Updated March 27 at 6:24am

BofA posts lower 3Q profit on Merrill legal costs


NEW YORK - Bank of America Corp., the second- largest U.S. lender, said third-quarter profit dropped 95 percent on litigation expenses and an accounting charge tied to the firm’s debt.

Net income fell to $340 million, or 0 cents a diluted share, from $6.2 billion, or 56 cents, a year earlier, according to a statement today from the Charlotte, N.C.-based firm. Analysts surveyed by Bloomberg were predicting a loss for the quarter, and the shares rose in early trading.

Chief Executive Officer Brian T. Moynihan, who took over in 2010, has approved more than $28 billion for settlements of legal and regulatory claims tied to his predecessor’s takeovers of Countrywide Financial Corp. and Merrill Lynch & Co. Last month, he agreed to pay $2.4 billion to investors who said management hid Merrill losses ahead of the 2009 deal.

“There are several things floating to the top that reflect a continual clean-up at Bank of America,” said Marty Mosby, an analyst at Guggenheim Securities LLC, which manages more than $100 billion including Bank of America stock. “The Merrill settlement was yet another uncertainty that goes away, and at the same time the housing market is getting better, which helps because the lion’s share of their issues are from real estate.”

Tougher rules

Those issues include tougher rules on how to account for home-equity mortgages to troubled customers. Thomas Curry, who took over the U.S. Office of the Comptroller of the Currency in March, is pushing lenders for write-offs when borrowers have declared bankruptcy, even if payments on the home loans are still current.

The new guidance cost JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. about $2 billion of write-offs in their third-quarter earnings reports. Bankers including Moynihan, 53, and Wells Fargo CEO John Stumpf, 59, have said borrowers tend to keep paying as long as they are able, even if home prices drop.

Bank of America, which rescued Countrywide Financial Corp. in 2008, had $118 billion in home-equity loans at June 30, with 1.1 percent at least 30 days overdue.

The bank said Sept. 28 the third quarter would include one- time events amounting to about $3.5 billion in pretax costs and $800 million in after-tax expenses. It cited the Merrill settlement, charges tied to debt accounting and a drop in the U.K. tax rate.

Merrill costs

Bank of America set aside part of the cost of the Merrill deal in advance and incurred more legal expenses during the quarter. The company denied misleading investors over Merrill’s health and said resolving the class-action suit was in the best interests of current shareholders.

A drop in the corporate tax rate in the U.K. means that the value of deferred tax assets diminished.

Accounting rules require companies to book losses when the market price of their bonds increases or a profit when the price falls, reflecting the hypothetical cost to repurchase and extinguish the debt.

Analysts often discount such adjustments because the cost remains theoretical unless the company conducts a buyback. Bank of America has been on a campaign to reduce interest costs since last year, cutting long-term debt by more than $120 billion in the 12 months ended June 30 through redemptions and by not replacing debt that matures.

The debt-accounting charges are a reversal from last year’s third quarter, when Bank of America booked more than $6 billion in gains as its credit deteriorated and concern swirled that its capital might not be adequate.

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