By Anil D'Silva and Amrutha Gayathri

(Reuters) - Bank of America Corp, the No. 2 U.S. bank by assets, reported a better-than-expected first-quarter profit, reversing from a year-earlier loss, as legal costs fell steeply and the bank earned more from mortgage lending.

Still, BofA's cost-cutting efforts fell short of what some in the market had expected, and the bank's shares fell about 1.2 percent to $15.63 in morning trading on Wednesday.

Litigation expenses fell to $370 million in the latest quarter from $6 billion a year earlier, suggesting again that the worst of the bank's legal troubles may be over.

BofA has paid at least $70 billion so far to settle legal issues related to the financial crisis, undermining cost-cutting initiatives introduced by Chief Executive Brian Moynihan since he took the bank's top job in 2010.

Through job cuts, the bank is approaching employment levels of early 2008, before it brought in more than 100,000 employees as a result of its purchase of Countrywide Financial Corp and Merrill Lynch, Moynihan said on a call.

BofA's headcount at the end of the quarter was under 220,000, down 8 percent from a year earlier, he said.

However, persistent low interest rates have overshadowed cost cuts and hurt the bank's net interest income, which fell 6.3 percent in the quarter.

"At a time of continued low interest rates, we had good expense control...," Moynihan said in a statement on Wednesday.

The bank's non-interest expenses fell 29.4 percent to $15.7 billion. But analysts said more needs to be done.

"Core expenses were a little worse than expected," Jefferies analyst Ken Usdin said in a client note.

Analysts at Oppenheimer Equity Research calculated non-interest expenses - excluding legal costs and the cost of servicing delinquent loans - at $14.3 billion, compared with their forecast of $14.2 billion.

BofA reported net income of $2.98 billion, or 27 cents per share, attributable to common shareholders compared with a loss of $514 million, or 5 cents per share, a year earlier.

Including a charge of 6 cents per share for retirement eligible incentives and excluding a charge of 3 cents per share for market-related net interest income adjustments, BofA earned 30 cents per share, according to Thomson Reuters I/B/E/S.

On that basis, the bank beat the average analyst estimate of 29 cents per share by 1 cent.

Revenue from the bank's bond trading unit fell 6.8 percent to $2.75 billion. In contrast, JPMorgan Chase & Co reported a 5 percent rise in revenue from that business.

Currency trading revenue doubled, however, helped by the Swiss central bank's shock move in January to remove the franc's cap against the euro, which set off frenzied trading.

BofA joined Wells Fargo & Co and JPMorgan Chase in reporting better results from mortgage lending as mortgage rates slipped to near two-year lows.

Mortgage banking revenue increased 68.4 percent to $694 million, while income from investment and brokerage services rose 3.3 percent to $3.38 billion.

Overall revenue, excluding adjustments, fell 5.9 percent to $21.42 billion. Both JPMorgan Chase and Wells Fargo reported revenue gains on Tuesday.

Goldman Sachs Group Inc and Citigroup Inc will report results on Thursday and Morgan Stanley on Monday.

(Reporting by Amrutha Gayathri and Anil D'Silva in Bangaluru; Editing by Ted Kerr)