Bank of America Corp posted an unexpectedly sharp drop in first-quarter profit as higher expenses from delayed home foreclosures weighed on its mortgage business.
The largest bank lost more than $2.39 billion in its home loan business as revenue fell and expenses rose. The foreclosure mess that began in the fourth quarter of 2010, with borrowers accusing major banks of repossessing homes without having the right paperwork in place, was a key source of higher costs in the quarter.
The bank also named Chief Risk Officer Bruce Thompson as its new chief financial officer. The current CFO, Charles Chuck Noski, is stepping aside due to a serious family illness.
The first-quarter results give some inkling of why the Federal Reserve told the bank in March to rein in its plans to boost dividends, even as competitors got approval to do so.
Bank of America is further behind. And the reason they're further behind is because of what's going on with the mortgage business, said Ben Wallace, analyst at Grimes & Co, with $1 billion under management.
The bank said it was not sure how it would resubmit its request for a higher dividend -- it now pays 1 cent per share quarterly -- and warned that a dividend increase could slip into 2012, depending on when it receives Fed approval.
The bank's shares were down 1.6 percent to $12.92 in afternoon trading Friday. The shares fell 1.5 percent Wednesday after JPMorgan Chase & Co's quarterly results showed the pressure facing consumer lending businesses.
Bank of America said in March it did not expect its mortgage business to return to normal earnings until 2014 or later, while most of its other businesses could recover by 2013.
Home loan difficulties appear to be widespread among major lenders. JPMorgan, the second-largest U.S. bank, suffered extraordinarily high losses on mortgage-related issues in the first quarter.
Unfortunately, these losses will continue for awhile, said JPMorgan Chief Executive Jamie Dimon.
Bank of America did manage to earn $2 billion in the latest quarter, its first profit since the second quarter of 2010.
But profit fell more than 35 percent from a year earlier, and earnings per share were just 17 cents, compared with analysts' average forecast of 27 cents, according to Thomson Reuters I/B/E/S.
A big portion of the bank's profit was driven by a $2.2 billion release of loan loss reserves, as loan delinquencies and defaults continued declining.
Increased expenses from mortgages included hiring more people to deal with foreclosures. And when it delayed foreclosures in the fourth quarter, it had to make compensatory payments to government-backed mortgage giants Fannie Mae and Freddie Mac.
UPHILL BATTLE FOR CEO MOYNIHAN
Bank of America's Merrill Lynch brokerage business provided a bright spot in the latest quarter, reporting sharply higher revenue and client assets as well as a net increase of nearly 200 financial advisers.
As with JPMorgan, bond trading was down from the record levels of a year earlier but up from the fourth quarter. Fixed income, currency and commodity trading revenue was $3.65 billion, more than double the fourth-quarter level.
Bank of America, built through a series of acquisitions over decades, made an ill-fated purchase in 2008 when it bought mortgage lender Countrywide Financial Corp as the financial crisis intensified.
The purchase gave BofA more subprime mortgages, home equity loans, and other assets that have generated big losses. The bank needed two government rescues during the financial crisis, although it has since repaid the money.
Chief Executive Brian Moynihan, who took the helm in early 2010 and received a $9.1 million bonus in January, is trying to fix the bank by cutting costs and selling more products to retail customers.
We need to do more to show we can hold expenses flat, Moynihan said on a call with analysts.
He faces macroeconomic hurdles. Bank of America's results are closely tied to the health of U.S. consumers, who have been reducing their debt as they wrestle with stagnant wages and high unemployment. The Charlotte, North Carolina-based bank does business with one of every two U.S. households.
The bank's loan book fell 8.5 percent during the first quarter, to $932.43 billion, due mainly to a decline in consumer loans.
Moynihan has put new people in charge of many areas of the bank, but more changes are underway in the executive suite.
In the latest change, Thompson will become CFO by the end of the second quarter. A search is underway for a new risk chief.
Noski took over as CFO in May 2010 and lives in Los Angeles. He had planned to move to Charlotte this summer, but the family illness prevented the move, the bank said.
Bank of America also said it had settled a mortgage-related lawsuit with Assured Guaranty, a bond insurer, at an estimated cost of $1.6 billion.
(Reporting by Joe Rauch, additional reporting by Dan Wilchins in New York and Dominic Lau in London; editing by John Wallace)