Bank of America: Earnings Loser (Update 1)

Updated with market close information.

NEW YORK ( TheStreet) -- Bank of America ( BAC) was the big loser among the largest U.S. financial names on Wednesday, with shares declining 5% to close at $11.70.

The Dow Jones Industrial Average and the S&P 500 ( SPX.X) index ended the session 1% declines, while the Nasdaq saw a 2% decline, after a disappointing first-quarter earnings report from Bank of America.

Oil and other commodity prices were also showing declines, after a prominent Chinese auditor warned local government debt in China was " out of control," according to the Financial Times.

Zhang Ke, of the accounting firm ShineWing, was quoted as saying "we audited some local government bond issues and found them very dangerous, so we pulled out," and that most of the municipal governments "don't have strong debt servicing abilities. Things could become very serious."

Shares of Apple ( AAPL) also weighed heavily on the market, sank 5.5% to close at $402.80, amid investor fear that disappointing earnings results from Cirrus Logic ( CRUS) -- one of Apple's suppliers -- could point to a weak first-quarter for the manufacturer of the iPhone.

Turning back to financials, the KBW Bank Index ( I:BKX) was down 2% to close at 54.52, with all 24 index components showing declines, except for PNC Financial Services ( PNC), which was up slightly to close at $65.05. The Pittsburgh-based regional lender reported strong first-quarter results, with revenue increases and expense reductions, and beat the consensus earnings estimate by a wide margin. Please see TheStreet's earnings coverage for full details on PNC's results.

Bank of America Disappoints

Bank of America reported a first-quarter profit of $2.6 billion, or 20 cents a share, increasing from $732 million, or 3 cents a share in the fourth quarter, and $653 million, or 3 cents a share, in the first quarter of 2012. Pretax results for the fourth quarter had been lowered by $2.5 billion in costs for independent foreclosure reviews, and $2.7 billion in charges related to the company's $10.3 billion settlement of a long-term dispute with Fannie Mae ( FNMA), over mortgage repurchase claims.

The first-quarter results disappointed investors, coming in below the consensus analyst estimate of a 22 cents a share.

Bank of America's first-quarter revenue totaled $23.7 billion, increasing from $22.5 billion a year earlier, and coming in ahead of the consensus estimate of $23.41 billion.

The Fannie Mae settlement led to a great reduction in the outstanding mortgage repurchase claims against Bank of America. Investors' mortgage repurchase claims against the company totaled $28.3 billion as of Dec. 31. Bank of America's fourth-quarter earnings presentation implied that the Fannie Mae settlement would reduce the putback claims by roughly $12.2 billion, leaving about $16.1 billion in claims.

But the company reported outstanding mortgage repurchase claims of $17.135 billion as of March 31, showing that new claims were continuing to come in.

Bank of America's first-quarter net interest income was $10.875 billion, increasing from $10.555 billion in the fourth quarter, but declining from $11.053 billion in the first quarter of 2012. The sequential increase was a positive development for the company, running counter to the industry trend. Bank of America's net interest margin -- the spread between the average yield on loans and investments and the average cost for deposits and borrowings -- widened to 2.43% in the first quarter from 2.35% in the fourth quarter, although the margin was down from 2.51% in the first quarter of 2012.

First-quarter noninterest income totaled $12.833 billion, increasing from $8.336 billion the previous quarter and $11.432 billion a year earlier. The company's trading account profits rose to $2.989 billion in the first quarter, from $792 billion in the fourth quarter and $2.075 billion in the first quarter of 2012.

The company followed the industry trend of declining mortgage revenue, with a sharp decline in its gain-on-sale margin for newly originated loans. The first-quarter margin was 3.26%, declining from 4.38% in the fourth quarter. First-quarter mortgage banking income totaled $$1.263 billion, improving from a negative $540 million in the fourth quarter (because of the Fannie Mae settlement), but declining from $1.612 billion in the first quarter of 2012.

Bank of America said its litigation expenses totaled $881 million during the first quarter, compared to $916 million the previous quarter and $793 million a year earlier. First-quarter litigation expenses included $500 tied to a settlement of a class action suit by mortgage-backed securities investors against Countrywide, which Bank of America acquired in 2008.

Credit quality continued to improve, with first-quarter net loan charge-offs of $2.517 billion, declining from $3.104 billion the previous quarter and $4.056 billion in the first quarter of 2012. The first-quarter annualized ratio of net charge-offs -- excluding impaired purchased loans, which had previously been written down -- to average loans was a decent 1.14%, improving from 1.40% the previous quarter and 1.80% a year earlier.

KBW analyst Christopher Mutascio rates Bank of America a "buy," with a price target of $13.50, and said in a note to clients that "total expenses increased to $18.15 billion versus our expectations for a decline to $17.10 billion. Driving the increase in expenses were seasonally higher personnel expenses of $9.9 billion versus $8.3 billion last quarter, partially offsetting this was a decline in other expenses to $3.98 billion from $5.37 billion last quarter."

"We expect that the noise in expenses this quarter will lead shares weaker on the day as investors look to see meaningful expense reductions in-line with prior company guidance," Mutascio wrote. He added, "The company is still on track to deliver our 4Q13 run-rate of below $16 billion in expenses."

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Interested in more on Bank of America? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.


Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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