Bank Of America: Recent News Paving The Way For Increased Profits

Jun.26.14 | About: Bank of (BAC)


BAC's legacy asset servicing business is laying off hundreds of employees.

More importantly, it signals LAS is continuing to shrink, reducing losses for the consolidated company.

Discussion of implications of the layoffs and the legacy unit's impact on overall profitability.

Bank of America's (NYSE:BAC) Legacy Asset Servicing (LAS) division is the catch-all where the bank houses its worst assets. These assets are relics of the pre-crisis era, where anyone that could fog a mirror could get a mortgage, and namely, from BAC's then-independent Countrywide unit. Countrywide was famous for making terrible loans as a way to generate fees and income while it was still independent, and now, those loans are BAC's problem. BAC has been servicing bad loans for years now, and while the losses are still substantial, the situation is beginning to improve.

BAC has announced it is laying off 540 employees in Charlotte that are currently servicing BAC's legacy assets. Nobody wants to see people lose their jobs, but what it means for BAC is that not only is it going to save tens of millions of dollars in payroll, it also signals that the LAS unit is improving. BAC must have tremendous confidence that the LAS unit is shrinking in order to lay off so many people that are responsible for winding the portfolio down. This should be exciting to shareholders, as this is the last big monkey on BAC's back remaining from the financial crisis.

The unit lost just over $5 billion last year, but that was a vast improvement from the $7.3 billion loss that was posted in the year prior. Also, LAS' earning assets have plummeted in recent years, with 2013 showing $48 billion in average earning assets versus $64 billion in 2012. This is all great news for shareholders, because BAC has sufficient confidence in the wind-down of LAS that it believes it no longer needs as many employees, and the numbers bear this out.

BAC doesn't break out its expense per employee for its units, but it does itemize personnel expense on the income statement and the number of full-time equivalent employees it has as of the financial statement release. In the 10-K linked above, those numbers worked out to an average of $143,767 per employee in annual expenditures. That seems a bit high for the LAS business, but if we assume even $100,000 per employee, BAC is slated to save $54 million from these layoffs. One-time costs are likely to eat up some of those savings, but they will accrue in 2015 and beyond.

Overall, the news of layoffs in the LAS is bittersweet. Nobody likes to see people lose their jobs, and this case is certainly no exception. However, sometimes layoffs are the only way forward, as we've seen with massive job cuts at Cisco (NASDAQ:CSCO) and others that have subsequently borne fruit for the company. BAC is looking to not only save tens of millions of dollars of noninterest expense with this move but also, more importantly, signal that the LAS unit is indeed shrinking substantially and is no longer in need of the attention it once was. I think when BAC reports its second-quarter earnings in a few weeks that we'll see further substantial reductions in the balance sheet of LAS, which is part of the Consumer Real Estate Services segment, and a further reduction in losses from the unit.

In particular, look for the unpaid principal balance of the Legacy Residential Mortgage Serviced Portfolio to decline from the $203 billion reported at the end of 2013; these are the toxic loans that BAC has been losing so much money on in the past few years. We also want to see the 60 days past due number come down, as it was a quarter of total loans in the portfolio as of the end of 2013. If we continue to see that number coming down, which we should, it means reduced losses for LAS, and by extension, increased profitability for BAC as a whole. BAC has come a long way with its LAS since the crisis, and the recent news indicates the job of winding down the portfolio is progressing nicely. While job losses are very unfortunate, it is a necessary evil of stopping the bleeding at LAS and paving the way for increased profitability down the road.

Disclosure: The author is long BAC. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.