December 6, 2023

DealBook: Bank of America Profit Drops 37%

Bank of America reported a 37 percent drop in first-quarter earnings on Friday, as the nation’s biggest bank continued to battle the legacy of the mortgage crisis and legal problems linked to the ill-fated acquisition of Countrywide Financial.

Although Bank of America’s loan portfolio showed some improvement in recent months, the bank lost $2.4 billion in its consumer real estate group, compared with a $2 billion loss the previous year. The poor results in home lending were partially offset by a $2.2 billion release of reserves and strong earnings from the bank’s credit card business.

After another disappointing quarter, the bank decided to shake up its management team on Friday and create a new position focused on legal and regulatory problems.

Bank of America, facing a prolonged reckoning in its mortgage business, has yet to shake the wide-ranging legal woes surrounding Countrywide, the former subprime lending giant. The bank put aside another $1 billion in the first quarter to cover claims from scorned investors who want the firm to repurchase billions of dollars in bad Countrywide mortgages. The bank also reported a spike in repurchase requests from Fannie Mae and Freddie Mac, the government controlled mortgage companies that already received some $3 billion from the bank last year.

The bank did take a step toward resolving complaints from mortgage-bond insurers, announcing on Friday a $1.6 billion agreement with Assured Guaranty, which guaranteed several mortgage-bond deals backed by Countrywide loans.

Bank of America in the first quarter also recorded some bright spots on its balance sheet. The bank’s credit card business saw income rise by 77 percent to $1.7 billion. Commercial banking reported a profit of $923 million, compared with $703 million in the same period of 2010. The investment banking operation reported strong results, as well, on the back of improved sales and trading revenue.

With overall earnings of $2 billion, or 17 cents a share, the bank still missed analysts’ estimates of 27 cents a share. Bank of America earned $3.2 billion, or 28 cents a share, in the same period a year earlier.

Total revenue dropped, too, to $27 billion from $32 billion, a decline partly attributable to the weak economic recovery. As consumers cling to their cash amid uncertain times, mortgage lending has stalled at Bank of America and other giant lenders. The bank, facing new government regulations, also missed out on millions of dollars in overdraft fees and other charges once levied on consumers.

The bank’s shares were down more than 1 percent in Friday morning trading.

Still, the quarterly profit can be seen as an encouraging sign for the bank after it recorded two straight quarterly losses totaling $8.5 billion.

“Strong growth in deposit balances and positive contributions from five of our six businesses reflect the steady improvement in the broader economy,” the bank’s chief executive, Brian T. Moynihan, said in a statement. “Our customer-focused strategy is working well, and we also benefited from improved credit quality.”

Bank of America is the second big financial firm to unveil first-quarter figures this week. JPMorgan Chase reported a record $5.6 billion quarterly profit on Wednesday, with the bank facing similar problems in its home lending unit. Other industry giants like Citigroup, Goldman Sachs and Wells Fargo are set to report earnings next week.

Bank of America’s report comes at a crucial time for the company, which is hoping regulators will approve a plan to increase the bank’s token 1 cent dividend. In March, the Federal Reserve nixed the bank’s proposal to raise its shareholder payouts in the second half of 2011. The bank said on Friday that it would try again, although it would not say when and analysts are skeptical of its chances.

“I think, eventually, the bank will have to back off,” said Marty Mosby, an analyst at Guggenheim Securities, a brokerage firm.

As the bank seeks to shed the legacy of the financial crisis, a nagging problem stands in the way: Countrywide. Bank of America bought the subprime lender for $4 billion, or roughly $4.25 a share, in July 2008.

Now, Countrywide has opened the bank’s giant mortgage business to attacks on multiple fronts.

Institutional investors want Bank of America to repurchase billions of dollars in soured mortgage securities sold by Countrywide at the height of the crisis.

The biggest spike came from Fannie Mae and Freddie Mac, the government-run firms that squeezed some $3 billion from the bank last year to cover claims that Countrywide’s underlying mortgages did not meet underwriting standards.

That settlement apparently did not satisfy Fannie and Freddie, whose outstanding claims recently rose to $5.3 billion, up from $2.8 billion in the fourth quarter of 2010 — reflecting “new claims” that were “not covered” by the previous agreements, the company said.

As a result, the bank’s potential hit on the claims increased, too. Bank of America’s liability increased by $800 million in the first quarter, bringing the total amount to $6.2 billion. That’s up from $3.3 billion in the same period of 2010.

The bank has previously said it could spend anywhere from $7 billion to $10 billion buying back troubled loans.

Bank of America also is among several firms ensnared in state and federal investigations into fraudulent foreclosure practices. The bank and 13 other firms signed an agreement with federal banking regulators on Wednesday to overhaul their foreclosure operations and adopt new oversight procedures.

But the bank and its peers still face demands from state attorneys general to make additional concessions and approve a multibillion-dollar settlement. The various investigations “could result in material fines, penalties, equitable remedies (including requiring default servicing or other process changes), or other enforcement actions, and result in significant legal costs,” Bank of America said in its 2010 annual report.

JPMorgan and other Wall Street titans face similar liabilities, although Bank of America’s mortgage woes set it apart. The bank, for instance, compared with its competitors, has many more loans on its books that have soured, according to a recent report by Oppenheimer Company. It also is unclear just how much legal liability the bank ultimately will face, an uncertainty that continues to plague its bottom line.

“With Bank of America, you’ve got this special asterisk: There’s no precedent to judge their exposure,” said Chris Kotowski, an analyst at Oppenheimer. “If not for that, I would be recommending the stock.”

Bank of America announced on Friday that it hired Gary Lynch, formerly of Morgan Stanley, to be its first chief of legal, compliance, and regulatory relations. The bank also said that its chief financial officer, Charles Noski, will leave his post after only a year to tend to “a serious illness of a close family member.” Mr. Noski, who will be replaced by the bank’s current chief risk officer, will remain at the company as vice chairman.

The bank last quarter had some trouble generating new loans, as revenue decreased to $2.2 billion this year from $3.6 billion in the first quarter of 2010. JPMorgan’s loan numbers were down, too, as banks tightened their underwriting standards and consumer tightened their belts.

“While loan growth tends to be seasonally weak in the first quarter, this quarter is tracking worse than seasonality would suggest,” a Barclays Capital analyst, Jason Goldberg, said in a recent report.

In the face of its mortgage woes, the bank did report some encouraging news about its loan portfolio. The bank’s net charge-offs for the quarter came in at $6 billion, compared with $10.8 billion a year ago. There was also a modest drop in nonperforming loans, which fell 14 percent to $31.6 billion.

The bank’s merger with Merrill Lynch, another marriage forged amid the financial crisis, has fared far better than its takeover of Countrywide. The global wealth management group, which includes Merrill, reported record revenue of $4.5 billion, versus $4 billion a year ago. Earnings rose more than 22 percent.

“There’s a nice feel to how Merrill is coming in,” Mr. Mosby said.

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