Bank of America Reports Third-quarter 2015 Net Income of $4.5 Billion, or $0.37 per Diluted Share

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The FINANCIAL — Bank of America Corporation on October 14 reported net income of $4.5 billion, or $0.37 per diluted share, for the third quarter of 2015, compared to a net loss of $232 million, or $0.04 per share, in the year-ago period.

“We saw solid results this quarter by continuing to execute our long-term strategy,” said Chief Executive Officer Brian Moynihan. “The key drivers of our business — deposit taking and lending to both our consumer and corporate clients — moved in the right direction this quarter and our trading results on behalf of clients remained fairly stable in challenging capital markets conditions. Our balanced approach to serving customers and clients is on track as the economy continues to move forward.”

“Our results this quarter reflect our ongoing efforts to improve operating leverage while continuing to invest in our business,” said Chief Financial Officer Paul Donofrio. “We built capital and liquidity to record levels and grew total loans for the second consecutive quarter while continuing to operate within our risk framework.”

Revenue, net of interest expense, on an FTE basis, was $20.9 billion(G), down $521 million from the third quarter of 2014. This was largely driven by higher negative market-related adjustments on the company’s debt securities portfolio due to lower long-term interest rates, partially offset by higher positive net debit valuation adjustments (DVA), compared to the year-ago quarter. The current quarter included $597 million in negative market-related adjustments and $313 million in positive net DVA, according to Bank of America.

Net interest income, on an FTE basis, was $9.7 billion in the third quarter of 2015, down 7 percent, or $702 million, from the year-ago quarter. Excluding the impact of market-related adjustments, net interest income was $10.3 billion in the third quarter of 2015, compared to $10.0 billion in the prior quarter and $10.5 billion in the year-ago quarter(G). The decline from the third quarter of 2014 was driven by lower consumer loan balances and lower yields, partially offset by commercial loan growth and lower long-term debt balances.

Noninterest income was up 2 percent, or $181 million, from the year-ago quarter to $11.2 billion. Results for the most recent quarter reflected year-over-year increases in mortgage banking and card income, higher asset management fees and other income, partially offset by lower capital markets revenue and lower equity investment income.

The provision for credit losses increased $170 million from the third quarter of 2014 to $806 million. Net charge-offs were $932 million in the third quarter of 2015, compared to $1.1 billion in the second quarter of 2015 and $1.0 billion in the third quarter of 2014. The net charge-off ratio improved to 0.42 percent in the third quarter of 2015 from 0.46 percent in the year-ago quarter. The decline in net charge-offs was driven primarily by an improvement in consumer portfolio trends, partially offset by higher commercial charge-offs. The net reserve release was $126 million in the third quarter of 2015, compared to a net reserve release of $407 million in the third quarter of 2014.

Noninterest expense declined $6.3 billion, or 31 percent, from the third quarter of 2014 to $13.8 billion. Excluding litigation expense of $231 million in the third quarter of 2015 and $6.0 billion in the year-ago quarter, noninterest expense decreased 4 percent from the year-ago quarter to $13.6 billion, reflecting lower Legacy Assets and Servicing (LAS) expense(A). Continued cost management efforts allowed the company to continue to invest in growth opportunities while keeping expenses relatively flat from the prior quarter.

The effective tax rate for the third quarter of 2015 was 26 percent, which included benefits related to the restructuring of certain non-U.S. subsidiaries.

Business Segment Results

The company reports results through five business segments: Consumer Banking, Global Wealth and Investment Management (GWIM), Global Banking, Global Markets, and Legacy Assets and Servicing (LAS), with the remaining operations recorded in All Other.

Business Highlights

Average deposit balances increased $34.3 billion, or 7 percent, from the year-ago quarter to $548.9 billion.

The company originated $13.7 billion in first-lien residential mortgage loans and $3.1 billion in home equity loans in the third quarter of 2015, compared to $11.7 billion and $3.2 billion, respectively, in the year-ago quarter.

Client brokerage assets increased $8.7 billion, or 8 percent, from the year-ago quarter to $117.2 billion, driven primarily by strong account flows, partially offset by lower market valuations.

The company issued 1.3 million new consumer credit cards in the third quarter of 2015, up from 1.2 million cards issued in the year-ago quarter.

Financial Overview

Consumer Banking reported net income of $1.8 billion, up 5 percent from the year-ago quarter. The business saw increased customer activity during the quarter with year-over-year increases in deposits, mortgage originations, credit card issuance and brokerage assets. In addition, the number of mobile banking users increased 14 percent from the year-ago quarter to 18.4 million users.

