Business context and reporting period
Bank of America Corporation’s unaudited Form 10-Q covers the three months ended March 31, 2011, with comparisons to the first quarter of 2010 and balance-sheet comparisons to December 31, 2010. The bank holding company reported $2.275 trillion in assets and operated through six business segments. The filing was signed May 5, 2011.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 or prior date |
|---|---|---|
| Revenue, net of interest expense, FTE | $27.095 billion | $32.290 billion |
| Net income | $2.049 billion | $3.182 billion |
| Net income applicable to common shareholders | $1.739 billion | $2.834 billion |
| Diluted earnings per share | $0.17 | $0.28 |
| Net interest income, FTE | $12.397 billion | $14.070 billion |
| Net interest yield, FTE | 2.67% | 2.93% |
| Noninterest income | $14.698 billion | $18.220 billion |
| Provision for credit losses | $3.814 billion | $9.805 billion |
| Noninterest expense | $20.283 billion | $17.775 billion |
| Efficiency ratio, FTE | 74.86% | 55.05% |
Net charge-offs fell to $6.028 billion, or 2.61% of average loans and leases, from $10.797 billion, or 4.44%. The period-end loan-loss allowance was $39.843 billion, equal to 4.29% of loans and leases; nonperforming loans, leases and foreclosed properties totaled $31.643 billion.
At March 31, total assets were $2.275 trillion, loans and leases $932.425 billion, deposits $1.020 trillion, long-term debt $434.436 billion and shareholders’ equity $230.876 billion. Versus year-end, assets rose $9.6 billion, loans declined $8.0 billion, deposits rose $9.7 billion and long-term debt fell $14.0 billion. Regulatory capital ratios were 8.64% Tier 1 common, 11.32% Tier 1 capital, 15.98% total capital and 7.25% Tier 1 leverage.
Cash and cash equivalents declined $10.885 billion to $97.542 billion. Cash flow was $(576) million from operating activities, $(13.968) billion from investing activities and $3.557 billion from financing activities. Global excess liquidity sources were $386 billion, up from $336 billion at year-end; parent-company liquidity was $116 billion. Parent-company time to required funding was 25 months, above the 21-month internal target.
Material changes and business drivers
- Revenue fell 16% year over year. Lower trading profits (down $2.5 billion), mortgage banking income (down $870 million), service charges (down $534 million) and other income (down $943 million) outweighed higher equity investment and investment banking income. Equity investment income included a $1.1 billion IPO-related gain.
- Credit costs improved substantially, with the provision down $6.0 billion. Management cited improving consumer and commercial credit trends, while adding $1.6 billion to consumer purchased-credit-impaired (PCI) reserves, largely reflecting a weaker home-price outlook.
- Expense rose $2.5 billion, including $874 million of mortgage-related assessments and waivers, $940 million of litigation expense (excluding external legal-service-provider fees), and higher personnel costs. The $874 million mortgage charge included $548 million of expected GSE compensatory fees.
- Segment results were mixed: Global Card Services net income rose to $1.712 billion as credit costs fell; Global Commercial Banking rose to $923 million; Global Wealth & Investment Management rose to $531 million. Global Banking & Markets fell to $2.132 billion. Consumer Real Estate Services posted a $2.392 billion loss, and All Other a $1.212 billion loss.
Outlook, risks, contingencies and unusual items
- Mortgage representations and warranties: The liability was $6.220 billion at March 31, versus $5.438 billion at year-end; the Q1 provision was $1.013 billion. Unresolved claims were $13.564 billion. The company estimated an additional possible-loss range of $7 billion to $10 billion for non-GSE exposures above existing accruals; this is not a probable-loss estimate and excludes potentially material servicing, securities and other claims.
- Assured Guaranty settlement: An April 14, 2011 agreement resolved claims involving 29 mortgage trusts. The estimated total cost is $1.6 billion, including approximately $1.1 billion in cash payments and an expected-value $470 million loss-sharing arrangement; the filing says it was provided for at March 31.
- Foreclosure matters: April 13 federal regulatory consent orders require servicing and control improvements and an independent review of specified foreclosure actions. They imposed no monetary penalties, but do not preclude future penalties. Foreclosure delays, investigations and litigation may generate additional costs and losses; management expected elevated servicing and legal costs to continue.
- Regulation and revenues: Based on 2010 volumes, management estimated debit interchange rules could reduce annual revenue by about $2.0 billion beginning in Q3 2011. The final rules were pending. The company also expected 2011 FDIC assessments to rise about $300 million and estimated a U.K. bank levy cost of about $120 million annually beginning in 2011.
- Capital distributions: The Federal Reserve objected to the proposed modest common-dividend increase for the second half of 2011. The common dividend remained $0.01 per share for Q1. Management said it expected to exceed future minimum capital requirements without raising new equity, while Basel III and other rules remained subject to change.
- Other sensitivities: A proposed U.K. corporate tax-rate reduction could trigger an approximately $800 million tax charge on deferred-tax-asset remeasurement upon enactment. Management identified housing weakness, home prices, repurchase claims, legal and regulatory proceedings, market conditions, credit ratings and financial reform as material uncertainties. Forward-looking statements are not guarantees.
Investor verification priorities
- Review the full notes on mortgage representations and warranties, including assumptions behind the $6.220 billion liability and the $7–$10 billion non-GSE possible-loss range.
- Track the Assured Guaranty settlement payments, reinsurance performance and any additional claims or settlements.
- Assess foreclosure-review findings, remediation costs, GSE assessments, litigation developments and any civil penalties.
- Verify the final debit interchange rules and realized revenue impact against the estimated $2.0 billion annual exposure.
- Monitor credit-loss and reserve trends, especially PCI mortgage reserves, and whether improving charge-offs persist.
- Reconcile FTE measures to GAAP results and assess whether one-time gains, including the IPO-related gain, affect underlying earnings trends.
- Monitor capital-plan approval, regulatory capital changes, liquidity by legal entity and credit-rating developments.