Bank of America Corporation — Q1 2014 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2014. Bank of America reported approximately $2.15 trillion of assets and operated through five segments: Consumer & Business Banking, Consumer Real Estate Services, Global Wealth & Investment Management, Global Banking and Global Markets, with remaining activities in All Other. Comparisons below are with Q1 2013 unless otherwise noted.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 or prior date |
|---|---|---|
| Revenue, net of interest expense, GAAP | $22.6 billion | $23.2 billion |
| Net interest income, GAAP | $10.1 billion | $10.7 billion |
| Net income (loss) | $(276) million | $1.48 billion |
| Net income (loss) applicable to common shareholders; diluted EPS | $(514) million; $(0.05) | $1.11 billion; $0.10 |
| Provision for credit losses | $1.01 billion | $1.71 billion |
| Noninterest expense | $22.24 billion | $19.50 billion |
| Efficiency ratio, FTE basis | 97.68% | 83.31% |
| Net interest yield, FTE basis | 2.29% | 2.36% |
| Operating cash flow | $22.72 billion | $26.47 billion |
| Net change in cash and cash equivalents | Increase of $20.32 billion | Decrease of $9.77 billion |
FTE means fully taxable-equivalent and is a non-GAAP measure. Q1 2014 total revenue was $22.77 billion on an FTE basis. Returns on average assets and tangible equity were not meaningful because the company reported a net loss.
At March 31, 2014, total assets were $2.15 trillion, loans and leases $916.2 billion, deposits $1.13 trillion, long-term debt $254.8 billion and shareholders’ equity $231.9 billion. Global Excess Liquidity Sources were $427 billion, including $95 billion at the parent company. The allowance for loan and lease losses was $16.6 billion, or 1.84% of loans; nonperforming loans, leases and foreclosed properties were $17.7 billion.
Regulatory capital ratios under Basel 3 Standardized-Transition were 11.8% common equity tier 1, 11.9% Tier 1, 14.8% total capital and 7.4% Tier 1 leverage. Management estimated fully phased-in common equity tier 1 ratios of 9.0% under the Standardized approach and 9.6% under the Advanced approach; these were estimates, not reported transition ratios.
Material changes versus the prior comparable period
- The company moved from $1.48 billion of net income to a $276 million net loss. The principal driver was a $2.74 billion increase in noninterest expense, including $6.0 billion of litigation expense, up $3.8 billion year over year.
- The litigation charge included the FHFA settlement and additional reserves primarily for legacy mortgage matters. The provision for credit losses fell $704 million, reflecting improved consumer credit quality, partly offset by higher commercial reserves.
- Mortgage banking income fell to $412 million from $1.26 billion, primarily due to lower servicing income and mortgage production revenue. First-mortgage originations in CRES declined 65% to $6.7 billion.
- Trading account profits declined $522 million, mainly reflecting lower rates and currencies activity amid reduced market volumes and volatility. Investment and brokerage income rose $242 million, while equity investment income rose $221 million, including a gain on the sale of an equity investment.
- Net charge-offs declined to $1.39 billion, or 0.62% of average loans and leases, from $2.52 billion, or 1.14%. Total loans fell from $928.2 billion at year-end to $916.2 billion at March 31; deposits increased from $1.12 trillion to $1.13 trillion.
Guidance, management commentary, risks and unusual items
- Capital plan revision: On April 28, after its April 16 earnings announcement, the company disclosed an error in calculating regulatory capital related to fair-value-option structured notes assumed in the Merrill Lynch acquisition. The correction reduced reported regulatory capital estimates; the company stated its historical GAAP financial statements and shareholders’ equity were properly stated. It suspended planned 2014 capital actions and was required to resubmit its CCAR plan by May 27, subject to possible extension, and undertake a third-party review. Until Federal Reserve action, capital distributions required prior approval. The previously planned $4.0 billion buyback and dividend increase were suspended; the existing $0.01 quarterly dividend was approved to continue. The filing reported $1.4 billion of Q1 share repurchases.
- FHFA and other settlements: The FHFA settlement was recorded as of March 31, including an additional $3.7 billion charge. On April 1 the company paid $9.5 billion and received RMBS valued at approximately $3.2 billion, for a net cost of $6.3 billion. The April payment is a subsequent-period cash outflow. FGIC and related trust settlements resulted in $900 million of payments in April, with a further $50 million contingent on completion of two remaining settlements; costs were covered by prior reserves.
- Other legal and regulatory matters: The company reported $13.4 billion of representations-and-warranties liabilities and estimated possible losses of up to $4 billion over existing accruals. Unresolved repurchase claims totaled $20.3 billion, excluding $1.2 billion of demands the company considered invalid. Separately, management estimated an aggregate $0–$5.0 billion range of possible loss above accrued liabilities for certain litigation and regulatory matters; this is not a maximum exposure, and some matters could not be estimated. A BNY Mellon settlement remained subject to appeals and final approval. The DOJ, state authorities and other agencies continued mortgage-related inquiries and litigation.
- Consumer product settlement: In April, the company agreed to pay $45 million in penalties and provide approximately $738 million in consumer refunds relating to credit-card debt-cancellation and identity-theft-protection products. The company said these amounts were covered by previously established reserves.
- Outlook: Management expected Q2 net interest income, excluding market-related adjustments, to be slightly below Q1, with modest growth through the second half of 2014. If economic and asset-quality improvements continued, it anticipated moderate further reductions in credit-loss allowances and net charge-offs. It expected Legacy Assets & Servicing quarterly expense, excluding litigation, to be about $1.1 billion by Q4 2014; Project New BAC savings were expected to reach $8 billion annualized by mid-2015. The company expected an approximately 31% effective tax rate for the remainder of 2014 absent unusual items, and lower All Other equity investment income for the remainder of the year.
- Key risks: Management highlighted mortgage repurchase, servicing and litigation exposures; the outcome of pending settlements and appeals; capital-plan review and evolving Basel 3 and liquidity rules; credit-rating downgrades and potential collateral calls; interest-rate, market and foreign-country risks; and operational, compliance and cybersecurity risks. Management also cited a slower U.S. economy in Q1, partly due to severe winter weather.
Important facts for investors to verify
- Review the revised Basel 3 capital calculations, the third-party review and Federal Reserve decisions on the resubmitted CCAR plan and any capital distributions.
- Track cash and accounting effects of the FHFA settlement, completion of the FGIC-related settlements, and the status of the BNY Mellon settlement and appeals.
- Assess whether mortgage litigation, representations-and-warranties claims, servicing matters and related losses remain within recorded reserves and disclosed loss ranges.
- Monitor mortgage originations, servicing portfolio and MSR values, as well as whether litigation-excluded servicing costs and Project New BAC savings meet management’s targets.
- Compare subsequent net interest income, credit losses, deposit and loan trends, liquidity and capital ratios with management’s outlook; note that the filing’s full-year outlook is conditional and includes non-GAAP measures.