Bank of America (BAC) beat analyst expectations, reporting net income of $168 million for the third quarter of 2014, on top of shrinking revenues driven by a decline in originations and mortgage servicing rights, among other factors.
After deducting dividends on preferred shares, the company reported a loss of $0.01 per share. Expectations were for a loss of $0.09 per share.
The results include the previously announced pretax charge of $5.3 billion for the settlement with the Department of Justice, certain federal agencies and six states (DoJ Settlement), which impacted earnings per share by $0.43. Earnings in the year-ago period were $2.5 billion or $0.20 per diluted share.
Revenue, net of interest expense, on an FTE basis declined 1% from the third quarter of 2013 to $21.4 billion. Revenue, net of interest expense, on an FTE basis, excluding equity investment gains ($9 million in the third quarter of 2014 and $1.2 billion in the third quarter of 2013) and valuation adjustments related to changes in the company's credit spreads, increased 1% from the year-ago quarter to $21.2 billion from $21.0 billion.
In loans, revenue declined $484 million from the third quarter of 2013 to $1.1 billion, driven primarily by lower servicing fees due to a smaller servicing portfolio, lower mortgage servicing rights results, net of hedges, and lower core production revenue due to fewer loan originations. These reductions were partially offset by lower representations and warranties provision compared to the year-ago quarter. Core production revenue decreased $172 million from the year-ago quarter to $293 million due primarily to lower volume.
Bank of America’s performance has felt the drag of litigation costs since the housing crisis started, especially after its 2008 purchase of mortgage giant Countrywide Financial Corp.
Two months ago, BofA reached a $16.65 billion settlement with the federal government that resolved a variety of federal and state investigations into its mortgage-backed securities and other practices.
Bank of America has spent more than $70 billion on litigation related to the recent financial crisis.
“We saw solid customer and client activity and improved profitability in most of our businesses relative to the year-ago quarter,” said Chief Executive Officer Brian Moynihan. “We remain focused on streamlining and simplifying our company and connecting customers and clients with the real economy, an approach that is paying dividends for them and for our shareholders.”
"We continued to focus on optimizing the balance sheet this quarter so we can best serve the core financial needs of our customers and clients and still be in a position to meet new capital and liquidity requirements in an evolving regulatory framework," said Chief Financial Officer Bruce Thompson. "We also made significant progress on our cost structure, staying on track to meet the goals we established three years ago, and our credit quality metrics reflect both the improved environment and our risk underwriting."
The company originated $11.7 billion in first-lien residential mortgage loans and $3.2 billion in home equity loans in the third quarter of 2014, compared to $11.1 billion and $2.6 billion, respectively, in the second quarter of 2014, and $22.6 billion and $1.8 billion, respectively, in the year-ago quarter.
The number of 60+ days delinquent first mortgage loans serviced by Legacy Assets and Servicing declined 16% during the third quarter of 2014 to 221,000 loans from 263,000 loans at the end of the second quarter of 2014. Year-over-year, these loans are down 44% from 398,000 loans at the end of the third quarter of 2013.
Noninterest expense in LAS, excluding litigation, declined to $1.3 billion in the third quarter of 2014 from $1.4 billion in the second quarter of 2014 and $2.2 billion in the year-ago quarter as the company continued to focus on reducing the number of delinquent mortgage loans.
Noninterest income was down 2% from the third quarter of 2013 to $11 billion. Excluding net debit valuation adjustments (DVA) and equity investment income in both periods, noninterest income was up 2% from the year-ago quarter, as modest increases across most categories were largely offset by a decline in mortgage banking income.
The provision for credit losses increased $340 million from the third quarter of 2013 to $636 million, driven by $400 million in incremental credit costs associated with the consumer relief portion of the DoJ Settlement. Net charge-offs declined 38% from the third quarter of 2013 to $1 billion, with the net charge-off ratio falling to 0.46% in the third quarter of 2014 from 0.73% in the year-ago quarter. Including the incremental credit costs associated with the DoJ Settlement, the reserve release was $407 million in the third quarter of 2014, compared to a reserve release of $1.4 billion in the third quarter of 2013.
Noninterest expense was $19.7 billion, compared to $16.4 billion in the year-ago quarter, driven by higher mortgage-related litigation expense, partially offset by reduced personnel expense. Excluding litigation expense of $5.6 billion in the third quarter of 2014 and $1.1 billion in the year-ago quarter, noninterest expense decreased 7% from the year-ago quarter to $14.2 billion, reflecting continued progress by the company to realize cost savings in its Legacy Assets and Servicing business and, to a lesser degree, Project New BAC.