By Christina Rexrode And Saabira Chaudhuri
Bank of America Corp.'s third-quarter earnings delivered a fresh
reminder that the shadow of the mortgage crisis is hard to
escape.
But now investors are also fretting about the future.
Shares of the Charlotte, N.C., lender fell more than 5% in early
afternoon trading as stocks across the board sold off due to fears
of a global economic slowdown.
Bank of America, the nation's second largest bank by assets, is
viewed as particularly vulnerable to continually low interest rates
because of its large base of deposits.
Led by Chairman and CEO Brian Moynihan, Bank of America's
management "is doing what they can in an environment that is not
particularly friendly to BofA," said Brennan Hawken, a banking
analyst with UBS. "It is an extremely strong current that BofA has
to swim against."
Bond yields moved lower Wednesday in a sign that investors are
more nervous about the economy. Investors are "obviously more
cautious that rates may not be moving up at the level that they
had" previously thought, said Bruce Thompson, the bank's chief
financial officer, on a call with analysts.
Bank of America managed to eke out a small profit, it said
Wednesday, but results were crimped because the bank had to take a
$4.9 billion charge to help pay for its blockbuster
mortgage-securities settlement with the Justice Department in
August.
Bank of America reported a profit of $168 million, down from
$2.5 billion a year earlier. On a per-share basis, which takes into
account the bank's dividend payments to preferred shareholders, the
bank reported a loss of a penny, which was better than the nine
cents a share loss expected by analysts polled by Thomson
Reuters.
Revenue fell 1.5% to $21.21 billion, missing analysts'
expectation of $21.36 billion and leaving the bank to rely on
cost-cutting to buoy net income.
Despite the legal expenses, Mr. Moynihan said, "I'm still
encouraged by what we accomplished this quarter." A bright spot was
trading revenue, which rose 9% after adjusting for an accounting
change--a better performance than that of Citigroup Inc. or J.P.
Morgan Chase & Co., which announced quarterly results
Tuesday.
Legal expenses, however, have dominated the bank for as long as
Mr. Moynihan has been CEO, since the start of 2010, frustrating
investors not only because of their size but also because of the
difficulty in predicting them. Mr. Moynihan has previously told
investors that the $16.65 billion Justice Department settlement
would be the last of the major crisis-era litigation.
In large part because of the settlement, Bank of America logged
legal expenses of $5.6 billion for the quarter, five times what it
set aside a year ago --and almost as much as the $6 billion that it
set aside in all of 2013.
The bulk of this quarter's expense, $4.9 billion, was to pay for
the Justice Department settlement. But more mortgage litigation
appears to be on the way, even if it's in much smaller increments.
Mr. Thompson said in a call with reporters that another $500
million of the litigation accrual was being set aside for other
mortgage-related matters. He declined to be specific, but the bank
has previously disclosed mortgage-securities lawsuits by private
investors.
"There still tends to be this nagging $1 billion here and there
in legal costs that just won't go away," Paul Miller, an analyst at
FBR Capital Markets, said on the bank's call with analysts.
Mr. Thompson said that the other $200 million of the litigation
reserves was related to the global-markets unit in Japan. In
August, the bank was ordered by a court in Japan to pay a fine over
a 2007 bond deal.
The Justice Department costs also demolished the results of the
mortgage unit, which logged a loss of $5.2 billion. The unit hasn't
had a quarterly profit since before the financial crisis. This
quarter's loss was its biggest since the second quarter of 2011,
when the bank announced an $8.5 billion mortgage-securities
settlement with private investors.
While the bank is still dealing with litigation related to the
housing crisis, it is also suffering from the housing market's
inability to enjoy a sustained bounceback. The bank funded $11.7
billion in mortgages during the third quarter, down from $22.6
billion a year ago. Results were higher than the second quarter,
which had $11.1 billion in mortgages.
The 9% jump in trading revenue was better than the 7% reported
by Citigroup and the 1% reported by J.P. Morgan on Tuesday. Bank of
America's fixed-income, currency and commodities trading revenue
was up 11% to $2.25 billion, while equities trading revenue was up
6% to $1.03 billion. The bank said that volatility in September
encouraged more investing in currencies, as well as gains in
mortgages and commodities.
In recent years, Mr. Moynihan has taken the tack of shrinking
the bank and cutting costs. The bank slashed a range of expenses,
including equipment, marketing and data processing. It shed more
than 18,000 jobs over the year, bringing its head count to about
230,000 employees, compared with nearly 290,000 three years ago.
The number of branches fell below 5,000 for the first time since
2004, when Bank of America bought FleetBoston Financial Corp.
Total loans and leases ticked down about 5% over the year,
though part of that comes from the bank's efforts to avoid loans to
riskier customers.
Write to Christina Rexrode at christina.rexrode@wsj.com and
Saabira Chaudhuri at saabira.chaudhuri@wsj.com
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