Business context and reporting period
Bank of America Corporation is a diversified bank holding company operating through Consumer Banking, Global Wealth & Investment Management (GWIM), Global Banking and Global Markets, with other activities in All Other. This Form 10-Q covers the quarter and six months ended June 30, 2018; comparisons are generally with the corresponding 2017 periods. The company reported approximately $2.3 trillion in assets and 208,000 employees at quarter-end.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 |
|---|---|---|
| Total revenue | $22.6 billion | $22.8 billion |
| Net interest income | $11.65 billion | $10.99 billion |
| Net income | $6.78 billion | $5.11 billion |
| Diluted EPS | $0.63 | $0.44 |
| Provision for credit losses | $827 million | $726 million |
| Noninterest expense | $13.28 billion | $13.98 billion |
| Efficiency ratio | 58.76% | 61.25% |
For the six months ended June 30, revenue was $45.73 billion versus $45.08 billion, net income was $13.70 billion versus $10.44 billion, and diluted EPS was $1.25 versus $0.89. The six-month effective tax rate was 18.9%, compared with 32.4%.
- Margins and returns: Q2 net interest yield rose 5 basis points to 2.34%. Return on average assets was 1.17%, return on average common equity 10.75%, and return on average tangible common equity 15.15% (the latter is a non-GAAP measure).
- Balance sheet: June 30 assets were $2.292 trillion, loans and leases $935.8 billion, deposits $1.310 trillion, and shareholders’ equity $264.2 billion. Long-term debt was $226.6 billion.
- Cash flow, six months: Operating cash flow was $33.8 billion (versus use of $3.3 billion in 2017); investing cash outflow was $20.9 billion and financing cash inflow $1.5 billion. Cash and cash equivalents increased $13.8 billion to $171.2 billion.
- Capital and liquidity: CET1 was 11.4% under the Standardized approach and 11.5% under Advanced; the company and Bank of America, N.A. met applicable “well capitalized” definitions. Average global liquidity sources were $512 billion, average consolidated HQLA $434 billion, and average LCR 122%. Parent-company time-to-required funding was 60 months.
- Credit: Allowance for credit losses was $10.8 billion, including a $10.1 billion loan-loss allowance and $787 million reserve for unfunded commitments. Nonperforming loans and leases were $5.9 billion; annualized net charge-offs were 0.43% of average loans.
Material changes versus the prior comparable period
- Q2 net income increased about 33%, primarily because lower tax expense following the Tax Cuts and Jobs Act and higher net interest income more than offset lower noninterest income.
- Noninterest income fell $884 million to $11.0 billion. Trading profits improved, but investment banking income declined and other income reflected the absence of the prior-year $793 million gain on the sale of the non-U.S. card business, the current-year $729 million trust preferred securities redemption charge, and a $572 million gain on mortgage-loan sales.
- Net interest income rose $664 million, supported by higher rates and commercial loan growth. Noninterest expense declined $698 million, primarily due to lower other general operating and litigation expense and the prior-year $295 million data-center impairment charge.
- Credit-loss provision rose $101 million, chiefly from seasoning and growth in U.S. credit cards and slower improvement in consumer real estate; lower commercial and energy-related credit costs partially offset this.
- Segment Q2 net income was $2.9 billion in Consumer Banking, $1.0 billion in GWIM, $2.1 billion in Global Banking and $1.1 billion in Global Markets; All Other recorded a $247 million loss.
- Compared with December 31, 2017, total assets rose $10.4 billion while loans and deposits were broadly unchanged. Shareholders’ equity fell $2.9 billion, reflecting repurchases, dividends, securities valuation declines and preferred-stock redemption, partly offset by earnings.
Outlook, management commentary, risks and unusual items
- Management expected an effective tax rate of approximately 21% for the second half of 2018, absent unusual items. The filing does not provide a broader quantified earnings or revenue outlook.
- Following Federal Reserve non-objection to the 2018 CCAR plan, the company estimated approximately $26 billion of common-shareholder returns over the next four quarters. The Board authorized up to approximately $20.6 billion of repurchases through June 30, 2019, subject to capital, liquidity, performance and market conditions. A $0.15 quarterly dividend was declared for payment in September 2018.
- The June redemption of 11 series of trust preferred securities, with $3.1 billion carrying value, resulted in a $729 million charge. Separately, the company sold primarily non-core mortgage loans and recognized a $572 million gain.
- Key stated risks include litigation and regulatory actions, potential mortgage representations-and-warranties losses, credit deterioration, interest-rate and market movements, trade tensions, geopolitical and non-U.S. exposures (including U.K. exit from the EU), cyber and operational failures, and evolving capital and liquidity rules. Management estimated reasonably possible aggregate litigation losses of $0–$1.2 billion above accrued liabilities for matters where a range could be estimated; this is not a maximum exposure. It stated that an adverse outcome could materially affect results or liquidity in a particular period.
- Management reported no material change in risk factors from the 2017 Form 10-K, effective disclosure controls, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the earnings increase is attributable to the lower tax rate versus recurring operating improvement, and whether the expected second-half tax rate is achieved.
- Whether deposit pricing and funding costs erode net interest income as rates rise, and how actual deposit behavior compares with the filing’s sensitivity assumptions.
- Whether credit-card seasoning, charge-offs and provision needs continue to rise, and how consumer real-estate and commercial credit quality evolve.
- The realizability and valuation effects of securities and mortgage-related assets, including the substantial accumulated other comprehensive loss on available-for-sale securities.
- Actual execution and funding of announced repurchases and dividends, while maintaining regulatory capital and liquidity buffers.
- Developments in litigation, representations-and-warranties claims, regulatory requirements, trade tensions and U.K./EU-related exposures.