Bank of America Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports fourth-quarter results. Bank of America is a diversified U.S. and international financial institution operating through Consumer & Business Banking, Consumer Real Estate Services, Global Wealth & Investment Management, Global Banking, Global Markets, and All Other. Merrill Lynch & Co. merged into the Corporation on October 1, 2013; management said the merger would not affect the Merrill Lynch brand or customer relationships.
Financial performance and condition
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue, GAAP, net of interest expense | $88.9 billion | $83.3 billion |
| Revenue, fully taxable-equivalent (FTE) basis | $89.8 billion | $84.2 billion |
| Net interest income, GAAP | $42.3 billion | $40.7 billion |
| Net interest yield, FTE | 2.47% | 2.35% |
| Net income | $11.4 billion | $4.2 billion |
| Diluted EPS | $0.90 | $0.25 |
| Provision for credit losses | $3.6 billion | $8.2 billion |
| Noninterest expense | $69.2 billion | $72.1 billion |
| Efficiency ratio, FTE | 77.07% | 85.59% |
| Return on average assets | 0.53% | 0.19% |
Fourth-quarter 2013 net income was $3.4 billion, or $0.29 diluted EPS, versus $732 million, or $0.03 diluted EPS, in fourth-quarter 2012. Q4 revenue was $21.5 billion GAAP ($21.7 billion FTE), credit-loss provision was $336 million, and noninterest expense was $17.3 billion.
Balance sheet and capital: At year-end, total assets were $2.10 trillion, down from $2.21 trillion; loans and leases were $928.2 billion, up from $907.8 billion; deposits were $1.12 trillion, up from $1.11 trillion. Long-term debt fell 9% to $249.7 billion. Total shareholders’ equity was $232.7 billion, versus $237.0 billion. Basel 1–2013 capital ratios were 11.19% Tier 1 common, 12.44% Tier 1, 15.44% total capital, and 7.86% Tier 1 leverage.
Cash flow and liquidity: Cash and cash equivalents increased $20.6 billion to $131.3 billion. Operating cash flow was $92.8 billion, investing cash flow was $25.1 billion, and financing cash flow was negative $95.4 billion. Global Excess Liquidity Sources were $376 billion, including $95 billion at the parent company. Parent-company Time to Required Funding was 38 months, above management’s 21-month minimum target.
Changes versus the prior comparable period
- Net income more than doubled, reflecting higher revenue, lower expenses and a $4.6 billion decline in credit-loss provision. Net charge-offs fell to $7.9 billion from $14.9 billion; nonperforming loans, leases and foreclosed properties declined to $17.8 billion from $23.6 billion.
- Revenue rose 7% on an FTE basis. Higher investment and brokerage services, investment banking, equity investment income and trading results were partly offset by lower card income and mortgage banking income.
- Net interest income increased, with the FTE net interest yield up 12 basis points. Management attributed the improvement to lower deposit costs, reduced long-term debt and higher commercial loan balances, partly offset by low rates and lower consumer loan balances.
- Noninterest expense declined 4%, but litigation expense increased $1.9 billion to $6.1 billion. Lower servicing, FDIC and other operating costs partly offset that increase.
- Total assets and long-term debt contracted, while deposits and total loans grew modestly. Credit quality improved across consumer and commercial portfolios.
Outlook, management commentary and material risks
- Outlook: The filing provides no formal earnings or revenue guidance. Management expected net charge-offs to improve in 2014, but more slowly than in 2013, and anticipated future allowance reductions at a substantially lower pace than in 2013. Project New BAC was expected to deliver $2 billion of quarterly savings by mid-2015; about $1.5 billion per quarter had been realized. Legacy Assets & Servicing expense, excluding litigation, was expected to decline to approximately $1.1 billion per quarter by Q4 2014.
- Mortgage and legal exposures: The representations-and-warranties liability was $13.3 billion at year-end; management estimated possible additional losses of up to $4 billion above that liability. Unresolved repurchase claims were $19.7 billion, with private-label claims increasing. Separately, the estimated aggregate range of possible loss for certain litigation and regulatory matters was $0–$6.1 billion above related accruals; management cautioned this is not a maximum-loss estimate.
- BNY Mellon settlement: The $8.5 billion settlement remained subject to appeals and reargument after a court approved it in January 2014 and final judgment was entered February 21, 2014. Failure to obtain final approval, or withdrawal under the settlement terms, could materially change future representations-and-warranties losses.
- Other unusual items: The Corporation paid FNMA $3.6 billion and repurchased loans for $6.6 billion under the January 2013 settlement. It paid FHLMC $404 million, less $13 million in credits, under a November 2013 settlement. The MBIA settlement included a $1.6 billion cash payment. Gains included $753 million from selling the remaining CCB investment and $1.4 billion from selling part of another equity investment. Improvement in structured-liability fair-value adjustments also helped year-over-year results. These items make reported earnings less indicative of recurring performance.
- Regulation and capital: Basel III rules took effect January 1, 2014, with capital and liquidity requirements still subject to implementation and transition. Management estimated fully phased-in Tier 1 common capital ratios of 9.96% under the Advanced approach and just above 9% under the Standardized approach. The Volcker Rule, proposed liquidity requirements, resolution planning, derivatives regulation and possible debit-interchange changes could increase costs or constrain revenue and capital distributions.
- Other risks: Mortgage servicing costs, foreclosure delays, mortgage insurance rescissions, housing-market weakness, interest-rate and mortgage-servicing-rights sensitivity, credit-rating downgrades, cyber and operational risks, international exposures, and regulatory investigations remain material. A one-notch rating downgrade could require approximately $1.3 billion of additional collateral; a second incremental notch could require approximately $4.1 billion.
Important facts for investors to verify
- Reconcile GAAP results with FTE and other non-GAAP measures, and assess how much of 2013 earnings came from lower credit provisions, valuation changes, asset sales and settlements.
- Track representations-and-warranties claims, the $13.3 billion liability, the possible additional loss range, and the final outcome and appeals related to the BNY Mellon settlement.
- Review the composition and transferability of the $376 billion liquidity sources, parent-company funding needs, debt maturities and downgrade-related collateral exposures.
- Confirm capital ratios under fully implemented Basel III rules, the effect of regulatory buffers and the Federal Reserve’s approval of capital distributions and repurchases.
- Test management’s 2014 credit, cost-savings and legacy-servicing expectations against subsequent results; also monitor litigation expense and mortgage-related claims not included in stated loss estimates.