Huge Mortgage Settlement Pushes Bank of America Into Q3 Loss

By Tanya Agrawal and Peter Rudegeair

Bank of America (BAC), reported a smaller-than-expected quarterly loss for common shareholders as a pickup in profits from trading helped make up for a $5.6 billion charge related to its record settlement with the government over shoddy mortgages.

The loss underscores how years after the financial crisis, the No. 2 U.S. bank is still paying for its mistakes, although fund managers and analysts have said the settlement may finally allow the bank to put last decade's housing crisis behind it.

Bank of America is the fourth of the six major U.S. banks to report third-quarter results. JPMorgan Chase (JPM) and Citigroup (C) were also hit by big legal expenses.

Chief Executive Officer Brian Moynihan, who took on the additional role of chairman in October, has been working to resolve Bank of America's legal and regulatory woes since he took over in 2010.

%VIRTUAL-WSSCourseInline-840%Four of the bank's five main businesses were profitable in the latest quarter, the exception being the mortgage business, underscoring the challenge still facing the 55-year-old CEO.

The $5.6 billion litigation expense was related to a $16.65 billion settlement reached with the government in August that was tied the bank's purchases of Countrywide Financial in July 2008 and Merrill Lynch six months later.

Bank of America has so far agreed to pay about $70 billion to resolve legal disputes related to the financial crisis -- more than double the amount JPMorgan has agreed to pay.

The bank's shares were down 2.4 percent at $16.12 in early trading amid a general market selloff that hit banks especially hard. The KBW bank index was down 1.83 percent.

Bank of America posted a net loss attributable to shareholders of $70 million, or a penny a share, for the three months ended Sept. 30, compared with a year-earlier profit of $2.22 billion, or 20 cents a share.

Net income including preferred stock dividends fell to $168 million from $2.5 billion.

The bank lost 3 cents a share on an adjusted basis, according to a calculation by Thomson Reuters I/B/E/S. Analysts on average had expected a loss of 9 cents a share.

"While it was a messy quarter, core results look okay," said Citigroup analyst Keith Horowitz.

Trading Revenues Rise

Total revenue slipped to $21.21 billion from $21.53 billion, while noninterest expenses, including litigation expenses, increased 20.5 percent to $19.74 billion.

Bond trading revenue, excluding accounting adjustments, rose 11 percent to $2.2 billion as market activity picked up in September. Citigroup's revenue from fixed income trading rose 5 percent, while JPMorgan's increased 2 percent.

Companywide investment banking fees rose 4 percent to $1.4 billion, while profit in the bank's largest business, retail banking, rose 3.9 percent to $1.86 billion.

Profit from wealth and investment management rose 12.9 percent to $813 million.