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What to watch for in Bank of America's earnings Wednesday

By Deon Roberts
deroberts@charlotteoberver.com

On Wednesday, Bank of America will become the fourth of the largest U.S. banks to report second-quarter earnings. Its three big-bank peers -- JPMorgan, Citigroup and Wells Fargo -- have all posted a profit in the quarter. Analysts are expecting Bank of America to also report a profit, even as legal challenges continue to loom over the Charlotte-based bank's head. Here are five things worth watching for:

1. Settlement announcement?

On Monday, Citigroup announced it had reached a $7 billion settlement with the government over the sale of securities tied to risky mortgages. Bank of America is also negotiating with the Justice Department over a potential settlement to resolve similar probes. Talks between the bank and Justice Department have broken down because the parties can't agree on the terms of the settlement, a source familiar with the matter told the Observer. So, it seems unlikely the bank will announce a deal tomorrow -- but that won't stop analysts from asking the bank about the status of the negotiations during an earnings conference call Wednesday morning.

2. The dividend

Earlier this year, the bank surprised investors when it announced that it was suspending plans to raise its quarterly dividend from 1 cent to 5 cents. The bank had to cancel those plans after realizing it had been incorrectly accounting for a type of debt inherited in its 2009 Merrill Lynch acquisition. The Federal Reserve has to approve the bank's resubmitted plan to return capital to shareholders. But it remains unclear whether the bank will again ask to raise the dividend to 5 cents. Analysts will likely ask about plans for the dividend during the conference call.

3. All eyes on legal expenses

Analysts will be paying close attention to how money the bank sets aside for future legal costs. During the first quarter, the bank reported its first quarterly loss in three years as it boosted its legal reserves by $2.4 billion, an amount that surprised analysts. At the time, the bank said the additional reserves were for a previously disclosed mortgage-related issue, but it offered few additional details.

4. Slashing costs

Bank of America, like other big banks, has been in a cost-cutting mode during a time of weak revenue growth and increased regulations for the industry. In the first quarter, the bank reported that its employment fell to 238,560, down 9 percent, or 24,252 full-time equivalents, from a year ago. Some of the cuts were employees who handled troubled home loans Bank of America acquired when it bought Countrywide Financial Corp. in 2008. The bank has shrunk the number of troubled loans on its book, thereby reducing the need for those employees. Just last month, the bank announced plans to lay off 540 Charlotte employees who worked with troubled mortgages. It was the largest single big-bank layoff in Charlotte since 2009.

5. Economic indicators

Like other major banks, Bank of America is a barometer for the overall economy. Second-quarter earnings reports from other big banks show they are still struggling to increase revenue. Wells Fargo, for example, reported last week that the spring housing market has not lived up to expectations and revenue in its community banking segment fell $336 million, or 3 percent, from a year ago, primarily because of lower mortgage banking revenue. On Tuesday, JPMorgan Chase & Co. reported its fixed-income trading revenue and equity-trading revenue were both down from a year ago.

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