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BAC posts $276M loss in 1Q driven by $6B in mortgage litigation costs

Bank makes headway with legacy, delinquent mortgages

Heavy mortgage-related litigation expenses and a mortgage lending business in retreat hurt Bank of America (BAC) in the first quarter of 2014, with the bank forking over $6 billion in mortgage-related litigation costs this quarter.

Bank of America reported a net loss of $276 million, or $0.05 per diluted share, for the first quarter of 2014, compared to net income of $1.5 billion, or $0.10 per diluted share, in first quarter 2013.

The results for the first quarter of 2014 include $6 billion in litigation expense related to the previously announced settlement with the Federal Housing Finance Agency, and additional reserves primarily for previously disclosed legacy mortgage-related matters.

Additionally, its mortgage services portfolio fell from$1.185 trillion to $780 billion.

Revenue, net of interest expense, on an FTE basis declined 3% from the first quarter of 2013 to $22.8 billion. Revenue was down 4% from the year-ago quarter to $22.7 billion.

"The cost of resolving more of our mortgage issues hurt our earnings this quarter,” said CEO Brian Moynihan. “But the earnings power of our business and customer strategy generated solid results and we continued to return excess capital to our shareholders."

"During the quarter, our Basel 3 standardized capital ratios and our liquidity improved to record levels and credit quality also improved," said CFO Bruce Thompson. "In addition, expenses in our legacy mortgage servicing business, excluding litigation, declined by $1 billion from the year-ago quarter."

Bank of America funded $10.8 billion in residential home loans and home equity loans during the first quarter of 2014, helping more than 36,000 homeowners either refinance an existing mortgage or purchase a home throughf retail channels. This included more than 3,300 first-time homebuyer mortgages and more than 12,800 mortgages to low- and moderate-income borrowers.

The pipeline for new mortgages increased 23% at the end of the first quarter of 2014 compared to the end of the fourth quarter of 2013. First mortgage originations fell 65% year-on-year.

The number of 60+ days delinquent first mortgage loans serviced by the legacy asset division declined 15% during the first quarter of 2014 to 277,000 loans from 325,000 loans at the end of the fourth quarter of 2013, and declined 58% from 667,000 loans at the end of the first quarter of 2013.

Overall, noninterest income was flat compared to the year-ago quarter, as lower mortgage banking income and lower trading account profits were largely offset by year-over-year increases in investment and brokerage income, equity investment income and gains on the sale of debt securities.

Noninterest expense was $22.2 billion, compared to $19.5 billion in the year-ago quarter, driven by higher mortgage-related litigation expenses, partially offset by reduced other expenses in LAS.

Litigation expense, including $3.6 billion for the FHFA settlement, was $6.0 billion in the first quarter of 2014, compared to $2.2 billion in the first quarter of 2013.

Separately, Bank of America reached a settlement with FGIC, as well as separate settlements with The Bank of New York Mellon, as trustee, for certain second-lien residential mortgage-backed securities trusts for which FGIC provided financial guarantee insurance. The agreements resolve all outstanding litigation between FGIC and the company, as well as outstanding and potential claims by FGIC and the trustee related to alleged representations and warranties breaches and other claims involving second-lien RMBS trusts for which FGIC provided financial guarantee insurance.

Seven of the trust settlements have already been completed, and the two remaining trust settlements are subject to additional investor approvals in a process that is expected to be completed within the next 45 days.

Bank of America has already made payments totaling approximately $900 million under the settlement with FGIC and the completed trust settlements and will pay an additional $50 million if the remaining two trust settlements are completed. The costs of the FGIC and trust settlements are covered by previously established reserves. With this settlement, Bank of America has resolved disputes with four monolines.

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