Business context and reporting period
Bank of America Corporation’s Form 10-K covers the fiscal year ended December 31, 2020; it is an annual report, not a standalone fourth-quarter filing. The company operates four segments—Consumer Banking, Global Wealth & Investment Management, Global Banking and Global Markets—with other activities in All Other. It reported $2.82 trillion in assets and approximately 213,000 employees at year-end.
Key financial metrics
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue, net of interest expense | $85.5 billion | $91.2 billion |
| Net interest income | $43.4 billion | $48.9 billion |
| Noninterest income | $42.2 billion | $42.4 billion |
| Provision for credit losses | $11.3 billion | $3.6 billion |
| Noninterest expense | $55.2 billion | $54.9 billion |
| Net income | $17.9 billion | $27.4 billion |
| Diluted earnings per share | $1.87 | $2.75 |
| Return on average assets | 0.67% | 1.14% |
| Efficiency ratio | 64.55% | 60.17% |
Net interest yield on a fully taxable-equivalent basis fell to 1.90% from 2.43%. The effective tax rate was 5.8%, compared with 16.3%; excluding ESG investment tax credits, management said the 2020 rate would have been 21%. Fourth-quarter 2020 net income was $5.47 billion and diluted EPS was $0.59, versus $6.99 billion and $0.74 in fourth-quarter 2019.
- Balance sheet: Year-end assets were $2.82 trillion, up 16%; deposits rose 25% to $1.80 trillion. Loans and leases declined 6% to $927.9 billion. Debt securities increased 45% to $684.9 billion, primarily reflecting investment of deposit inflows.
- Credit: The allowance for credit losses was $20.7 billion, including $18.8 billion for loans and leases and $1.9 billion for unfunded commitments. Net charge-offs were $4.1 billion, or 0.42% of average loans, versus $3.6 billion and 0.38% in 2019. Nonperforming loans, leases and foreclosed properties were $5.1 billion, up from $3.8 billion.
- Cash flows: Operating activities provided $38.0 billion, investing activities used $177.7 billion, and financing activities provided $355.8 billion. Cash and cash equivalents increased $218.9 billion to $380.5 billion, largely alongside deposit growth and investment in securities. Bank cash flows reflect balance-sheet and customer funding activity and should not be read like industrial-company free cash flow.
- Debt, liquidity and capital: Long-term debt was $262.9 billion, up from $240.9 billion. Average Global Liquidity Sources in the fourth quarter were $943 billion. Average consolidated HQLA was $584 billion and average LCR was 122%, compared with 116% a year earlier. Standardized CET1 was 11.9% and the reported SLR was 7.2%, which benefited from a temporary regulatory exclusion of Treasury securities and Federal Reserve deposits. The company and its principal bank subsidiary met applicable well-capitalized requirements.
Material changes versus the prior comparable period
- Net income fell 35%, mainly because the provision for credit losses rose $7.7 billion amid the pandemic-related economic outlook and net interest income declined $5.5 billion in a lower-rate environment.
- Noninterest income was broadly flat: higher investment and brokerage income and investment banking fees—up 27% for the Corporation—were offset by weaker card and service-charge income and lower market-making and other income.
- Noninterest expense increased slightly. The 2019 comparison included a $2.1 billion pretax impairment charge tied to termination of the merchant services joint venture; from July 2020, the company handled the transferred merchant contracts.
- Deposits surged and cash and securities balances expanded, while year-end loans declined. The allowance for credit losses rose substantially, reflecting both adoption of CECL and pandemic-related reserve builds.
- Segment net income declined in Consumer Banking ($6.5 billion to $6.5 billion), GWIM ($4.3 billion to $3.1 billion) and Global Banking ($8.1 billion to $3.5 billion); Global Markets improved to $5.2 billion from $3.5 billion. All Other’s net loss narrowed to $0.4 billion, partly because the prior year included the merchant-services impairment.
Outlook, commentary, risks and unusual items
- Management expected net interest income to be higher in the second half of 2021 than in both the second half of 2020 and the first half of 2021, assuming continued economic improvement and using the January 19, 2021 forward curve. It expected a 2021 effective tax rate of 10%–12%, absent unusual items, including ESG-related tax credits.
- The Federal Reserve limited large-bank dividends and repurchases during 2020. In January 2021 it permitted distributions within a cap based on average net income over the preceding four quarters; Bank of America authorized up to $2.9 billion of repurchases through March 31, 2021, in addition to employee-award offset repurchases.
- The pandemic’s duration and economic effects remained uncertain. Management highlighted potential credit deterioration, particularly in travel, hospitality, entertainment and commercial real estate; persistent low rates; customer deposit and credit-line behavior; market volatility; and operational demands from relief programs and remote work.
- Other material risks include cyber and third-party disruptions, litigation and regulatory actions, climate-related physical and transition risks, Brexit-related operating changes, and the transition from LIBOR to alternative reference rates. The company reported a $1.3 billion representations-and-warranties reserve and estimated a possible loss range of $0–$1.3 billion above accrued liabilities for disclosed matters and those exposures. It cautioned that actual outcomes could differ and some matters could materially affect a particular period.
- CECL adoption on January 1, 2020 increased the allowance by $3.3 billion and reduced retained earnings by $2.4 billion after tax and other adoption effects. The 2020 effective tax rate also reflected a roughly $700 million benefit related to a U.K. tax-law change.
Investor verification priorities
- Track credit quality, criticized commercial exposures, deferral performance, charge-offs and whether the $20.7 billion allowance remains adequate as support programs expire.
- Test the assumptions behind the 2021 net interest income outlook, especially rate sensitivity, deposit pricing and deposit mix.
- Confirm the durability of deposit growth and liquidity, and distinguish regulatory capital ratios from measures temporarily benefiting from regulatory relief.
- Review the 2021 capital-return permissions and actual dividend and repurchase activity against earnings, capital needs and regulatory limits.
- Follow material litigation, mortgage representations-and-warranties claims, merchant-services exposures, and LIBOR-transition milestones and costs.
The independent auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting; management also concluded internal controls were effective as of December 31, 2020.