Financial Controls: Bank of America Reports Questionable Financial Performance (Charts, Video) *$7.6B in accounting & valuation gains* BAC

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Bank of America (BAC) reported Q3 2011 financial results on October 18, 2011

* Charts and commentary have been updated for Bank of America Q3 2011 financial results *

Bank of America Reports Questionable Financial Performance: $7.6B in accounting & valuation gains

Bank of America Summary Q3 2011 Bank of America Q3 financial performance rebounded to a net income of $6.23 billion, but this included accounting and valuation net gains of $7.6 billion. You do the math. This is after the prior Q2 2011 financial collapse and massive net loss of -8.83 billion. Prior to that, there was much improved net income of +$2.05 billion in Q1 2011, a huge Q4 net loss of -$1.24 billion in Q4 2010, and a colossal Q3 2010 net loss of -$7.30 billion. Financial position continues adequate even with the record losses due to the sheer size of Bank of America (total assets are $2.22 trillion and stockholders' equity is $230.25 billion). Bank of America Chief Executive Officer Brian Moynihan continues the cleanup of the biggest debacle in banking history, "Our focus this quarter was on strengthening the balance sheet by selling non-core assets and building capital to position the company for future growth." The volatile swings in the bottom line due to both valuation and extraordinary items plus core operations results prevent meaningful QoQ or YoY comparisons. A few quarters of financial stabilization are necessary before there is convincing evidence that Bank of America has rebounded from and overcome the USA financial system crisis.

Bank of America Income Statement Q3 2011 Bank of America reported net revenues of $28.45 billion, a net income of $6.23 billion, and earnings per share of $0.56. This is a significant rebound from the prior quarter financial collapse. From the prior quarter Q2 2011, net revenues were up +115%, net income was up +171%, and earnings per share were up +162%. From the prior year Q3 2010, net revenues were up +7%, net income was up +175%, and earnings per share were up +173%. The operating and net margins rebounded accordingly to 26.12% and 21.90%, respectively. The quarterly Provision for Credit Losses of $3.41 billion increased slightly. The operating expense ratio also dropped accordingly to 52.08%.

Bank of America Balance Sheet Q3 2011 Total assets decreased QoQ -1.84% to $2.219 trillion. Bank of America is now "creating a fortress balance sheet" the same as JPMorgan Chase promotes. Bank of America has now dipped below the total assets of $2.29 trillion reported by JPMorgan Chase for the current quarter. The capital to assets ratio (total stockholders' equity divided by total assets) increased to 10.37%, which is strong. The Tier 1 capital and Tier 1 common ratios are adequate. Return on assets "improved" to -0.08%. Gross Loans decreased QoQ -0.93% and YoY -0.15%, but Net Loans are an increasing share of the asset mix. The ALL/Loans ratio (Allowance for Loan Losses divided by Gross Loans) was 3.76%, should be adequate, and is the lowest since the QE June 2009.

Valuation and Extraordinary Gains and Losses Q3 2011 A net gain of $7.6 billion was included in the current financial results due to valuation and extraordinary gains and losses. This included $4.5 billion (pretax) in positive fair value adjustments on structured liabilities, a pretax gain of $3.6 billion from the sale of shares of China Construction Bank (CCB), $1.7 billion pretax gain in trading Debit Valuation Adjustments (DVA), and a pretax loss of $2.2 billion related to private equity and strategic investments, excluding CCB. As disclosed by Bank of America in Q2 2011, an estimated additional losses not recognized in Q2 or Q3 2011 of $5 billion from "legacy mortgage issues" could be charged-off in the future.

Bank of America Financial Performance by the Quarters (Charts)

Bank of America Earnings (Loss) per Share Chart Below is a chart of quarterly earnings per diluted share. Current Earnings per Share increased to +$0.58, a 13-quarter high, after losses in 3 of the prior 4 quarters: -$0.90 for Q2 2011, +$0.17 for Q1 2011, -$0.16 for Q4 2010, and -$0.77 for Q3 2010. The chart average Loss per Share is -$0.02, which reflects the ongoing financial struggles of Bank of America.

