Moynihan’s Loan Struggle May Push BofA Dividend Boost to 2012

Bank of America Corp. CEO Brian Moynihan
Bank of America Corp. Chief Executive Officer Brian Moynihan. Photographer: Jeffrey Camarati/Bloomberg

Bank of America Corp. Chief Executive Officer Brian T. Moynihan said the firm’s dividend may not rise from 1 cent a share until next year as the biggest U.S. lender struggles to tame costs tied to defective mortgages.

“We’re doing the work we need to do” so that the Federal Reserve will approve an increase, Moynihan, 51, said today in a conference call with analysts and investors. The Charlotte, North Carolina-based bank’s efforts will continue “whether we get the dividend in the second quarter, third quarter, fourth quarter, first quarter, next year, this year.”

The bank was left behind as competitors including JPMorgan Chase & Co. and Wells Fargo & Co. got Fed approval last month to increase their payouts following a review of their ability to withstand another economic slump. Moynihan had previously told investors the bank may raise its dividend this year. After the rejection, the firm announced plans to re-apply for an increase in 2011’s second half.

“It doesn’t help with the credibility issue,” said Andrew Marquardt, an analyst at Evercore Partners Inc. in New York. “Bank of America just doesn’t have a ton of confidence from investors and analysts alike. Certainly I didn’t have them in the capital-deployment camp.”

The bank’s first-quarter net income declined 36 percent to $2.05 billion, or 17 cents a share, missing analysts’ estimates on what Moynihan called “one-time” charges and as revenue from consumer banking slipped. The firm booked about $3 billion in costs tied to faulty mortgages, foreclosures and lawsuits and agreed to resolve loan disputes from bond insurer Assured Guaranty Ltd. in a $1.6 billion settlement.

Settlement Costs

Costs include additions to reserves fueled by new repurchase requests from U.S.-owned Fannie Mae, managers said during a conference call. In January, Bank of America Chief Financial Officer Charles Noski said a $3 billion settlement with Fannie Mae and Freddie Mac, along with existing reserves, had “largely addressed” liabilities to the companies.

Bank of America slipped 21 cents, or 1.6 percent, to $12.92 at 1:43 p.m. in New York Stock Exchange composite trading. The firm has dropped more than 33 percent in the past year, 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.

“We have work to do in this company that we knew we had to do in the first half of this year” including paring assets and preparing for regulatory changes, Moynihan said today in an interview with Erik Schatzker on Bloomberg Television’s “InsideTrack.” After that is completed, “then I’m sure that we’ll be in the position to get the dividend increased.”

Fed’s Decision

Lenders including Bank of America, which had a 64-cent payout until 2008, slashed dividends during the financial crisis to conserve capital as loan losses piled up. This year, the Fed tested the capital adequacy of the 19 biggest banks, allowing most to pay more money to shareholders.

“Ultimately the decision to increase the dividend will be one determined in part by approval by the Federal Reserve,” said Jerry Dubrowski, a Bank of America spokesman.

Revenue for the first quarter declined 16 percent to $27.1 billion. Results were aided by $2.2 billion released from reserves, a figure exceeding some analysts’ estimates and a benefit not typically considered reliable.

“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 company separately cut jobs in mortgage origination.

‘Mortgage Mess’

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 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.

“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.”

Gary Lynch

To help with legal and regulatory disputes, Moynihan also shook up management, hiring Gary Lynch, a former Securities and Exchange Commission enforcement director and top legal officer of Morgan Stanley. Noski, 58, will be replaced by Chief Risk Officer Bruce Thompson, 46, by the second quarter, the bank said. A serious illness in Noski’s family prevented him from moving to Charlotte as he had planned, the company said.

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. The insurer’s shares surged 25 percent to $17.72 in New York trading.

Concerns over potential liabilities from bad loans may have been a reason the Fed 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.

Messages to Investors

The episode cast doubt on Moynihan’s assurances to investors in January and March 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., 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.

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