Shares in Bank of America fall as earnings disappoint

New York Times News ServiceApril 18, 2013 

Bank of America reported first-quarter earnings Wednesday that fell well short of Wall Street's expectations but were substantially higher than in the period a year earlier.

The bank made 20 cents a share in the first quarter, compared with 3 cents in the year-ago period. Analysts were expecting a profit of 23 cents a share. Bank of America, the nation's second-largest lender when measured by assets, had revenue of $23.5 billion in the first quarter.

Since the financial crisis, Bank of America's performance has been hurt by large mortgage-related losses, but in recent months investors have been betting that the bank would regain its footing. Its shares have risen nearly 40 percent in the past 12 months. Earlier this year, regulators approved the bank's plan to

buy back stock, a clear sign that they felt the lender was on firmer ground.

In a statement, Brian T. Moynihan, Bank of America's chief executive, said, "Our strategy of connecting our customers to all we can do for them is working."

The question now is how the latest earnings will affect the recent optimism surrounding the bank, which lends to individuals and companies and has a large Wall Street presence through its Merrill Lynch unit.

Other large banks have reported earnings that exceeded analysts' estimates this quarter, so Bank of America's failure to do so may unnerve some investors. The debate will be over whether the bank fell short because of deeper issues that will be hard to resolve, or because of items that will have less of a negative effect as time passes. On Wednesday the bank's stock fell nearly 5 percent to close at $11.70.

Much uncertainty surrounds the cost of litigation relating to bad mortgages. Most of these troubled loans were made by Countrywide Financial, which Bank of America acquired in 2008. Bank of America has settled several big mortgage lawsuits, including one on Wednesday for $500 million, which was led by the Iowa Public Employees' Retirement System. In the first quarter, Bank of America had litigation expenses of $881 million.

Some analysts wonder why the bank is still setting aside large amounts of money to cover mortgage litigation after reaching several settlements. "Maybe they haven't been accruing enough for the outstanding litigation," said Todd L. Hagerman, an analyst with Sterne Agee & Leech.

In particular, analysts are focusing on a pending settlement with Bank of New York Mellon. The cost of this litigation, they say, could soar if the settlement doesn't gain court approval. A research note this year from Mike Mayo, an analyst with CLSA, suggested that the actual cost of the Bank of New York Mellon litigation could be as high as $30 billion, versus the bank's current estimated cost of $8.5 billion.

On Wednesday the bank defended its litigation reserves.

"We believe we are appropriately reserved for the exposures we face and we have provided investors with a range of possible loss estimate that could go beyond those reserves," said Jerome F. Dubrowski, a spokesman for Bank of America. Responding to the skepticism about the reserves against the Bank of New York litigation, he added, "We believe extrapolating selective rulings from other venues involving other litigants and facts, and drawing conclusions about our settlements and other litigation matters does not portray a fair and accurate presentation of our litigation matters."

The first-quarter results also revealed a mixed performance in Bank of America's current mortgage business. Initially the bank did not participate in the mortgage refinancing boom as strongly as rivals like Wells Fargo, but in recent months it has jumped back in.

In the first quarter, Bank of America originated $23.9 billion of mortgages, well up from $15.2 billion a year earlier. But revenue from writing new mortgages fell to $815 million from $928 million in the period a year earlier. This shows that profit margins in the new mortgage business have fallen as Bank of America has stepped up activity.

The quarter contained bright spots for shareholders. The bank said it had made headway in cutting expenses, something investors are watching closely. As banks struggle to increase revenue, they can improve earnings by reducing costs.

"There were many examples of progress this quarter," Bruce R. Thompson, Bank of America's chief financial officer, said in a statement. "We reduced noninterest expense by nearly $1 billion year-over-year."

One of the criticisms of banks since the financial crisis is that, as they work through their difficulties, they have failed to lend enough. Bank of America had on its books a smaller amount of loans to individuals in the first quarter. The figure was down to $551 billion from $599 billion. But the bank's loans to companies rose to $355 billion from $315 billion in the year-earlier period.

While Bank of America's earnings per share increased a lot when measured using generally accepted accounting principles, it was actually down on a measure that investors often use. This nonstandard metric excludes arcane accounting charges. Absent those charges in the first quarter of 2012, the bank made 31 cents a share.

This year's first quarter contained very little effect from such charges, so the 20 cents a share the bank reported Wednesday should be compared with the 31 cents a share from the period a year earlier. In effect, under this approach, Bank of America's earnings fell by more than a third.

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