Bank of America on Wednesday said the Charlotte-based bank managed only a small third-quarter profit after spending billions on legal costs, but executives touted progress in one area: cutting costs.
As part of the “Project New BAC” program announced in 2011, the No. 2 U.S. bank by assets said it reached CEO Brian Moynihan’s goal of reducing expenses by $2 billion per quarter nine months ahead of schedule.
Executives, however, said they still want to wring more expenses out of the company, especially in the unit that handles problem mortgage loans.
“There’s additional work that we need to do there,” Chief Financial Officer Bruce Thompson told reporters after the earnings announcement.
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Bank of America said it made a profit of $168 million in the third quarter, down from $2.5 billion in profit a year ago. As expected, a previously announced settlement with the U.S. Justice Department over soured mortgage loans reduced earnings by $5.3 billion before taxes, or 43 cents per share after taxes.
When counting preferred dividends, the bank posted a loss of $70 million, or a penny per share, beating analysts’ consensus estimate of a 9-cent loss per share. Its revenue of $21.21 billion fell below the $21.36 billion expected by analysts.
Project New BAC – named for the bank’s stock ticker – was among Moynihan’s first major initiatives after becoming CEO in 2010.
It was designed to boost profitability and investor confidence in the struggling bank, which employs about 15,000 in the Charlotte region. After years of growing by gobbling up other lenders across the U.S., the bank rolled out the program to help it become more streamlined and efficient.
The plan included the elimination of 30,000 jobs, a number that the bank has said it has exceeded. Its total headcount now stands at 229,538 full-time employees, down 7 percent from the same quarter a year ago and down 2 percent from the second quarter of this year.
Under the project, the bank has also lowered its branch count, reorganized its management structure and sold certain business units.
It has just under 5,000 branches now, about 700 fewer than at the end of the third quarter in 2011. The bank said the reduction comes as more customers use mobile banking and other self-service banking options.
Now that the Project New BAC goals have been met, Bank of America is seeking to further lower costs in its Legacy Assets and Servicing business, which handles mortgages that borrowers are struggling to pay.
Bank of America inherited most of those mortgages when it acquired Countrywide Financial in 2008.
Although it has reduced the amount of troubled loans serviced by the unit as well as the unit’s headcount, the bank says its costs are still too high. Thompson said the bank’s goal is to bring costs in the unit to $1.1 billion by the first quarter of next year. Costs in the unit were $1.3 billion in the third quarter, excluding legal expenses.
Ultimately, the bank would like to get the unit’s costs down to around $500 million.
Marty Mosby, an analyst with Vining Sparks, said the bank has been making steady progress on lowering expenses in the Legacy Assets and Servicing business.
The bank’s challenge will be finding ways to reduce the amount of problem loans on its books so it can cut mortgage-servicing costs further, he said.
Historically, the way to do that is by making the loans more affordable by restructuring or refinancing them, he said. But such modifications are hard to do in today’s housing market due to tough lending standards and a lack in equity in some homes, among other reasons, he said.
Even as it cuts costs, the bank is also spending more on cyber security, as financial institutions continue to face attacks from hackers seeking to disrupt service and obtain customer information. Moynihan told an analyst the bank is spending “several hundreds of millions” of dollars on cyber security and that he expects expenses in this area to keep growing.
Legal woes not over
Bank of America wasn’t expected to have a rosy earnings report after it reached a $16.65 billion settlement with the U.S. Department of Justice in August over soured mortgages that the bank and companies it had bought packaged into bonds.
The accord was the biggest civil settlement between a single company and the government. A big portion of the problem loans came from Countrywide Financial and Merrill Lynch, which the bank purchased during the financial crisis.
Still, Bank of America said four of its five businesses reported higher profits than a year ago, including the wealth and investment management group, which posted record earnings of $813 million. Its consumer real estate unit reported a $5.2 billion loss, driven by the Justice Department settlement.
Moynihan, speaking on a conference call with analysts, pointed out that the bank’s businesses generated enough earnings to enable it to absorb the costs of the settlement and still post a profit.
“I’m still encouraged by what we accomplished this quarter,” he said.
But the bank’s legal woes are not over.
On Wednesday, the bank said it had to boost its legal reserves by $700 million to cover previously disclosed litigation.
Of that amount, $200 million is for a case in Japan involving lender Takefuji Corp., which sued Merrill Lynch four years ago over losses from a 2007 bond deal.
Thompson told reporters the other $500 million is for “legacy mortgage matters,” but he did not give specifics.
To date, Bank of America has spent at least $70 billion to resolve financial crisis-era legal issues, more than any other lender has spent to resolve similar matters.
“This DOJ settlement did significantly reduce legacy issues,” bank analyst William Schwartz, of Toronto-based DBRS, said in an interview. “But it didn’t eliminate them. The ghost of Countrywide doesn’t go away fast.”
Bank of America reported its third-quarter results after Wells Fargo, JPMorgan Chase and Citigroup announced theirs Tuesday.
Wells posted $5.7 billion in profit, up 3 percent from a year ago. JPMorgan said it had net income of $5.6 billion after reporting a loss of $380 million the same period last year. Citigroup posted profit of $3.4 billion, up from $3.2 billion a year earlier.
Bank of America shares fell 4.6 percent Wednesday to $15.76 on a day when U.S. stocks fell sharply.
Staff writer Rick Rothacker contributed.