Bank of America Corporation — 2016 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended December 31, 2016; fourth-quarter figures are also noted below. Bank of America is a diversified U.S. and international financial institution operating through Consumer Banking, Global Wealth & Investment Management, Global Banking, Global Markets and All Other. At year-end, it reported approximately $2.2 trillion in assets and 208,000 full-time-equivalent employees.
Key financial metrics
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue, net of interest expense | $83.7 billion | $83.0 billion |
| Net interest income | $41.1 billion | $39.0 billion |
| Noninterest income | $42.6 billion | $44.0 billion |
| Provision for credit losses | $3.6 billion | $3.2 billion |
| Noninterest expense | $55.0 billion | $57.7 billion |
| Net income | $17.9 billion | $15.8 billion |
| Diluted earnings per common share | $1.50 | $1.31 |
| Efficiency ratio | 65.65% | 69.59% |
- Fourth-quarter revenue was $20.0 billion versus $19.6 billion in fourth-quarter 2015; net income was $4.7 billion versus $3.3 billion, and diluted EPS was $0.40 versus $0.27.
- Net interest yield was 2.25% on a fully taxable-equivalent basis. The filing’s narrative also cites a 2.21% net interest yield; investors should check the underlying definition and reconciliation.
- Year-end loans and leases were $906.7 billion, deposits were $1.261 trillion, total assets were $2.188 trillion, and shareholders’ equity was $266.8 billion. Long-term debt was $216.8 billion, down from $236.8 billion.
- Cash and cash equivalents ended the year at $147.7 billion, down $11.6 billion. Operating cash flow was $18.3 billion, investing cash flow was negative $63.1 billion and financing cash flow was positive $33.0 billion.
- Global Liquidity Sources were $499 billion. Parent-company and NB Holdings liquidity was $76 billion; the parent-company time-to-required-funding measure was 35 months. The Corporation and insured depository institutions were above the 2017 LCR requirement, but a specific LCR ratio is not provided in the supplied text.
- Basel 3 Advanced-transition capital ratios were 11.0% Common Equity Tier 1, 12.4% Tier 1 and 14.3% total capital; the Tier 1 leverage ratio was 8.9% and the SLR was 6.9%. Management stated the Corporation was well capitalized under current requirements.
- Net charge-offs were $3.8 billion, or 0.43% of average loans, compared with $4.3 billion, or 0.50%, in 2015. Nonperforming loans, leases and foreclosed properties declined to $8.1 billion from $9.8 billion.
- Common dividends paid were $0.25 per share for the year. The quarterly dividend rose from $0.05 to $0.075 beginning in the third quarter. The company repurchased approximately $5.1 billion of common stock.
Material changes versus the prior comparable period
- Net income rose 13%, principally on higher net interest income and lower expenses; revenue increased less than 1%. Net interest income grew $2.1 billion, aided by commercial loan growth, higher short-term rates and greater debt-securities balances.
- Noninterest expense fell $2.8 billion, reflecting cost management, lower personnel and legal costs, and lower foreclosed-property expense. The efficiency ratio improved.
- Noninterest income declined $1.4 billion. Lower investment and brokerage, investment banking, mortgage banking and debt-security sale gains more than offset stronger trading profits and service charges.
- Credit-loss provision increased $436 million as consumer credit quality improved more slowly and energy-sector reserves rose. Commercial nonperforming loans increased to $1.7 billion from $1.2 billion, with energy and metals and mining contributing to the increase.
- Deposits increased $63.7 billion, while long-term debt decreased $19.9 billion as maturities and redemptions exceeded issuance. Common Equity Tier 1 capital under the Advanced-transition approach increased to $168.9 billion; risk-weighted assets declined to $1.53 trillion.
- Results include a $348 million tax charge from remeasurement of U.K. deferred tax assets following U.K. tax-law changes. The company also changed its accounting method for certain debt-security premium amortization and discount accretion effective July 1, 2016; it did not disclose the 2016 impact of that change.
Outlook, management commentary, risks and unusual items
- Management expected net interest income to increase approximately $600 million per quarter beginning in first-quarter 2017, assuming rates remained at year-end 2016 levels and loans and deposits grew modestly. This is an assumption-dependent estimate, not a guarantee.
- The company maintained an annual noninterest-expense target of approximately $53 billion for full-year 2018.
- Bank of America agreed to sell its non-U.S. consumer credit card business, including $9.2 billion of loans classified as held for sale. Closing was expected by mid-2017, subject to regulatory approval. The company expected a small after-tax gain and would retain substantially all payment protection insurance exposure above existing reserves.
- Mortgage representations-and-warranties exposure remained significant: unresolved repurchase claims were $18.3 billion, the recorded liability was $2.3 billion, and estimated reasonably possible loss was up to $2.0 billion above the accrual. The filing says this estimate excludes certain servicing, fraud, indemnity and securities-law or monoline litigation matters.
- Separately, management estimated an aggregate range of possible loss of $0 to $1.5 billion in excess of accrued liabilities for certain litigation matters where a range could be estimated. The filing cautions that this is not the Corporation’s maximum exposure and that actual results may differ materially.
- The Corporation paid $8.5 billion in February 2016 to settle claims brought by BNY Mellon; this drove the sharp decline in the representations-and-warranties liability from $11.3 billion at year-end 2015. Litigation-related expense was $1.2 billion in both 2016 and 2015.
- Energy committed exposure declined to $39.2 billion, but the allowance for energy credit losses rose to $925 million and reservable criticized energy exposure increased. Management said oil prices had stabilized by year-end, while noting continued sector risk.
- Approximately 23% of the HELOC portfolio was expected to enter amortization in 2017. The filing notes that HELOCs entering amortization have experienced higher early delinquencies and nonperforming status than the portfolio overall.
- Regulatory and operating risks include evolving capital, liquidity, resolution-planning and derivatives requirements; legal and consumer-protection proceedings; cyber and operational threats; and uncertainty around the U.K.’s planned exit from the EU. New expected-credit-loss accounting was expected to increase the allowance and reduce retained earnings upon adoption in 2020.
- External audit opinions were unqualified, and management and the auditor concluded internal control over financial reporting was effective as of December 31, 2016.
Most important facts for investors to verify
- Whether the projected quarterly net-interest-income increase and the $53 billion 2018 expense target remain achievable under actual rate, deposit, loan-growth and expense conditions.
- The current status, assumptions and potential additional costs of mortgage repurchase claims, related litigation and other contingencies beyond recorded liabilities.
- Completion terms and regulatory approval for the non-U.S. card-business sale, including retained PPI exposure and the actual gain and capital impact.
- Trends in energy-sector credit quality and reserves, and the performance of HELOC borrowers as draw periods end and amortizing payments begin.
- Capital and liquidity headroom after fully phased-in regulatory requirements, and the extent to which subsidiary liquidity is available to the parent company.
- Comparability of reported results given the accounting-method change and the filing’s differing net-interest-yield figures and FTE versus GAAP measures.