Bank of America Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods unless noted. Bank of America is a diversified U.S. bank holding company with Consumer Banking, Global Wealth & Investment Management (GWIM), Global Banking, Global Markets and All Other businesses. At quarter-end, it reported $3.1 trillion of assets and approximately 209,000 employees.
Financial performance and condition
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $22.8B | $20.3B | $67.1B | $65.4B |
| Net interest income | $11.1B | $10.1B | $31.5B | $33.1B |
| Provision for credit losses | $(624)M benefit | $1.4B expense | $(4.1)B benefit | $11.3B expense |
| Noninterest expense | $14.4B | $14.4B | $45.0B | $41.3B |
| Net income | $7.7B | $4.9B | $25.0B | $12.4B |
| Diluted earnings per share | $0.85 | $0.51 | $2.75 | $1.28 |
| Efficiency ratio | 63.43% | 70.81% | 67.11% | 63.10% |
| Net interest yield, FTE basis | 1.68% | 1.72% | 1.66% | 1.96% |
Balance sheet and funding (September 30, 2021): Total assets were $3.085T, deposits $1.965T, loans and leases $927.7B, long-term debt $278.6B, and shareholders’ equity $272.5B. Assets and deposits rose $265.8B and $169.3B, respectively, from year-end 2020, reflecting deposit inflows and investment of liquidity, including in debt securities. Long-term debt increased $15.7B from year-end.
Cash flows (nine months): Operating activities used $51.8B, investing activities used $254.4B, and financing activities provided $208.6B. Cash and cash equivalents declined $100.6B to $279.9B. The filing attributes major balance-sheet movements to deposit flows and securities activity; these cash-flow figures should be considered in that context.
Liquidity and capital: Average global liquidity sources were $1.12T; average consolidated high-quality liquid assets were $612B and the average liquidity coverage ratio was 117%. The standardized CET1 ratio was 11.1%, against a 9.5% requirement; the supplementary leverage ratio was 5.6%, against a 5.0% level required to avoid certain distribution restrictions. Management reported the Corporation was well capitalized. The 2.5% stress capital buffer applied from October 1, 2021 through September 30, 2022.
Credit quality: The allowance for credit losses declined $6.0B from year-end to $14.7B, mainly from improved economic outlook and credit quality. Nine-month net charge-offs were $1.9B versus $3.2B in 2020; annualized Q3 net charge-offs were 0.20% of average loans, down from 0.40%. Nonperforming loans were $4.7B, or 0.51% of loans, versus $5.0B, or 0.54%, at year-end. Commercial criticized utilized exposure fell to $24.1B from $38.7B.
Changes and business drivers
- Q3 revenue increased 12% year over year, supported by higher fees and stronger market-making activity. Nine-month revenue increased 2%; lower net interest income was offset by higher noninterest income.
- Q3 net income rose primarily because of higher revenue and a credit-loss benefit instead of the prior-year provision expense. Nine-month earnings also benefited substantially from credit-reserve releases. These benefits reflect improving credit conditions and are not necessarily recurring operating revenue.
- Net interest income rose in Q3 on deposit growth and accelerated recognition of capitalized PPP loan fees as loans were forgiven; it declined for the nine-month period mainly due to lower rates and loan balances. Fully taxable-equivalent net interest yield declined year over year in both comparisons.
- Noninterest income rose to $11.7B in Q3 and $35.5B year to date. Nine-month investment and brokerage services income increased to $12.4B, investment banking fees to $6.5B, and market-making income to $7.4B. Q3 expense was nearly flat; nine-month expense increased 9%, including higher compensation, card-claims processing costs, a Foundation contribution and a real-estate rationalization impairment.
- Segment results: Q3 net income was $3.0B for Consumer Banking, $1.2B for GWIM, $2.5B for Global Banking and $926M for Global Markets. Global Banking and Consumer Banking improved notably with credit-loss releases; GWIM benefited from market valuations and client flows. Global Markets’ nine-month net income fell 13% to $3.9B as higher expenses outweighed revenue growth.
Outlook, management commentary and risks
- The filing provides no formal consolidated earnings or revenue guidance. The allowance outlook incorporated multiple economic scenarios, including downside and inflation/higher-rate risks; its weighted outlook assumed U.S. unemployment just above 5% in Q4 2022 and Q4 2023 and GDP growth of 1.8% and 1.9%, respectively.
- Management described economic and credit conditions as improved but uncertain, citing COVID-19 variants, supply-chain disruption, inflation and the uneven recovery. Hospitality remained affected by the pandemic; commercial real estate also faced demand and tenant uncertainty, including uncertainty about future office needs.
- Interest-rate sensitivity estimates show a projected $7.2B pretax increase in net interest income over 12 months from an instantaneous parallel 100-basis-point increase, versus a $2.0B decrease from a 25-basis-point decline. These are model estimates assuming no management response and unchanged deposit size and mix, not guidance. Higher rates could also reduce AFS securities values and affect accumulated other comprehensive income and capital.
- COVID-19 support included $35.4B of cumulative PPP originations, with $8.4B outstanding at quarter-end. Management noted continuing uncertainty about pandemic effects and loan forgiveness.
- The LIBOR transition remained a risk: a significant majority of specified exposures due to cease or become non-representative after December 31, 2021 had been remediated, but residual exposure remained under remediation.
- Litigation and regulatory matters remain uncertain. The estimated possible loss range was $0–$1.1B in excess of accrued liabilities, if any; the filing cautions this is not the maximum exposure. Management did not expect pending matters to materially affect consolidated financial condition or liquidity, but an adverse outcome could materially affect a particular period’s results or reputation.
- The U.K. tax-rate change generated an approximately $2.0B write-up of deferred tax assets and a positive tax adjustment in the nine-month period. The reported nine-month effective tax rate was 4.6%; excluding recurring tax credits and U.K. tax-law changes, management estimated a rate of approximately 25%.
- Capital returns included $9.9B of common-stock repurchases in Q3. On October 20, the Board renewed a $25B repurchase authorization and declared a $0.21 quarterly common dividend. Repurchases remain subject to capital, liquidity, regulatory and market conditions.
Key facts investors should verify
- How much of earnings improvement is sustainable from underlying revenue and expenses versus credit-reserve releases and the U.K. deferred-tax adjustment.
- Whether deposit growth can support net interest income as rates, deposit mix and customer behavior change, and how actual results compare with the filing’s interest-rate sensitivity assumptions.
- Credit performance and allowance adequacy if stimulus effects fade or inflation, supply-chain pressures, pandemic conditions or commercial real-estate stress worsen.
- Capital and liquidity headroom after share repurchases, changes in risk-weighted assets and the expiration of temporary supplementary-leverage-ratio relief.
- Progress in remediating remaining LIBOR-linked contracts, and any material developments in litigation, regulatory matters or contingent obligations.