BofA Posts Profit, Settles More Disputes Tied to Faulty Mortgage Lending

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 Charlotte, North Carolina-based lender said today in a statement. The company also replaced its chief financial officer, citing family reasons, and hired Gary Lynch, a former Securities and Exchange Commission enforcement director, to deal with legal and regulatory disputes.

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. Moynihan said in an interview the bank had about $3 billion of one-time costs in the first quarter and is cutting about 3,500 jobs tied to mortgage lending. The company also resolved claims with Assured Guaranty Ltd. (AGO), the mortgage-bond insurer, for about $1.6 billion.

“It’s really a tale of two cities; the rest of the company continues to push forward,” Moynihan told Erik Schatzker on Bloomberg Television’s “InsideTrack.” “The mortgage business continues to push us back, and we’ve got great customer activity in those other businesses.”

Settlement Costs

Bank of America said CFO Charles Noski, 58, will be replaced by Chief Risk Officer Bruce Thompson, 46, by the second quarter. Noski, who was appointed CFO a year ago, will become vice chairman. A serious illness in Noski’s family prevented him from moving to Charlotte as he had planned, the bank said.

Lynch, 60, was vice chairman and the head legal officer of Morgan Stanley. Bank of America named him global chief of legal, compliance and regulatory relations.

The bank said the agreement with Assured Guaranty and its subsidiaries covers the insurer’s outstanding and potential repurchase claims on mortgage-backed securitizations. The accord includes a $1.1 billion cash payment to Hamilton, Bermuda-based Assured Guaranty and a loss-sharing agreement, the bank said.

“You had that big settlement with the monoline companies, which is a good thing, which probably resulted in the missing numbers,” Paul Miller, an analyst at FBR Capital Markets, said in an interview on “InsideTrack.” He rates the stock “market perform.”

Shares React

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. The shares rose 18 cents to $13.31 as of 9:35 a.m. in New York Stock Exchange composite trading. Assured Guaranty advanced 20 percent to $17.02.

Revenue for the first quarter declined 16 percent to $27.1 billion. Results were aided by $2.2 billion released from reserves, a sign that the bank expects defaults by borrowers to ease in future quarters.

The bank’s mortgage unit posted a $2.4 billion loss, widening from $2.1 billion a year earlier. The deposits unit had a $355 million profit, down by almost half from a year earlier, on lower fees because of U.S. overdraft regulations. The cards unit reported a $1.7 billion profit, 78 percent higher from a year earlier as credit costs declined.

Investment Banking

Global banking and markets, run by Thomas K. Montag, reported a $2.1 billion profit compared with $701 million in the fourth quarter and $3.2 billion a year earlier. Investment banking fees of $1.5 billion rose 24 percent from a year earlier, fueled by mergers and acquisitions and debt and equity issuance, the company said. Sales and trading revenue was $4.9 billion, a $2.1 billion decrease from a year earlier, the bank said.

The wealth and investment management business run by Sallie L. Krawcheck reported a $531 million profit, 22 percent higher than a year earlier, as the unit added deposits and financial advisers.

“Today’s report demonstrates why we are indifferent to Bank of America shares; we believe a cheap stock and strong franchises are offset by ongoing mortgage-mess costs and a complete lack of momentum in traditional banking businesses,” said David Trone, an analyst at JMP Securities LLC in New York. He rates the bank “market perform.”

Mortgage Agreements

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.

“Our expenses are higher than we’d like them to be, but a lot of that expense is due to the 2,500 people, 2,700 people we added in mortgage this quarter to continue to deal with the bad assets,” Moynihan said in the interview. The Charlotte Observer reported earlier today that the bank plans to cut 1,500 jobs from mortgage originations, reflecting a 25 percent drop in applications. “The volumes aren’t there,” Moynihan told Bloomberg.

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.

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

To contact the editors responsible for this story: David Scheer in New York at dscheer@bloomberg.net; Rick Green in New York at rgreen18@bloomberg.net.

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