Bank of America, Weighed by Legal Costs, Posts Loss

 

Eduardo Munoz/ReutersA Bank of American branch in New York.

Updated, 8:30 p.m. | Bank of America delivered an unwelcome surprise to its investors, as the bank disclosed larger-than-expected legal expenses in the first quarter stemming from the financial crisis.

The bank recorded $6 billion in legal costs, which led it to report a $276 million loss in the quarter. The bank’s results, which were released on Wednesday, missed analysts’ expectations and obscured otherwise decent results in its consumer and investment banking businesses.

The disappointing news shows how Bank of America is still paying for its mortgage problems nearly six years after the financial crisis. And other large pending mortgage cases could continue to weigh on future earnings, including those involving the Justice Department and multiple state regulators.

Even as executives demonstrate their successes in rebuilding the bank into a leaner and less risky lender, the latest quarter reflected the unpredictability of its legal woes. The bank’s quarterly loss of 5 cents a share missed analyst estimates of a profit of 5 cents a share.

“Higher litigation expenses clearly blurred the progress we’ve made in improving our businesses,” the bank’s chief financial officer, Bruce R. Thompson, said.

The unexpected loss at Bank of America drove down the bank’s shares by 1.6 percent on Wednesday on an otherwise positive day for the stocks.

At the heart of the additional legal expenses was a $6.3 billion settlement that the bank announced last month to settle a lawsuit arising from troubled mortgage-backed securities it bundled and sold to Fannie Mae and Freddie Mac before the financial crisis.

The bank agreed to pay that sum to settle a lawsuit filed by the Federal Housing Finance Agency on behalf of the two government-sponsored mortgage finance firms that bought the securities from two Bank of America affiliates, Countrywide Financial and Merrill Lynch.

Bank of America continues to grapple with the legal fallout from the mortgage lending debacle. The settlement with the Federal Housing Finance Agency concludes one of the bank’s largest legal liabilities, accounting for about $3.6 billion of the legal expenses in the quarter. (The rest of the settlement, $2.7 billion, was accounted for in previous quarters.)

The bank disclosed the $3.6 billion charge related to the Federal Housing Finance Agency settlement last month, but the additional legal expenses of $2.4 billion in the quarter related to other cases caught many by surprise.

“There is no way to model for this,” said Lisa Kwasnowski, a banking analyst at the credit rating firm DBRS.

The bank does not do much to help investors project how much in legal expenses it will record each quarter. Bank officials say they will not disclose their total legal reserves for a particular case because that could give litigants the upper hand in negotiating a settlement by signaling how much the bank is willing to pay.

But the large litigation expense in the first quarter indicates that the bank is getting closer to reaching settlements with prosecutors and other litigants on a number of fronts, people briefed on the matter said. The bank and prosecutors are negotiating a broad deal, referred to as a global settlement, that would resolve a number of outstanding investigations, according to people briefed on the matter. In paying a multibillion-dollar penalty, the bank would put to rest an investigation into the bank’s sale of mortgage backed investments and a separate mortgage related lawsuit that the Justice Department filed against the bank last summer.

Last month, Bank of America said it had preliminary discussions to resolve the government’s inquiry. The deal, one of the people briefed on the matter said, is expected to be more than the $2.4 billion that the bank set aside in the first quarter.

Excluding the litigation expense, the bank said its profits would have totaled roughly 35 cents a share, beating Wall Street expectations of 27 cents a share.

Still, revenue was down 4 percent from the year-ago quarter, to $22.7 billion.

“It was a messy quarter,” said Mike Mayo, a banking analyst at CLSA.

Bank of America’s fixed-income trading operations suffered from declining client demand and low interest rates — a fate none of the largest Wall Street firms has escaped in the first quarter. The bank’s fixed-income trading revenue fell 15 percent in the first quarter when adjusting for a one-time write-down in the same period a year ago. But overall markets revenue increased, fueled by solid results in equities and credit trading.

Consumer banking profit increased 14 percent from a year ago, as deposits increased and expenses declined. Overall loan values were down, as the bank continued to run off its legacy portfolio.

The bank’s pipeline of mortgage applications increased 23 percent from the fourth quarter, suggesting that this market was “bottoming out,” Mr. Thompson said.

He said the bank was not lowering its credit standards to bolster its mortgage productions, but was focusing more intently on selling mortgages to private wealth clients and other existing customers. “We are not going down-market,” he said.