Bank of America Corporation — 2009 Q2 Form 10-Q
Reporting period: Three and six months ended June 30, 2009. The filing was signed August 7, 2009. Bank of America reported six business segments and operated across the United States and more than 40 foreign countries. Results include Merrill Lynch from its January 1, 2009 acquisition and Countrywide from July 1, 2008, so comparisons with 2008 are not like-for-like.
Financial performance and position
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Revenue, net of interest expense | $32.8bn | $20.4bn | $68.5bn | $37.5bn |
| Net interest income | $11.6bn | $10.6bn | $24.1bn | $20.6bn |
| Provision for credit losses | $13.4bn | $5.8bn | $26.8bn | $11.8bn |
| Noninterest expense | $17.0bn | $9.7bn | $34.0bn | $18.9bn |
| Income before tax | $2.4bn | $4.9bn | $7.8bn | $6.7bn |
| Net income | $3.2bn | $3.4bn | $7.5bn | $4.6bn |
| Diluted EPS | $0.33 | $0.72 | $0.75 | $0.95 |
- Q2 net income available to common shareholders was $2.4bn after $805m of preferred dividends. Six-month common income was $5.2bn after $2.2bn of preferred dividends. Q2 EPS benefited by $576m from preferred-stock exchanges, recorded as an increase to retained earnings and income available to common shareholders.
- Net interest income increased, but the FTE net interest yield declined to 2.64% from 2.92% in Q2 2008. Management cited lower-yielding acquired assets and ALM portfolio deleveraging, partly offset by lower funding costs and the rate environment. The FTE efficiency ratio was 51.44%, versus 46.60%.
- At June 30, total assets were $2.254tn, up from $1.818tn at year-end 2008; loans and leases were $942.2bn, deposits $970.7bn, long-term debt $447.2bn, and shareholders’ equity $255.2bn. Cash and cash equivalents were $140.4bn, versus $32.9bn at year-end.
- For the first six months, operating cash flow was $65.6bn, investing cash flow was positive $183.1bn, and financing cash flow was negative $141.1bn; cash increased $107.5bn. These flows include substantial trading/derivative movements and acquisition-related cash, so they should not be read as recurring free cash flow.
- Regulatory capital at June 30: Tier 1 common ratio 6.90%, Tier 1 ratio 11.93%, total capital ratio 15.99%, and Tier 1 leverage ratio 8.21%. The corporation said it exceeded the $33.9bn SCAP capital buffer requirement, reporting approximately $39.7bn of common-capital improvement.
Material changes versus comparable periods
- Reported revenue rose sharply, but included major gains and acquired businesses. Q2 revenue included a $5.3bn pretax gain on the sale of remaining initial China Construction Bank shares and a $3.8bn pretax gain from contributing merchant processing to a joint venture. Six-month CCB sale gains were $7.3bn pretax.
- Credit costs deteriorated substantially: Q2 provision rose to $13.4bn from $5.8bn, and six-month provision to $26.8bn from $11.8bn. Net charge-offs were $8.7bn in Q2 versus $3.6bn; the annualized ratio was 3.64% versus 1.67%. Nonperforming loans and leases were $29.2bn at June 30, compared with $16.4bn at December 31, 2008. The allowance for loan and lease losses was $33.8bn, up from $23.1bn.
- Noninterest expense increased with Merrill Lynch and Countrywide, integration costs, incentive compensation and a $760m FDIC special assessment. Merger and restructuring charges were $829m in Q2 and $1.6bn in the first half.
- Q2 segment results were mixed: Global Card Services lost $1.6bn, Home Loans & Insurance lost $725m, and Deposits earned $505m. Global Banking earned $2.5bn, Global Markets $1.4bn, GWIM $441m, and All Other $757m. Merchant-sale and CCB gains materially affected reported results.
- Common shares increased substantially through the Merrill Lynch acquisition, preferred conversions and a 1.25bn-share at-the-market offering that raised about $13.5bn. Average common shares outstanding in Q2 were 7.24bn versus 4.44bn a year earlier, contributing to lower per-share earnings despite higher six-month net income.
Outlook, commentary, risks and unusual items
- Management said the weak economy, unemployment, housing-market declines and lower consumer and business spending were driving credit deterioration. It expected economic weakness to continue affecting markets and results through the remainder of 2009; the impact depended on the duration and severity of conditions. The filing provides no quantified earnings guidance.
- Management expected the effective tax rate to move toward statutory rates for the rest of 2009, depending on earnings and geographic mix. Q2 tax benefit included a $750m release of a valuation allowance on an acquired capital-loss carryforward.
- New SFAS 166/167 rules, effective January 1, 2010, were expected to bring certain securitization trusts and other entities onto the balance sheet. The company estimated affected entities held about $150bn of assets at June 30, including about $115bn related to credit-card securitizations and commercial-paper conduits; adoption was expected to increase reported loans, securities, borrowings and credit-loss provision. Final effects were still being evaluated.
- The CARD Act’s principal provisions were due to take effect in February 2010; management was assessing the financial impact. The FDIC had also indicated a possible additional special assessment in Q4 2009, with amount and occurrence uncertain.
- Liquidity indicators included 33 months of “Time to Required Funding” at the parent company and a 105% domestic loan-to-deposit ratio. Management reported elevated cash balances and improved market access, but noted dependence on credit ratings and government support. A one-level downgrade could require about $1.8bn of additional collateral or termination payments on certain derivatives and trading agreements.
- Contingencies include ongoing litigation and regulatory inquiries. Auction-rate-securities claims sought more than $2bn in damages. The SEC had filed a complaint alleging proxy disclosure deficiencies concerning Merrill Lynch employee incentive compensation; the company consented to a proposed $33m civil penalty, subject to court approval, while the SEC inquiry continued. A proposed U.S. government loss-protection arrangement related to Merrill Lynch losses remained under discussion, but the company said it did not intend to enter a binding agreement as of filing.
- Other notable exposures include $2.65tn notional of written credit derivatives (not a direct measure of expected loss), substantial monoline counterparty exposure, mortgage representations-and-warranties obligations, and legal and tax contingencies. The filing states that estimates and fair values, especially for illiquid or Level 3 assets, involve judgment and may change.
Important facts for investors to verify
- How much of 2009 revenue and earnings came from CCB sales, the merchant-services gain, preferred exchanges, tax benefits, and acquisition-related accounting, rather than recurring operations?
- Whether credit losses, delinquencies, nonperforming assets and reserve needs continued to rise after June 30, particularly in cards, residential mortgages, home equity, commercial real estate and acquired Countrywide portfolios.
- Whether Merrill Lynch integration costs, earnings contributions and acquired asset valuations developed as expected, and whether the SCAP capital buffer and reported capital ratios remained adequate.
- The eventual balance-sheet and capital impact of SFAS 166/167, including consolidation of securitization entities, and the effect of the CARD Act and potential additional FDIC assessments.
- Developments in the proposed government loss-sharing arrangement, SEC and other litigation or regulatory matters, and the collectability of tax assets and contingent recoveries.