Litigation Expense Drags Down Bank of America Corp Second-Quarter Results

Following a settlement with AIG, Bank of America recognized $4 billion in litigation expenses, hurting its bottom-line results for the second quarter of 2014.

Patrick Morris
Patrick Morris
Jul 16, 2014 at 9:53AM
Financials

Today Bank of America (NYSE:BAC) announced earnings of $0.19 per share in the second quarter, down 40% from the $0.32 seen in the second quarter of 2013 as pretax litigation expenses of $4 billion, $0.22 per share (after tax), took their toll. 

Bank of America announced it had come to terms with insurer AIG (NYSE:AIG) in a $650 million settlement surrounding mortgage securities claims from the insurer. As a result of the settlement, AIG will withdraw its objection to the $8.5 billion settlement coordinated by trustee Bank of New York Mellon reached in 2011.

Following the settlement with AIG and the corresponding removal of its objection to the previously announced settlement, Bank of America in turn increased its litigation reserves by $3.8 billion during the quarter.

In total, Bank of America saw its net income stand at $2.3 billion, versus $4 billion during the second quarter of last year. Its revenue fell by 4.3% to stand at $21.8 billion. Bank of America saw a sizable drop in its mortgage banking income, which fell by 55% to $527 million. It also saw its equity investment income nearly get cut in half, falling from $680 million to $357 million.

As shown in the chart below, Bank of America did see improvements relative to the second quarter of last year across three of its four core businesses, with the biggest gain coming from its largest, the Consumer & Business Banking unit:

Business Segment

Q2 2013

Q2 2014

Change ($)

Change (%)

Consumer & Business Banking

$1,391

$1,788

$397

29%

GWIM

$759

$724

-$35

-5%

Global Banking

$1,297

$1,353

$56

4%

Global Markets

$962

$1,101

$139

14%

Source: Company Investor Relations. GWIM = Global Wealth and Investment Management.

The reason behind the increase of nearly 30% in the Consumer & Business Banking unit stemmed largely from a reduction in the provision for credit losses -- what a bank expects to lose on the loans it issued -- which fell from $967 million to $534 million for the unit. In total the bank saw its provision for credit losses dip by $800 million, or 66%.

Bank of America also highlighted it has officially reached a record in its deposit balances, which stood at $1.13 trillion at the end of the second quarter.

"The economy continues to strengthen, and our customers and clients are doing more business with us," noted Bank of America's CEO, Brian Moynihan, in the announcement. "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. We are well positioned for further progress."


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While Bank of America has had a difficult first six months of 2014 with more than $10 billion in litigation costs, the bank has seen its tangible book value continue to rise, growing to $14.24 per share, a gain of 3.3% over where it stood at the end of 2013.