Bank of America beats expectations despite declining 3Q revenue

Drop in LAS servicing costs, rise in mortgage lending drove income

Bank of America (BAC) beat analysts' expectations on Wednesday despite declining revenue with its third quarter earnings, and shares of the banking giant rose in premarket trading.

Bank of America posted third quarter revenue of $20.68 billion, down from $21.43 billion a year ago. Non-interest expense declined 31% to $13.8 billion.

The company has net income of $4.5 billion for the third quarter of 2015, compared to a net loss of $232 million. Adjusted earnings of 37 cents per share reversed losses in third quarter 2014 related to a multibillion-dollar settlement with the federal government over mortgages. Analysts expected 33 cents per share.

"We saw solid results this quarter by continuing to execute our long-term strategy," said Chief Executive Officer Brian Moynihan. “The key drivers of our business — deposit taking and lending to both our consumer and corporate clients — moved in the right direction this quarter and our trading results on behalf of clients remained fairly stable in challenging capital markets conditions. Our balanced approach to serving customers and clients is on track as the economy continues to move forward."

The decline from the third quarter of 2014 was driven by lower consumer loan balances and lower yields, partially offset by commercial loan growth and lower long-term debt balances. Noninterest income was up 2%, or $181 million, from the year-ago quarter to $11.2 billion. Results for the most recent quarter reflected year-over-year increases in mortgage banking and card income, higher asset management fees and other income, partially offset by lower capital markets revenue and lower equity investment income.

The company originated $13.7 billion in first-lien residential mortgage loans and $3.1 billion in home equity loans in the third quarter of 2015, compared to $11.7 billion and $3.2 billion, respectively, in the year-ago quarter. 

"Our results this quarter reflect our ongoing efforts to improve operating leverage while continuing to invest in our business," said Chief Financial Officer Paul Donofrio. "We built capital and liquidity to record levels and grew total loans for the second consecutive quarter while continuing to operate within our risk framework."

Noninterest expense declined $6.3 billion, or 31%, from the third quarter of 2014 to $13.8 billion. Excluding litigation expense of $231 million in the third quarter of 2015 and $6.0 billion in the year-ago quarter, noninterest expense decreased 4% from the year-ago quarter to $13.6 billion, reflecting lower Legacy Assets and Servicing expense. Continued cost management efforts allowed the company to continue to invest in growth opportunities while keeping expenses relatively flat from the prior quarter.

Legacy Assets and Servicing reported a net loss of $196 million in the third quarter of 2015, compared to a net loss of $5.1 billion for the same period in 2014, driven by lower litigation expense. Revenue increased in the third quarter of 2015 as mortgage servicing rights net-of-hedge performance improved and the representations and warranties provision declined, partially offset by lower mortgage servicing fees.

Mortgage servicing fees were down 27% from the year-ago quarter to $345 million as the number of first- lien and second-lien loans serviced by LAS declined from the third quarter of 2014. 

The provision for credit losses decreased $261 million from the third quarter of 2014 to $6 million, driven primarily by costs related to the consumer relief portion of the U.S. Department of Justice settlement in the year-ago quarter. 
Noninterest expense decreased $5.5 billion from the year-ago quarter to $1.1 billion primarily due to a decrease in litigation expense of $5.1 billion and lower default-related servicing expenses.

Excluding litigation, noninterest expense was $0.9 billion in the third quarter of 2015, relatively unchanged from the prior quarter and down $430 million, or 32%, from the third quarter of 2014 as the number of 60+ days delinquent first-mortgage loans serviced by LAS declined 48% to 114,000 loans .

BAC recorded a second quarter net income of $5.3 billion, or $0.45 per diluted share, compared to $2.3 billion, or $0.19 per share, a year ago. Revenue, net of interest expense, on an FTE basis, rose $385 million, or 2%, from the second quarter of 2014 to $22.3 billion.

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