Bank of America loses money in first quarter after settlement

adunn@charlotteobserver.comApril 16, 2014 

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Charlotte -based Bank of America bank said it lost money in the first quarter as it absorbed the cost of a multibillion-dollar settlement with the government.

DAVIE HINSHAW — 2012 CHARLOTTE OBSERVER FILE PHOTO Buy Photo

Bank of America was once again hammered by financial crisis-era legal woes in the first quarter, and Wednesday’s earnings report raised fresh questions about just how much the bank will be forced to pay going forward.

The Charlotte bank said it lost money in the first quarter as it absorbed the cost of a multibillion-dollar settlement with the government. Bank of America also set aside an additional $2.4 billion in the quarter to cover future legal expenses.

All told, the bank lost $276 million in the first three months of 2014, or 5 cents per share. That was down from a profit of $1.5 billion in the same time period a year ago, and it marked the first quarterly loss since mid-2011.

The results were marred by the impact of a $9.5 billion settlement Bank of America agreed to with the Federal Housing Finance Authority late last month. The agency, which oversees Fannie Mae and Freddie Mac, accused Bank of America and its subsidiaries of violating securities law while selling bonds to the mortgage giants between 2005 and 2007.

Bank of America also announced a new settlement with the Financial Guaranty Insurance Co. over second-lien mortgage securities sponsored by Countrywide Financial. Bank of America acquired Countrywide in 2008.

Bank of America has paid FGIC about $900 million under the settlement.

CEO Brian Moynihan said on a conference call with analysts that the bank is “disappointed” in the results but that they reflected the resolution of more of the issues that have plagued the bank since he began his tenure in 2010.

The news that Bank of America had put $2.4 billion more into a legal reserve drew the most attention as bank executives presented the results to industry analysts Wednesday. The figure does not include money spent or reserved for either settlement described in the earnings report.

CLSA analyst Mike Mayo described it as “out of the blue” when questioning the bank’s executives on the conference call.

Chief Financial Officer Bruce Thompson declined to say specifically what the additional reserves were tied to. He said they related to “mortgage-related matters” the bank had previously disclosed.

While announcing the $9.5 billion settlement in March, Bank of America said it still faces investigations by the Department of Justice, state attorneys general and other government agencies.

The Wall Street Journal reported Wednesday that Bank of America was in talks with the Justice Department about a settlement over mortgage-backed securities that could reach several billion dollars.

Guggenheim Securities analyst Marty Mosby said the $2.4 billion increase in the bank’s reserves came as a surprise.

“At the magnitude that it was, it was just larger than what we had seen in recent quarters,” he said, adding that it “suggests that management believes that future costs and losses might be larger than previously expected.”

Bank of America has enough earnings to cover additional legal costs as they pop up, but such costs will weigh on its profitability, Mosby said.

“They’ll have quarters where they don’t earn a lot of money, and they’re going to have to continue to work past that,” he said.

Bank of America shares fell about 1.5 percent, closing Wednesday at $16.13.

News not all bad

But the news wasn’t all bad in the earnings report.

The bank said the Federal Housing Finance Agency settlement cost the bank about $6 billion, or about 40 cents per share after taxes. Without that charge, Bank of America would have beaten Wall Street’s consensus estimates, according to the bank’s figures.

Total revenue fell 3 percent to $22.8 billion, and expenses grew 14 percent to $22.2 billion.

Bank of America said that outside of litigation expense, it cut costs by 6 percent. The bank cut expenses in its division that services delinquent mortgages by $1 billion, and it cut the number of mortgage loans more than 60 days delinquent by more than half, to 277,000.

The bank also set aside less for bad loans, $1 billion compared with $1.7 billion a year ago.

Bank of America topped JPMorgan Chase in investment banking fees for the second straight quarter, recording $1.5 billion compared with the New York banking giant’s $1.4 billion.

Bank of America was the last of the largest four U.S. banks to report earnings. Wells Fargo said last week that it earned a record $5.9 billion in the first quarter. That edged out JPMorgan Chase’s $5.3 billion in profit. Citigroup earned $4.1 billion.

Staff writer Deon Roberts contributed.

Dunn: 704-358-5235; Twitter: @andrew_dunn

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