Bank of America Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Comparisons are primarily with the corresponding 2019 periods; balance-sheet comparisons are with December 31, 2019. Bank of America operates Consumer Banking, Global Wealth & Investment Management, Global Banking and Global Markets, with remaining activities in All Other.
Financial results and key metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue, net of interest expense | $20.3 billion | $22.8 billion | $65.4 billion | $68.9 billion |
| Net interest income | $10.1 billion | $12.2 billion | $33.1 billion | $36.8 billion |
| Provision for credit losses | $1.4 billion | $779 million | $11.3 billion | $2.6 billion |
| Noninterest expense | $14.4 billion | $15.2 billion | $41.3 billion | $41.7 billion |
| Net income | $4.9 billion | $5.8 billion | $12.4 billion | $20.4 billion |
| Diluted earnings per share | $0.51 | $0.56 | $1.28 | $2.01 |
- Q3 return on average assets was 0.71%, return on average common equity 7.24%, and efficiency ratio 70.81%, versus 0.95%, 8.48%, and 66.51%, respectively, a year earlier. FTE net interest yield was 1.72%, down from 2.41%.
- At September 30, assets were $2.74 trillion, loans and leases $955.2 billion, deposits $1.70 trillion, long-term debt $255.7 billion, and shareholders’ equity $268.9 billion. Deposits rose $268.1 billion from year-end 2019; loans declined $28.3 billion.
- For the first nine months, operating cash flow was negative $16.6 billion, investing cash flow negative $123.8 billion, and financing cash flow positive $277.9 billion. Cash and cash equivalents ended at $301.0 billion, up $139.4 billion from year-end. Deposit inflows and securities activity were major drivers; bank cash flows are substantially affected by balance-sheet movements.
- Q3 net charge-offs were $972 million, or 0.40% of average loans; the allowance for credit losses was $21.5 billion, including unfunded commitments, versus $10.2 billion at September 2019. The allowance for loan and lease losses was 2.07% of loans.
Material changes and business segments
- Lower interest rates were the principal drag on net interest income. Lower funding costs and deposit growth partly offset the effect.
- Nine-month investment banking fees increased to $5.3 billion from $4.2 billion, and Global Markets net income rose to $4.5 billion from $2.9 billion, supported by stronger trading and underwriting activity. Global Banking net income fell to $1.8 billion from $6.1 billion, mainly because of higher credit provisions and lower net interest income.
- Consumer Banking nine-month net income fell to $3.9 billion from $9.9 billion; GWIM net income declined to $2.2 billion from $3.2 billion. Lower interest income and pandemic-related effects weighed on both. GWIM client balances reached $3.1 trillion, up 6% year over year.
- All Other reported nine-month net income of $19 million versus a $1.6 billion loss a year earlier. The prior-year period included a $2.1 billion pretax impairment charge related to termination of the merchant services joint venture. From July 1, 2020, the Corporation took on its share of merchant contracts and began processing services directly.
Liquidity, capital, outlook and risks
- Average Global Liquidity Sources were $859 billion, compared with $576 billion at year-end 2019; average consolidated LCR was 122%, versus 116%. Available borrowing capacity against identified eligible collateral was $320 billion at quarter-end.
- Standardized CET1 capital ratio was 11.9%, above the 9.5% requirement including the 2.5% stress capital buffer effective October 1, 2020. The Corporation reported it met the definition of well capitalized. Repurchases were suspended, except those to offset equity awards; the quarterly common dividend remained $0.18 per share, subject to Board approval and regulatory limits.
- Management expected Q4 net interest income to be relatively flat or modestly higher than Q3, assuming stable interest rates and no economic deterioration. It expected Q4 noninterest expense of approximately $13.7 billion, assuming lower pandemic-related and litigation costs, and an effective tax rate of about 10%, excluding unusual items.
- COVID-19 remains the dominant uncertainty. The company cited potential further credit deterioration, particularly in travel and entertainment, commercial real estate and other affected industries; future effects on revenue, expenses, funding, capital and liquidity remain uncertain. Commercial criticized utilized exposure increased to $35.7 billion from $11.5 billion at year-end.
- As of October 21, deferred consumer and small-business loans totaled $9.8 billion; deferred commercial balances, excluding small business, were $1.4 billion. Approximately 343,000 PPP loans totaling $24.7 billion remained outstanding at September 30. Management noted that most deferral programs had expired and customer assistance requests had declined.
- CECL adoption on January 1 increased the allowance by $3.3 billion and reduced retained earnings by $2.4 billion after tax and other effects. The quarter included an approximately $700 million positive tax adjustment related to a U.K. tax-law change, contributing to reported income tax benefit of $335 million despite pretax income of $4.5 billion.
- Litigation-related expense was $636 million in Q3. The estimated aggregate reasonably possible loss range for certain matters, including representations-and-warranties exposures, was $0 to $1.3 billion in excess of accrued liabilities, if any; actual outcomes may differ. The filing also identifies LIBOR transition, cyber and operational disruption, regulatory changes, market volatility and geopolitical risks.
Important facts for investors to verify
- Whether credit-loss reserves adequately reflect the duration and severity of the pandemic’s effects, and how deferred borrowers perform after assistance ends.
- Whether lower rates and deposit mix keep Q4 net interest income within management’s stated outlook.
- Whether expected Q4 expense reductions materialize, particularly in litigation and pandemic-related costs.
- Capital distribution constraints, the applicable stress capital buffer and any changes to repurchase or dividend permissions after regulatory stress testing.
- The size and timing of potential litigation, representations-and-warranties and merchant-processing losses, and progress in processing PPP forgiveness.