Bank of America Net Revenues, Operating Income (Loss), Net Income (Loss) Chart Below is a chart of quarterly net revenues, operating income, and net income. Consolidated revenues are reported net of interest expense. Current Net Revenues significantly increased to $28.45 billion and a 5-quarter high. Current Operating Income of $7.43 billion is a multi-year high. Current Net Income of $6.23 billion is also a multi-year high. The chart averages for NR, OI, and NI are $27.13 billion, $34 million, and $318 million, respectively, which reflects the tenuous profitability of Bank of America.

Bank of America Operating Margin and Net Margin (Chart) Below is a chart of quarterly operating margin and net margin. Both the current operating margin and net margin rebounded, after the prior quarter collapse deep into negative territory. Such dismal operating and net margins are rarely, if ever, seen in banking. The current Operating Margin of +26.12% and current Net Margin of +21.90% are a significant improvement QoQ and YoY. The chart averages for OM and NM are -5.75% and -2.94%, respectively, reflecting the ongoing, overall dismal financial performance of Bank of America.

Bank of America Capital to Assets, Tier 1 Capital Ratio, and Tier 1 Common Ratios (Chart) Below is a chart of the Tier 1 capital ratio, capital to assets ratio, and Tier 1 common ratio. The capital to assets ratio is stockholder's equity to total assets. The current Tier 1 Capital Ratio increased to 11.48% and is greater than the chart average of 11.09%. The current Capital Ratio of 10.37% is strong, increased to 10.37%, and is greater than the chart average of 10.31%. The current Tier 1 Common Ratio increased to 8.65% and is greater than the chart average of 7.77%. All 3 ratios are financial regulatory ratios and measurements and are adequate.

Bank of America Return on Assets (Chart) Below is a chart of annual return on average assets per quarter. The total net income for the most recent 4 quarters is divided into average assets for the most recent 4 quarters to obtain a rolling annualized ROA, an annualized return on average assets for the 12 months (4 quarters) ended. Bank of America had already been struggling with a very low Return on Assets in the +0.20% range for 4 quarters before the Q3 2010 ROA turned a negative -0.05% due to the prior record net loss. Then the ROA continued downward to -0.10% and -0.15%, before literally dropping off the bottom of the chart to -0.67%! Current Return on Assets of -0.08% is actually a significant rebound, but inadequate. The chart average for ROA is a marginal +0.03%.

Bank of America Income Statement Components (Chart) Below is a chart of the major income statement components: NonInterest Income, Net Interest Income, Provision for Credit Losses, and NonInterest Expense. Current Net Interest Income of $17.96 billion is a 6-quarter high and above the chart average of $15.08 billion. Current NonInterest Expense, operating expenses, of $17.61 billion is a 5-quarter low and below the chart average of $19.14 billion. Goodwill impairment charge-offs pushed NonInterest Expense higher in previous quarters. Current Net Interest Income of $10.49 billion is a multi-year low and above the chart average of $12.05 billion. Current Provision for Credit Losses of $3.41 billion increased, after a prior quarter multi-year low of $3.26 billion. However, the PCL is well below the chart average of $7.95 billion, indicating credit quality has improved.

Bank of America Asset Mix (Chart) Below is a chart of quarterly asset mix, the major asset categories as a percentage of total assets: Cash & Securities, Mortgages & Loans for Sale, Net Loans (Gross Loans less Allowance for Loan Losses), Mortgage Servicing Rights, and NonEarning Assets (Premises & Equipment, Goodwill, and Other Assets). Bank of America reported $2.22 trillion for the current quarter, so percentage points add up fast. Bank of America has now dipped below the total assets of $2.29 trillion reported by JPMorgan Chase for the current quarter. Overall, the current asset mix shifted slightly favorably. Lower yielding Cash & Securities increased to 43.13%, a multi-year high, which is higher than the chart average of 41.86%. Higher yielding loans, Net Loans increased to 40.43%, a 10-quarter high, which is higher than the chart average of 39.50%. NonEarning Assets decreased to 15.03%, a multi-year low, which is lower than the chart average of 16.440%. While this is a positive shift in asset deployment, the prior disastrous charges and losses have offset any benefit. Both Mortgages & Loans for Sale and Mortgage Servicing Rights combine for an immaterial 1.4% of total assets.

