Bank of America Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Comparisons are with the same periods in 2021 unless otherwise noted. Bank of America is a diversified bank holding company with Consumer Banking, Global Wealth & Investment Management, Global Banking and Global Markets segments.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $13.8bn | $11.1bn | $37.8bn | $31.5bn |
| Total revenue, net of interest expense | $24.5bn | $22.8bn | $70.4bn | $67.1bn |
| Provision for credit losses | $898m expense | $624m benefit | $1.5bn expense | $4.1bn benefit |
| Noninterest expense | $15.3bn | $14.4bn | $45.9bn | $45.0bn |
| Net income | $7.1bn | $7.7bn | $20.4bn | $25.0bn |
| Diluted EPS | $0.81 | $0.85 | $2.34 | $2.75 |
| Efficiency ratio | 62.45% | 63.43% | 65.17% | 67.11% |
Q3 net interest yield on a fully taxable-equivalent basis was 2.06%, up 38 basis points year over year. Net interest income growth reflected higher rates and loan growth, partly offset by lower deposits and securities. Nine-month net interest yield was 1.87%, up 21 basis points.
Noninterest income fell to $10.7bn in Q3, chiefly as investment banking fees and service charges declined; stronger market-making revenue partly offset those decreases. Noninterest expense rose, including from higher investment in people and technology and the legacy monoline insurance settlement. The nine-month comparison also reflects a favorable U.K. tax adjustment in 2021, which contributed to lower prior-year tax expense.
Balance sheet, cash flow and capital
- At September 30, total assets were $3.073tn, loans and leases $1.032tn, deposits $1.938tn, long-term debt $269.1bn and shareholders’ equity $269.5bn.
- Since December 31, 2021, loans and leases increased $53.3bn, while deposits decreased $126.3bn and cash and cash equivalents decreased $143.2bn to $205.0bn. Management attributed the deposit and cash decline primarily to the rising-rate environment and customer tax payments.
- For the first nine months, operating cash flow was negative $37.3bn, investing cash flow negative $16.9bn and financing cash flow negative $81.7bn. Cash and cash equivalents declined $143.2bn.
- Standardized CET1 capital ratio was 11.0% at quarter-end, versus a 10.4% minimum requirement effective October 1, 2022. The Corporation reported that it met the applicable definition of well capitalized. Its supplementary leverage ratio was 5.8%.
- Average global liquidity sources were $941bn; average consolidated HQLA was $618bn and average LCR was 123% for Q3. The LCR was 115% for the three months ended December 31, 2021. The Corporation and insured depository institutions were in compliance with the NSFR requirement.
- Available-for-sale and held-to-maturity debt securities had aggregate fair value of $763.8bn versus $885.5bn amortized cost at September 30. The filing reports $116.2bn of gross unrealized losses on HTM securities. AOCI was negative $21.0bn, compared with negative $5.1bn at year-end, largely reflecting losses on debt securities and derivatives.
Material changes and segment trends
- Q3 revenue increased about 8% year over year, while net income declined about 8%; for the first nine months, revenue increased about 5% and net income declined about 18%. Higher credit-loss provisions, lower noninterest income and higher expenses weighed on earnings, partly offset by stronger net interest income.
- Consumer Banking Q3 net income was $3.1bn, broadly unchanged. Global Wealth & Investment Management earned $1.2bn, also broadly unchanged; client balances declined 12% year over year to $3.2tn, mainly due to lower market valuations.
- Global Banking Q3 net income fell 20% to $2.0bn, as higher net interest income was offset by lower investment banking and other noninterest income and increased credit-loss provision. Global Markets Q3 net income rose 15% to $1.1bn, supported by lower expenses and stronger sales and trading, partly offset by lower investment banking fees.
- Commercial loans and leases grew $38.2bn during the first nine months. Nonperforming loans and criticized commercial exposures declined, though the filing highlights inflation, rising rates and geopolitical uncertainty as possible sources of future credit deterioration.
Outlook, risks and unusual items
- The filing provides no specific consolidated earnings or revenue guidance. Management describes the balance sheet as asset-sensitive: its modeled 12-month pretax net interest income impact was positive $4.2bn under an instantaneous parallel 100-basis-point increase and negative $5.4bn under a 100-basis-point decrease. These estimates assume no response to rate changes and no change in deposit size or mix; deposit migration to higher-cost funding could reduce benefits from rising rates.
- The September 30 credit-loss estimate incorporated baseline, recession, downside, tail-risk and upside economic scenarios. The weighted outlook assumed U.S. unemployment above 5% in Q4 2023 and GDP growth of 0.2% in Q4 2023 and 1.5% in Q4 2024. Management cautioned that inflation, higher rates and geopolitical conditions could adversely affect credit quality.
- After quarter-end, on October 6, the Corporation agreed to pay Ambac $1.84bn to resolve specified legacy mortgage-insurance litigation. It recorded $354m of Q3 litigation expense for the amount exceeding prior accruals. The filing reported litigation-related expense of $507m for Q3 and $1.1bn for the first nine months. It estimated possible loss above accrued liabilities, if any, at up to $0.7bn across the disclosed matters and representations-and-warranties exposures; actual losses may differ.
- In July, BANA agreed to OCC and CFPB orders concerning administration of prepaid debit cards, including penalties of $125m and $100m, respectively, and required remediation. In September, subsidiaries resolved SEC and CFTC record-keeping investigations and paid penalties of $125m and $100m, respectively.
- The Inflation Reduction Act led to a $152m Q3 increase in income tax expense from a revised estimate of solar tax credits. The Corporation did not expect the new corporate alternative minimum tax and stock-repurchase excise tax to significantly affect its future effective tax rate.
- Direct net country exposure to Russia was $461m at quarter-end; Ukraine exposure was not significant. The filing also identifies litigation and regulatory matters, cyber and operational risks, benchmark-rate transition, capital and liquidity regulation, and climate-related transition and physical risks.
Important facts for investors to verify
- Whether deposit pricing and customer migration reduce the benefit from higher interest rates, and whether reported NII sensitivity is realized.
- Whether credit-loss provisions rise as economic conditions evolve, including exposure to inflation, commercial real estate and Russia-related risk.
- The realized capital and earnings effects of securities valuation losses, including the distinction between AFS and HTM securities and the potential for further AOCI changes.
- The final cash, accounting and legal impact of the Ambac settlement, and developments in other litigation and regulatory matters.
- Capital headroom against the new 10.4% CET1 requirement, liquidity trends, and the effect of regulatory requirements on distributions and buybacks.
- Segment revenue trends, particularly investment banking, wealth-management fees and Global Markets trading, and the assumptions underlying non-GAAP measures and rate-sensitivity scenarios.