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 Wednesday 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."

The quarter included increased sales and trading revenue, excluding accounting adjustments, higher income from mortgage banking and investment banking and better credit quality, according to the bank. Deposits and mortgage originations both rose, the bank said.

Banks face 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. (JPM), Citigroup Inc. (C) and Wells Fargo & Co. (WFC) 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.

 "Our strategy is taking hold even as we work through a challenging economy and continue to clean up legacy issues," Moynihan said in today's statement. The stock rose 7 cents to $9.53 at 7:17 a.m. in New York.

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.

After preferred dividends, Bank of America showed a net loss for the quarter of $33 million, according to Wednesday's statement. In home mortgages, losses could be as much as $6 billion above accruals on demands that the firm repurchase shoddy loans. The bank was able to reach the projection "as the result of continued dialogue" with Fannie Mae and Freddie Mac.

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.

The bank's stock plunged almost 60 percent in 2011, dipping below $5 in December for the first time since 2009. The shares have led the Dow Jones Industrial Average this year with a gain that reached 70 percent this week as Moynihan boosted capital and the U.S. recovery strengthened.

Moynihan has vowed to cut $8 billion in annual expenses and more than 30,000 jobs. The CEO sold more than $50 billion in assets since taking over in 2010 from Kenneth D. Lewis, who announced his sudden retirement after clashing with investors and regulators over the Merrill Lynch deal, which threatened the bank's stability.

JPMorgan and Wells Fargo, ranked No. 1 and No. 4 by assets, said record third-quarter earnings were aided by a rise in mortgage fees. JPMorgan's profit climbed 34 percent to $5.71 billion, while Wells Fargo's rose 22 percent to $4.94 billion.

Bank of America scaled back its mortgage business after the 2008 takeover of Countrywide saddled it with more than $40 billion in costs from faulty mortgages and foreclosures. The bank became the biggest U.S. mortgage lender after the acquisition, then slipped to No. 4 and had about 4.4 percent of the U.S. market this year, compared with 33 percent for Wells Fargo and 11 percent for JPMorgan, according to industry newsletter Inside Mortgage Finance.

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