Bank of America's latest litigation costs stem from a $2.4-billion… (Victor J. Blue, Bloomberg )
Bank of America Corp. eked out a $340-million profit for the third quarter after recording $1.6 billion in legal expenses, but analysts say the bank has much more work ahead before it can resolve the headaches that have plagued it since the financial crisis.
The latest litigation costs, disclosed in a third-quarter financial report, stem from a $2.4-billion settlement of lawsuits over BofA's takeover of brokerage giant Merrill Lynch in 2008. The settlement, announced Sept. 28, was with investors who contended BofA knew Merrill was in worse financial shape than it revealed at the time.
Former BofA Chief Executive Ken Lewis engineered the deal at the end of a decades-long expansion spree. His successor, Brian Moynihan, has been scaling back many operations in an effort to create a leaner and more profitable company, including drastically curtailing BofA's mortgage business, once the nation's largest.
But one critical analyst, R. Christopher Whalen of investment banker Tangent Capital Partners, said BofA still faces enormous liabilities stemming from investor losses on mortgage-backed securities that were issued during the housing boom by Countrywide Financial Corp., which BofA also acquired.
"It's like pulling on a string — it never ends," Whalen said Wednesday as BofA announced its earnings.
He said a proposed $8.5-billion settlement with investors demanding that BofA buy back soured mortgage bonds could still fall apart and cost the bank billions of dollars more.
The bank's legal problems also include a $10-billion lawsuit filed by insurer American International Group Inc., seeking to reclaim losses on mortgage securities. Meanwhile, giant mortgage buyer Fannie Mae is demanding that BofA repurchase billions of dollars in flawed home loans
In its quarterly financial report Wednesday, BofA said its $340-million profit worked out to less than a penny a share, down 95% from earnings of $6.2 billion, or 56 cents a share, in the third quarter of 2011. Revenue fell 28%, to $20.4 billion from $28.5 billion.
The results included $2.7 billion in one-time charges to reflect changes in the bank's British tax liabilities and valuation of its debt. It had announced those charges, along with the Merrill settlement costs, last month.
Moynihan described BofA as gaining ground in many areas, including higher home lending than in the second quarter and a 27% increase in small-business lending.
BofA shares fell 2 cents to $9.44. Analysts had expected the bank to show a small loss but about $1 billion more in revenue.
The bank also announced it has offered to reduce the balances of mortgage borrowers by $4.75 billion — assistance it is providing to satisfy its obligations under a $25-billion national settlement between state and federal government agencies and the five biggest home lenders.
In the five months since the settlement won court approval, about 30,000 homeowners have been approved for trial modifications, BofA said. The average principal reduction is more than $150,000, it added, and monthly payments are dropping by an average of 35% for borrowers who qualify for the program.
The settlement, stemming from wrongdoing such as "robo-signing" of foreclosure affidavits, requires BofA to provide more than $7.6 billion in relief through loan modifications and short sales. Not all of the $4.75 billion in principal reductions will be credited against that obligation because banks don't receive dollar-for-dollar credit for assisting borrowers under the settlement.
Also on Wednesday, Pasadena's East West Bancorp reported third-quarter net income of $71.1 million, or 48 cents per share, up 14% from $62.4 million, or 41 cents a share, a year earlier.
Growth in core deposits and loans was strong, and bad loans and other nonperforming assets fell 15% from a year earlier to 0.66% of total assets.
"At this point, we believe we are well on our way to another year of record earnings," East West Chairman and CEO Dominic Ng said in a statement.