Business context and reporting period
Bank of America Corporation’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2016. The bank holding company reported through Consumer Banking, Global Wealth & Investment Management (GWIM), Global Banking and Global Markets; residual activities are in All Other. Period-end assets were $2.20 trillion.
Financial performance and condition
Amounts are in U.S. dollars; income-statement figures are for the three and nine months ended September 30, respectively, unless noted.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue, net of interest expense | $21.6B | $21.0B | $63.7B | $63.4B |
| Net interest income | $10.2B | $9.9B | $30.8B | $29.3B |
| Provision for credit losses | $850M | $806M | $2.8B | $2.4B |
| Noninterest expense | $13.5B | $13.9B | $41.8B | $43.7B |
| Net income | $5.0B | $4.6B | $13.2B | $12.6B |
| Diluted EPS | $0.41 | $0.38 | $1.10 | $1.03 |
- Q3 return on average assets was 0.90%; return on average common equity was 7.27%. The reported efficiency ratio was 62.31% (66.40% a year earlier). FTE net interest yield was 2.23%, up 4 basis points.
- At September 30, loans and leases were $905.0B, deposits $1,232.9B, long-term debt $225.1B, total assets $2,195.3B and shareholders’ equity $270.1B. Long-term debt was down $11.6B from year-end 2015.
- Nine-month cash flow: operating activities provided $26.7B; investing activities used $63.0B; financing activities provided $17.8B. Cash and cash equivalents fell $15.9B to $143.4B.
- Regulatory capital under Basel 3 Advanced-Transition: CET1 11.0%, Tier 1 12.4%, total capital 14.2%, and Tier 1 leverage 9.1%. The Corporation said it met the current “well-capitalized” definition.
- Global Liquidity Sources were $522B; parent company and NB Holdings time-to-required funding was 38 months. Management estimated consolidated liquidity coverage was above the 2017 LCR requirement.
Material changes versus comparable periods
- Q3 revenue rose about 3% and net income about 7% year over year, as higher revenue and lower expenses more than offset a modestly higher credit provision. For the first nine months, revenue was nearly flat while net income rose about 5%; lower expenses and higher revenue were partly offset by higher credit provisions and taxes.
- Net interest income increased, supported by commercial loan growth, higher short-term rates and increased debt securities balances. Q3 noninterest income improved, notably from stronger trading results; year-to-date noninterest income declined, including lower investment and brokerage, investment banking and mortgage banking income.
- Noninterest expense decreased 3% in Q3 and 4% year to date, reflecting expense management and lower personnel costs. Provision for credit losses increased 20% year to date, including increased energy-sector reserves.
- Credit indicators were mixed: total nonperforming loans, leases and foreclosed properties declined to $8.7B from $10.3B at year-end 2015, while nonperforming commercial loans and leases increased to $2.0B from $1.2B, primarily in energy and metals and mining. Net charge-offs were $888M in Q3, down from $932M.
Outlook, commentary, risks and unusual items
- No specific consolidated full-year revenue or earnings guidance is provided in the supplied filing text. Management described a mixed economic environment, low rates and continued uncertainty after the U.K. EU-exit referendum; the Federal Reserve did not raise rates during the quarter.
- The approved 2016 CCAR plan authorized $5.0B of common-stock repurchases over four quarters beginning in Q3, plus repurchases to offset equity-award dilution, and raised the quarterly dividend from $0.05 to $0.075 per share. Q3 repurchases were $1.4B. Future distributions remain subject to capital, liquidity, performance and market conditions.
- A $350M tax charge followed enactment of U.K. tax-law changes and remeasurement of U.K. deferred tax assets. Q3 All Other results also included a net $282M increase in MSR fair value from revised valuation assumptions.
- Effective July 1, 2016, the Corporation changed the accounting method for premiums and discounts on certain debt securities; prior periods presented were restated. The filing says the impact on regulatory capital metrics was insignificant, but previously filed capital metrics were not restated.
- Energy risk increased: energy allowance for credit losses reached $1.0B, and higher-risk exploration/production and oil-field-services exposure had 56% of utilized exposure criticized. Sustained low oil prices could cause further deterioration.
- Legacy mortgage matters remain material. Unresolved representation-and-warranty claims totaled $18.3B notional; the recorded liability was $2.8B, and possible loss was estimated at up to $2.0B above accruals. The filing separately estimated aggregate possible litigation losses of $0–$1.1B above accrued liabilities for matters where a range could be estimated; some matters could not be quantified.
- Other exposures include pending litigation and regulatory matters, U.K. payment-protection-insurance claims (reserve $165M; additional expense cannot be reasonably estimated), FDIC surcharge costs, interest-rate and market risk, and potential effects of regulatory capital and liquidity rules. Management cautions actual outcomes may differ materially from estimates.
Most important facts for investors to verify
- Whether net interest income and expense reductions can persist, and how results change with rates, deposit pricing and customer behavior.
- Energy-sector criticized exposures, reserves and commercial nonperforming loans, including subsequent oil-price and borrower developments.
- Actual costs and outcomes of representation-and-warranty claims, litigation, PPI claims and regulatory proceedings versus recorded reserves and disclosed possible-loss ranges.
- Capital and liquidity after dividends, repurchases, resolution-planning transfers and any future regulatory requirements.
- The sustainability of earnings after the $350M U.K. tax charge and the favorable MSR valuation revision, and the effect of the debt-securities accounting-method change on comparisons.