Bank of America Corporation — Q1 2015 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2015. Bank of America is a diversified U.S. and international financial services company with approximately $2.1 trillion in assets. Effective January 1, 2015, it realigned its reporting segments; prior-period results were reclassified to the new presentation. The filing describes slower U.S. growth in the quarter, alongside gradual labor-market improvement, and continued low interest rates.
Financial performance and condition
| Metric | Q1 2015 | Comparable period / reference |
|---|---|---|
| Revenue, net of interest expense | $21.2 billion GAAP; $21.4 billion FTE | $22.6 billion GAAP; $22.8 billion FTE in Q1 2014 |
| Net income (loss) | $3.36 billion; diluted EPS $0.27 | $(276) million; diluted loss per share $0.05 |
| Net interest income / yield | $9.45 billion GAAP; $9.67 billion FTE; 2.17% FTE yield | $10.09 billion GAAP; $10.29 billion FTE; 2.29% yield |
| Noninterest expense | $15.70 billion; 73.27% FTE efficiency ratio | $22.24 billion; 97.68% efficiency ratio |
| Provision / net charge-offs | $765 million / $1.19 billion; annualized charge-off rate 0.56% | $1.01 billion / $1.39 billion; charge-off rate 0.62% |
| Assets / loans / deposits | $2.144 trillion / $878.0 billion / $1.153 trillion at March 31 | Assets $2.105 trillion and deposits $1.119 trillion at December 31, 2014 |
| Long-term debt | $237.9 billion at March 31 | $243.1 billion at December 31, 2014 |
| Capital and liquidity | Basel 3 Standardized-Transition CET1 11.1%; fully phased-in Standardized estimate 10.3%; SLR 6.3%; global excess liquidity $478 billion | Transition CET1 12.3%; excess liquidity $439 billion at December 31, 2014 |
Operating cash flow was negative $4.7 billion, versus positive $22.7 billion in Q1 2014. Investing cash flow was negative $8.6 billion and financing cash flow was positive $38.5 billion, including $34.2 billion of deposit growth and $3.0 billion of preferred-stock proceeds. Cash and cash equivalents increased $24.0 billion to $162.5 billion.
Material changes versus the prior comparable period
- Net income improved by $3.63 billion, principally because litigation expense fell $5.6 billion to $370 million. Q1 2014 included major settlement costs and additional legacy mortgage reserves; the year-over-year profit comparison therefore reflects an unusually large prior-period expense.
- FTE net interest income declined $616 million and noninterest income fell $730 million. Lower loan yields and consumer balances, negative market-related adjustments and lower equity investment gains weighed on revenue; mortgage banking income improved.
- Credit provision declined $244 million amid improving consumer and U.S. commercial credit conditions. Management expects reserve releases to be lower in the remaining quarters of 2015.
- Period-end total assets rose $39.0 billion from year-end, mainly from seasonal customer deposit inflows and higher cash. Loans declined modestly from year-end, as consumer run-off and sales outweighed growth in commercial lending.
- Credit quality indicators generally improved year over year: nonperforming loans, leases and foreclosed properties were $12.1 billion versus $17.7 billion; the allowance for loan and lease losses was $13.7 billion versus $16.6 billion.
Outlook, commentary, risks and unusual items
- The Federal Reserve gave a conditional non-objection to the 2015 capital plan. The company may proceed with requested repurchases of up to $4.0 billion over five quarters beginning Q2 2015 and maintain the $0.05 quarterly common dividend, but must resubmit its plan by September 30, 2015. Unresolved planning weaknesses could lead to restrictions on future capital distributions.
- Management expects an approximately 30% effective tax rate for the rest of 2015 absent unusual items, and expects Legacy Assets & Servicing noninterest expense, excluding litigation, to decline to approximately $800 million per quarter by Q4 2015. No consolidated earnings or revenue guidance is stated.
- Mortgage-related legal exposure remains significant. The $8.5 billion BNY Mellon settlement was approved by a New York appellate court but remains subject to conditions, including an IRS private-letter ruling. The filing reports a $12.0 billion representations-and-warranties liability and estimates reasonably possible losses of up to $4 billion above existing accruals.
- Unresolved repurchase claims, net of duplicates, rose to $25.8 billion from $22.8 billion at year-end; the filing cautions that claim amounts are not equivalent to expected losses. Separately, management estimates an aggregate $0–$2.5 billion possible loss above accruals for certain litigation and regulatory matters it can estimate; this is not a maximum exposure.
- Other key risks include regulatory and litigation outcomes, interest-rate and foreign-exchange movements, credit-rating downgrades and related collateral demands, cyber and operational events, international economic and geopolitical conditions, and evolving capital and liquidity rules. Regulators’ requested Advanced-approaches model changes could reduce the estimated CET1 ratio by about 100 basis points.
- Interest-rate sensitivity estimates indicate that an instantaneous +100 basis-point parallel shift would increase forecast 12-month net interest income by $4.55 billion, while a −50 basis-point shift would reduce it by $3.48 billion; these estimates assume no management response and unchanged deposit mix.
Important facts for investors to verify
- How much of the earnings rebound reflects the lower prior-year litigation charge, and how sustainable are underlying revenue and expense trends?
- Whether the BNY Mellon settlement’s outstanding conditions are met, and how mortgage repurchase claims and servicing-related exposures develop.
- Whether the CCAR resubmission resolves Federal Reserve concerns and what capital distributions are ultimately permitted.
- How interest-rate changes, deposit behavior and market-related securities adjustments affect net interest income, accumulated OCI and capital.
- Whether credit improvement continues, particularly in legacy mortgages, commercial borrowers exposed to lower oil prices, and portfolios with future payment resets.