4 Important Updates from Bank of America's Recently Filed 10-Q

By Fool.com

With Bank of America's second-quarter earnings in the rearview mirror -- and an excellent quarter it was! -- the second and more substantive phase of the publicly traded bank's earnings ritual kicked off last week with the filing of its comprehensive quarterly update, its 10-Q.

If you've ever made your way through a big bank's 10-Q, then you know what a laborious process it is. Bank of America's latest submission clocks in at 239 pages, covering everything from pending legal proceedings to risk factors to the management's detailed analysis of the bank's performance over the last three months. But while the most important updates are generally found deep within the $2.2 trillion bank's filing, they're front and center in the most recent one.

Continue Reading Below

The first update is that Bank of America's harrowing seven-year legal odyssey may finally be coming to an end. As the bank explained, a recent ruling by New York highest court allowed the nation's second biggest bank by assets to lop of $7.6 billion in outstanding legal claims related to toxic mortgages that date back to the financial crisis.

To give you an appreciation for the magnitude of this development, here's a chart I made of quarterly legal claims (related to toxic mortgages) submitted to Bank of America over the past five quarters. The substantial decline in the latest period is the result of this case.

The second update is that Bank of America is still working feverishly to meet the Federal Reserve's expectations regarding the quality and thoroughness of the bank's capital-planning process.

Following this year's stress tests, the bank had to resubmit its capital plans -- its request to boost its dividend and repurchase more common stock -- after uncovering a $4 billion error in the way it valued securities inherited in its 2008 acquisition of Merrill Lynch. As a result of the disclosure, the Fed demanded that Bank of America resubmit its capital plan by the end of September.

It was the third time the North Carolina-based bank has run into problems with the stress test in the last five years, and many believe it contributed to a recent management shakeup, the centerpiece of which was CFO Bruce Thompson's departure.

As the bank noted on page 5 of its 10-Q:

The third update also relates to capital adequacy -- though, this time Bank of America isn't being singled out. Last month, the Fed finalized its rules regarding how much additional capital the nation's biggest banks are required to hold under more stringent, Dodd-Frank mandated rules and regulations.

The most important component of this -- the systematically important financial institution surcharge, or SIFI surcharge -- requires the largest lenders to hold markedly more capital than their smaller counterparts. This matters because banks make money by using leverage. They start with, say, $10 million in capital, leverage that up with $90 million in debt from depositors and institutional investors, and then use the combined proceeds to purchase interest-earning assets. In large part, in turn, a bank's income comes from the extent to which it can magnify its capital base.

How much more capital are big banks required to hold? That depends on the size of the bank and its role in the global financial industry. The nation's largest bank by assets, JPMorgan Chase, must reserve an additional 4.5% of its capital as insulation against future losses, whereas Bank of America must hold an additional 3%.

Finally, as I alluded to earlier, Bank of America included a brief note about multiple changes to its management team which were initially announced two weeks ago. The three most significant are:

  • CFO Bruce Thompson is leaving the company
  • Former co-COO David Darnell is retiring
  • Two of Moynihan's colleagues dating back to their days at FleetBoston Financial, which merged with Bank of America in 2003, were given elevated titles and responsibility

I, for one, don't think shareholders should read too much into these moves. As opposed to hinting at possible problems, they seem to me to be the result of the natural turnover that one should expect at the top of any company.

The article 4 Important Updates from Bank of America's Recently Filed 10-Q originally appeared on Fool.com.

John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.