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BofA posts mega profit, sees some legacy loan improvement

Mortgage issues and litigation risk linger

Bank of America (BAC) posted a $2.5 billion profit for the third quarter, gaining traction on new home loans, equity line growth, rising commercial loan balances and improved credit quality.

Still, the mega bank reported signs of strain from legacy mortgage issues.  

The lender recorded a $2.5 billion, or 20 cent-a-share, profit on revenue of $21.7 billion for 3Q, which is up from $340 million, or zero cents per share, a year ago.

Looking at real estate — the division providing mortgage loans, refi products and home equity loans — the company saw a divisional net loss of $1 billion in 3Q, which compares to a year ago net loss of $857 million. The deeper hole suggests the segment is still bleeding money with revenue in the segment declining $1.5 billion from last year to $1.6 billion in 3Q.

Noninterest income for the unit also fell to $844 million – a $1.5 billion annual drop – attributed to lower servicing income and lower core production revenue, BofA said. The provision set aside to cover reps and warrants risk associated with mortgages also grew from $307 million last year to $323 million in the most recent quarter.

The good news is the overall provision for credit losses in the consumer real estate segment declined by $571 million from a year ago to a current set aside provision of $308 million. The drop is attributed to improving loan portfolio trends, resulting from higher home prices and the impact of regulatory guidance on the treatment of loans discharged through bankruptcy.

Lower default-servicing expenses benefitted the bank’s legacy asset services segment as well, with noninterest expenses falling to $3.4 billion, from $4.2 billion a year ago. This drop stems from a series of servicing staff reductions and business divestures. These declines were then partially offset by higher expenses in the home loan segment.

BofA funded $24.4 billion home loans and equity lines in the third quarter alone, and assisted another 97,000 homeowners with refinancing existing mortgages or funding new home purchases. During the period, 5,300 first-time homebuyers obtained a BofA mortgage – while a total of 32,000 mortgages were delivered to low- and moderate-income borrowers.

Of the funded first mortgages, 22% were for home purchases, while 78% involved refinancings.

Delinquent loans serviced by BofA also declined, with the legacy asset services devision reporting a 19% drop in the number of 60-plus day late mortgages. In fact, only 398,000 loans met this definition last quarter, down from 492,000 in 2Q and a steep 57% drop from 936,000 at the end of 3Q2012.

While BofA is working through loan delinquencies and seeing much improvement, mortgage issues remain on the litigation and regulatory front.

Overall, the firm’s noninterest expenses hit $16.4 billion in 3Q, down from $17.5 billion a year ago – a drop attributed to lower litigation costs and reduced expenses in the bank’s legacy assets and servicing business.

However, litigation expense remained at $1.1 billion in 3Q, up from $471 million in the second quarter  — and a slight drop from $1.6 billion in the third quarter of last year.

The takeaway: BofA is not out of the woods just yet.

Among its routine risk dlsclosures, the firm noted that mortgage issues remain a part of "the inherent uncertainty of litigation," and it's expected to "continue in future periods."

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