Bank of America's (BAC) net income dropped 43% as it spent $4 billion to cover litigation costs, including a mortgage settlement with American International Group.
Net income declined to $2.29 billion in the second quarter, or 19 cents a share, from $4.01 billion, or 32 cents, a year earlier. This beat analyst expectations for the second quarter, with the bank reporting net income of $2.3 billion, or $0.19 per diluted share, for the second quarter of 2014, compared to net income of $4.0 billion, or $0.32 per diluted share, in the year-ago period.
The banking giant's legals costs in the second quarter included a $650 million deal to resolve all mortgage-bond litigation with insurer AIG. This follows the bank having $55 billion in costs tied to home loans, foreclosures and RMBSs, growing out of the bank's aquisition five years ago of Countrywide Financial Corp.
Noninterest expense was $18.5 billion, compared to $16 billion in the year-ago quarter, driven by higher mortgage-related litigation expense.
At June 30, 2014, the company had 233,201 full-time employees, down 9% from the year-ago quarter and 2% below the first quarter of 2014. Total staffing declined 14% from 1Q14, due primarily to continued reductions in legacy asset services, as well as actions taken in sales and fulfillment as refinance demand slowed.
"The economy continues to strengthen, and our customers and clients are doing more business with us," said CEO Brian Moynihan. "Among other positive indicators, consumers are spending more, brokerage assets are up by double digits and our corporate clients are increasingly turning to us to help finance business expansion and merger activity. We are well positioned for further progress."
"During the quarter, our Basel 3 capital ratios improved and credit losses remained near historical lows," said Chief Financial Officer Bruce Thompson. "In addition, we did a good job managing expenses. Although litigation expenses were higher than the year-ago quarter, total noninterest expense, excluding litigation, declined 6% from the second quarter of 2013."
On July 15, 2014, Bank of America executed a definitive settlement agreement with AIG to resolve all outstanding residential mortgage-backed securities (RMBS) litigation between the parties. Under the terms of the settlement, AIG will file notices of dismissal in its securities lawsuits against Bank of America and its affiliates pending in California and New York federal courts. Also, AIG has agreed to withdraw its objection to the Bank of New York Mellon private-label securities settlement (Article 77 Proceeding).
The AIG settlement amount of $650 million was covered by litigation reserves as of June 30, 2014. Bank of America has now resolved approximately 95% of the unpaid principal balance of all RMBS as to which RMBS securities litigation has been filed or threatened for all Bank of America-related entities.
In addition, the parties agreed to settle three actions brought by Bank of America seeking to collect mortgage insurance proceeds due from AIG’s United Guaranty mortgage insurance subsidiaries on legacy Bank of America originated and serviced loans.
In other areas of note, noninterest income was down 4% from the year-ago quarter, driven primarily by year-over-year declines in mortgage banking income and equity investment income. The provision for credit losses declined 66% from the second quarter of 2013 to $411 million, driven by improved credit quality.
Net charge-offs declined 49% from the second quarter of 2013 to $1.1 billion, with the net charge-off ratio falling to 0.48% in the second quarter of 2014 from 0.94% in the year-ago quarter.
Noninterest expense was $18.5 billion, compared to $16.0 billion in the year-ago quarter, driven by higher mortgage-related litigation expense, partially offset by reduced personnel expense. Substantially all litigation expense incurred in the second quarter of 2014 related to previously disclosed legacy mortgage-related matters.
Mortgage Banking and Legacy Assets
Excluding litigation expense, noninterest expense declined 6% from the year-ago quarter to $14.6 billion, reflecting continued progress by the company to realize cost savings in its Legacy Assets and Servicing business.
Bank of America funded $13.7 billion in residential home loans and home equity loans during the second quarter of 2014, helping nearly 43,000 homeowners either refinance an existing mortgage or purchase a home. This included more than 5,500 first-time homebuyer mortgages and more than 13,800 mortgages to low- and moderate-income borrowers.
The number of 60+ days delinquent first mortgage loans serviced by Legacy Assets and Servicing (LAS) declined 5% during the second quarter of 2014 to 263,000 loans from 277,000 loans at the end of the first quarter of 2014, and declined 47% from 492,000 loans at the end of the second quarter of 2013.
Noninterest expense in LAS, excluding litigation, declined to $1.4 billion in the second quarter of 2014 from $1.6 billion in the first quarter of 2014, and $2.3 billion in the year-ago quarter as the company continued to focus on reducing the number of delinquent mortgage loans in its portfolio.
Consumer Real Estate Services
Consumer Real Estate Services reported a net loss of $2.8 billion for the second quarter of 2014, compared to a net loss of $930 million for the same period in 2013, driven largely by a $3.6 billion increase in litigation expense. Revenue declined $725 million from the second quarter of 2013 to $1.4 billion, driven primarily by lower core production revenue due to fewer loan originations as well as lower servicing income, primarily due to a smaller servicing portfolio.
CRES first-mortgage originations declined 59% in the second quarter of 2014 compared to the same period in 2013, reflecting a decline in overall market demand for refinance mortgages. Core production revenue decreased $542 million from the year-ago quarter to $318 million due primarily to lower volume and a reduction in revenues from sales of loans that had returned to performing status.
The provision for credit losses decreased $311 million from the year-ago quarter to a provision benefit of $20 million due to the continued improvement in portfolio trends.
Noninterest expense increased $2.5 billion from the year-ago quarter to $5.9 billion, due to a $3.6 billion increase in litigation expense, partially offset by lower LAS default-related staffing and other default-related servicing expenses, and lower Home Loans expenses as refinance demand slowed.