BofA Profit Drops 36 Percent on Mortgage Losses

Friday, 15 Apr 2011 07:24 AM

 

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Bank of America Corp. (BAC), the largest U.S. lender by assets, reported its first profit in three quarters and settled more claims tied to faulty mortgages as an improving economy helped borrowers keep up with debts.

First-quarter earnings fell 36 percent to $2.05 billion, or 17 cents a share, from $3.18 billion, or 28 cents, a year earlier, the bank said today in a statement. Results for the Charlotte, North Carolina-based company were below the average estimate for adjusted earnings of 26 cents a share from 28 analysts surveyed by Bloomberg.

Chief Executive Officer Brian T. Moynihan, 51, has sought to assure investors that the bank is on the path to recovery after last year’s $2.2 billion net loss. The deficit was driven by $12.4 billion in mortgage and credit-card unit writedowns, most of them tied to loans and takeovers that predate his promotion to CEO in January, 2010. Bank of America set aside about $3 billion to settle some disputed home loans last year, and shunted almost half of its 13.9 million mortgages into a “bad” bank unit designed to clean up or dispose of underperformers.

“This could be the first clue that some of Moynihan’s management strategies are starting to take root,” said Greg Donaldson, chairman of Evansville, Indiana-based Donaldson Capital Management, with $460 million under management, including Bank of America shares. “Bank of America is valuable, everybody knows that. The problem has been their legacy issues.”

Settlement Costs

The bank said it reached an agreement with Assured Guaranty Ltd. and its subsidiaries to resolve all of the insurer’s outstanding and potential repurchase claims on mortgage-backed securitizations. Bank of America also said chief financial officer Charles Noski will be replaced by Bruce Thompson, citing an illness in Noski’s family.

Bank of America shares have dropped 32 percent in the past year as of yesterday to $13.13, the worst performance in the 24-company KBW Bank Index, on concern that claims from investors and homeowners for faulty mortgages and foreclosures will cost more than Moynihan has budgeted. Most of the firm’s retail and investment-banking operations other than mortgage lending will return to so-called normalized earnings next year, Moynihan said in a March 8 conference.

The December settlement with Fannie Mae and Freddie Mac, along with existing reserves, have “largely addressed” liabilities to the U.S.-owned firms, the bank has said. Remaining disputes with mortgage investors may cost $7 billion to $10 billion, the company estimated earlier this year.

Bank of America was among the 14 largest U.S. mortgage servicers required to pay back homeowners for losses from foreclosures or loans that were mishandled under a settlement announced two days ago. The accord between servicers and banking regulators could help the U.S. Justice Department determine the size and scope of fines for the flawed practices, regulators said.

Fed’s Rejection

Concerns over potential liabilities from bad loans may have been a reason the Federal Reserve rejected Bank of America’s request to boost its dividend last month, Frederick Cannon, director of research at KBW Inc., wrote at the time. The bank asked for permission to increase its 1-cent-a-share payout to 3 cents, then later to 4 cents, said a person with knowledge of the request.

The episode cast doubt on Moynihan’s repeated assurances to investors that he expected to be able to raise the dividend this year. The bank, the only U.S. lender among the biggest four that didn’t get Fed approval to raise its payout, said March 18 that it would resubmit a proposal in the second half, without explaining why it had to. Five days later, the bank said in a filing that the Fed “objected” to the bank’s proposed increase.

Banks are releasing reserves set aside for loan losses back into earnings as the economy improves. The U.S. unemployment rate unexpectedly fell to a two-year low of 8.8 percent in March as employers created more jobs than forecast and retail sales advanced for a ninth month.

JPMorgan Chase & Co. (JPM), the second-biggest U.S. bank by assets, said this week that first-quarter profit surged 67 percent to $5.56 billion as provisions for soured mortgages and credit-card loans fell. Citigroup Inc., the No. 3 bank, and No. 4-ranked Wells Fargo & Co. are scheduled to report results next week.

© Copyright 2014 Bloomberg News. All rights reserved.

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