Legal Costs Sapped 2nd-Quarter Profit at Bank of America

CHARLOTTE, N.C. (The Charlotte Observer/MCT) -

Bank of America returned to profit in the second quarter, but earnings were down 43 percent from a year ago, as legal costs continued to be a drag on 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 that it reached a $650 million settlement that resolves its outstanding mortgage-bond litigation with insurer American International Group.

Under the agreement, AIG will withdraw its objection to an $8.5 billion settlement Bank of America reached about three years ago with 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.

The bank lost $276 million in the first quarter, as it recorded $6 billion in legal costs. It was the bank’s first quarterly loss in three years. Of that figure, $3.6 billion related to a settlement with the Federal Housing Finance Authority, while $2.4 billion was to boost the bank’s reserves for future legal costs.

Since the financial crisis, legal costs have weighed on Bank of America’s profits, 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 that the expense was related to the talks.

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

The bank is negotiating with the Justice Department to resolve various mortgage investigations 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 said 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 chief executive 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 shares.

But the bank had to scrap the dividend and buyback 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.