Bank of America Corporation’s (BAC) third quarter 2010 earnings came in at 27 cents per share, substantially ahead of the Zacks Consensus Estimate of 16 cents. This also compares favorably with the loss of 26 cents in the prior-year quarter.
Earnings for the reported quarter leave out a non-cash, non-tax deductible goodwill impairment charge of $10.4 billion. Considering this charge, BofA reported a net loss of $7.3 billion or 77 cents per share, compared with a net loss of $1.0 billion or 26 cents per share in the year-ago quarter.
Lower credit costs and higher net interest income and increased mortgage banking and card income were primarily responsible for the better-than-expected results. However, higher non-interest expense, pressure on trading income, lower service charges and reduced insurance income were the primary offsetting factors. BofA’s trading business includes the Merrill Lynch operation.
Quarter in Detail
Fully taxable-equivalent revenues net of interest expense were $27.0 billion, up 2% from $26.4 billion in the prior-year quarter. This also compares favorably with the Zacks Consensus Estimate of $26.8 billion.
Net interest income on a fully taxable-equivalent basis was $12.7 billion, up 8% from $11.8 billion in the year-ago quarter. The increase was primarily due to the addition of net assets of approximately $100 billion to the balance sheet as a result of the adoption of the new consolidation guidance, effective January 1, 2010.
As a result of the accumulation of higher-yielding loans on the balance sheet,net interest yield increased 11 basis points (bps) year-over-year to 2.72%. This was partially offset by the impact of spread compression.
Non-interest income came in at $14.3 billion, down 2% from $14.6 billion in the prior-year quarter. The decline was driven by lower service charges, reduced trading account profits and lower gains on sales of debt securities.
Including a goodwill impairment charge of $10.4 billion,non-interest expense was $27.2 billion, up 67% from $17.0 billion in the prior-year quarter. Excluding the goodwill impairment charge, non-interest expense increased 3% year-over-year to $16.8 billion. The increase in non-interest income reflects higher personnel costs, increased professional fees and litigation costs. Pretax merger and restructuring charges declined to $421 million from $594 million in the year-ago quarter.
The efficiency ratio on a fully taxable-equivalent basis was 100.87% compared to 61.84% in the prior-year quarter.
Book value per share as of September 30, 2010 was $21.17, compared to $21.45 as of June 30, 2010 and $22.99 as of September 30, 2009.
Credit Quality
Though overall credit costs declined for the fifth consecutive quarter, they remained at elevated levels. However, credit quality showed improvement during the quarter. Provisions for credit losses decreased 33% sequentially and 54% year over year to $5.4 billion. The provisions were $1.8 billion lower than net charge-offs, resulting in a reduction in the allowance for loan and lease losses for the quarter.
Nonperforming loans, leases and foreclosed properties decreased 3% sequentially but increased 2% year-over-year to $34.6 billion. Net charge-offs decreased 25% sequentially as well as year-over-year to $7.2 billion. Net charge-off ratio improved 91 bps sequentially to 3.07% and nonperforming loans ratio improved 2 bps sequentially to 3.71%.
Capital Ratios
At the end of the reported quarter, the company’s Tier 1 capital ratio improved to 11.16% from 10.67% at the end of the prior quarter. Tier 1 common ratio also improved to 8.45% from 8.01% at the end of the prior quarter.
The market turmoil was more harmful to BofA than its peers except Citigroup (C). After incurring significant losses for the last two quarters of 2009, backed by strong activity primarily in the capital markets, the company has bounced back to profitability during the first quarter of 2010. We are also impressed to see better-than-expected second and third quarter results in a sluggish economic recovery.
BofA is one of the major lenders to have recently decided to rein in their foreclosure activities as rampant paperwork irregularities led to a wrong evaluation of the authenticity of information provided in the mortgage documents. The other lenders that have taken similar decisions are General Motors Acceptance Corporation (“GMAC”) Mortgage LCC, a wholly-owned subsidiary of Ally Financial, the JPMorgan Chase & Co. (JPM) and PNC Financial Services Group Inc. (PNC). As a precautionary measure, lawmakers have asked several other lenders to halt their processes as well.
Though concerns relating to the recent suspension of foreclosures and the near-term impact of the financial reform have overshadowed its share price in recent days, the stock was up about 1.1% in before-market trading, following the announcement of third quarter results.
Also, BofA said on Monday that it intends to resume its foreclosure activities in 23 states as it has legal right to foreclose despite the allegation related to paperwork flaws. It is planning to foreclose more than 100,000 homes next week. BofA plans to resubmit documents with proper verification and new signatures in the 23 states where judicial authorization is required to start the foreclosure process.
Though seasonal reduction in July and August activities are expected to result in lower trading revenues, continuing decline in credit costs will support the bottom-line to a great extent.
The BofA stock maintains a Zacks #3 Rank, which translates into a short-term Hold recommendation.
Also, considering the company’s business model and fundamentals, we have a long-term Neutral recommendation on the stock.
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