Bank of America Corporation — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual report, not a standalone fourth-quarter filing. The company operates five segments: Consumer Banking, Global Wealth & Investment Management, Global Banking, Global Markets, and Legacy Assets & Servicing, with remaining activity in All Other.
Financial performance
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue, net of interest expense (GAAP) | $82.5 billion | $84.2 billion |
| Net interest income (FTE) | $40.2 billion | $40.8 billion |
| Net interest yield (FTE) | 2.20% | 2.25% |
| Net income | $15.9 billion | $4.8 billion |
| Net income applicable to common shareholders | $14.4 billion | $3.8 billion |
| Diluted earnings per common share | $1.31 | $0.36 |
| Return on average assets | 0.74% | 0.23% |
| Efficiency ratio (FTE) | 68.56% | 88.25% |
Net income increased sharply chiefly because litigation expense fell $15.2 billion from 2014, when significant legacy mortgage-related charges were recorded. Revenue declined 2%; lower net interest income and noninterest income partly offset the expense reduction. The provision for credit losses rose to $3.2 billion from $2.3 billion, while net charge-offs were broadly stable at $4.3 billion and the net charge-off ratio was 0.50% versus 0.49%.
Fourth quarter: GAAP revenue was $19.5 billion, net income $3.3 billion, and diluted EPS $0.28. In fourth-quarter 2014, revenue was $18.7 billion, net income $3.1 billion, and diluted EPS $0.25. Fourth-quarter 2015 provision for credit losses was $810 million versus $219 million a year earlier.
Balance sheet, liquidity, capital and cash flow
- At year-end, total assets were $2.14 trillion, loans and leases $903.0 billion, deposits $1.20 trillion, total liabilities $1.89 trillion, and shareholders’ equity $256.2 billion. Compared with year-end 2014, assets rose 2%, loans 2%, deposits 7%, and equity 5%; long-term debt declined 3% to $236.8 billion.
- Cash and cash equivalents were $159.4 billion. Global Excess Liquidity Sources were $504 billion, up from $439 billion; parent-company time-to-required funding remained 39 months. The company estimated it was above the 2017 consolidated Liquidity Coverage Ratio requirement at year-end.
- Common equity tier 1 capital was $163.0 billion and the Basel 3 Advanced-transition CET1 ratio was 10.2%, down from 12.3% reported under the 2014 Standardized approach. The comparison is affected by the move to Advanced approaches and higher risk-weighted assets following regulator-requested model changes. The transitional supplementary leverage ratio was 6.6%.
- Cash flow from operating activities was $27.7 billion; investing activities used $55.0 billion; financing activities provided $48.6 billion. Cash and cash equivalents increased $20.8 billion during the year. Management stated that operating cash flows, available cash, and access to short- and long-term debt were sufficient for operating liquidity needs.
- Shareholders received $5.9 billion through common and preferred dividends and share repurchases. Common dividends were $0.05 per share per quarter; the company repurchased approximately $2.4 billion of common stock in 2015.
Material changes and segment trends
- Noninterest expense fell to $57.2 billion from $75.1 billion, principally because 2014 included much higher litigation expense. Personnel and several operating-cost categories also declined.
- Noninterest income fell to $43.3 billion from $44.3 billion. Lower investment banking and equity investment income were partly offset by higher mortgage banking income and trading profits.
- Net interest income (FTE) declined $661 million. Lower loan yields and consumer balances, plus a $612 million charge tied to the discount on certain trust preferred securities, outweighed commercial loan growth and lower funding costs. Debt-security market-related adjustments improved to a $296 million expense from a $1.1 billion expense.
- Consumer Banking net income rose 5% to $6.7 billion. Global Wealth & Investment Management net income fell 12% to $2.6 billion; client balances were nearly $2.5 trillion, down 2%, largely due to market valuation declines. Global Banking net income fell 9% to $5.3 billion, including higher credit provision and lower revenue. Global Markets net income fell 8% to $2.5 billion; net DVA losses were $786 million versus $240 million in 2014. Legacy Assets & Servicing narrowed its net loss to $740 million from $13.1 billion, mainly on lower litigation expense.
Outlook, commentary, risks and unusual items
- Management expected reserve releases to decrease in 2016; all else equal, this would increase provision expense if underlying asset quality remained stable. Management expected a 2016 effective tax rate in the low-30% range absent unusual items.
- The company described itself as asset-sensitive: an instantaneous parallel 100-basis-point rise in rates was estimated to increase next-12-month pretax net interest income by $4.3 billion, assuming no management action or change in deposit mix. This is a modeled sensitivity, not guidance; higher-rate deposit migration could reduce the benefit.
- Commercial credit risks include energy exposure amid low oil prices. Utilized energy exposure was about 2% of total loans and leases; commercial criticized balances increased $4.9 billion to $16.5 billion, primarily due to energy-related downgrades.
- Legacy mortgage exposure remains material. Unresolved repurchase claims were $18.4 billion, net of duplicates; the recorded representations-and-warranties liability was $11.3 billion, with an estimated reasonably possible loss of up to $2.0 billion above accruals. These estimates depend on assumptions and do not include certain servicing, fraud, indemnity, securities-law or monoline matters.
- The $8.5 billion BNY Mellon RMBS settlement was paid in February 2016 and had been fully reserved. The trustee, not the Corporation, is responsible for distributing the settlement; a court proceeding concerning distribution was pending after year-end.
- The filing estimated aggregate possible loss on certain litigation and regulatory matters of $0 to $2.4 billion above accrued liabilities, for matters where a range could be estimated. The filing cautions that this is not maximum exposure and that some matters cannot be estimated.
- Other notable risks include credit-rating downgrades and related collateral calls, evolving capital/liquidity and TLAC requirements, litigation and regulatory enforcement, cybersecurity and operational disruption, low interest rates, mortgage servicing and home-equity performance, and international economic and political conditions. The filing noted that 44% of HELOCs were expected to enter amortization in 2016–2017.
- Unusual accounting item: the company early-adopted guidance moving unrealized own-credit DVA on certain fair-value-option liabilities to OCI. Adoption reclassified $2.0 billion pretax of unrealized DVA losses from retained earnings to OCI; 2015 quarterly net income previously reported for the first three quarters was reduced by approximately $0.02 per share per quarter.
- Auditor PricewaterhouseCoopers issued an unqualified opinion on the financial statements and internal control over financial reporting; management concluded internal controls were effective at December 31, 2015.
Most important facts for investors to verify
- How much of the 2015 earnings improvement reflects durable operating performance versus the unusually high 2014 litigation comparison; review results excluding major items and confirm non-GAAP reconciliations.
- Whether net interest income and margins stabilize, and whether the modeled rate sensitivity holds after deposit pricing, customer behavior, and market changes.
- Developments in energy-related credit quality, criticized commercial exposures, credit-loss provisions, and management’s expected pace of reserve releases.
- Outcomes and potential incremental costs from RMBS representations-and-warranties claims, the BNY Mellon settlement distribution proceeding, and other litigation or regulatory matters.
- Capital ratios under the applicable Advanced approach and the effect of phased-in buffers, the G-SIB surcharge, and proposed loss-absorbing-capacity rules on future distributions.
- Whether liquidity remains available at the parent and operating subsidiaries, given legal-entity transfer restrictions and potential rating-related collateral requirements.