Bank of America Operating Expense Ratio (Chart) Below is a chart of the operating expense ratio (NonInterest Expense divided by Total Revenues which are NonInterest Income and Interest Income). The current Operating Expense Ratio decreased to 52.08% and a 5-quarter low. NonInterest Expense is at a 5-quarter low and NonInterest Income rebounded. An decreasing share of each dollar of revenues is being spent on operating expenses. The chart average for OER is 56.05%.

Bank of America Reports Third Quarter 2011 Financial Results

*** Credit Costs Continue to Decrease With Net Charge-Offs Declining Across Most Portfolios Strong Capital Generation With Tier 1 Common Equity Ratio at 8.65 Percent Average Deposit Balances Increased for the Fourth Consecutive Quarter Growth in Corporate Banking Average Core Loan Balance Across All Regions Bank of America Merrill Lynch (BAML) Was Ranked No. 2 Globally in Net Investment Banking Fees in the Third Quarter of 2011 Customer Solutions Pilot Program Showing Positive Results ***

CHARLOTTE, N.C., Oct 18, 2011 (BUSINESS WIRE) -- Bank of America Corporation today reported net income of $6.2 billion, or $0.56 per diluted share, for the third quarter of 2011, compared with a net loss of $7.3 billion, or $0.77 per diluted share, in the year-ago period. Revenue, net of interest expense, on a fully taxable-equivalent (FTE) basis1 rose 6 percent to $28.7 billion.

There were a number of significant items that affected results in both periods. The most recent quarter included, among other things, $4.5 billion (pretax) in positive fair value adjustments on structured liabilities, a pretax gain of $3.6 billion from the sale of shares of China Construction Bank (CCB), $1.7 billion pretax gain in trading Debit Valuation Adjustments (DVA), and a pretax loss of $2.2 billion related to private equity and strategic investments, excluding CCB. The fair value adjustment on structured liabilities reflects the widening of the company's credit spreads and does not impact regulatory capital ratios. The year-ago quarter included a $10.4 billion goodwill impairment charge. Details on the significant items are included in the revenue and expense section of this press release.

"This quarter's results reflect several actions we took that highlight our ongoing transformation toward becoming a leaner, more focused company," said Chief Executive Officer Brian Moynihan. "The diversity and depth in our customer and client offerings provided some resiliency in a very challenging environment."

"Our focus this quarter was on strengthening the balance sheet by selling non-core assets and building capital to position the company for future growth," said Chief Financial Officer Bruce Thompson. "In that regard, we accomplished a great deal. We reduced the size of our balance sheet by $42 billion from the second quarter of 2011, nearly doubled our Tier 1 common equity ratio since early 2009, and continued to have strong liquidity levels even after significantly reducing both short- and long-term debt."

About Bank of America

Bank of America is one of the world's largest financial institutions, serving individual consumers, small- and middle-market businesses and large corporations with a full range of banking, investing, asset management and other financial and risk management products and services. The company provides unmatched convenience in the United States, serving approximately 58 million consumer and small business relationships with approximately 5,700 retail banking offices and approximately 17,750 ATMs and award-winning online banking with 30 million active users. Bank of America is among the world's leading wealth management companies and is a global leader in corporate and investment banking and trading across a broad range of asset classes, serving corporations, governments, institutions and individuals around the world. Bank of America offers industry-leading support to approximately 4 million small business owners through a suite of innovative, easy-to-use online products and services. The company serves clients through operations in more than 40 countries. Bank of America Corporation stock (NYSE: BAC) is a component of the Dow Jones Industrial Average and is listed on the New York Stock Exchange.

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