Bank of America Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter ended September 30, 2015; financial statements are unaudited. Bank of America is a diversified bank holding company operating through Consumer Banking, Global Wealth & Investment Management, Global Banking, Global Markets, and Legacy Assets & Servicing (LAS). It reported approximately $2.2 trillion in assets.
Financial results and position
- Revenue and earnings: Q3 GAAP revenue was $20.7 billion, down from $21.2 billion a year earlier; on a fully taxable-equivalent (FTE) basis, revenue was $20.9 billion versus $21.4 billion. Net income was $4.5 billion, or $0.37 diluted EPS, compared with a $232 million net loss, or $(0.04) per diluted share, in Q3 2014. Nine-month net income was $13.2 billion, or $1.09 diluted EPS, versus $1.8 billion, or $0.10, a year earlier.
- Net interest income and margins: Q3 net interest income was $9.5 billion GAAP and $9.7 billion FTE, down from $10.2 billion and $10.4 billion, respectively. FTE net interest yield was 2.10%, down 19 basis points year over year. The FTE efficiency ratio improved to 66.03% from 93.97%, chiefly reflecting lower litigation expense.
- Cash flow: For the first nine months, operating activities provided $22.3 billion, investing activities used $32.3 billion, and financing activities provided $42.4 billion; cash and cash equivalents increased $31.8 billion. These consolidated cash-flow figures reflect substantial banking and securities activity and should not be read as ordinary industrial-company free cash flow.
- Balance sheet and funding: At September 30, total assets were $2.153 trillion, loans and leases $887.7 billion, deposits $1.162 trillion, long-term debt $237.3 billion, and shareholders’ equity $255.9 billion. Compared with December 31, 2014, assets rose 2%, deposits 4%, and long-term debt declined 2%.
- Liquidity and capital: Global Excess Liquidity Sources were $499 billion, up from $439 billion at year-end, and parent-company time-to-required funding was 42 months. Basel 3 Standardized-transition CET1 was 11.6% (versus 12.3% at year-end); the supplementary leverage ratio was 6.4%. After requested regulatory model changes, management estimated fully phased-in Advanced-approaches CET1 at 9.7% pro forma as of quarter-end.
- Credit quality: Net charge-offs were $932 million in Q3, with an annualized ratio of 0.42%, versus $1.043 billion and 0.46% a year earlier. Nonperforming loans, leases, and foreclosed property were $10.3 billion, down from $14.2 billion at year-end. The allowance for loan and lease losses was $12.7 billion, or 1.44% of loans, compared with $14.4 billion, or 1.65%, at year-end.
Changes versus comparable periods
- Profit improved sharply from the prior-year quarter, primarily because litigation expense fell $5.7 billion in Q3 and $15.2 billion for the first nine months. Noninterest expense declined to $13.8 billion from $20.1 billion in Q3 and to $43.3 billion from $60.9 billion year to date.
- Revenue remained pressured: FTE net interest income declined, reflecting lower loan yields and consumer loan balances and, in Q3, larger negative mortgage-securities market-related adjustments. Nine-month noninterest income also fell, in part because prior-year results included substantial equity investment gains.
- The provision for credit losses rose to $806 million in Q3 from $636 million and to $2.4 billion year to date from $2.1 billion. Management attributed commercial provision increases in part to loan growth; consumer credit quality generally improved, though reserve releases slowed.
- Commercial lending grew: period-end total loans and leases increased to $887.7 billion from $881.4 billion at year-end, led by commercial demand. Commercial criticized exposures rose $2.0 billion to $13.6 billion, primarily from oil, gas, and energy borrower downgrades.
Outlook, risks, and unusual items
- Management expected provision for credit losses to remain generally consistent with then-current levels through mid-2016, assuming economic conditions remained unchanged. It expected an approximately 30% effective tax rate in Q4 and for full-year 2015, subject to unusual items.
- The BNY Mellon mortgage settlement’s final conditions were satisfied; the $8.5 billion payment, excluding legal fees, was due by February 9, 2016. The payment and legal fees had been fully reserved.
- Mortgage representations-and-warranties liability was $11.5 billion, including $8.6 billion related to the BNY Mellon settlement. The company estimated reasonably possible additional losses of up to $2 billion over existing accruals. The estimate depends on litigation outcomes, claim activity, statutes of limitation, and other assumptions.
- For certain litigation and regulatory matters where a loss range could be estimated, the aggregate range was $0–$2.4 billion in excess of related accruals, if any. Management cautioned that some matters could have a material effect on results or cash flows in a particular period; other matters could not be estimated.
- The Federal Reserve required a CCAR capital-plan resubmission to address identified weaknesses. The company resubmitted on September 30, 2015; the review could restrict future capital actions. The requested plan included $4.0 billion of common-stock repurchases over five quarters and a $0.05 quarterly dividend; approximately $1.6 billion of repurchases had occurred year to date.
- Other notable exposures include U.K. payment-protection-insurance claims (reserve $434 million; additional expense could not be reasonably estimated), interest-rate sensitivity, regulatory capital and liquidity changes, international economic conditions, and cyber and operational risks.
- The filing corrected prior cash-flow presentation for certain noncash loan-sale transactions: operating and investing cash flows were each adjusted by $3.4 billion for the 2014 comparative period, with no effect on net income, balance sheets, or cash balances.
Key facts investors should verify
- How much of reported earnings improvement reflects sustainable operating performance versus lower legacy litigation costs and other unusual items.
- Whether net interest income and margins stabilize, particularly if interest rates, deposit mix, loan yields, or mortgage-security prepayments change.
- Results of the Federal Reserve’s CCAR resubmission review and the effect of Advanced-approaches model changes on capital ratios and distributions.
- Cash payment timing and settlement allocation for BNY Mellon, and developments in mortgage claims, servicing matters, PPI, and other litigation beyond recorded reserves.
- Whether commercial energy criticized exposures, credit-loss provisions, and liquidity remain consistent with management’s stated assumptions and outlook.