Bank of America Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; filed May 2, 2016. Bank of America is a diversified financial services company with consumer banking, wealth management, global banking and markets, and legacy mortgage operations. All amounts below are U.S. dollars.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior period |
|---|---|---|
| GAAP revenue, net of interest expense | $19.512 billion | $20.914 billion |
| Net interest income (GAAP) | $9.171 billion | $9.411 billion |
| Net income | $2.680 billion | $3.097 billion |
| Diluted earnings per share | $0.21 | $0.25 |
| Provision for credit losses | $997 million | $765 million |
| Noninterest expense | $14.816 billion | $15.827 billion |
| FTE net interest yield / efficiency ratio | 2.05% / 75.11% | 2.16% / 74.91% |
| Operating cash flow | $10.843 billion | $245 million |
Revenue fell about 7% and net income about 13% year over year. The decline reflected lower net interest income and noninterest income and higher credit-loss provision, partly offset by lower expenses. FTE net interest income was $9.386 billion, including $1.2 billion of negative market-related debt-security adjustments, versus $484 million a year earlier. Noninterest income decreased to $10.341 billion, notably from lower trading, investment banking, and mortgage banking income. Expense reductions included lower personnel costs.
Operating cash flow was $10.843 billion; investing activities used $21.374 billion and financing activities provided $29.382 billion. Cash and cash equivalents were $179.610 billion at quarter-end. The filing notes a correction to the 2015 cash-flow presentation that shifted $4.8 billion between operating and investing activities without changing total cash.
At March 31, total assets were $2.185 trillion, loans and leases $901.113 billion, deposits $1.217 trillion, and shareholders’ equity $262.776 billion. Long-term debt was $232.849 billion; short-term borrowings were $30.881 billion. Common equity tier 1 was 10.3% under Basel 3 Advanced-Transition, and the fully phased-in supplementary leverage ratio was 6.8%. Global Excess Liquidity Sources were $525 billion, with parent-company time-to-required funding of 36 months.
Material changes and business segments
- Consumer Banking net income rose to $1.785 billion from $1.461 billion, supported by lower consumer credit provision and expenses.
- Global Wealth & Investment Management net income increased to $740 million from $652 million, though client balances declined about $45 billion to $2.465 trillion, mainly due to market declines.
- Global Banking net income fell to $1.066 billion from $1.367 billion as energy-related credit reserves rose and investment banking income declined.
- Global Markets net income increased to $984 million from $677 million, substantially helped by a swing in net debit valuation adjustments; excluding those adjustments, net income declined year over year.
- Legacy Assets & Servicing narrowed its net loss to $40 million from $237 million. All Other’s net loss widened to $1.855 billion from $823 million, chiefly due to larger negative debt-security adjustments and higher expense.
Total assets increased $41.2 billion from year-end 2015, mainly on higher customer financing activity, cash from deposit inflows, and commercial loan growth. Deposits increased $20.0 billion. Long-term debt declined $3.9 billion as maturities exceeded issuance. The company returned $2.0 billion through common and preferred dividends and common-share repurchases; common repurchases included $800 million under the 2015 CCAR plan and $200 million under an additional authorization.
Outlook, risks, and unusual items
- Management expected 2016 provision expense to approximate net charge-offs and an effective tax rate closer to 30% for the remainder of the year, absent unusual items.
- The commercial credit picture weakened in energy: the allowance for energy loans rose $525 million to $1.0 billion, energy net charge-offs increased to $102 million, and energy criticized exposure increased to $6.3 billion. Management cited sustained low oil prices.
- The February 2016 BNY Mellon settlement required an $8.5 billion cash payment. The representations-and-warranties liability fell to $2.812 billion from $11.326 billion; the company estimated up to $2 billion of reasonably possible losses above existing accruals.
- Separately, for certain litigation and regulatory matters, management estimated an aggregate possible-loss range of $0 to $2.4 billion above accrued liabilities, where estimation was possible. Actual outcomes could differ materially; some matters were not included in this estimate.
- The proposed U.K. corporate tax-rate reduction, if enacted, was expected to produce an approximately $350 million tax charge on remeasurement of deferred tax assets. The filing also identifies evolving regulation, litigation, credit ratings, cyber/operational risks, international economic conditions, interest rates, and oil prices as risks.
- Lower long-term rates increased mortgage-security premium amortization and reduced mortgage servicing rights values. A modeled instantaneous parallel 100-basis-point rate increase was estimated to add $5.958 billion to next-12-month net interest income, assuming no management response and other specified assumptions.
Most important facts for investors to verify
- Whether net interest income and fee revenue recover, and whether the unusually large negative mortgage-security adjustments persist.
- Energy borrower performance, criticized exposures, charge-offs, and the adequacy of commercial loan-loss reserves.
- Final cash and earnings consequences of mortgage representations-and-warranties matters, the BNY Mellon settlement, and other litigation and regulatory proceedings.
- Whether the stated liquidity, capital, and rate-sensitivity measures remain robust under stress and evolving regulatory requirements.
- Whether share repurchases, the dividend, and management’s provision and tax-rate expectations remain consistent with capital and earnings performance.