Bank of America's Profit Mainly Due to Recent Deals

By Binyamin Appelbaum
Washington Post Staff Writer
Tuesday, April 21, 2009

Bank of America said yesterday it earned $4.2 billion in the first quarter, the latest sign that the government is succeeding in stabilizing the banking industry.

The company's profits came mostly from Merrill Lynch, the investment bank it purchased in the fall with financial aid from the federal government. Revenue from trading in financial products, including corporate debt and securities, has driven the renewed profitability of most large banks in the first quarter, even as retail banking operations continue to struggle.

Bank of America also benefited from a surge in its mortgage refinancing business, catalyzed by the government's determined efforts to hold down interest rates. That success, too, was largely the product of an acquisition, the 2007 deal to purchase Countrywide Financial, then the nation's largest mortgage lender.

The bank reported earnings of 44 cents per share in the first quarter, compared with 23 cents per share, or $1.2 billion, in the first quarter of last year.

Bank of America has received two rounds of federal aid. The Treasury Department invested $45 billion in the company, and the government also guaranteed to limit the company's losses on an $118 billion portfolio of troubled assets. Much of that support was specifically intended to help Bank of America close its purchase of Merrill Lynch at the end of last year.

The deals for Merrill Lynch and Countrywide have been extremely controversial with the company's investors because of the prices paid for them. Ken Lewis, Bank of America's chairman and chief executive who orchestrated both deals, has faced calls to resign from one or both positions.

Two firms that advise investors, RiskMetrics Group and Glass, Lewis and Co., recommended last week that Bank of America shareholders vote to remove Lewis as chairman of the company's board. Separating the offices of chairman and chief executive is favored by many experts on corporate governance as a way to increase accountability to shareholders. Bank of America has defended Lewis's performance.

The first-quarter results seem to bolster the defense for the two deals, but the initial response from investors remained negative. Bank of America's shares fell $2.58, or 24 percent, to $8.02 in trading yesterday.

Lewis himself cautioned that the company still faced large challenges related to the faltering economy, echoing remarks from the executives of other large firms.

"The fact that we were able to post strong, positive net income for the quarter is extremely welcome news in this environment," Lewis said in a statement. "However, we understand that we continue to face extremely difficult challenges primarily from deteriorating credit quality driven by weakness in the economy and growing unemployment."

As with other large banks, Bank of America's earnings benefited substantially from accounting rules.

The bank booked a profit of $2.2 billion on the decline in value of its own debt, which is allowed because the bank could now repurchase that debt at the lower price. Other banks, including Citigroup, also have claimed billions in profits under the same rule. Some financial analysts regard the technique as obscuring the true picture of a company's health, because the companies have not actually repurchased the debt, so the gains could be reversed if the values rebound.

The bank's profits remained modest compared to its massive revenue of $36.1 billion, a reflection of the continued struggles of its core retailing banking operation.

Bank of America's deposit base contracted slightly in the first quarter, excluding the acquisition of Merrill Lynch, and defaults on nearly every kind of loan rose sharply, as the bank abandoned hope of recovering billions of dollars it had loaned to borrowers.

It wrote off about $7 billion in loans and added another $6.4 billion to its reserves against future losses. The combination is a sharp increase over the cost of loan losses in the fourth quarter, and the bank said that loan defaults are still rising.

The company's credit card division lost $1.8 billion in the quarter. Its mortgage division lost $500 million. Joe Price, Bank of America's chief financial officer, said that the rate of new delinquencies on consumer loans appeared to be slowing. That could indicate a reduction in the number of defaults -- the end of the process that begins with delinquency -- within the next few months. Citigroup and other banks have noted a similar phenomenon. But Bank of America, along with the other banks, cautioned that it was too early to evaluate the trend, which might be a result of seasonal variations.

"We're kind of managing as if it isn't" getting better "until we see it on a sustained basis," Price said.

The company also said it was interested in selling assets through a forthcoming government program to help investors purchase troubled assets.

"Our inclination would be to think about giving it a small trial run," Lewis said.

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