BANK OF AMERICA CORP annual report, FY2011

Business context and reporting period

Bank of America Corporation’s Form 10-K covers the fiscal year ended December 31, 2011; it was filed February 23, 2012. The company reported six operating segments: Deposits, Card Services, Consumer Real Estate Services (CRES), Global Commercial Banking, Global Banking & Markets (GBAM), and Global Wealth & Investment Management (GWIM), with remaining activities in All Other. The filing also reports fourth-quarter results separately.

Financial performance and condition

• Revenue declined about 15%, with FTE net interest income down $7.1 billion and noninterest income down $9.9 billion. Mortgage banking income swung to an $8.8 billion loss from $2.7 billion of income, largely reflecting higher representations-and-warranties provisions.
• Provision for credit losses fell to $13.4 billion from $28.4 billion. Management attributed the improvement to better delinquencies, collections and commercial real estate credit trends, partly offset by additional reserves for purchased credit-impaired loans.
• Noninterest expense was $80.3 billion, down from $83.1 billion, but included $3.2 billion of goodwill impairment. Litigation expense and mortgage-related assessments and waivers increased materially.
• At year-end, total assets were $2.13 trillion, loans and leases $926.2 billion, deposits $1.03 trillion, long-term debt $372.3 billion, and shareholders’ equity $230.1 billion. Compared with 2010, assets and loans declined, deposits increased, and long-term debt fell by $76.2 billion.
• Regulatory capital ratios improved: Tier 1 common 9.86% versus 8.60%; Tier 1 capital 12.40% versus 11.24%; total capital 16.75% versus 15.77%; and Tier 1 leverage 7.53% versus 7.21%.
• Global Excess Liquidity Sources were $378 billion at year-end, including $125 billion available to the parent company. Parent-company Time to Required Funding was 29 months against a 21-month target. Cash and cash equivalents increased $11.7 billion during 2011.
• Fourth-quarter 2011 net income was $1.99 billion, or $0.15 per diluted share; revenue was $24.9 billion. These quarter figures do not represent full-year performance.

Material changes versus the prior year

• Net income improved from a loss to a profit, but common earnings remained close to break-even. The comparison is affected by goodwill impairments of $3.2 billion in 2011 and $12.4 billion in 2010.
• Credit quality improved overall: net charge-offs and nonperforming loans, leases and foreclosed properties declined. The allowance fell by $8.1 billion, while the allowance-to-net-charge-offs ratio rose to 1.62 from 1.22.
• Mortgage-related exposures drove a sharp increase in provisions. The representations-and-warranties liability reached $15.9 billion from $5.4 billion; 2011 provision was $15.6 billion.
• The company sold a substantial portion of its China Construction Bank stake, recording a $6.5 billion gain, and sold its Canadian consumer card portfolio. It exchanged preferred and trust preferred securities for common stock and senior notes, generating a $1.2 billion gain on trust preferred exchanges.
• Long-term debt, wholesale borrowing and trading assets were reduced as part of balance-sheet and capital actions. Deposits grew, especially noninterest-bearing deposits.

Outlook, commentary, risks and unusual items

• Management expected net interest income to remain muted in 2012 given the forward yield curve, and expected reductions in the allowance for loan and lease losses to be smaller than in 2011 and 2010.
• Management projected a Tier 1 common ratio of 7.25%–7.50% by year-end 2012 under assumed Basel III phase-in rules. This was a forecast, not a reported year-end result, and depended on regulatory implementation and model approvals.
• Project New BAC aimed to reduce approximately 30,000 positions in Phase 1 and achieve $5 billion of annual cost savings by 2014; management expected more than 20% of Phase 1 savings by the end of 2012. Phase 2 savings had not yet been estimated.
• On February 9, 2012, the company reached mortgage-servicing agreements in principle, subject to definitive documentation and court and regulatory approvals. The Global AIP contemplated about $1.9 billion in upfront cash payments, $7.6 billion of borrower assistance and $1.0 billion of refinancing assistance, with potential additional payments for missed commitments. The FHA AIP contemplated a $500 million payment and a possible additional $500 million. Management said no additional reserves were expected beyond existing accruals based on its understanding of the terms; implementation costs and future lower interest income were possible.
• The $8.5 billion BNY Mellon settlement covering legacy Countrywide securitizations remained subject to final court approval and other conditions. The company recorded $8.6 billion related to the settlement. It estimated up to $5 billion of possible additional non-GSE representations-and-warranties loss over existing accruals; this was described as reasonably possible, not probable. Separate litigation and servicing exposures may not be included in that estimate.
• Mortgage servicing and foreclosure issues remained significant. The company cited a backlog and delays in judicial-state foreclosures, higher default-servicing costs, unresolved mortgage-insurance rescissions and ongoing regulatory and private litigation. The filing also disclosed a separate estimated aggregate range of $0–$3.6 billion of possible litigation and regulatory losses above accrued liabilities for certain matters; it is not a maximum exposure.
• Credit rating downgrades in 2011 increased funding and collateral risks. A further one-notch downgrade could require about $1.6 billion of additional collateral under specified contracts. European sovereign-debt stress, weak housing conditions, unemployment, low interest rates and regulatory changes were additional risks.
• Unusual earnings drivers included the CCB sale gain, debt-securities sale gains, gains from changes in the company’s own credit spreads and derivative valuation adjustments, alongside large mortgage provisions, litigation expense and goodwill impairment. Some gains, particularly own-credit valuation gains, may not indicate recurring operating performance.

Most important facts for investors to verify

• Whether the BNY Mellon settlement received final approval, and how actual repurchase claims and losses compare with the $15.9 billion recorded liability and the additional-loss estimate.
• Whether the February 2012 servicing agreements were finalized and approved, and whether borrower-assistance targets, payments and servicing costs differed from management’s expectations.
• Whether credit improvement and reserve reductions continued without weakening coverage; examine consumer mortgage, home-equity and commercial real-estate performance separately.
• How much of 2011 earnings came from asset sales, own-credit marks and other nonrecurring items, versus recurring banking and customer-business results.
• Whether liquidity remained available by legal entity after credit-rating actions, and whether collateral calls, funding costs or regulatory restrictions changed.
• Progress against Project New BAC savings, capital forecasts and Basel-related requirements; compare reported results with management’s assumptions and targets.