Bank Of America: Is Project New BAC Working?

| About: Bank of (BAC)


Bank of America's occupancy and personnel expenditures have decreased $2.5 billion annually since 2011.

One-time expenditures mask the true potential of cost savings.

Further cost savings and lack of one-time expenditures means further earnings upside.

Much ado has been made about Bank of America's (NYSE:BAC) Project New BAC over the past few years. The idea was simple; eliminate unproductive spending that didn't support the bank's leaner, more focused mission following the financial crisis. We get quarterly updates from management at a high level regarding how well New BAC is progressing, but I decided to take a deeper look myself. In this article, we'll examine the two biggest expenses New BAC should be affecting; occupancy and personnel. From this information, we can assess ourselves how well BAC is doing with its streamlining efforts.

To begin, I chose occupancy and personnel, because those are the two biggest expenditures that should be affected by reducing headcount. BAC has been closing branches like it's going out of style, and less corporate headcount means less office space needed. While there are other ancillary areas where New BAC is likely having an impact, we can get the biggest bang for our analysis buck looking at occupancy and personnel. To do this, I pulled the data from BAC's 10-K filings and created the chart below.

I used the dataset of 2010 to 2013 because the New BAC review process began in January of 2010. As the reductions began in earnest in 2011, I see those two years as providing both a baseline for the expenditure reductions and reason why these reductions needed to be done. If we look at personnel expense (blue columns), we can see that 2010 produced a value of just over $35 billion. Looking at the next year, that same figure is about $2 billion higher, while occupancy expense was roughly flat. As we know, 2011 wasn't exactly a banner year for BAC, yet it managed to bloat its personnel expenses another $2 billion over what was already a record expenditure. Clearly, something needed to be done.

Enter Project New BAC's implementation, and we see occupancy expense decline almost $200 million in 2012 from 2011 and personnel expense decline $1.3 billion in the same period. Last year looked even better, with a further $100 million saved in occupancy and nearly a billion dollars from personnel expenditures. These are great numbers, roughly $2.5 billion in combined annual savings versus the peak in 2011, but what does it mean for shareholders?

I think shareholders can not only be excited about the enormous cost savings that have already accrued to BAC, a total of about 25 cents per share added back into the income statement, but also that these are not the full accrual of personnel and occupancy expenditure savings as a result of New BAC. When BAC closes a branch and reduces headcount, it often must pay lease termination fees to the landlord of the branch and severance pay to those workers that have been displaced. As a result, the company's occupancy and personnel expense will look higher in that particular year that it will be under a steady-state scenario due to those one-time costs. Thus, I believe there is actually more savings for BAC just based upon what it has already done than what're seen in terms of cost savings for 2013. Unfortunately, it is impossible to quantify exactly how much additional savings BAC will see, because it isn't broken out in the 10-K. However, we know it will be more than what 2013 showed, because the company is still working on New BAC and because of the one-time costs I mentioned that will not be reoccurring in 2014 and beyond.

It may be 2016 before we get a full picture of what the leaner BAC will look like in terms of cost savings, but I do know this: there is still a lot left in New BAC, and while it is definitely working as planned, there is a lot more to go. In a tough revenue environment, like the banks are in now, it is important to remove unnecessary costs from the model, and BAC realized that a few years ago. My own personal projection is that BAC's occupancy and personnel costs will fall to around $38 billion in total for 2014, a further ~$1.2 billion savings over last year based upon more branch closures and the lack of one-time costs I spoke of earlier. Should this occur, another ~12 cents per share will be added back into the income statement and much of that will flow directly to earnings, further boosting already robust earnings upside.

Disclosure: I am long BAC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.