BANK OF AMERICA CORP annual report, FY2010

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Bank of America Corporation — FY 2010 Form 10-K

Reporting period: Fiscal year ended December 31, 2010. This annual filing also reports fourth-quarter results; it is not a standalone quarterly filing. Bank of America is a diversified U.S. and international financial institution operating through six segments: Deposits, Global Card Services, Home Loans & Insurance, Global Commercial Banking, Global Banking & Markets, and Global Wealth & Investment Management.

Financial performance and position

  • Revenue: Total revenue, net of interest expense, was $110.2 billion on a GAAP basis, down from $119.6 billion in 2009. On the company’s fully taxable-equivalent (FTE) basis, revenue was $111.4 billion, down 8%. FTE is a non-GAAP measure.
  • Net interest income and margin: GAAP net interest income was $51.5 billion, compared with $47.1 billion. FTE net interest income was $52.7 billion, up $4.3 billion; FTE net interest yield rose to 2.78% from 2.65%. Management attributed the increase partly to deposit pricing and new consolidation accounting, while core net interest yield declined to 3.46% from 3.69%.
  • Profit: GAAP net loss was $2.2 billion, versus net income of $6.3 billion in 2009. Net loss applicable to common shareholders was $3.6 billion, or $0.37 per diluted share, versus a $2.2 billion loss, or $0.29 per diluted share. Results included $12.4 billion of non-cash, non-tax-deductible goodwill impairment charges. Excluding those charges, a non-GAAP measure, net income was $10.2 billion and diluted earnings per common share were $0.86.
  • Credit costs and asset quality: Provision for credit losses fell to $28.4 billion from $48.6 billion. Net charge-offs were $34.3 billion, or 3.60% of average loans and leases, versus $33.7 billion, or 3.58%. The allowance for loan and lease losses was $41.9 billion, or 4.47% of loans and leases, compared with $37.2 billion, or 4.16%. Nonperforming loans, leases and foreclosed properties declined to $32.7 billion from $35.7 billion.
  • Expenses and efficiency: Noninterest expense increased to $83.1 billion from $66.7 billion, primarily due to goodwill impairment. Excluding impairment, expense was $70.7 billion, up about $4.0 billion, including higher personnel and litigation costs. The FTE efficiency ratio was 74.61%, versus 55.16%; excluding goodwill impairment it was 63.48%.
  • Cash flow: Operating activities provided $82.6 billion, compared with $129.7 billion in 2009. Investing activities used $30.3 billion and financing activities used $65.4 billion. Cash and cash equivalents declined $12.9 billion to $108.4 billion.
  • Balance sheet, debt and liquidity: Total assets were $2.265 trillion, loans and leases $940.4 billion, deposits $1.010 trillion, and long-term debt $448.4 billion at year-end. The debt balance includes debt of newly consolidated entities. Global excess liquidity sources rose to $336 billion from $214 billion; parent-company sources were $121 billion. Parent-company “Time to Required Funding” was 24 months, above the 21-month target.
  • Capital: Year-end Tier 1 common, Tier 1, total capital and Tier 1 leverage ratios were 8.60%, 11.24%, 15.77% and 7.21%, respectively, all above 2009 levels. Management said it expected to maintain a Tier 1 common ratio above 8% as regulatory changes are implemented, without issuing new equity.

Material changes versus 2009

  • Revenue declined as noninterest income fell $13.8 billion, including lower mortgage banking, equity investment, trading and service-charge income. Mortgage banking income included a $6.8 billion representations-and-warranties provision, compared with $1.9 billion in 2009.
  • Credit provision decreased $20.1 billion, reflecting improving trends in many consumer and commercial portfolios; however, net charge-offs remained elevated. Commercial real estate credit indicators improved overall but remained stressed.
  • The $12.4 billion impairment comprised $10.4 billion in Global Card Services and $2.0 billion in Home Loans & Insurance. Global Card Services’ annual net loss was $6.6 billion; Home Loans & Insurance’ net loss was $8.9 billion. The impairments did not affect reported regulatory capital ratios.
  • New consolidation guidance effective January 1, 2010 added $100.4 billion of assets and $106.7 billion of liabilities and reduced opening retained earnings by $6.2 billion, net of tax. It brought credit-card trusts and other entities onto the balance sheet, affecting comparability with 2009.
  • Segment reporting was realigned in 2010, with prior-period segment results reclassified. Global Commercial Banking returned to profitability, while Global Banking & Markets and Global Wealth & Investment Management reported lower net income than in 2009.

