BofA ekes out a profit despite settlement cost, charges

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By Rick Rothacker | October 18, 2012 2:49 AM EST

Bank of America Corp eked out a third-quarter profit even after taking $1.6 billion of litigation charges, as the second-largest U.S. bank set aside less money to cover bad loans.

The bank posted a big jump in bond trading revenue, excluding accounting adjustments, and its mortgage banking revenue rose 25 percent.

But it earned just $340 million during the quarter, down 95 percent from the same period last year, when it sold assets and recorded an accounting benefit.

The results show Chief Executive Brian Moynihan is still haunted by acquisitions forged during the financial crisis. The bank last month agreed to pay $2.4 billion to settle claims that it hid crucial information from shareholders when it bought investment bank Merrill Lynch & Co at the height of the crisis.

Bank of America said last month that the settlement, a UK tax charge and an accounting charge related to the value of its debt would reduce third-quarter earnings by 28 cents per share.

Adding to its woes, investors who bought mortgage-backed securities from the bank years ago demanded the bank buy back another $4.98 billion of the securities. In last year's third quarter, new buyback requests amounted to $3.8 billion.

To boost profits, the bank launched a broad cost-cutting program in 2011 that aims to eliminate $8 billion in annual expenses and 30,000 jobs.

But even with that project, called "New BAC," noninterest expenses rose nearly 1 percent in the latest quarter to $17.54 billion. The bank attributed the increase to additional legal expenses.

Still, Thompson said the bank was "well ahead" of its year-end goal to produce 20 percent of the $5 billion in annual savings called for in the first phase of New BAC.

Excluding the unit that handles troubled loans, the bank's work force is down by about 21,000 from a year ago, to 230,900. Head count in Legacy Asset Servicing, however, is up nearly 5,000 to 41,700. The bank has another 17,000 contractors on the job.

Bank of America in the past signaled that expenses were peaking in the Legacy Asset Servicing unit, but head count has grown as more work has poured in from government settlements requiring loan modifications and servicing improvements. Thompson said head count has stabilized, and the bank should make "real progress" on expenses in the fourth quarter.

NEW REPURCHASE LOSS ESTIMATE

The bank on Wednesday posted net earnings of nil per share, for the quarter, compared with 56 cents a share a year earlier.

Analysts' average forecast was a loss of 7 cents per share, according to Thomson Reuters I/B/E/S. It was not immediately clear if the results were comparable.

The bank set aside $1.8 billion in the quarter to cover bad loans, down from $3.4 billion a year earlier.

In its earnings presentation, Bank of America provided more clarity on possible losses from repurchases of mortgage-backed securities. It said it could lose up to $6 billion above its current reserves on claims from Fannie Mae and Freddie Mac as well as private investors. It previously said its losses beyond reserves could be up to $5 billion for private investors only.

In a conference call with reporters, Chief Financial Officer Bruce Thompson said the bank still has disagreements with Fannie Mae over claims and has not reached any settlement with the government-controlled mortgage finance company.

Bank of America had $16.3 billion in reserves for repurchase claims at the end of the third quarter.

The bank's shares were down 1 cent to $9.45 in late-morning trading.

(Reporting By Rick Rothacker in Charlotte, N.C.; Editing by Gerald E. McCormick and John Wallace)

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Copyright 2012 Thomson Reuters. All rights reserved.

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