Business context and reporting period
Bank of America Corporation’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2014. The company reported approximately $2.1 trillion in assets and operated through five business segments, with remaining activities in All Other. On October 1, 2014, FIA Card Services merged into Bank of America, N.A.
Financial results and condition
- Third-quarter earnings: Net loss was $232 million, or $(0.04) per diluted share, versus net income of $2.497 billion, or $0.20 per diluted share, in Q3 2013. Net loss applicable to common shareholders was $470 million.
- Revenue: GAAP revenue, net of interest expense, was $21.209 billion, down from $21.530 billion. On a fully taxable-equivalent (FTE) basis, revenue was $21.434 billion, down from $21.743 billion. Q3 pretax income was $431 million.
- Margins and expenses: FTE net interest income was $10.444 billion, down $35 million; FTE net interest yield fell four basis points to 2.29%. The FTE efficiency ratio worsened to 93.97% from 75.38%, mainly reflecting litigation charges.
- Nine-month results: GAAP revenue was $65.522 billion versus $67.454 billion; net income was $1.783 billion versus $7.992 billion. Diluted EPS was $0.10 versus $0.62.
- Credit: Q3 provision for credit losses was $636 million, up from $296 million, including $400 million for DoJ settlement consumer relief. Nine-month provision fell to $2.056 billion from $3.220 billion. Q3 net charge-offs declined to $1.043 billion (0.46% of average loans) from $1.687 billion (0.73%). Period-end allowance for loan and lease losses was $15.106 billion, or 1.71% of loans, versus $17.428 billion, or 1.90%, at year-end 2013.
- Balance sheet and debt: At September 30, assets were $2.124 trillion, loans and leases $891.3 billion, deposits $1.112 trillion, long-term debt $250.1 billion and shareholders’ equity $238.7 billion. Total assets rose 1% from December 2013; loans and deposits declined 4% and 1%, respectively.
- Capital and liquidity: Transitional Basel 3 common equity tier 1 ratio was 12.0%; Tier 1 and total capital ratios were 12.8% and 15.8%. Estimated fully phased-in CET1 ratios were 9.5% under the Standardized approach and 9.6% under Advanced. Global Excess Liquidity Sources were $429 billion, including $93 billion at the parent company; parent-company time-to-required funding was 38 months.
- Cash flow: Nine-month operating cash flow was $27.1 billion, down from $80.8 billion; investing cash flow was $(31.9) billion versus $7.3 billion provided, and financing cash flow was $3.5 billion versus $(76.0) billion. Cash and cash equivalents declined $2.7 billion during the period to $128.7 billion.
Material changes, outlook and key risks
- Major legal charges: The August 2014 DoJ settlement required $9.65 billion in cash and $7.0 billion of consumer relief by August 2018. After prior reserves, the company recorded a $5.3 billion pretax Q3 charge. It paid $9.16 billion in October, with the remainder paid in November.
- Foreign-exchange matter: After its October 15 earnings announcement, the company recorded an additional $400 million nondeductible Q3 charge following advanced discussions with U.S. banking regulators. The filing reports the adjusted Q3 net loss of $232 million; resolution, timing and final amounts remained uncertain.
- Other legal exposure: Litigation expense was $6.0 billion in Q3 and $16.0 billion for nine months, compared with $1.1 billion and $3.8 billion in 2013. The company estimated reasonably possible litigation and regulatory losses of up to $3.1 billion beyond accrued liabilities for matters where it could estimate a range. Separately, possible representations-and-warranties losses were estimated at up to $4 billion above existing accruals. Unresolved repurchase claims totaled $24.2 billion in notional amount; this is not an estimate of expected loss. The $8.5 billion BNY Mellon settlement remained subject to final court approval and appeals.
- Business trends: Consumer Real Estate Services reported a $5.184 billion Q3 loss, principally reflecting litigation charges, lower mortgage income and settlement-related credit provision. Mortgage banking income fell to $272 million from $585 million. Global Markets returned to profit, reporting $369 million versus a Q3 2013 loss of $875 million; improved valuation adjustments and trading results contributed.
- Management outlook: The company expected a Q4 effective tax rate of approximately 31%, absent unusual items. It said Project New BAC achieved its $2 billion quarterly cost-savings target ahead of schedule and expected Legacy Assets & Servicing noninterest expense, excluding litigation, to fall to $1.1 billion in Q1 2015. No broad earnings or revenue guidance was provided.
- Regulatory and operating risks: New LCR requirements phase in from 2015 to 2017; management expected to meet them on schedule. The company estimated an SLR of 5.5% at September 30, with a pro forma 6.8% after the FIA merger. Risks also include FX and reference-rate investigations, mortgage servicing and insurance claims, potential rating downgrades, implementation of Basel 3 and other rules, and geopolitical and market risks. Management noted the FDIC deemed the 2013 resolution plans of 11 large banks not credible; the Federal Reserve did not join that determination.
Most important facts for investors to verify
- How the DoJ consumer-relief obligation, cash payments and FX regulatory discussions affect subsequent-period earnings and liquidity.
- Whether BNY Mellon settlement court approval is obtained, and how new private-label repurchase claims and mortgage-insurance disputes develop.
- The basis and sensitivity of the $4 billion representations-and-warranties exposure range and the separate $0–$3.1 billion litigation range.
- Whether core earnings can improve as mortgage revenue contracts and litigation costs normalize; compare reported results with segment and FTE measures.
- Capital ratios under fully phased-in rules, regulatory model approvals, liquidity availability by legal entity, and the effect of credit-rating changes.