Banks report record profits despite massive legal fees

The nation’s major banks reported record fourth-quarter profits Wednesday, with Bank of America announcing that its profit jumped to $3.44 billion from $732 million in the same quarter in 2012, and Wells Fargo edging out JPMorgan Chase as the nation’s most profitable bank.

The jump represents a major turnaround for Charlotte, N.C.-based Bank of America, the country’s second-largest bank, which was hit last year by an $11.6 billion settlement with home mortgage giant Fannie Mae.

The settlement is the result of the bank’s involvement in the subprime mortgage crisis of 2007–08, which contributed to the massive financial crisis and subsequent recession in the U.S. As a result of the crisis, more than 6 million homeowners have an underwater mortgage, meaning they are paying more than what their house is worth.

Bank of America’s profits got a big boost because it was able to significantly reduce the amount of money it holds on its balance sheet to protect itself from bad loans. The bank's provision for credit losses fell to $336 million from $2.2 billion in the same period a year earlier.

Even Bank of America's mortgage division improved, despite taking huge losses after the housing bubble popped. The number of mortgages that were delinquent 60 days or more fell 58 percent from a year earlier.

"We enter this year with one of the strongest balance sheets in our company's history," Bank of America Chief Financial Officer Bruce Thompson said in a prepared statement.

Since the financial crisis, Bank of America has slimmed down, cutting businesses and reducing staff. The number of bank employees fell to 242,100 in the fourth quarter, from 267,200 a year earlier.

Bank of America’s stock is up roughly 8 percent so far this year.

Meanwhile, JPMorgan stepped down from its perch as the U.S. bank with the largest annual profit, ceding the spot to San Francisco–based Wells Fargo because of the $11.1 billion JPMorgan spent in legal expenses.

New York–based JPMorgan reported fourth-quarter earnings of $5.28 billion, a decrease of more than 7 percent from the year before. Wells Fargo saw an increase of 10 percent, bringing profits to $5.6 billion for the quarter and $21.8 billion for the year.

Like JPMorgan and Wells Fargo, Bank of America saw a slowing in its mortgage origination business last year. Mortgage originations fell by 46 percent in the fourth quarter from a year earlier.

Over the summer, mortgage rates started to rise, which stopped consumers from refinancing their home loans. Mortgage giant Freddie Mac said last week that the average 30-year fixed-rate mortgage had an interest rate of 4.51 percent, compared with 3.35 percent in May 2013.

Al Jazeera and The Associated Press