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McClatchy-Tribune  07/16/2014 9:09 AM ET
Bank of America profit falls in second quarter [The Charlotte Observer :: ]

July 16--Bank of America returned to profitability in the second quarter, although profit was down 43 percent from a year ago as legal costs continued to be a drag on its earnings.

Legal expenses, which have dogged the Charlotte bank since the financial crisis, rose to $4 billion, up from $471 million a year earlier.

The bank said Wednesday it reached a $650 million settlement that resolves its outstanding mortgage-bond litigation with insurer American International Group.

Under the agreement, AIG will dismiss federal lawsuits against the bank and withdraw its objection to an $8.5 billion settlement Bank of America reached about three years ago with about two dozen investors over soured home loans. Bank of America has also agreed to stop seeking to collect mortgage insurance proceeds from AIG's mortgage insurance subsidiaries.

The bank posted profit of $2.3 billion, down from $4 billion a year ago.

Its earnings of 19 cents a share missed Wall Street's expectations. The consensus estimate was for 29 cents a share.

The bank lost $276 million in the first three months of this year as it recorded $6 billion in legal costs -- the bank's first quarterly loss in three years. Of the figure, $3.6 billion related to a settlement with the Federal Housing Finance Authority, while the other $2.4 billion was to boost the bank's reserves for future legal costs.

The bank said the additional reserves are for a previously disclosed mortgage-related matter but has provided few other details.

Since the financial crisis, legal costs have weighed on Bank of America's profitability as it has reached large settlements to resolve mortgage cases stemming from the crisis.

Of the $4 billion in litigation expenses the bank reported Wednesday, $3.8 billion was taken for mortgage-related matters, Bruce Thompson, the bank's chief financial officer, said in a conference call with reporters. Thompson declined to comment on negotiations with the U.S. Department of Justice on a possible $12 billion settlement over its sale of shoddy mortgage-backed bonds, but indicated the expense was related to the talks.

"Clearly, the DOJ is the most significant matter out there remaining," Thompson said.

In what could be its largest settlement yet stemming from the financial crisis, the bank is negotiating with the Justice Department to resolve various mortgage probes into bonds backed by home loans that went bad and fueled the financial crisis.

Talks between the bank and Justice Department stalled last month, a person familiar with the matter told the Observer last week. The bank and federal authorities have been unable to reach agreement on the total settlement amount, as well as how much would be in the form of consumer relief and cash, the person said.

The person said U.S. Attorney General Eric Holder turned down a request from the bank to meet with CEO Brian Moynihan to discuss the issue, because the two sides are too far apart.

The bank and Justice Department have declined to comment on the negotiations.

In a setback to the bank during the second quarter, it announced the discovery of a math error that forced it to suspend a much-anticipated dividend increase.

In March, the bank won approval from the Federal Reserve to raise its quarterly dividend to 5 cents per share from 1 cent -- where it has been since the financial crisis. The Fed also approved the bank's plan to buy back $4 billion in common stocks.

But the bank had to scrap the dividend and buy-back plans after realizing it had been incorrectly accounting for a type of debt inherited in its 2009 Merrill Lynch acquisition. The bank has said its revised plan will return less capital to shareholders.

Bank of America was the last of the four largest U.S. banks to report second-quarter earnings. Its three big-bank peers -- JPMorgan, Citigroup and Wells Fargo -- all posted a profit in the quarter.


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