Revenue was up 1 percent from the third quarter of 2014 to $7.8 billion, as higher noninterest income was largely offset by lower net interest income. Net interest income declined as the benefit from higher deposits was more than offset by the impact of the company’s allocation of asset liability management (ALM) activities and lower card yields. Noninterest income was up 6 percent to $2.8 billion, driven by gains on divestitures and higher card income, partially offset by lower service charges.

The provision for credit losses decreased $20 million from the year-ago quarter to $648 million, driven by continued improvement in credit quality, primarily related to the small business and credit card portfolios.

Noninterest expense decreased 1 percent from the third quarter of 2014 to $4.4 billion, as the company continued to optimize its delivery network and invest some of the savings from these initiatives back into the business by adding sales specialists. Over the last 12 months, the company has added more than 300 mortgage loan officers, financial solutions advisors and small business bankers to help serve customers and deepen relationships.

Driven by the continued growth in mobile banking and other self-service customer touchpoints, the company closed or divested 244 locations and added 38 locations since the third quarter of 2014, resulting in a total of 4,741 financial centers at the end of the third quarter of 2015.

Return on average allocated capital was 24 percent in the third quarter of 2015, compared to 22 percent in the third quarter of 2014.

Business Highlights

The number of wealth advisors increased by 998 advisors from the year-ago quarter to 18,037, due to continued investment within the Advisor Development program, improved competitive recruiting and near historically low advisor attrition levels. This increase includes 174 advisors in Consumer Banking as the company continues to expand its specialist network to broaden and deepen client relationships.

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Third-quarter 2015 long-term assets under management (AUM) flows of $4.4 billion were the 25th consecutive quarter of positive flows.

Average deposit balances increased 2 percent, or $4.6 billion, from the year-ago quarter to $244.0 billion, and average loan balances increased 10 percent from the year-ago quarter to $133.2 billion, marking the 22nd consecutive quarter of loan balance growth.

Asset management fees increased 2 percent from the third quarter of 2014 to $2.1 billion.

Financial Overview

Global Wealth and Investment Management reported net income of $656 million, compared to $812 million in the third quarter of 2014. Revenue was down $198 million to $4.5 billion, as higher asset management fees were more than offset by lower transactional revenue and the impact of the company’s allocation of ALM activities on net interest income. This is the continuation of a trend in transactional revenue as clients continue to migrate from brokerage to managed relationships, compounded by lower markets and muted new issue activity.

The third-quarter 2015 pretax margin was 23 percent, down from 27 percent in the year-ago quarter.

Noninterest expense increased slightly from the year-ago quarter to $3.4 billion, as litigation-related costs were higher and the number of wealth advisors grew by 6 percent from the year-ago quarter.

The benefit in the provision for credit losses decreased $13 million from the year-ago quarter to a benefit of $2 million, driven by higher recoveries recorded in the year-ago quarter.

Return on average allocated capital was 22 percent in the third quarter of 2015, compared to 27 percent in the year-ago quarter.

Business Highlights

Bank of America Merrill Lynch generated firmwide investment banking fees of $1.3 billion, excluding self-led deals, in the third quarter of 2015, maintaining its No. 3 global ranking(H).

Bank of America Merrill Lynch was ranked among the top three global financial institutions in high-yield corporate debt, leveraged loans, mortgage-backed securities, asset-backed securities, convertible debt, investment grade corporate debt, syndicated loans, and debt capital markets during the third quarter of 2015(H).

Firmwide advisory fees of $391 million were the second-highest results since the Merrill Lynch merger.

Average loan and lease balances increased $26.8 billion, or 9 percent, from the year-ago quarter, to $310 billion, largely due to growth in the commercial and industrial loan portfolio and in the commercial real estate portfolio.

Financial Overview

Global Banking reported net income of $1.3 billion in the third quarter of 2015, compared to $1.5 billion in the third quarter of 2014, as strong loan and deposit growth and higher advisory fees were offset by lower net interest income and lower underwriting fees in line with lower industry volumes.

Net interest income was down $105 million, reflecting the impact of the company’s allocation of ALM activities and liquidity costs, as well as compression in loan spreads. This was offset in part by loan growth. Firmwide investment banking fees, excluding self-led deals, decreased to $1.3 billion in the third quarter from the year-ago quarter of $1.4 billion, with higher advisory fees more than offset by a decline in equity issuance fees.

The return on average allocated capital was 14 percent in the third quarter of 2015, compared to 18 percent in the year-ago quarter.

