May 11 (Bloomberg) -- Bank of America Corp. Chief Executive Officer Brian T. Moynihan told shareholders today the lender is still straining to curtail bad mortgages in a housing market that faces “enormous challenges.”
The biggest U.S. bank needs to resolve disputes that arose with borrowers, regulators, investors and insurers after the 2008 takeover of Countrywide Financial Corp., Moynihan told shareholders at the annual meeting in Charlotte, North Carolina, where the company is based.
Refunds and legal settlements tied to defective home loans dragged down first-quarter profit 36 percent to $2.05 billion, and the mortgage unit “still struggles mightily,” Moynihan said. Bank of America is the biggest servicer of U.S. mortgages, and is among firms negotiating with state attorneys general on potential penalties for faulty foreclosures.
Fourteen of the largest servicers including Bank of America signed a consent decree in April with the Federal Reserve and Office of the Comptroller of the Currency that compels them to pay back homeowners for losses on foreclosures that were mishandled, and to overhaul procedures for seizing homes.
Earnings are suffering from excess risk taken on when the firm acquired Countrywide, Moynihan told more than 300 people attending the meeting. While regulators at the time welcomed the bank’s rescue of Countrywide -- which had been the biggest U.S. home lender -- “attitudes have changed,” he said.
The bank has worked over the past year to rebuild a “fortress balance sheet” and capital cushion “to make sure we can handle anything that comes our way,” Moynihan said. Capital ratios are the strongest in a decade and the core franchise is strong, he said.
Moynihan told the audience the company needs to resolve concern about bad mortgages and lower the perceived volatility of the firm in the eyes of regulators before trying again to win approval of its capital plan, which would allow the company to raise its dividend. The lender will resubmit the plan when management is sure regulators will accept it, he said.
Bank of America was left behind as competitors including JPMorgan Chase & Co. and Wells Fargo & Co. passed a Federal Reserve review of their capital plans and then increased their payouts. Moynihan told investors in January and March that he believed the firm could raise its dividend this year. Bank of America had a 64-cent quarterly payout until 2008; it’s now one cent a share.
Promising a dividend before knowing you could deliver it was a “rookie mistake,” said Tony Plath, a professor of finance at the University of North Carolina in Charlotte who follows Bank of America. Moynihan became CEO in January 2010.
“You can’t be a rookie CEO when you’re running a $2 trillion company,” Plath said in an interview before today’s annual meeting.
Home prices fell in more than three-fourths of U.S. cities in the first quarter as foreclosures that sell at cut-rate prices devalued real estate, the National Association of Realtors reported yesterday. That may add to pressure on Bank of America, which has said it’s expecting a “gradual improvement over the second half” in home prices.
Underestimating the slump in U.S. real estate led to $3 billion of expenses in the past two quarters, and Bank of America has said it may incur $1.5 billion in losses for every four percentage points that price declines exceed its own forecast, which it hasn’t disclosed.
Bank of America fell 1 cent to $12.27 at 2:38 p.m. in New York Stock Exchange composite trading. The shares declined 29 percent in the past year through yesterday, the worst performance in the 24-company KBW Bank Index.
Investor Judith Koenick, who said her income was slashed when the dividend was cut, said Moynihan and other executives should forgo bonuses until they restore the payout.
“I would like you to explain how you’re entitled to all this money when you’re still sticking it to shareholders,” said Koenick of Chevy Chase, Maryland. “You should not be taking more than a dollar until you get the stock back up to where it was before you and your predecessors screwed it up.”
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