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 U.S. 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.
BofA also named Chief Risk Officer Bruce Thompson as its new chief financial officer, becoming the sixth new CFO in seven years. The current CFO, Charles Chuck Noski, is stepping aside after less than a year in the post 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 be pushed back into 2012, depending on when it receives Fed approval.
Noski, in an interview with Reuters, said the bank is still hoping for a dividend increase in the second half of 2011, but could not estimate the likelihood of such an increase occurring.
That's up to the judgment of our regulators, he said.
In addition to the foreclosure costs, the bank reported a shrinking loan portfolio, mainly due to a decline in consumer loan assets. Consumers grew more confident about the economy in April, a survey showed, which could signal greater loan demand ahead, and retail prices remained relatively stable.
Revenue in five of the bank's six major businesses fell, with the investment banking business facing a particularly steep drop as trading revenues fell from their unusually high levels in the same quarter last year.
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.
Total revenues after interest expenses dropped 15.9 percent to $26.9 billion.
The bank's shares closed down 2.4 percent at $12.82 Friday. The shares fell 1.5 percent Wednesday after JPMorgan Chase & Co's quarterly results showed the pressure facing consumer lending businesses.
WAITING YEARS FOR NORMAL EARNINGS
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.
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.
Bank of America faced increased mortgage expenses from hiring more people to deal with foreclosures. And when the bank delayed foreclosures in the fourth quarter, it had to make compensatory payments to government-backed mortgage giants Fannie Mae and Freddie Mac.
The bank is also buying back home loans packaged into bonds and sold to investors, because the mortgages did not meet the standards that investors had demanded.
Those loans are usually worth far less than face value, but the bank must buy them back at 100 cents on the dollar. The company set aside $1 billion during the quarter for this expense, an extra $474 million compared to the same quarter last year.
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 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.
HURDLES TO JUMP
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.
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. BofA does business with one of every two U.S. households.
The bank's loan book fell 8.5 percent to $932.43 billion during the first quarter.
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 Ltd, 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, Gerald E. McCormick and Bernard Orr)