The provision for credit losses increased $243 million from the year-ago quarter to $179 million, associated with higher loan balances and higher reserve releases in the prior year. Noninterest expense was relatively unchanged from the year-ago quarter at $2.0 billion.

Business Highlights

Equities sales and trading revenue, excluding net DVA, increased 12 percent from the year-ago quarter to $1.2 billion, driven by a strong performance in derivatives, reflecting favorable market conditions(I).

Bank of America Merrill Lynch’s U.S. Equity Research Team was ranked No. 1 in the 2015 All-America Institutional Investor survey.

Financial Overview

Global Markets reported net income of $1.0 billion in the third quarter of 2015, compared to $371 million in the year-ago quarter, as lower noninterest expense, principally litigation, was partially offset by lower Fixed Income, Currencies and Commodities (FICC) sales and trading revenues.

Revenue decreased $90 million, or 2 percent, from the year-ago quarter to $4.1 billion. Excluding net DVA, revenue decreased $198 million, or 5 percent, to $3.8 billion(J). Net DVA gains were $313 million, compared to $205 million in the year-ago quarter.

Sales and trading revenue was relatively unchanged from the year-ago quarter at $3.5 billion. Excluding net DVA, sales and trading revenue was down 4 percent from the third quarter of 2014 to $3.2 billion as higher equities sales and trading revenue was more than offset by lower FICC sales and trading revenue(I).

Fixed Income, Currencies and Commodities sales and trading revenue, excluding net DVA, decreased 11 percent from the year-ago quarter, due to declines in credit-related businesses, offset in part by improvement in rates products(I). Equities sales and trading revenue, excluding net DVA, increased 12 percent from the year-ago quarter, led by a strong performance in derivatives, reflecting favorable market conditions(I).

Noninterest expense of $2.7 billion decreased $674 million from the year-ago quarter, driven by lower litigation expense. The year-ago quarter included approximately $600 million in litigation expense, the majority of which was non-deductible for tax purposes. Excluding litigation, noninterest expense declined 4 percent, driven by lower revenue-related expenses(K).

Return on average allocated capital was 11 percent in the third quarter of 2015.

Business Highlights

The number of 60+ days delinquent first-mortgage loans serviced by LAS declined to 114,000 loans at the end of the third quarter of 2015, down 18,000 loans, or 14 percent, from the prior quarter and down 107,000 loans, or 48 percent, from the year-ago quarter.

Noninterest expense, excluding litigation, was approximately $0.9 billion in the third quarter of 2015, compared to $0.9 billion in the second quarter of 2015 and $1.3 billion in the third quarter of 2014(B).

Financial Overview

Legacy Assets and Servicing reported a net loss of $196 million in the third quarter of 2015, compared to a net loss of $5.1 billion for the same period in 2014, driven by lower litigation expense. Revenue increased in the third quarter of 2015 as mortgage servicing rights (MSR) net-of-hedge performance improved and the representations and warranties provision declined, partially offset by lower mortgage servicing fees. Mortgage servicing fees were down 27 percent from the year-ago quarter to $345 million as the number of first-lien and second-lien loans serviced by LAS declined from the third quarter of 2014.

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The provision for credit losses decreased $261 million from the third quarter of 2014 to $6 million, driven primarily by costs related to the consumer relief portion of the U.S. Department of Justice (DoJ) settlement in the year-ago quarter.

Noninterest expense decreased $5.5 billion from the year-ago quarter to $1.1 billion primarily due to a decrease in litigation expense of $5.1 billion and lower default-related servicing expenses. Excluding litigation, noninterest expense was $0.9 billion in the third quarter of 2015, relatively unchanged from the prior quarter and down $430 million, or 32 percent, from the third quarter of 2014 as the number of 60+ days delinquent first-mortgage loans serviced by LAS declined 48 percent to 114,000 loans.

All Other reported net income of $4 million in the third quarter of 2015, compared to $509 million for the same period a year ago.

Net interest income decreased $570 million from the year-ago quarter, driven by the negative impact of the market-related adjustments on the company’s debt securities due to lower long-term interest rates. Noninterest income rose $123 million from the year-ago quarter to $12 million, driven primarily by approximately $400 million in gains on sales of consumer real estate loans, compared to approximately $230 million in gains in the year-ago quarter. Noninterest income for the third quarter of 2015 also included a charge of $303 million for the payment protection insurance provision (PPI) in the U.K. card business and $385 million in gains of the sale of debt securities. This compares with a PPI charge of $298 million and gains on debt securities of $410 million in the third quarter of 2014.

The provision for credit losses was a benefit of $67 million, compared to a benefit of $265 million in the third quarter of 2014, as the company released reserves at a slower pace compared to the year-ago quarter.

