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Tuesday, January 25, 2011

Bank of America Reports Huge $1.2 Billion Loss (Financial Charts, Review) "Headwinds still remain" BAC

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Bank of America reported Q4 2010 financial results on Friday, January 21, 2011


Bank of America Reports Huge $1.2 Billion Quarterly Loss

Bank of America reported quarterly financial results on Friday, January 21 before the market opened. Bank of America financial performance charts for Q4 2010 and prior quarters have been posted, along with commentary, on the Bank of America Financial Performance page. The charts are:

Bank of Ameica Performance by the Quarters
Earnings per Share (Diluted)
Net Revenues, Operating Income, Net Income
Operating Margin, Net Margin
Capital to Assets and Tier 1 Capital Ratios
Return on Assets
Income Statement Components
Asset Mix

In addition, a Bonus Chart has been included below in this post, Bank of America Operating Expense Ratio. More charts have been posted on the Bank of America Financial Performance page.

Summary Q4 2010 The state of financial performance at Bank of America is such that the huge Q4 loss of $1.2 billion is a significant improvement over the colossal Q3 loss of $7.3 billion. However, it is a larger loss than the prior year Q4 2009 loss of $194 million, which does not seem so bad now. The losses continue pouring in from every direction. Goodwill impairment charges were an almost incomprehensible $12.4 billion in 2010 and provision for representation and warranties expense, related to mortgage loan buybacks, were $4.1 billion in 2010. See below for more discussion.

Income Statement Q4 2010 Bank of America reported net revenues of $22.4B, net loss of ($3.6B), and a loss per share of ($0.16). From the prior quarter Q3 2010, net revenues were down -16.11%, net loss decreased +82.96%, and loss per share decreased +79.22%. From the prior year Q4 2009, net revenues were down +10.86%, net loss increased +541.24%, and loss per share decreased +73.33%, respectively. The operating and net margins continue negative at -16.05% and -5.55%, respectively. This is an improvement over the prior quarter Q3 2010 at -22.14% and -27.34%, respectively. On a positive note, the quarterly Provision for Credit Losses of $5.1B is a multi-year low and the net charge-off ratio continues decreasing as credit quality improves.

Balance Sheet Q4 2010 Total assets decreased QoQ -3.19% to $2.265 trillion. The capital to assets ratio (total stockholders' equity divided by total assets) increased to 10.08%, which is adequate. Tier 1 capital increased to 11.24%, which is adequate and the highest since September 2009. Loans slightly increased QoQ +0.70%. The ALL/Loans ratio (Allowance for Loan Losses divided by Gross Loans) decreased to 4.45%, should be adequate, and continues above 4% for the 5th consecutive quarter.

Asset Mix Q4 2010 Higher yielding loans, net loans, continue in the high 30% range, near 40%. Lower yielding cash & securities had increased for the past 6 quarters, since March 2009, but decreased slightly in Q4 2010 to 41.95%.  NonEarning assets of 16.16% had decreased the past 5 quarters, since June 2009, but increased slightly in Q4 2010. A chart of the asset mix is at the bottom of this page.

Representations and Warranties Expense (Home Loans) In the current quarter Q4 2010, part of the huge net loss of $1.2 billion was due to an enormous provision for representations and warranties expense of $4.1 billion in the Home Loans segment. This charge is related to mortgage loan buybacks. During the Credit Bubble, Bank of America sold billions of dollars of mortgage loans to GSEs FNMA and FHLMC plus other mortgage investors that were inadequately underwritten and improperly documented. Bank of America also acquired Countrywide Financial, at the time the largest mortgage lender in the USA, which had done the same. Bank of America has since been entangled in lawsuits and negotiations to resolve, settle, and even buy back these misrepresented and substandard mortgage loans which eventually defaulted. The total provision for representations and warranties expense in 2010 was $6.8 billion.

Goodwill Impairment Charge (Home Loans) In the current quarter Q4 2010, part of the huge net loss of $1.2 billion was due to a very large goodwill impairment charge of $2 billion in the Home Loans segment. This charge is related to the write-down of the value of the mortgage business acquired from Countrywide Financial.

Litigation Expenses (Home Loans) In the current quarter Q4 2010, part of the huge net loss of $1.2 billion was due to increased litigation expenses of $1.5 billion mostly in the Home Loans segment. This expense is related to the mortgage loan buybacks discussed above, including the Countrywide Financial mortgages.

Goodwill Impairment Charge (Global Card Services) In the prior quarter Q3 2010, the colossal net loss of $7.3 billion was due to an astronomical goodwill impairment charge of $10.4 billion in the Global Card Services segment. This charge was related to limits to be placed on debit interchange fees under the financial reform legislation enacted in July 2010, which will reduce future revenues in the global card services business.


Bank of America Performance by the Quarters (Operating Expense Ratio)

Morgan Stanley Operating Expense Ratio (Chart) Below is a chart of the operating expense ratio for Bank of America. The operating expense ratio is NonInterest Expense divided by Total Revenues which are NonInterest Income and Interest Income. Overall, the operating expense ratio is high and has been the past 2 quarters. This is due to goodwill impairments and extraordinary provision expense in Q3 2010 and Q4 2010. A higher share of each dollar of revenues is being spent on operating expenses and in this case on goodwill impairments, extraordinary provision expenses, and litigation expenses. This negatively affects profitability and already has as an ongoing drag on earnings. The chart covers the past 11 quarters, from June 2008 through the latest quarter reported, December 2010. More charts have been posted on the Bank of America Financial Performance page. Recent chart data is:
Quarter, Operating Expense Ratio
Dec09: 52.58%
Mar10: 46.65%
Jun10: 48.78%
Sep10: 83.81%
Dec10: 73.86%




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