BofA Profit Slides on $1.9B in Writedowns

Updated from 9:49 a.m. EDT

Bank of America(BAC Quote) on Monday reported a steep drop in first-quarter profit, fueled by a big writedown and a boost to its provision for credit losses.

The Charlotte-based bank posted a profit of $1.21 billion, or 23 cents a diluted share, vs. $5.26 billion, or $1.16 a diluted share in the year-ago period. Revenue, net of interest expenses, dropped 6% to $17.3 billion. Analysts polled by Thomson Financial had expected earnings of 41 cents a share on revenue of $16.46 billion.

BofA's disappointing results reflected an ailing U.S. economy that has hit consumers by stemming easy access to credit cards, auto loans and mortgages, as the credit-rich days of the earlier part of the decade are now just a distant memory. A significant portion of BofA's troubles in the first quarter came from its consumer business, while another portion came from its corporate and investment banking arm in which it had to significantly write down the value of securities backed by risky mortgages.

Dodgy Loans Hit BofA

"First quarter was much worse than our expectations three months ago, with the most notable deterioration in the latter part of the quarter," CEO Ken Lewis said during a conference call. "The issues we faced in capital markets in the fourth quarter continued into the first quarter with March being particularly difficult."

The company does not plan to reduce its dividend, but if "the economy worsens over the next few quarters resulting in a prolonged recessionary environment, we will do what we think prudent to manage capital," Lewis says.

BofA wrote down $1.47 billion of collateralized debt obligations, or CDOs, and $439 million in leveraged loans, contributing to $1.31 billion in trading losses. In the year-ago period, the bank posted a profit of $1.66 billion through trading.

The bank increased its provision for credit losses to $6.01 billion, from $1.24 billion in the year-ago period, primarily to protect against increasing losses in its home equity, small business and homebuilder loan portfolios, it said. Total net charge-offs increased to $2.72 billion in the quarter, from $1.43 billion in the first quarter of last year. Nonperforming assets rose to $7.83 billion, compared to $2.06 billion in the year-ago period.

"Credit quality will continue to be an issue with charge-offs at least at first quarter levels but probably higher for the rest of the year," Lewis added. "While we don't expect to increase reserves with the pace we experienced cover the past two quarters, our reserving actions will correlated with the direction of the economy and the impact on our customers."

Like other banks struggling through the credit crisis, some analysts are becoming concerned with BofA's capital position. BofA, like rivals JPMorgan Chase(JPM Quote) and Citigroup(C Quote) posted sharp drops in profit in the first quarter as banks have dealt with souring loans.

Smaller rivals, like Washington Mutual(WM Quote) and Wachovia(WB Quote) have resorted to dilutive capital raising efforts to shore up their balance sheets. Earlier on Monday, Cleveland-based National City(NCC Quote) said a consortium of investors led by private-equity firm Corsair Capital agreed to inject $7 billion in the struggling bank.

"Our consumer credit recession call is playing out, with faster than anticipated credit deterioration," Morgan Stanley analyst Betsy Graseck writes in a note. "Additionally, Bank of America's Tier 1 capital is lowest among peers at 7.51% and we wouldn't be surprised by further capital raising."

Moody's Investors Service downgraded BofA's long-term senior debt to double-A2 from double-A1 and placed a negative rating outlook on the company, it said. The ratings agency also lowered the bank's so-called financial strength rating to A-minus from A.

"Today's downgrades address [Bank of America's] relatively weak capital position, despite a substantial capital raise earlier this year," Moody's said. "Given a challenging operating environment, a weakened outlook for earnings, and a heavy dividend burden, [Bank of America's] equity ratios are unlikely to expand meaningfully in the near term."