BANK OF AMERICA CORP quarterly report, Q3 FY2012

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Bank of America Corporation — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2012. Bank of America reported approximately $2.2 trillion in assets and operated through five business segments, with remaining activities in All Other.

Financial performance and position

  • Third-quarter results: GAAP revenue was $20.4 billion, down 28% year over year; revenue on a fully taxable-equivalent (FTE) basis was $20.7 billion. Net income was $340 million versus $6.2 billion a year earlier. Preferred dividends left a $33 million loss applicable to common shareholders; diluted EPS was $0.00.
  • Nine-month results: GAAP revenue was $64.7 billion, down 6%; net income was $3.5 billion versus a $545 million loss in 2011. Common-shareholder income was $2.4 billion, or $0.22 diluted EPS. The prior-year period included a $2.6 billion goodwill impairment charge.
  • Interest income and efficiency: Q3 FTE net interest income was $10.2 billion, with a 2.32% net interest yield, unchanged year over year. Nine-month FTE net interest income was $31.0 billion, down from $34.6 billion, and yield declined from 2.50% to 2.35%. The Q3 FTE efficiency ratio was 84.93%, versus 61.37% a year earlier.
  • Credit and asset quality: Q3 provision for credit losses was $1.8 billion; net charge-offs were $4.1 billion, or 1.86% of average loans. The allowance for loan and lease losses fell to $26.2 billion from $33.8 billion at year-end 2011; nonperforming loans, leases and foreclosed properties declined to $24.9 billion from $29.1 billion.
  • Cash flow: For the first nine months, operating cash flow was $12.1 billion, investing cash flow was negative $21.6 billion and financing cash flow was negative $4.6 billion. Cash and cash equivalents declined $13.7 billion to $106.4 billion.
  • Balance sheet and funding: At September 30, total assets were $2.166 trillion, loans and leases $893.0 billion, deposits $1.063 trillion and shareholders’ equity $238.6 billion. Long-term debt declined to $286.5 billion from $372.3 billion at year-end 2011.
  • Capital and liquidity: Basel I Tier 1 common, Tier 1 and total capital ratios were 11.41%, 13.64% and 17.16%, respectively; Tier 1 leverage was 7.84%. Global excess liquidity sources totaled $380 billion. Parent-company time to required funding was 35 months against a 21-month minimum target. Management estimated a fully phased-in Basel III Tier 1 common ratio of 8.97%, subject to assumptions including regulatory model approval.

Material changes and segment trends

  • Q3 revenue and earnings fell sharply year over year, reflecting negative fair-value adjustments on structured liabilities, derivative debit valuation adjustment (DVA) losses, lower equity investment income and lower consumer loan balances. The 2011 comparison benefited from positive structured-liability marks and a $3.6 billion gain on part of the China Construction Bank investment.
  • Nine-month credit provisions fell to $6.0 billion from $10.5 billion, primarily reflecting improving residential mortgage and home equity trends. Reserve releases exceeded net charge-offs by $5.8 billion.
  • Consumer & Business Banking Q3 net income fell to $1.3 billion from $1.7 billion, affected by lower card revenue, the Durbin Amendment and compressed deposit spreads. Global Banking earned $1.3 billion, up year over year in Q3 but down for the nine-month period. Global Wealth & Investment Management Q3 net income rose to $542 million.
  • Consumer Real Estate Services remained loss-making, with a Q3 net loss of $877 million. Its nine-month loss narrowed substantially versus 2011, largely because the prior year included substantial representations-and-warranties provisions and a goodwill impairment.
  • Global Markets’ Q3 net loss was $359 million, including $583 million of net DVA losses. Excluding net DVA, management reported improved results, citing stronger sales and trading revenue and lower expenses.

Outlook, commentary and key risks

  • Cost program: Project New BAC Phase 1 was expected to deliver more than $1 billion in 2012 savings and $5 billion in annualized savings by Q4 2013, with the full impact in 2014. Phase 2 was expected to add $3 billion in annualized savings by mid-2015. These are forward-looking targets, not guarantees.
  • Credit outlook: Absent unexpected economic deterioration, management expected allowance reductions, excluding the PCI valuation allowance, to continue in the near term but at a slower pace than in 2011. Management believed default-related servicing costs peaked in Q3 2012 and would decline in Q4 and further in 2013, subject to foreclosure delays.
  • Mortgage and litigation exposure: The representations-and-warranties liability was $16.3 billion. The estimated possible loss beyond accruals was up to $6 billion and was not characterized as probable. Unresolved repurchase claims rose to $25.5 billion from $12.6 billion at year-end 2011. The BNY Mellon settlement remained subject to court approval; a final hearing was scheduled to begin May 2, 2013.
  • Settlements and unusual items: The proposed Merrill Lynch securities class-action settlement was $2.4 billion and fully covered by litigation reserves at quarter-end, subject to court approval. The Syncora settlement cost approximately $400 million and was fully accrued by June 30. The National Mortgage Settlement included approximately $2.4 billion in upfront payments, paid in April, plus borrower-assistance commitments and possible additional payments if targets are missed.
  • Regulatory, market and funding risks: Basel III and market-risk rules could substantially increase capital requirements; the company also cited uncertainty from Dodd-Frank and derivatives regulation. Further credit-rating downgrades could raise funding costs, require collateral or permit derivative termination. European sovereign-debt stresses and potential economic or market volatility remained risks.
  • Other disclosures: The company reported no material changes to internal control over financial reporting and concluded disclosure controls were effective. A major storm in the Northeast and Mid-Atlantic in late October affected operations and some branch locations after quarter-end.

Important facts for investors to verify

  • Reconcile GAAP revenue and earnings with FTE and other non-GAAP measures, and assess the impact of DVA, structured-liability marks, securities gains and reserve releases on recurring performance.
  • Track the growth and resolution of repurchase claims, the $16.3 billion recorded liability and the possible loss of up to $6 billion beyond accruals; verify developments in the BNY Mellon proceeding and Fannie Mae disputes.
  • Evaluate whether consumer credit improvement supports continued reserve reductions, particularly given home equity charge-offs and new bankruptcy-related classifications that increased reported TDRs and nonperforming loans.
  • Monitor execution of Project New BAC savings targets alongside litigation, servicing and restructuring costs.
  • Assess capital under finalized Basel III rules and model approvals, as well as the distribution and transferability of the reported $380 billion in liquidity across subsidiaries.
  • Review debt maturities, planned trust-preferred redemptions, rating-agency actions and potential collateral needs under further downgrades.