BofA Slides After Posting Loss From More Mortgage Expenses

Apr 16, 2014 4:34 pm ET

(Updates with closing stock price in second paragraph.)

April 16 (Bloomberg) -- Bank of America Corp. fell in New York trading after the lender posted a surprise loss driven by $6 billion of costs tied to mortgage disputes.

The shares slid 1.6 percent to $16.13 at 4:15 p.m. as investors assessed the newest batch of legal expenses, which have cost Bank of America more than $50 billion since the financial crisis. The stock slipped as much as 3.7 percent during the session, its worst intraday showing since June.

Bank of America’s $276 million quarterly deficit was the fourth since Chief Executive Officer Brian T. Moynihan took the top job at the start of 2010. His predecessor’s 2008 purchase of Countrywide Financial Corp. left BofA responsible for thousands of bad home loans, and the bank told investors today that more legal costs lay ahead.

“It’s a reminder there’s still a way to go to on litigation expenses for the industry and Bank of America,” said Devin Ryan, an analyst at JMP Securities LLC in New York. “You think you have your arms around what the exposure is to find there’s still room for surprises.”

The first-quarter loss equaled 5 cents a diluted share, compared with a profit of $1.48 billion, or 10 cents, a year earlier. Companywide revenue at the Charlotte, North Carolina- based firm dropped 2.7 percent to $22.6 billion. The bank is the second-largest in the U.S. by assets.

“The cost of resolving more of our mortgage issues hurt our earnings this quarter,” Moynihan said in a statement today detailing results. “But the earnings power of our business and customer strategy generated solid results.”

Legal Cases

The $6 billion in legal costs included $3.6 billion tied to a settlement disclosed last month that covered Fannie Mae and Freddie Mac. There was also a $2.4 billion increase in reserves for “previously disclosed legacy mortgage-related matters,” the lender said in a presentation. Chief Financial Officer Bruce Thompson declined to specify which cases triggered the added reserves.

“These are ongoing discussions that we obviously have with people we’re in litigation with, and I just don’t think it’s going to be productive to give a breakout,” Thompson told reporters.

The bank also announced a $950 million accord today that extinguished claims from bond insurer Financial Guaranty Insurance Co. The deal includes $584 million for the bond insurer plus cash payments to trusts for mortgage-backed securities, according to the firm. The cost was already covered by Bank of America’s reserves.

Being Realistic

Last month, the bank said it may have to pay penalties tied to probes from government entities including the Justice Department and state attorneys general and that it faces civil lawsuits from the DOJ regarding its sales of mortgage bonds.

Remaining litigation costs could vary greatly from quarter to quarter, Thompson, 49, said during a conference call with analysts.

“I think we need to be realistic in your thoughts this quarter as it relates to the remaining couple of matters that we disclosed,” Thompson said. “It can be lumpy and it’s just very hard to predict.”

Earnings before taxes and loan-loss provisions fell to $500 million in the first quarter, compared with $3.9 billion a year ago. The measure is watched by analysts as a means to gauge a firm’s profitability without some of the distortions caused by one-time items.

Global Markets

Global markets, the trading operations overseen by co-Chief Operating Officer Thomas K. Montag, posted a 3.1 percent increase in quarterly profit to $1.24 billion excluding accounting adjustments tied to credit. Revenue in the division slipped 0.4 percent to $4.9 billion on declines in rates and currencies.

Revenue in the fixed-income, currency and commodities sales and trading division decreased 15 percent to about $2.95 billion, excluding the impact of a $450 million writedown a year ago. Equities sales and trading revenue was $1.2 billion, similar to a year earlier.

Income at the global banking unit fell 3.5 percent to $1.24 billion on a higher provision for credit losses. The consumer and business banking unit’s profit rose 15 percent to $1.66 billion as expenses fell 4 percent. The companywide staff was reduced by more than 3,500 people to 238,560 during the quarter.

Pending Cases

Resolving the Fannie Mae and Freddie Mac cases, which date from 2011, ended one of the biggest legal disputes facing Bank of America. The settlement covered $57.5 billion in mortgage bonds.

Bank of America also said in a February regulatory filing that authorities in North America, Europe and Asia are examining participants in foreign-exchange markets for misconduct that spanned several years. The lender said it’s cooperating.

Last month, the lender won Federal Reserve approval for a higher dividend after lowering the amount of its initial request for returning capital to shareholders. The 5-cent quarterly payout, rising from a penny, will be accompanied by a $4 billion stock repurchase program.