Bank of America Corporation — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; fourth-quarter results are also summarized. Bank of America is a diversified U.S. and international financial services company with Consumer Banking, Global Wealth & Investment Management (GWIM), Global Banking, Global Markets and All Other operations. It reported approximately $2.3 trillion in assets and 209,000 employees at year-end.
Financial results and key metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue, net of interest expense | $87.4 billion | $83.7 billion |
| Net interest income | $44.7 billion | $41.1 billion |
| Noninterest income | $42.7 billion | $42.6 billion |
| Provision for credit losses | $3.4 billion | $3.6 billion |
| Noninterest expense | $54.7 billion | $55.1 billion |
| Income before income taxes | $29.2 billion | $25.0 billion |
| Income tax expense | $11.0 billion | $7.2 billion |
| Net income | $18.2 billion | $17.8 billion |
| Diluted earnings per share | $1.56 | $1.49 |
| Efficiency ratio | 62.67% | 65.81% |
| Return on average assets | 0.80% | 0.81% |
| Return on average common equity | 6.72% | 6.69% |
Net interest yield on a fully taxable-equivalent basis was 2.37%, versus 2.25% in 2016. Management attributed the increase in net interest income to higher rates and loan and deposit growth, partly offset by the sale of the non-U.S. consumer credit card business. The efficiency ratio improved as expenses declined while revenue rose.
Fourth quarter: Revenue was $20.4 billion, net income was $2.4 billion and diluted EPS was $0.20. Results included an estimated $2.9 billion net-income impact from the Tax Act, including $1.9 billion in income tax expense and a $946 million pre-tax downward valuation adjustment on tax-advantaged energy investments.
Balance sheet, capital and liquidity
- Year-end assets were $2.281 trillion, up 4%; loans and leases were $936.7 billion, up 3%; deposits were $1.310 trillion, up 4%.
- Long-term debt was $227.4 billion, up 5%; total liabilities were $2.014 trillion. Cash and cash equivalents were $157.4 billion.
- Common equity Tier 1 capital ratio was 11.8% under the Advanced approaches transition measure; total capital ratio was 15.1%. The Corporation and Bank of America, N.A. were reported as well capitalized.
- Average Global Liquidity Sources were $522 billion in Q4. Average consolidated HQLA was $439 billion and average LCR was 125%. Parent company and NB Holdings time-to-required funding was 49 months at year-end, versus 35 months a year earlier.
- Cash flow from operating activities was $10.4 billion, compared with $18.4 billion in 2016; investing cash flow was negative $52.0 billion and financing cash flow was positive $49.2 billion. The filing describes operating cash, available balances and access to short- and long-term debt as sufficient for operating liquidity needs.
- The Corporation repurchased $12.8 billion of common stock in 2017 and paid $0.39 per common share in dividends. The Board authorized an additional $5.0 billion buyback through June 30, 2018, following earlier authorization; remaining authorization at year-end was $10.1 billion.
Material changes versus 2016
- Revenue rose $3.7 billion, mainly from a $3.6 billion increase in net interest income. Noninterest income was nearly flat: higher investment banking, investment and brokerage, and trading revenue was largely offset by a $1.6 billion decline in mortgage banking income.
- Provision for credit losses fell $201 million overall. Commercial provision improved with reduced energy exposures, while consumer provision rose, primarily due to U.S. credit-card portfolio seasoning and growth.
- Noninterest expense decreased $340 million. Lower operating, litigation and business-sale costs were partly offset by a $316 million data-center impairment and $145 million in shared-success bonuses.
- The Tax Act reduced reported 2017 net income by an estimated $2.9 billion and raised the effective tax rate to 37.6%, from 28.8% in 2016. Management estimated a 2018 effective tax rate of approximately 20%, absent unusual items.
- Year-end nonperforming loans, leases and foreclosed properties fell to $6.8 billion from $8.1 billion. The allowance for loan and lease losses declined to $10.4 billion from $11.2 billion; net charge-offs increased to $4.0 billion from $3.8 billion.
- Segment net income increased in Consumer Banking ($8.2 billion), GWIM ($3.1 billion) and Global Banking ($7.0 billion), while Global Markets declined to $3.3 billion. All Other recorded a $3.3 billion net loss, largely reflecting the Tax Act.
- The non-U.S. consumer credit card business was sold on June 1, 2017, generating $10.9 billion cash proceeds and a $793 million pre-tax gain ($103 million after tax).
Outlook, commentary and principal risks
Management described a strengthening U.S. economy in 2017 and expected gradual Federal Reserve rate increases to continue in 2018. It reported that the balance sheet remained asset-sensitive: an instantaneous parallel 100-basis-point increase in rates was estimated to raise next-12-month banking-book net interest income by $3.3 billion, assuming no management response and no correlated changes in other economic variables. This is a sensitivity estimate, not earnings guidance. Management also noted that deposit repricing or shifts to higher-cost funding could reduce the benefit.
- Credit and housing: Credit quality improved in consumer real estate and energy, but card losses rose with portfolio seasoning and growth. About 10% of HELOCs were expected to enter amortization in 2018; those loans have shown higher early-stage delinquency and nonperforming rates.
- Legacy mortgage and litigation exposures: Unresolved repurchase claims were $17.6 billion; the recorded representations-and-warranties reserve was $1.9 billion, with estimated reasonably possible additional loss of up to $1.0 billion. Separately, the estimated aggregate range of possible loss for certain litigation matters was $0 to $1.3 billion above accrued liabilities. The filing cautions that some servicing, securities, fraud and indemnity matters are not included in the mortgage estimate and that outcomes may be material in a particular period.
- Rates, markets and valuation: Changes in interest rates, yield-curve shape, market liquidity, prepayments, credit spreads and asset prices may affect net interest income, securities values, mortgage servicing rights, trading results, capital and wealth-management fees.
- Funding and regulation: Liquidity and distributions depend on deposits, capital-market access, credit ratings and the ability to move funds among legal entities. Regulatory capital, liquidity, resolution-planning, deposit-insurance and loss-absorbing-debt requirements may increase costs or constrain capital actions.
- Operational, cyber and compliance: Cyber attacks, technology or third-party failures, privacy obligations, evolving regulation, investigations and litigation could cause financial, legal or reputational harm. GDPR compliance was due May 25, 2018; LIBOR benchmark reforms also presented transition uncertainty.
- Other contingencies: U.K. exit from the EU, geopolitical and sovereign risks, competition, tax-law interpretation and estimates for deferred tax assets could affect results. Management stated that the 2017 hurricanes were not expected to have a material financial impact.
PricewaterhouseCoopers issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also concluded internal controls were effective at December 31, 2017.
Important facts for investors to verify
- Reconcile the reported $18.2 billion net income with the $2.9 billion estimated Tax Act impact, including the related energy-investment valuation adjustment and the possibility of revisions to tax estimates.
- Assess whether net interest income can continue to grow as rates rise, considering deposit repricing, funding costs and the yield curve.
- Track credit-card delinquencies, charge-offs and reserve coverage, as well as the 2018 HELOC amortization transition.
- Monitor developments in mortgage repurchase claims, the $1.9 billion reserve and up-to-$1.0 billion additional-loss estimate; review litigation exposures separately.
- Confirm capital, liquidity and regulatory headroom alongside the pace of buybacks and dividends, including limits on subsidiary-to-parent distributions.
- Review segment trends, particularly Global Markets trading performance and mortgage banking/MSR results, and distinguish recurring earnings from the business-sale gain and other unusual items.