Business context and reporting period
Bank of America Corporation’s unaudited Form 10-Q covers the three months ended March 31, 2010, compared with the first quarter of 2009. The diversified U.S. and international financial services company reported through six business segments. Management said economic conditions and credit quality showed signs of improvement, but unemployment, housing-market stress and elevated credit losses remained concerns.
Financial results and key metrics
| Metric | Q1 2010 | Q1 2009 or comparison |
|---|---|---|
| Revenue, net of interest expense, FTE | $32.3 billion | $36.1 billion |
| Net interest income, GAAP | $13.7 billion | $12.5 billion |
| Net interest yield, FTE | 2.93% | 2.70% |
| Net income | $3.2 billion | $4.2 billion |
| Net income applicable to common shareholders | $2.8 billion | $2.8 billion |
| Diluted EPS | $0.28 | $0.44 |
| Provision for credit losses | $9.8 billion | $13.4 billion |
| Net charge-offs | $10.8 billion; 4.44% of average loans | $6.9 billion; 2.85% |
| Operating cash flow | $23.9 billion | $54.8 billion |
| Total assets, March 31 | $2.34 trillion | $2.32 trillion at March 31, 2009 |
| Total deposits, March 31 | $976.1 billion | $953.5 billion at March 31, 2009 |
| Long-term debt, March 31 | $511.7 billion | $438.5 billion at December 31, 2009 |
| Shareholders’ equity, March 31 | $229.8 billion | $231.4 billion at December 31, 2009 |
| Capital ratios, March 31 | Tier 1 common 7.60%; Tier 1 10.23%; total capital 14.47%; Tier 1 leverage 6.46% | Tier 1 common 7.81% at December 31, 2009 |
Cash and cash equivalents rose to $144.8 billion from $121.3 billion at year-end. Net cash provided by investing activities was $5.8 billion; financing activities used $6.2 billion. The filing reports a 55.05% FTE efficiency ratio, versus 47.12% a year earlier, and return on average assets of 0.51%, versus 0.68%.
Material changes versus the prior comparable period
- Revenue fell 11%, largely reflecting weaker mortgage banking income, card income, equity investment income and other income. Mortgage banking income declined to $1.5 billion from $3.3 billion.
- Net interest income increased, supported in part by lower deposit costs and the first-quarter adoption of new consolidation rules. Management estimated the accounting change added about $2.0 billion to year-over-year net interest income.
- Net income declined, while common-shareholder income was nearly flat. Diluted EPS fell partly as average diluted shares increased to 10.0 billion from 6.4 billion, following share issuance and conversion of Common Equivalent Securities.
- Credit-loss provision declined as card and commercial reserve builds eased, but net charge-offs rose. Management attributed part of the charge-off increase to newly consolidated securitized loans and required write-downs on modified real estate loans.
- The allowance for loan and lease losses was $46.8 billion at quarter-end. Nonperforming loans and leases were $33.6 billion, little changed from year-end; nonperforming loans, leases and foreclosed properties totaled $35.9 billion, up from $25.6 billion a year earlier.
- Effective January 1, new consolidation guidance added $100.4 billion of assets and $106.7 billion of liabilities, including securitized loans and $90.3 billion of VIE long-term debt at March 31. Adoption also reduced opening retained earnings by $6.2 billion after tax; it did not affect operating results on the adoption date.
Outlook, management commentary, risks and unusual items
- Management described the recovery as uneven and fragile. Elevated unemployment, household debt, housing stress and customer deleveraging could continue to weigh on loan growth, revenues and credit performance. No specific consolidated earnings guidance was provided.
- The CARD Act and overdraft-rule changes were expected to reduce 2010 revenue. Management estimated after-tax impacts of approximately $900 million for the CARD Act and approximately $1 billion for overdraft policy changes and Regulation E.
- A U.K. bank bonus payroll tax was expected to add approximately $465 million to compensation expense in the second quarter of 2010. The filing also discusses proposed financial-sector taxes and regulatory reforms whose outcomes and effects were uncertain.
- Global excess liquidity sources were $269 billion at March 31, including $98 billion at the parent, $142 billion at bank subsidiaries and $29 billion at broker-dealers. Parent-company time to required funding was 24 months, above the 21-month minimum target. Liquidity held at regulated subsidiaries may be restricted from transfer to the parent or other entities.
- Mortgage repurchase and representation-and-warranty exposure remains significant. The recorded liability was $3.3 billion; first-quarter expense was $526 million. Unresolved monoline repurchase requests involved about $3.0 billion of unpaid principal, and the company said potential losses on certain disputed or unasserted claims could not be reasonably estimated.
- Litigation and regulatory matters include mortgage-backed securities, Countrywide-related claims and other disputes. Management said some matters were not both probable and estimable and therefore had no specific reserve; it could not predict ultimate outcomes or losses. Litigation-related expenses, excluding external legal-provider fees, were $558 million in Q1 2010.
- Other notable items include $601 million of net impairment losses on available-for-sale debt securities, $521 million of merger and restructuring charges, and a $331 million loss on sale of a $2.7 billion discretionary equity portfolio. The Columbia asset-management sale closed April 30, 2010; management expected no material financial effect.
Important facts for investors to verify
- How much of the reported change in assets, loans, debt, credit losses and capital reflects the new VIE consolidation rules rather than underlying business trends.
- Whether credit quality and charge-offs improve, particularly in credit cards, residential mortgage, home equity and commercial real estate; also monitor allowance coverage and nonperforming assets.
- The eventual cost of mortgage repurchase claims, litigation and regulatory matters, including exposures for which the company has not recorded a liability.
- Whether liquidity remains accessible across the parent, bank subsidiaries and broker-dealers, and how funding costs or ratings changes could affect it.
- The realized earnings impact of the CARD Act, overdraft changes, the U.K. payroll tax and other regulatory developments, as well as the company’s ability to offset those costs.