Bank of America Corp posted its first quarterly profit since summer 2009 as it generated outsized bond trading revenue and set aside less money to cover bad loans.

The results weren't entirely positive -- fee income plunged more than 20 percent as mortgage lending slowed, and the bank's shares fell. But big trading profits show the Merrill Lynch acquisition is paying off.

The bank's lower credit provision signals that borrower defaults may be stabilizing as the economy improves.

Across the board, they have benefited in this change in the weather, said Michael Holland, chairman of Holland & Co in New York. They were hit by a significant hurricane a year ago and now, if anything, they have a strong wind behind their backs.

Chief Executive Brian Moynihan has reshuffled management and is expanding Merrill Lynch's commercial and investment banking business in a bid to keep boosting the bank's profits.

Moynihan sounded optimistic about the bank's outlook on a conference call with analysts.

The worst of the credit cycle is clearly behind us, he said.

Moynihan adding the bank is targeting the low teens for its return on shareholder equity.

Moynihan said he expects the bank's tangible common equity ratio -- a key metric analysts, investors and regulators have monitored throughout the financial crisis -- to increase to between 5 and 5.5 percent.

But he also cautioned that until there is more certainty about the economy, Bank of America is likely to keep its reserves for bad loans fairly close to where they are now.

The bank's reserve for loan and lease losses totals $46 billion.

Moynihan just finished his first quarter at the helm of the bank, after predecessor Kenneth Lewis generated two quarters of losses in the second half of 2009 and stirred tremendous controversy with his acquisitions.

In a later speech in Charlotte, North Carolina on Friday at a Federal Reserve Bank of Richmond symposium, Moynihan said the Merrill Lynch deal has irrevocably changed the bank.

We changed ourselves as a company, and I don't think we'll ever go back, he said.

Bank of America said first-quarter net income rose to $2.83 billion, or 28 cents per share, from $2.81 billion, or 44 cents per share, a year earlier.

Bank of America's first-quarter per-share earnings were lower because of an increase in shares outstanding. The bank sold shares in the 2009 fourth quarter to raise funds to repay a government bailout.

Analysts on average had forecast a profit of 9 cents per share, according to Thomson Reuters I/B/E/S.

The decrease in the bank's credit provision more than offset a decline in overall revenue. Revenue fell 11 percent to $32.3 billion as fee income tumbled nearly 22 percent to $18.2 billion.

Five of the bank's six major business units were profitable during the quarter.

The home loans unit reported a $2.1 billion loss for the quarter. Revenue for the unit dipped 31 percent as the bank is still coping with mortgage defaults and foreclosures.

Bank of America shares declined $1.01 or 5.2 percent in afternoon trading to $18.47, as investors sold bank stocks broadly on the news of fraud charges levied Friday by the U.S. Securities and Exchange Commission against Goldman Sachs Group Inc. But bank shares had declined earlier in the day, despite the quarterly profit.

The bank's share price had surged nearly 30 percent since the start of the year until the market's close on Thursday, slightly trailing the broader KBW Bank Index.

Clearly, the market priced in some terrific earnings ... The only explanation for the sell-off that we're witnessing now ... is profit-taking and a more realistic valuation that gets the stock in line with actual earnings, said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.


Earnings were driven by arguably Lewis's most controversial deal in his nearly decade-long run as CEO -- the Merrill Lynch purchase, which closed in early 2009 and was announced around the same time Lehman Brothers Holdings Inc was filing for bankruptcy.

Bank of America's global banking and markets division generated $3.2 billion of profit in the quarter, the best results of the six major business units. Record sales and trading revenue drove that profit, particularly in fixed income, currencies and commodities. That investment banking division reported $5.8 billion in revenues during the quarter.

The credit situation seems to be getting a little better but the capital markets business is helping a lot, said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.

Moynihan, during his Fed speech, said the company was hiring in its corporate and investment bank and capital markets business globally to continue its growth.

Particularly in Asia, he said, we're hiring to meet people's needs.

The strong investment banking results mirror those of key Bank of America rival JPMorgan Chase & Co , which beat earnings expectations on Wednesday with a $3.3 billion profit.

As that business surged, Bank of America's provision for credit losses decreased by $3.6 billion, to $9.8 billion.

Total nonperforming loans were little changed in the quarter, totaling $35.9 billion, versus $35.7 billion at the end of 2009.

The bank ended the quarter with $2.3 trillion in assets and $976 billion in loans and leases, little changed from a year earlier.

(Reporting by Joe Rauch; Additional reporting by Steve Eder, Dan Wilchins, Edward Krudy, and Elinor Comlay; Editing by John Wallace and Gerald E. McCormick)