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

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).

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And this was the best performing stock of 2012?