GSEs and Private Labors, sending the total to a record $16.1 billion.

Keeping the truly big picture in mind: $730 billion in outstanding balance in 2004-2008 originations, have paid $13 billion, and have just $16 billion in reserves established. "Estimated Range of Possible Loss (RPL) above accruals up to $5B for non-GSE exposures at March 31, 2012". Translated: the bank is once again woefully underreserved, because as the chart above shows, BAC mortgage repurchase claims from GSEs increased by $1.8 billion in just one quarter (and by $1.6 billion from private labels). Recall this post from October 2010: it is still 100% valid and relevant.

Income statement summary, showing the $6.1 billion in "selected" addbacks.

Sales and Trading results excluding fudges:

Full slidedeck:


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ndotken's picture

Since the days of Hugh McColl, BofA has wanted to look, and act, like the big boys on Wall St ... now they're just like those lieing, deceitful, corrupt, greedy, immoral, irresponsible and arrogant bastards, Jamie Dimon and Lloyd Blankfein ... congratulations BofA on becoming the lieing sack of shit you've always wanted to be

maxmad's picture

This is the equivalent of the drug addict living on the street that tells all of his freinds that he is a millionaire.... Dilusional!

SeverinSlade's picture

No, it's worse than that. 

This is like a drug addict talking to his friends while sitting in his cardboard box home, shooting up with heroin, sitting in his own feces, yet insists that not only is he a millionaire but also that he is completely clean and drug free.

SeverinSlade's picture

Ironic how "America's bank" fudges its numbers just like Amerika itself.  Just ask the BLS.

maxmad's picture

Funny how FASB allows this to go on!  Its like they are bought and paid for, oh wait...

disabledvet's picture

Soon to be Bank America Goldman Mellon Morgan New York City BB&T Fargo Citi Corp. It's all good. MOVE ALONG!

Cursive's picture

Funny how one-time items have a perpetual life

ihedgemyhedges's picture

Get with the program dude.  They're called "non-recurring" items.  Unfortunately, they're there every quarter..............FASB allows you to exclude oxymorons................

Thomas's picture

Saw the beat coming across the air this AM and murmured, "Huh?"

pods's picture

I have actually been paying attention to the radio news more lately, specifically trying to pick out the utter BS, slant, and puff pieces.

Seems besides the traffic, there is nothing that is delivered as it should be.

The Ministry of Information is powerful.



TooBearish's picture

Wait - didnt i recall that these same TBTF were booking profits in 4Q11 when funding spreads widened in the fall?  How the fuk do u get it both ways?!?!?!?

junkyardjack's picture

When you make up the numbers they can always go the direction you want.

Catullus's picture

They're not focusing on their core business line which is a being a massive piece of shit and buying up companies that are even bigger pieces of shit than they are.

BlueCollaredOne's picture

I admit that Im not to savvy to financial jargon, especially when it's dealing with the subject of accounting but still do my best to try and learn what I don't know.

When Tyler writes "Bottom line - The bank finally has to accept reality," that's something even a layperson like me can understand, and appreciate.  My coffee just started tasting a little better 

Justice is an idea that permeates everyone through all different walks of life, and its time for BOA to get theirs.


SeverinSlade's picture

BAC will get their "justice" around the same time that the USSA will.  But by that time comes, I think it's safe to say that Americans in general will get what they deserve for years of voting for the bankster puppets that were chosen for them. 

XtraBullish's picture

And people wonder why we have had 17 consecutive months of equity fund outflow? Wall Street is SO COMPLETELY fucked. I am XtraBullish on hard assets but very little else. These thieves should be in jail.

firstdivision's picture

Forgive my accounting ignorance, but I was under the impression that DVA could only be taken once, or am I thinking of something else?

Bob's picture

Why pick on a visionary crew like BAC?  Here's some color from Matt Taibbi to flesh out the numbers:


"At least Bank of America got its name right. The ultimate Too Big to Fail bank really is America, a hypergluttonous ward of the state whose limitless fraud and criminal conspiracies we'll all be paying for until the end of time. Did you hear about the plot to rig global interest rates? The $137 million fine for bilking needy schools and cities? The ingenious plan to suck multiple fees out of the unemployment checks of jobless workers? Take your eyes off them for 10 seconds and guaranteed, they'll be into some shit again: This bank is like the world's worst-behaved teenager, taking your car and running over kittens and fire hydrants on the way to Vegas for the weekend, maxing out your credit cards in the three days you spend at your aunt's funeral. They're out of control, yet they'll never do time or go out of business, because the government remains creepily committed to their survival, like overindulgent parents who refuse to believe their 40-year-old live-at-home son could possibly be responsible for those dead hookers in the backyard . . . "


TooRichtoCare's picture

Oh for goodness we have to go through this every single frikkin quarter??  Say what you will about the banking landscape going forwards and how the over-regulated environment is not conducive to banking profitability. Say what you will about the housing market.  Say what you will about exposure to Europe.  But please, for the love of god, can we get over this never-ending misinterpretation of what DVA adjustments are all about??

First of all, it is NOT a form of evil and conniving manipulation in order to deceive people about true earnings.  It's an accounting measure that all banks have to use.  It simply takes the Liability side of the ledger and attaches a value to the outstanding debt that the Bank has issued in the past.  Based on whether credit markets are tightening or widening it attaches a value to this liability just like it would to an Asset.  It is a quirky & annoying measure which throws out phantom profits and phantom losses, and most anaylsts and investors simply look through it to see the true earnings picutre.  It is NOT something that we ignore when it's bad, and praise when it's good.  In fact, I've found that it's the opposite.  When you have DVA creating phantom profits, the message boards are full of people denouncing the fake profits as some form of manipulation, and yet when the DVA adjustment creates a phantom loss no-one says a word about it.  

