Bank of America Corporation — 2011 Q2 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Bank of America is a diversified U.S. and international financial services company with six business segments. At quarter-end it reported $2.26 trillion in assets and approximately 288,000 full-time equivalent employees. Unless noted, amounts below are U.S. dollars.
Financial performance and condition
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue, net of interest expense, FTE basis | $13.5bn | $29.5bn | $40.6bn | $61.7bn |
| Net income (loss) | $(8.8)bn | $3.1bn | $(6.8)bn | $6.3bn |
| Diluted earnings (loss) per share | $(0.90) | $0.27 | $(0.73) | $0.55 |
| Net interest income, FTE basis | $11.5bn | $13.2bn | $23.9bn | $27.3bn |
| Provision for credit losses | $3.3bn | $8.1bn | $7.1bn | $17.9bn |
| Noninterest expense | $22.9bn | $17.3bn | $43.1bn | $35.0bn |
- GAAP revenue was $13.2bn in Q2 and $40.1bn for the first half; FTE revenue is a non-GAAP measure. FTE net interest yield was 2.50% for Q2 and 2.58% for the first half, down 27 basis points year over year in both periods. A meaningful consolidated efficiency ratio was not reported for the loss-making periods.
- The Q2 loss included a $14.0bn representations-and-warranties provision, largely related to mortgage exposures, and a $2.6bn noncash, nondeductible goodwill impairment in Consumer Real Estate Services (CRES). Mortgage-related litigation and servicing costs also increased. Excluding the impairment, the company reported a non-GAAP Q2 net loss of $6.2bn, or $0.65 per diluted share; this measure still includes the mortgage provision.
- At June 30, total loans and leases were $941.3bn, deposits $1,038.4bn, total shareholders’ equity $222.2bn, and total common shareholders’ equity $205.6bn. Compared with December 31, 2010, deposits grew $28.0bn, while total assets declined slightly and shareholders’ equity fell $6.1bn, mainly reflecting the second-quarter loss.
- Long-term debt was $426.7bn, down from $448.4bn at year-end; commercial paper and other short-term borrowings were $50.6bn, down from $60.0bn. Global Excess Liquidity Sources totaled $402bn, including $119bn at the parent company; bank-subsidiary and broker-dealer liquidity is subject to transfer restrictions. Parent-company Time to Required Funding was 22 months against a 21-month target.
- Regulatory capital ratios at quarter-end were 8.23% Tier 1 common, 11.00% Tier 1 capital, 15.65% total capital, and 6.86% Tier 1 leverage. The Tier 1 common ratio declined from 8.60% at year-end, as capital fell; risk-weighted assets also declined by $63.2bn to $1.39tn.
- Six-month cash flows were $51.2bn provided by operating activities, $15.4bn used in investing, and $24.9bn used in financing. Cash and cash equivalents increased $11.1bn to $119.5bn. Operating cash flow includes substantial bank balance-sheet and trading-related movements and should not be read as a simple measure of recurring earnings cash generation.
- Credit indicators improved overall: first-half net charge-offs fell to $11.7bn from $20.4bn; the annualized charge-off rate declined to 2.53% from 4.21%. Nonperforming loans, leases and foreclosed properties were $30.1bn, down from $35.6bn at year-end. The loan-loss allowance was $37.3bn, or 4.00% of loans, versus $41.9bn, or 4.47%, at year-end.
Material changes and segment results
- Revenue fell sharply year over year as mortgage banking income swung to a $13.2bn loss in Q2, primarily reflecting the representations-and-warranties provision. Lower consumer loan balances and yields also reduced net interest income. Service-charge income declined following overdraft-policy changes; investment banking income rose, and Q2 trading results improved year over year.
- Credit costs decreased substantially, reflecting improved card and commercial credit trends. This was more than offset by the mortgage provision, higher litigation and servicing expenses, and the goodwill impairment.
- CRES reported a Q2 net loss of $14.5bn, compared with a $1.5bn loss a year earlier; its first-half loss was $16.9bn. Global Card Services earned $2.0bn in Q2 and $3.8bn in the first half, benefiting from lower credit provisions despite declining revenue. Global Commercial Banking earned $1.4bn in Q2 and $2.3bn in the first half, helped by lower credit costs. Global Banking & Markets earned $1.6bn in Q2 but $3.7bn for the first half, down year over year for the half amid weaker first-quarter trading. Global Wealth & Investment Management earned $506m in Q2 and $1.0bn in the first half. Deposits earned $430m in Q2 and $785m in the first half. All Other posted a $216m Q2 loss and a $1.4bn first-half loss.
Outlook, risks and unusual items
- The filing provides no firm, quantified consolidated earnings or revenue guidance. Forward-looking statements refer to 2011 expense levels and expectations for higher revenue and expense reductions in 2012, but actual results remain subject to significant uncertainty.
- The June 28 BNY Mellon settlement would pay $8.5bn, plus currently estimated fees and expenses of about $100m, to resolve specified claims involving legacy Countrywide non-GSE mortgage trusts. It requires final court approval and other conditions; objections, appeals, or failure to satisfy conditions could delay or prevent approval. The recorded Q2 provision included $8.6bn attributed to this settlement.
- The representations-and-warranties liability rose to $17.8bn from $5.4bn at year-end. The company estimated possible additional non-GSE losses of up to $5bn above existing accruals; this is not a probable-loss estimate. It said it could not reasonably estimate potential additional GSE losses if GSE claim behavior changes, and the reserves and non-GSE range exclude certain servicing, securities-law, fraud and other claims.
- The Assured Guaranty settlement had a recognized total cost of about $1.6bn, including approximately $1.1bn in cash payments and a loss-sharing reinsurance arrangement with an estimated value of $470m. The agreement resulted in consolidation of $5.2bn of consumer loans and related trust debt.
- Mortgage servicing and foreclosure processes remain material risks. The company reported $716m of mortgage-related assessments and waiver costs in Q2, including $485m of expected GSE compensatory fees, and said such costs were expected to remain elevated. Federal and state investigations and negotiations over possible servicing resolutions continued; penalties, settlement payments and further litigation remain uncertain.
- Home prices remained weak, and management cited foreclosure delays, U.S. economic weakness, European sovereign-debt risks and potential U.S. sovereign-rating effects. A UK tax-rate change was expected to require an approximately $800m Q3 2011 tax charge. New debit-interchange rules were expected to reduce Q4 2011 debit-card revenue by approximately $475m.
- Regulatory changes, including Basel capital rules, the Volcker Rule, derivatives regulation and credit-risk-retention requirements, may increase costs, restrict activities or affect capital and revenue. Management said it expected to meet Basel III capital requirements within regulatory timelines and anticipated being above minimum ratios without raising new equity, but noted uncertainty around final rules.
Important facts for investors to verify
- Whether the BNY Mellon settlement receives final court approval, its final costs and any claims or legal rights it does not cover.
- Whether the $17.8bn representations-and-warranties liability and the stated non-GSE loss range remain adequate as claims, home-price assumptions and GSE behavior evolve.
- Trends in mortgage servicing costs, foreclosure delays, litigation exposure and the value of mortgage servicing rights.
- Whether credit-quality improvements persist, particularly in consumer real estate and commercial real estate, and how reserve releases compare with charge-offs.
- Capital and liquidity resilience under adverse conditions, including rating changes, regulatory rule implementation and the transferability of liquidity held in subsidiaries.
- Progress against the stated 2012 revenue and expense expectations and the realized impact of UK tax changes and debit-interchange rules.