Noninterest expense declined $174 million, reflecting improved litigation and lower personnel and infrastructure costs, partially offset by higher professional fees. The third quarter of 2015 included tax benefits of $507 million, compared with tax benefits of $541 million in the third quarter of 2014.

Credit quality remained strong in the third quarter of 2015 with net charge-offs declining across most major portfolios when compared to the year-ago quarter. The balance of 30+ days performing delinquent loans, excluding fully insured loans, declined across most consumer portfolios from the year-ago quarter. Additionally, nonperforming loans, leases and foreclosed properties were down 27 percent from the year-ago period.

Net charge-offs were $932 million in the third quarter of 2015, compared to $1.1 billion in the second quarter of 2015 and $1.0 billion in the third quarter of 2014. The net charge-off ratio improved to 0.42 percent in the third quarter of 2015 from 0.46 percent in the year-ago quarter. The decline in net charge-offs was driven by an improvement primarily in consumer portfolio trends, partially offset by higher commercial charge-offs. The provision for credit losses increased $170 million from the third quarter of 2014 to $806 million. In the third quarter of 2015, the net reserve release was $126 million compared to a net reserve release of $407 million in the third quarter of 2014.

The allowance for loan and lease losses to annualized net charge-off coverage ratio was 3.42 times in the third quarter of 2015, compared with 3.65 times in the third quarter of 2014. Nonperforming loans, leases and foreclosed properties were $10.3 billion at September 30, 2015, a decrease from $11.6 billion at June 30, 2015 and $14.2 billion at September 30, 2014.

Within the commercial loan portfolio, reservable criticized loans increased 15 percent from the year-ago quarter due to certain downgrades in the company’s oil and gas portfolio. However, the reservable criticized rate is still below pre-financial crisis levels.

The Common equity tier 1 capital ratio under the Basel 3 Standardized Transition approach was 11.6 percent at September 30, 2015 and 11.2 percent at June 30, 2015.

While the Basel 3 fully phased-in Standardized and fully phased-in Advanced approaches do not go into effect until 2018, the company is providing the following estimates for comparative purposes.

The estimated Common equity tier 1 capital ratio under the Basel 3 Standardized approach on a fully phased-in basis was 10.8 percent at September 30, 2015 and 10.3 percent at June 30, 2015(C).

The estimated Common equity tier 1 capital ratio under the Basel 3 Advanced approaches on a fully phased-in basis was 11.0 percent at September 30, 2015 and 10.4 percent at June 30, 2015(C).

On September 3, 2015 the Federal Reserve Board and the Office of the Comptroller of the Currency announced that Bank of America received approval to begin using the Advanced approaches capital framework to determine risk-based capital requirements beginning in the fourth quarter of 2015.

As previously disclosed, with the approval to exit parallel run, U.S. banking regulators requested modifications to certain internal analytical models including the wholesale (e.g., commercial) credit models which increased risk-weighted assets as of October 1, 2015. If the modifications to these models were included, the estimated CET1 ratio under the Basel 3 Advanced approaches on a fully phased-in basis would be approximately 9.7 percent and 9.3 percent, at September 30, 2015 and June 30, 2015, respectively(C).

At September 30, 2015, the estimated fully phased-in supplementary leverage ratio (SLR)(L) for the Bank Holding Company was approximately 6.4 percent, which exceeds the 5.0 percent minimum for bank holding companies, and the estimated fully phased-in SLR for the company’s primary banking entity was approximately 7.0 percent at September 30, 2015, which exceeds the 6.0 percent “well capitalized” level.

At September 30, 2015, Global Excess Liquidity Sources totaled $499 billion, compared to $484 billion at June 30, 2015 and $429 billion at September 30, 2014(D). Time-to-required funding was 42 months at September 30, 2015, compared to 40 months at June 30, 2015 and 38 months at September 30, 2014(D). The U.S. Liquidity Coverage Ratio estimate at September 30, 2015 exceeds the fully phased-in 2017 minimum requirement(M).

Period-end common shares issued and outstanding were 10.43 billion at September 30, 2015, 10.47 billion at June 30, 2015 and 10.52 billion at September 30, 2014. The company repurchased approximately $800 million in common stock during the third quarter.

Tangible book value per share(E) was $15.50 at September 30, 2015, compared to $15.02 at June 30, 2015 and $14.09 at September 30, 2014. Book value per share was $22.41 at September 30, 2015, compared to $21.91 at June 30, 2015 and $20.99 at September 30, 2014.

 

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