Bank of America posts profit, surpasses view

Goodbye to the mortgage meltdown? Not so fast.

Bank of America Corp.’s earnings report Monday showed that soured home loans are still tormenting the financial system, with maxed-out credit cards and shaky commercial loans increasing the pain.

The Charlotte, N.C.-based financial institution showed a profit of $2.8 billion in the first quarter of 2009, but a closer look at its results reveals that the bank lost half a billion dollars on mortgages alone.

“Credit is bad and we believe credit is going to get worse before it will eventually stabilize,” Bank of America Chairman and Chief Executive Kenneth Lewis said during a conference call.

The quarter’s profit, analysts said, stemmed from ultra-low interest rates that won’t last forever, along with changes in accounting rules and the sale of part of Bank of America’s stake in a Chinese bank.

The grim news gave Wall Street a reality check, with the Dow Jones industrial average tumbling nearly 300 points.

“We still have the teeth of the recession to deal with,” said analyst Jefferson Harralson of Keefe, Bruyette & Woods, who described Bank of America’s problems as a proxy for the financial industry and economy as a whole.

Shares of BofA nose-dived $2.58, or 24%, to $8.02.

The first-quarter results come as the bank digests its controversial acquisitions of Merrill Lynch & Co. and Countrywide Financial Corp.

The pockmarked balance sheet shows the difficulty facing Bank of America and other financial institutions as they try to recover from the self-inflicted wounds of the real estate and mortgage crash and the resulting credit crunch -- despite help from the federal stimulus and bailout programs.

And analysts say the pain may get worse: Whereas the difficulty was once relatively contained among so-called subprime mortgages, now customers are defaulting on prime loans, credit cards and commercial loans.

Huge problems are concentrated at Countrywide, which during the boom pushed aggressively into subprime loans for the riskiest borrowers and exotic loans for people with prime credit but no evidence that they had enough income to pay off the mortgages.

The bank plans to retire the Countrywide name next week -- a move that Lewis and others had hoped would help put the troubled acquisition behind it.

But the problems at Bank of America are now “all over the place,” said NAB Research analyst Nancy Bush, including nearly 9% of all credit card balances that the bank gave up on as uncollectible during the first quarter.

The bank’s credit card losses for the quarter were nearly $1.8 billion, compared with a profit of $867 million a year earlier. The financial behemoth set aside $13.4 billion during the quarter to account for future loan losses.

Borrowers stopped paying on $25.7 billion of Bank of America loans during the quarter -- nearly 3% of all the money it had lent out.

That was more than triple the $7.8 billion of these so-called nonperforming loans that Bank of America had on its books at the end of the first quarter of 2008, before it acquired Countrywide and Merrill.

Nonperforming home loans jumped from $2.6 billion to $10.8 billion over the course of those 12 months, and dud home equity loans doubled from $1.8 billion to $3.6 billion.

Nor was the damage limited to consumers. Nonperforming commercial loans also had more than tripled during the year, from $2.9 billion to $9.3 billion.

The difficulties have so angered some shareholder activists and advisory groups that they have urged shareholders to remove Lewis from the bank’s board of directors during the annual meeting April 29.

The bank’s position in the black for the first quarter was cemented in part by the recent increases in refinancing and home purchases facilitated by low interest rates and the federal stimulus package.

The bank reported that it was hurrying to meet the demand for new mortgages, adding nearly 5,000 permanent employees, mostly at call centers across the country, including Simi Valley.

It said it also was bringing in 700 employees from elsewhere in the bank.

Adding jobs runs counter to the trend at Bank of America, which reported last June that it would slash 7,500 jobs over two years as a result of the Countrywide acquisition, and then in December said it would cut an additional 35,000 positions over three years because of the Merrill takeover and the economy.

In a bright spot, Bank of America said corporate and investment banking income rose to $2.4 billion from a $991-million loss a year earlier, with Merrill Lynch contributing $3.7 billion in revenue.

Analysts noted that Goldman Sachs Group Inc. and JPMorgan Chase & Co. reported similar quarterly surges in trading profit owing to declining interest rates, but they questioned how long the bonanza would continue.

The bank also said it had paid the government $402 million in dividends that came due on the $45 billion in bailout funds it has received from the U.S. Treasury.

Lewis told The Times in late March that he hoped to start repaying the bailout funds after the government concluded its “stress tests” to determine whether 19 major banks are strong enough to survive two more years of recession.

The tests are to conclude late this month.

Asked about the testing Monday, Lewis declined to predict what the government would do.

“We have submitted information, and now it’s in their hands,” he said.

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