Business context and reporting period
Bank of America Corporation’s unaudited Form 10-Q covers the three months ended March 31, 2013; comparisons are primarily with Q1 2012, and balance-sheet changes with December 31, 2012. The company reported approximately $2.2 trillion in assets and operated through five segments: Consumer & Business Banking, Consumer Real Estate Services, Global Banking, Global Markets, and Global Wealth & Investment Management.
Financial results and key metrics
- Earnings and revenue: GAAP revenue, net of interest expense, was $23.2 billion, up from $22.3 billion. Net income was $1.48 billion, or $0.10 per diluted share, versus $653 million, or $0.03, a year earlier. Net income applicable to common shareholders was $1.11 billion. Pre-tax income was $1.98 billion.
- Net interest income and margins: GAAP net interest income was $10.66 billion, down $182 million year over year; fully taxable-equivalent (FTE) net interest income was $10.88 billion, down $178 million. FTE net interest yield was 2.43%, down 8 basis points. The FTE efficiency ratio was 83.31%, versus 85.13%.
- Credit costs and asset quality: Provision for credit losses was $1.71 billion, down $705 million. Net charge-offs were $2.52 billion, or 1.14% of average loans, versus $4.06 billion, or 1.80%. The period-end allowance for loan and lease losses was $22.44 billion, 2.49% of loans; nonperforming loans, leases and foreclosed properties were $22.84 billion.
- Balance sheet, debt and liquidity: Total assets were $2.175 trillion, down $35.2 billion from year-end; loans were $911.6 billion and deposits $1.095 trillion. Long-term debt was $279.6 billion, up from $275.6 billion. Global Excess Liquidity Sources were $372 billion. Parent-company Time to Required Funding was 30 months, or 29 months including the MBIA settlement, above the 21-month minimum target.
- Cash flow: Operating activities provided $26.5 billion; investing activities provided $1.7 billion; financing activities used $36.6 billion. Cash and cash equivalents declined $9.8 billion to $101.0 billion. These cash-flow totals reflect substantial trading, securities and funding movements.
- Capital: The Basel 1–2013 Rules Tier 1 common ratio was 10.49%, versus 11.06% at year-end; Tier 1 capital was 12.22% and total capital 15.50%. The new market-risk rules materially increased risk-weighted assets, so the period-end comparison is not fully like-for-like.
Material changes versus the prior comparable period
Earnings improved largely because Q1 2012 included much larger negative fair-value adjustments on structured liabilities and derivative DVA losses. These comparisons were partly offset by $1.2 billion of prior-year gains from debt repurchases and trust-preferred exchanges, lower mortgage banking income, and lower securities-sale gains. Excluding DVA, sales and trading revenue fell to $4.15 billion from $5.19 billion, mainly reflecting weaker fixed-income, currencies and commodities results.
Credit quality improved broadly, reducing provision expense and charge-offs. The allowance also declined from $24.18 billion at year-end, including $839 million of purchased credit-impaired loan write-offs. At segment level, Consumer Real Estate Services’ net loss widened to $2.16 billion from $1.14 billion, mainly on litigation and default-related servicing expense and lower mortgage banking income. Global Markets net income rose to $1.17 billion from $828 million, while Global Wealth & Investment Management rose to $720 million from $550 million. Consumer & Business Banking and Global Banking net income declined.
Outlook, management commentary, risks and unusual items
- Costs and credit outlook: Management expected Project New BAC savings to reach $1.5 billion quarterly by Q4 2013 and $2 billion quarterly, or $8 billion annualized, by mid-2015. Absent unexpected economic deterioration, it expected further allowance reductions near term, but at a slower pace than in 2012.
- Mortgage servicing: Agreements to sell servicing rights on loans with approximately $327 billion of unpaid principal were expected to transfer in stages during 2013, subject to approvals. Completed sales were expected to reduce revenue by about $150 million per quarter versus Q4 2012. Management anticipated default-related servicing costs would decline during 2013, while warning that foreclosure delays could disrupt that decline and increase costs.
- Capital actions and regulation: The Federal Reserve did not object to the 2013 capital plan, which included up to $5 billion of common-stock repurchases over four quarters, approximately $5.5 billion of preferred-stock redemptions, and continuation of the $0.01 quarterly common dividend. Basel 3 rules and model approvals remained uncertain; management estimated a fully phased-in Basel 3 Advanced Approach Tier 1 common ratio of 9.52%, assuming regulatory approval of internal models. Proposed U.K. tax-rate cuts could trigger an estimated $1.2 billion deferred-tax charge upon enactment.
- Major settlements: The May 7, 2013 MBIA settlement, a subsequent event relating to quarter-end conditions, resulted in approximately $1.6 billion of Q1 pre-tax charges: about $1.3 billion in litigation expense and a $300 million receivable write-down. The settlement provides for $1.565 billion cash, transfer of approximately $95 million of MBIA notes, a $500 million secured credit facility, and warrants; it also resolves claims and terminates CDS with $7.4 billion notional value. The January FNMA settlement included a $3.6 billion cash payment and repurchase of loans for $6.6 billion; the company said it was fully reserved at year-end. A separate $500 million Countrywide RMBS class-action settlement remained subject to court approval.
- Contingencies and risks: Unresolved representation-and-warranty claims were $17.1 billion at March 31; management expected private-label claims to keep increasing. The estimated possible loss on these exposures was up to $4 billion over recorded accruals, excluding monoline claims. Separately, the estimated aggregate range of possible loss for certain litigation and regulatory matters was $0–$2.6 billion over accrued liabilities; other matters could not be reasonably estimated and could be material. Risks also include mortgage servicing and foreclosure claims, mortgage-insurance recoveries, credit-rating downgrades and collateral calls, European sovereign stress, market volatility, and evolving U.S. and U.K. regulation.
Most important facts for investors to verify
- Whether the MBIA and Countrywide settlements receive all required approvals and their final cash, credit-facility and earnings effects.
- Whether private-label repurchase claims, mortgage-insurance disputes and broader litigation losses exceed recorded reserves or disclosed possible-loss estimates.
- Progress and economics of the $327 billion mortgage-servicing-rights transfers, including approvals and the projected quarterly revenue reduction.
- Whether improving credit trends persist, supporting allowance releases without under-reserving; assess purchased-credit-impaired write-offs separately.
- Capital-ratio comparability under changing rules, Basel 3 model approval and execution of planned repurchases and preferred redemptions.
- Liquidity availability by legal entity, particularly under a ratings downgrade, and the impact of settlement payments and other contingent cash needs.