DealBook: Bank of America’s Earnings Decline 43% on Legal Costs

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Updated, 8:32 a.m. |

Bank of America said on Wednesday that its second-quarter profit plunged 43 percent, dragged down by a large legal expense that overshadowed some otherwise positive results.

The bank reported profit of $2.3 billion, or 19 cents a share, on revenue of $22 billion. Wall Street analysts had expected profit of 29 cents a share, but that estimate did not take into account large litigation expenses. The bank's revenue exceeded analysts' estimates of about $21.6 billion.

Bank of America's chief executive, Brian T. Moynihan, struck an optimistic tone about consumer spending and the bank's ability to generate revenue from investment banking.

"The economy continues to strengthen, and our customers and clients are doing more business with us," Mr. Moynihan said in a statement. "Among other positive indicators, consumers are spending more, brokerage assets are up by double digits and our corporate clients are increasingly turning to us to help finance business expansion and merger activity."

Bank of America's $4 billion legal expense in the quarter wiped out a substantial amount of its profit.

The bank said it had reached a $650 million agreement with the American International Group in the quarter to settle mortgage securities litigation. At the time it filed the lawsuit in 2011, A.I.G. had been seeking to recover $10 billion in losses, making it one of the largest single mortgage securities claims ever filed by a single investor.

The bank also said on Wednesday that A.I.G. had dropped its objection to an $8.5 billion settlement Bank of America had reached with a group of 22 mortgage investors in a case known as the Article 77 proceedings. That removes a significant challenge to the deal, which has been held up for more than two years.

The next big legal hurdle for the bank is settling an investigation by the Justice Department into the bank's role in selling defective mortgage securities in the lead up to the financial crisis.

On Tuesday, the bank's lawyers met in Washington with the Justice Department, but the two sides remain far apart on reaching a settlement, people briefed on the matter said. The Justice Department had been seeking as much as $17 billion, which would include a combination of a cash penalty and so-called soft dollar relief for consumers. Prosecutors have warned the bank that they will file a lawsuit if the bank does not substantially raise its offer, which currently totals more than $12 billion. The bank is offering roughly $3 billion in cash, the people said, with the remaining sum earmarked for "soft dollar" measures.

In a call with reporters on Wednesday, Bruce R. Thompson, the bank's chief financial officer, declined to say whether the large legal expense was related to a possible Justice Department settlement, but he acknowledged that "the D.O.J. is one of the significant remaining mortgage-related matters we have left."

He also declined to comment on the status of the negotiations.

Bank of America's legal charge comes after Citigroup agreed to a record $7 billion settlement with the Justice Department on Monday.

Like Citigroup, Bank of America has been wrangling with federal prosecutors over the terms of its own settlement in an effort to avoid a costly lawsuit.

The bank has been squirreling away reserves for several quarters to pay for an assortment of litigation expenses. But the charge announced on Wednesday most likely indicates that the potential price tag for settling with the Justice Department has grown substantially.

It was the second consecutive quarter that Bank of American had reported a large legal expense. During the first quarter, the bank posted its first quarterly loss in three years as it reported legal costs of $6 billion, taking many analysts by surprise.

Setting aside the legal morass, Bank of America reported some positive results, particularly in its investment bank.

Global banking profit rose to $1.4 billion in the second quarter from $1.3 billion in the period a year earlier, fueled by strong equity underwriting fees. The bank's global wealth and investment management business also grew rapidly, as total assets increased to $878 billion from $743.6 billion in the period a year earlier.

Another bright spot: Bank of America said its fixed-income trading revenue increased 5 percent from the period a year earlier.

At JPMorgan Chase, revenue from fixed-income trading dropped 15 percent, driven lower by what the bank described as "historically low levels of volatility and lower client activity across products." Goldman Sachs reported declines of 10 percent in fixed income, currency and commodities trading in the second quarter.

Trading revenue on Wall Street has plummeted in recent quarters because of low interest rates and tighter regulations. But for most banks, the decline in the second quarter has been less precipitous than many executives had feared.

As traditional profit centers like trading and mortgage originations shrink, Bank of America and other banks have aggressively moved to cut costs, shedding employees and closing branches.

Correction: July 16, 2014
An earlier version of this article misstated the value of assets in the bank's global wealth and investment management business. It is $878 billion, not $878 million.
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