Banking Law

Bank Gushes About 4Q Profits -- These SEC Filings Sound A Lot More Ominous

When a lawyer hears a company tout good financial news, it's time to scour the latest filings for all the warts.

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You can’t blame a bank for trying. Putting on a happy face is part of the job of being a high-profile financial entity, especially after the financial powers exhausted all their goodwill with the American people when they crashed the global economy and used taxpayer dollars to bail themselves out.

But when a bank touts its 4Q profits — and good for them for that triumph — the media doesn’t have to accept the bank’s rosy financial picture at face value. Especially when a quick trip over to the Annual Report reveals that outside of press releases, the bank has some serious concerns over its own financial situation…

Basically this whole thing is an adventure in how differently lawyers read financial news. Glass half empty, my friends!

Bank of America beat estimates last quarter and they are psyched:

Bank of America has spent the last five years digging out from its mortgage problems, shoring up its capital levels and laying off employees.

Now comes the hard part of trying to rebuild a banking business in a sluggish economy without reverting to the loose lending practices that nearly brought the company to its knees during the financial crisis.

That uphill battle came into focus on Wednesday as Bank of America reported fourth-quarter earnings that were stronger than expected.

The bank’s profits exceeded Wall Street estimates, helped in large part by its success at driving down expenses related to its troubled past, including the 2008 acquisition of the mortgage lender Countrywide Financial.

Countrywide, eh? I’ve think I’ve heard that word before. So is Bank of America saying it’s solved the Countrywide issue, or just that it’s not spending as much as expected in tending to that potential bombshell?

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Looming over the entire banking industry is the $13 billion settlement that JPMorgan reached with the Justice Department and other authorities in November over the bank’s sale of questionable mortgage securities leading up to the financial crisis.

In light of those large settlements, analysts expect that Bank of America and other big mortgage players will have to set aside billions of dollars more in case of future regulatory settlements, which could weigh on earnings.

The bank’s litigation expenses in the fourth quarter more than doubled from the third quarter, to $2.3 billion, but bank officials declined to say whether that legal tab was likely to grow.

I’ll go ahead and posit that its litigation costs will grow in the near future because checking out the Annual Report, there are just a plethora of scary sounding suits at various stages of bad news for Bank of America. But even the meager revelations quoted above appear late in an article gushing about 4Q profits. Maybe it’s the skeptical outlook of a lawyer talking, but it seems like someone should have checked the filings first, because these days a bank’s future profitability is closely tied with its upcoming docket, and BofA’s upcoming docket looks potentially treacherous.

But, look, while the outcomes of all these cases could total in the billions, Bank of America had to have already set aside large reserves.

Nope:

There may be other disclosed matters for which a loss is probable or reasonably possible but such an estimate may not be possible. For those matters where an estimate is possible, management currently estimates the aggregate range of possible loss is $0 to $3.1 billion in excess of the accrued liability (if any) related to those matters. This estimated range of possible loss is based upon currently available information and is subject to significant judgment and a variety of assumptions, and known and unknown uncertainties. The matters underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate. Those matters for which an estimate is not possible are not included within this estimated range. Therefore, this estimated range of possible loss represents what the Corporation believes to be an estimate of possible loss only for certain matters meeting these criteria. It does not represent the Corporation’s maximum loss exposure.

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Obviously, it’s ludicrous to assume any business would set aside reserves for every litigation threat under the sun. And it’s definitely ludicrous to assume that a business should be held to figuring out some kind of concrete reserve estimate for especially complex and speculative exposure. But if these cases start going against BofA — and there are tons of reasons outlined in the Annual Report to believe they will — the exuberance over 4Q2013 is going to look like a distant memory.

How in the world is unreserved litigation exposure scarcely mentioned in an article where BofA is credited with having “turned that big ship” around? Unless, of course, you’re pointing out that the ship has turned itself into the lesser of two icebergs.

Bank of America’s Profit Exceeds Estimates [DealBook / New York Times]
Bank of America 2012 Annual Report (incorporated by reference into Form 10-Q dated October 30, 2013) [Bank of America]

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