The simple fact is, when the credit environment is bad and CDS spreads are widening that means the PRICE of your outstanding bonds are lower.  That would normally be a bad thing as it clearly means that your borrowing costs are now higher than they used to be.  Instead of being able to borrow at US Treasuries plus 2% you now have to borrow at UST + 4%.  But the accounting measure doesn't penalise you for debt that you haven't issued or may not even need to issue.  What it does instead is, it assumes that you can buy back your own debt (which you issued at par) at a significantly reduced price and thereby make a profit.  Never mind that you haven't actually decided to buy back your own bonds, it assumes you have, and it credits you with a mark to market ficititious profit.  Clearly, this is nonsense.  But, the reverse happens when your credit improves.  If things are going well for you, and the cds market tightens in dramatically, and your bonds rally nicely, this would normally mean that you could now borrow money at a lower interest rate...cheaper borrowing...but no, Mr DVA looks at it bass-ackward and says that your bonds are now more expensive and if you wanted to buy them back in the secondary market it would cost you...and hence it cranks out a phantom loss.  So, in the case of Morgan Stanley, they had a blowout quarter where, for the 3rd qtr in a row, they crushed their rivals Goldman, and yet the DVA measure docks them $2billion bucks.  Yes, you're supposed to ignore it.  Just like you're supposed to ignore it when the DVA cranks out a bogus $2bn LOSS.

So stop it with all this "they should be put in jail"'s an accounting measure. Get over it. 

Vegamma's picture

Agree with this. BTW, I'm interpreting the DVA differently.

 included $1.5 billion in DVA "resulting from the narrowing of the company's credit spread", and resulted in a $0.28 per share addition

A narrowing of credit spreads creates a loss, not an addition. I am not a fan of BAC, but instead of puffing up results, they had to overcome this drag to post a positive #.

TooRichtoCare's picture

Yes....isn't that what I said...the narrowing credit spread creates a phantom loss...except my example used morgan stanley and yours uses Bank of America.  Either way, MS had a 2billion dollar loss due to the DVA, and yet below that fictitious DVA-driven "loss" was an extremely healthy quarter.  I think we're saying the same thing, and i think you're agreeing with me....?

Vegamma's picture

Yes, RTrC, I agree with you. The statement I disagree with (and listed in my post) is from the article, not your comment. The article implies the spread tightening was a gain.

azzhatter's picture

When your a too biggerer to fail, why do you need reserves?

BlueCollaredOne's picture

Too shoot anyone that questions your practices


Oh, you were talking money?

Clamdigger's picture

...or too buggered to fail.

MFL8240's picture

The fraud continues to line the pockets of the maget from Omaha.

FreeNewEnergy's picture

I love BofA. They paid nearly $10,000 in property taxes on the house I live in, owned by my deceased father's estate, now 33 months in default and 25 months after they sued for foreclosure, complete wit robo-signed assignment on top of fraudulent assessment and income on the original mortgage from 2007.

Even more, I love the state of New York, not for having the highest property taxes in the nation, but for having the best jurisprudence in the country. The judges in Supreme Court have done a masterful job of keeping banks like BofA from mucking up the court system with "shitty" foreclosures, on most of which they are not even the note-holder.

BAC should not be trading for $8 or $9. Their true value is a negative number, but the TBTF poster child gets everything they want from a supine congress while Fannie and Freddie buy up all of their BS mortgages.

The upshot is that Fannie and Freddie will be on the public dole nearly forever, written down and eventually written off as massive losses years from now, at which point they will be summarily banished to the dust heap of history as another "good idea gone bad."

Perhaps the only massive entity with more gross stupidity than Bank of America is the federal government. They breed distrust, dishonesty and moral hazard each and every day.

I still love this country, but I refuse to support any business or government that is so wantonly and purposefully against the public interest at every juncture.

Something for all Americans to remember: This is YOUR country. Not Bank of America's and surely not the wayward federal government's. I cannot wait until November 6, when Adolf Romney becomes the newest heir to the throne, for he shall usher in an age of even greater despair for OUR country and he will find the job he so covets to be his ultimate destruction.

Obama promised hope and change and delivered neither. Romney is promising "a military that no nation would ever dare oppose," meaning the world should be ready to accept the raining down of bombs from US aircraft and warships upon their "threatening to our security" homelands.

Anybody with a heartbeat, half a functioning brain and a clear conscience must begin (if not already started) to take the banks, utilities, mega-corporations and various levels of government to task for their wanton disrespect and disregard for individuals and individual liberty. We are, as a nation of individuals, still empowered to do what is in our own best interests, even to the detriment of our government.

Small, timely acts of conscience, civil disobedience and self-survival will eventually have a huge cumulative effect on the oppressors and hopefully contribute their downfall.

Hail BofA, hail Obama, hail Rommey! May your days be short and filled with the same cruelty and hatred that you have for "ordinary" people.

In the words of Muse, from their awesome hit, "Uprising"

They will not force us

They will stop degrading us

They will not control us

We will be victorious! 


Sorry for the long and rambling post. I don't know about anybody else around here, but I find that I have to get my screed out on a near-daily basis to rally my spirits and keep the inner warrior strong.

Pairadimes's picture

As long as you realize that the business model for banking is that losses are socialized and profits are privately distributed, then this makes perfect sense. Otherwise, it would appear that the inmates are running the asylum, and we can't have the public thinking about that.

resurger's picture


dirtbagger's picture

BAC is using the wrong accounting firm.  Instead of Dreamworks, the should be using the Brother's Grimm.