Outlook, management commentary and key risks

  • Revenue and regulation: The company estimated that debit interchange limits would reduce annual revenue by about $2.0 billion beginning in the third quarter of 2011, based on 2010 volumes. Final rules and mitigation actions remained uncertain; the filing warns of possible additional Global Card Services goodwill impairment. Management also expected further service-charge reductions in 2011 from Regulation E and overdraft-policy changes.
  • Capital and funding: Dodd-Frank and proposed Basel rules could increase capital, liquidity, compliance and funding costs, constrain activities and reduce revenue. Trust preferred securities totaling $19.9 billion were expected to lose Tier 1 eligibility beginning in 2013, subject to phase-in and rulemaking. Ratings outlooks were negative or on negative watch; downgrades could increase funding costs, reduce market access and trigger collateral or termination requirements.
  • Mortgage exposure and foreclosure matters: On December 31, 2010, the company paid $2.8 billion to resolve certain legacy Countrywide claims with Fannie Mae and Freddie Mac and recorded a related $3.0 billion fourth-quarter provision, including adjustments for other GSE loans. The agreements do not resolve all GSE, servicing or private-label claims. The recorded representations-and-warranties liability was $5.4 billion; unresolved claims were about $10.7 billion. The company estimated a reasonably possible additional loss of $7–$10 billion for non-GSE sales over existing accruals; this was not deemed probable and depends on assumptions subject to change.
  • Foreclosure sales were temporarily suspended in 2010 while processes were reviewed and controls enhanced. State and federal investigations, litigation, servicing obligations and delays could increase legal and servicing costs, nonperforming loans, advances and property-related losses. The filing also describes a private-label investor letter covering 225 securitizations and other unresolved mortgage matters.
  • Other contingencies: The company recorded a $630 million liability for U.K. payment protection insurance claims and said additional liability could be required. Litigation-related expense was $2.6 billion in 2010. For a limited set of matters, the estimated aggregate possible loss was $145 million to $1.5 billion above accrued liabilities, but this is not a maximum exposure; other matters could not be estimated.
  • Guidance and distributions: No consolidated earnings forecast was provided. Management intended to modestly increase the common dividend in the second half of 2011, subject to Federal Reserve approval. The common dividend remained $0.01 per share quarterly in 2010.
  • Management described a gradual economic recovery but cited weak housing and labor markets, distressed mortgages, commercial real estate stress, European sovereign-debt concerns and uncertainty in financial regulation. These conditions could adversely affect credit quality, asset values, earnings and liquidity.

Most important facts for investors to verify

  • Reconcile the $2.2 billion GAAP net loss with the $10.2 billion net income figure excluding goodwill impairment; confirm the non-GAAP adjustments and common-shareholder impact.
  • Track final debit interchange rules, actual revenue effects, mitigation progress and any further impairment in Global Card Services.
  • Assess the adequacy of the $5.4 billion representations-and-warranties liability against the $7–$10 billion estimated possible additional non-GSE loss and outstanding claims.
  • Monitor foreclosure investigations, private-label servicing and investor claims, PPI exposure, and litigation costs or settlements after year-end.
  • Evaluate credit trends and allowance coverage, especially in residential and home-equity lending, credit cards, purchased credit-impaired loans and commercial real estate.
  • Check regulatory capital and liquidity under final Dodd-Frank and Basel rules, and the effects of credit-rating changes and legal-entity restrictions on funds available to the parent company.
  • Account for the consolidation-guidance change when comparing 2010 with 2009, particularly for loans, credit-card results, debt and capital measures.

The filing reports that management and the independent auditor concluded internal control over financial reporting was effective at December 31, 2010; the auditor issued an unqualified opinion on the financial statements.