Bank of America Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Comparisons are with Q1 2011 for income and cash flow, and December 31, 2011 for balance-sheet changes. Bank of America reported through five business segments following a January 2012 realignment.
Financial performance and condition
| Metric | Q1 2012 | Comparison |
|---|---|---|
| Revenue, GAAP | $22.3 billion | Down 17% from $26.9 billion |
| Net interest income, GAAP | $10.8 billion | Down 11% from $12.2 billion; FTE net interest yield was 2.51%, down from 2.67% |
| Noninterest income | $11.4 billion | Down 22% from $14.7 billion |
| Net income | $653 million | Down from $2.05 billion |
| Net income applicable to common shareholders; diluted EPS | $328 million; $0.03 | Down from $1.74 billion; $0.17 |
| Provision for credit losses; net charge-offs | $2.42 billion; $4.06 billion | Provision down from $3.81 billion; charge-offs down from $6.03 billion |
| Noninterest expense; efficiency ratio | $19.1 billion; 85.13% FTE | Expense down 6%; efficiency ratio worsened from 74.86% |
| Operating cash flow | $(15.6) billion | $(0.6) billion in Q1 2011 |
| Assets; loans and leases | $2.18 trillion; $902.3 billion | Assets up 2%; loans down 3% from year-end |
| Deposits; long-term debt | $1.04 trillion; $354.9 billion | Deposits up 1%; long-term debt down 5% from year-end |
| Tier 1 common; Tier 1; total capital; Tier 1 leverage | 10.78%; 13.37%; 17.49%; 7.79% | All reported ratios increased from year-end |
Cash and cash equivalents rose $8.7 billion to $128.8 billion. Investing activities used $11.4 billion, while financing activities provided $35.1 billion. Global excess liquidity sources were $406 billion, including $129 billion at the parent company. Parent-company time to required funding was 31 months against a 21-month minimum target. The filing notes that subsidiary liquidity is subject to transfer restrictions.
Material changes and segment performance
- Earnings declined sharply year over year. Revenue fell, while the quarter included substantial own-credit fair-value losses and derivative valuation adjustment (DVA) losses. Consumer & Business Banking earned $1.45 billion, down from $2.04 billion; Global Markets earned $798 million, down from $1.39 billion. Global Banking and Global Wealth & Investment Management earnings were broadly stable.
- Consumer Real Estate Services remained loss-making. Its net loss improved to $1.15 billion from $2.40 billion, mainly on lower representations-and-warranties provisions, lower credit provision and reduced expenses. Legacy servicing and default-management costs remained high.
- Credit indicators generally improved. Annualized net charge-offs fell to 1.80% of average loans from 2.61%; period-end nonperforming loans, leases and foreclosed properties fell to $27.8 billion from $31.6 billion a year earlier. The allowance for loan and lease losses was $32.2 billion, or 3.61% of loans, versus $39.8 billion and 4.29% a year earlier. A $1.9 billion regulatory reclassification of performing junior-lien home-equity loans increased reported nonperforming consumer loans, without affecting the provision or allowance.
- Mortgage production contracted. Total first-mortgage production was $15.2 billion, down from $56.7 billion in Q1 2011, reflecting the exit from correspondent lending and lower retail originations. The mortgage servicing portfolio was $1.69 trillion at quarter-end.
- Capital strengthened and debt declined. Tier 1 common capital increased to $131.6 billion. Debt repurchases and security exchanges contributed to capital gains and a reported 13-basis-point increase in the Tier 1 common ratio; reduced risk-weighted assets also supported higher ratios.
Outlook, commentary, risks and unusual items
- Management expected net interest income to remain muted in 2012 under the prevailing forward yield curve. It expected allowance reductions to continue absent unexpected economic deterioration, but at a slower pace than in 2011.
- Project New BAC targeted more than 20% of its $5 billion annual Phase 1 savings by year-end 2012, with full implementation expected by the end of 2014. These are management expectations, not guaranteed outcomes.
- Q1 included $3.3 billion of negative fair-value adjustments on structured liabilities from tighter Bank of America credit spreads; $1.5 billion of net DVA losses on derivatives; $1.2 billion of gains on subordinated-debt repurchases and trust-preferred exchanges; $752 million of debt-security sale gains; $765 million of equity investment income; $892 million of annual retirement-eligible incentive compensation costs; and $793 million of litigation expense. A $1.6 billion reserve reduction contributed to the $2.42 billion credit-loss provision. GAAP income before taxes was $719 million; the FTE presentation reports $926 million.
- The March 2012 mortgage Global Settlement was entered by the court on April 5, after quarter-end. It included about $1.9 billion in upfront government and borrower payments, $7.6 billion in borrower assistance and approximately $1.0 billion in interest-rate reduction credits. The $2.4 billion upfront-payment liability was recorded at March 31 and paid in April. Management did not expect the borrower assistance program to require an incremental credit provision, but costs and outcomes remain subject to program terms and borrower participation.
- Mortgage representations-and-warranties exposure remains material. The recorded liability was $15.7 billion. Unresolved repurchase claims were $16.1 billion, excluding claims related to the BNY Mellon settlement; the estimated possible loss for non-GSE representations and warranties was up to $5 billion over existing accruals and was not characterized as probable. The GSE loss range was not reasonably estimable. The BNY Mellon settlement still required final court approval.
- There were approximately 99,000 open mortgage-insurance rescission notices. The company disputed Fannie Mae’s policy treating such notices as grounds for repurchase; compliance with that policy could increase the liability. Foreclosure delays and new servicing standards were expected to keep mortgage servicing and operational costs elevated.
- Moody’s had placed certain long-term ratings on review for possible downgrade. A one-notch downgrade could require about $2.7 billion of additional collateral under specified contracts; further downgrade effects could be greater. European sovereign-debt conditions, low interest rates, regulatory changes and mortgage litigation were also identified risks.
- Management anticipated an approximately $800 million tax charge if proposed U.K. rate reductions were enacted, to remeasure U.K. deferred tax assets. The Federal Reserve did not object to the company’s capital plan; its severe-adverse CCAR scenario projected a minimum Tier 1 common ratio of 5.9% through 2013, above the 5% reference rate.
Important facts for investors to verify
- Whether revenue and earnings can recover from the impact of lower loan balances and yields, trading valuation losses, Durbin-related card fee pressure and subdued investment-banking activity.
- Whether reported credit improvement persists, and how reserve releases compare with subsequent charge-offs and losses—especially in mortgage, home-equity and purchased credit-impaired portfolios.
- The ultimate cost and approval status of the BNY Mellon settlement, the Global Settlement commitments, GSE repurchase claims and the potential non-GSE loss range.
- Whether liquidity remains available at the parent company if ratings weaken, and how debt reduction, collateral calls and subsidiary transfer restrictions affect funding flexibility.
- Progress against Project New BAC savings targets and the actual costs of mortgage servicing, foreclosure remediation and other legal or regulatory matters.