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, North Carolina-based firm. Analysts surveyed by Bloomberg were predicting a loss for the quarter. The shares were little changed 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.

“If you could clean up the litigation, it’s actually a good story,” said Chris Whalen, a senior managing director at Tangent Capital Partners LLC, on Bloomberg Television. “They would be very competitive with Wells Fargo.”

Revenue dropped 28 percent to $20.4 billion before adjustments. The quarter’s results were aided by a 48 percent drop in provisions for credit losses to $1.77 billion from a year earlier. 

Unit Results

Net income for consumer and business banking was $1.3 billion, down $379 million, even as average deposits rose 3 percent. The bank reported sales and trading revenue increased to $3.2 billion from $1.3 billion a year earlier excluding the impact of debt-valuation adjustments, and was little changed from the second quarter. Mortgage originations increased 18 percent, the bank said, with consumer real estate narrowing its net loss to $877 million from $1.1 billion.

“Our strategy is taking hold even as we work through a challenging economy and continue to clean up legacy issues,” Moynihan, 53, said in today’s statement. The stock rose 2 cents to $9.48 at 7:56 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.

Accrual Expense

After preferred dividends, Bank of America showed a net loss for the quarter of $33 million, according to today’s statement. In home mortgages, losses could be as much as $6 billion above accruals on demands that the firm repurchase shoddy loans, compared with previous guidance of $5 billion for a smaller set of demands. The bank was able to reach the projection “as the result of continued dialogue” with Fannie Mae and Freddie Mac.

The U.S. housing market is starting to improve with prices moving “in the right direction,” Chief Financial Officer Bruce Thompson said today. “We’ve clearly begun to turn a corner,” he told reporters on a conference call.

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.

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.

Discounted Costs

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. 

Expense Target

Moynihan has vowed to cut $8 billion in annual expenses and more than 30,000 jobs. The bank shrank the number of full-time employees 5.6 percent to 272,594 in 12 months.

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 Chase & Co. and Wells Fargo & Co., 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.

OCC Rules

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, Citigroup Inc. and Wells Fargo about $2 billion of write-offs in their third-quarter earnings reports. Bankers including Moynihan 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.