BofA Sustains Equity Hit on Mortgage-Bond Value Decline

Bank of America Corp.’s shareholder equity declined in the second quarter as the company’s bond portfolio took the biggest hit from rising interest rates among top lenders.

The second-largest U.S. bank by assets reported a $4.22 billion drop in a measure of equity that includes changes in bond holdings, currency translations and pension adjustments. The bulk was from unrealized losses in the securities portfolio, including a $5.73 billion decline in the value of government-backed mortgage securities, according to figures on the Charlotte, North Carolina-based bank’s website today.

Investors are watching equity levels at the largest U.S. banks after a jump in interest rates during the quarter eroded bond values. While JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. also sustained losses on their securities, they earned enough to compensate for the declines and boost equity.

Bank of America, run by Chief Executive Officer Brian T. Moynihan, said total shareholder equity, which includes common and preferred stock and retained earnings, fell to $231 billion at the end of June from $237.3 billion at the end of March. That included $4.01 billion in profit during the quarter, a 63 percent increase from a year earlier.

The lender redeemed $5.5 billion of preferred stock in the period, which also helped trim shareholder equity. Common stock and paid-in capital dropped as well.

Paper Losses

Accounting rules require banks to record unrealized gains and losses from securities marked as “available-for-sale” under accumulated other comprehensive income, or AOCI. Those are excluded from net income and instead counted in balance sheet equity.

Unrealized gains and losses are sometimes called paper gains and losses because they reflect changes in values recorded on a firm’s accounts that don’t result in cash changing hands.

Bank of America’s AOCI loss more than doubled to $7.71 billion at the end of June from $3.49 billion on March 31, according to figures released on the bank’s website.

Under rules proposed by the Basel Committee on Banking Supervision, known as Basel III, the regulatory capital measure known as Tier 1 common equity will also incorporate changes to AOCI. A steep enough drop could push a bank below the minimum ratio and force it to raise capital.

Agency MBS

Bank of America reported total unrealized losses on its available-for-sale bond portfolio of $1.03 billion at the end of June, a swing from $5.54 billion in paper gains three months earlier, figures on the supplement included with second-quarter earnings show.

Within the portfolio, agency mortgage-backed securities swung to a net paper loss of $2.3 billion on June 30 from a $3.43 billion net unrealized gain at the end of March.

The lender also booked $457 million in income, the most in at least a year, by selling debt securities during the quarter.

Total paper gains on Wells Fargo’s securities fell to $5.1 billion at the end of June from $11.2 billion in March. That led the San Francisco-based bank, the largest U.S. home lender, to report a $3.35 billion hit to AOCI.

JPMorgan, the biggest U.S. bank by assets, sustained a $3.1 billion decline in AOCI and Citigroup, the third-biggest, had a $2.1 billion deduction. Both are based in New York.

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