Bank of America Corp. shelled out billions to put a major legal issue behind it in the third quarter and the bank still broke even.
Mortgage battles yet to be resolved, however, could have a deeper impact in the future.
The Charlotte bank reported losing $33 million for shareholders in the third quarter, or less than a penny per share. Overall net income, calculated before paying preferred stockholders, was a $340 million profit.
It marked a steep drop from the same time period last year, when the bank earned $5.9 billion for shareholders, or 58 cents per share.
But much of the difference can be attributed to the x $2.43 billion settlement Bank of America announced last month to resolve the long-running shareholder lawsuit stemming from its acquisition of Merrill Lynch. CEO Brian Moynihan called it a milestone in a conference call with analysts Wednesday.
I think we've shown strong results, and we're moving in the right direction in every area, Moynihan said.
He and Chief Financial Officer Bruce Thompson both told analysts in the call to look past that bottom line to find better-than-expected results in a number of its business lines.
Mortgage banking income increased to $2 billion as originations jumped 13 percent. Investment banking fees were up 17 percent. Bank of America also grew its capital levels.
Investors initially sent the stock price up slightly, but it closed down 2 cents to $9.44.
Bank of America is still not out of the woods yet regarding its ill-fated merger with Countrywide, its rescue of Merrill Lynch, and the Great Recession, St. John's University professor Anthony Sabino said in a statement about the results.
But ... it's progress, by any measure, and it demonstrates that current CEO Brian Moynihan is not afraid to take hits to profits and make reserves, all this with the paramount goal of restoring Bank of America to its former greatness.
After the Merrill settlement was announced, analysts had estimated the nation's second-largest bank by assets would lose about 7 cents per share. If approved by the courts, the settlement would resolve claims that bank executives hid mounting losses at the investment bank during the 2008 financial crisis from shareholders voting on the deal.
Bank of America also said in last month's announcement that it would take about $1.9 billion in accounting losses tied to the value of the bank's debt. Essentially, when a bank's financial position improves, its debt becomes more valuable on the open market, thus increasing its liabilities.
Bank of America also disclosed last month that it would lose $800 million because of changes in the United Kingdom tax rate.
Without those items, analysts had predicted the bank would earn 15 cents per share. In fact, the bank would have earned about 19 cents per share without the one-time changes, bank analyst Marty Mosby of Guggenheim Securities calculated.
If you could clean up the litigation, it's actually a good story, said Chris Whalen, Tangent Capital Partners LLC senior managing director, during an interview on Bloomberg TV.
More troubling, however, were new predictions on other legal issues on the mortgage side that could end up costing the bank.
Bank of America has been locked in disagreements with mortgage giants Fannie Mae and Freddie Mac and other firms that buy up mortgages on whether the bank should be forced to buy back soured loans. So-called repurchase demands now total $25.5 billion outstanding.
Bank executives are fighting the claims, but said they are looking to settle when it makes sense financially.
Thompson estimated they could cost the bank $6 billion beyond what it has set aside money to cover.
Cutbacks in jobs
Executives also detailed Wednesday the progress of the bank's ongoing job cuts.
Bank of America cut 2,900 full-time employees in the third quarter, bringing the total number of job cuts since last year to 21,000 outside of its division that deals with troubled mortgages. And for the first time in more than three years, cuts were made even there about 400.
Moynihan said that was possible because the number of mortgages 60 days or more past due fell 12 percent.
The bank said last year that it expects to cut 30,000 jobs over the first phase of its cost-cutting program known as Project New BAC.
The bank also hired 400 mortgage loan officers in the last six months, along with 250 small-business bankers and 400 financial solutions advisers in the last quarter.
Some of the workers laid off from the troubled-mortgage division were moved to the regular mortgage business, Moynihan said.
Bank of America also shed between 50 and 60 branches in the quarter, but lost fewer customers and less in deposits than the bank projected.
We're keeping the customers and having less operating costs, Moynihan said. Each quarter there will be continuing progress.