Bad loans, bad first quarter for BofA

Bank of America Corp. said Monday that profit dropped for a third straight quarter as the company set aside $6 billion for bad loans.

First-quarter net income declined 77% to $1.21 billion from $5.26 billion a year earlier, the Charlotte, N.C.-based bank said. The results fell short of analysts’ estimates and sent the bank’s stock down 2.5%.

Chief Executive Kenneth Lewis scaled back a January forecast of 20% earnings growth this year after reporting the two worst quarters since he took over in 2001. The bank’s consumer unit, which contributed more than 60% of operating income in 2007, faces a nationwide jump in unpaid debt and the highest unemployment rate since 2005.

“The first quarter was much worse than our expectations three months ago,” Lewis said.

Revenue fell 6% to $17.3 billion, while earnings per share shrank to 23 cents from $1.16. Profit decreased 59% in the consumer and small-business unit, and dropped 92% at the corporate and investment bank. Results included $1.31 billion in trading losses and $2.72 billion in costs for uncollectable loans.

Home-equity, home-builder and small-business loans were “particularly” affected by the slowing economy, the bank said.

Shares of Bank of America fell 95 cents to $37.61.

The net interest margin, the difference between interest paid on deposits and received from loans, widened to 2.73% from 2.61% on Dec. 31.

Earnings growth should enable the bank to maintain its quarterly dividend of 64 cents, unless there is a prolonged recession, Lewis said.

“The real guts of the bank appear to be working well, and as they manage their way through the credit crisis they’re going to come out of this in very good shape,” said Georges Yared, chief investment strategist at Yared Investment Research in Wayzata, Minn.

Bank of America will move deeper into the mortgage business when it acquires Calabasas-based Countrywide Financial Corp., the biggest U.S. home lender. The transaction is on schedule to be completed early in the third quarter, Lewis said.

The stock-swap transaction, originally valued at about $4 billion, gives Bank of America a role in one out of every four home loans in the nation. Countrywide, with losses of $1.6 billion over the last two quarters, is scheduled to report quarterly results April 29.

Earnings included a $776-million pretax gain linked to the sale of shares in Visa Inc., the world’s biggest credit card network, and $170 million of restructuring costs.

San Francisco-based Visa set a record for U.S. initial public offerings last month by raising more than $19 billion, and the stock has since gained more than 60%. Bank of America ranked as Visa’s second-largest bank owner after JPMorgan.

Bank of America has raised at least $13 billion from public investors after write-downs and credit losses of at least $8.2 billion before Monday, according to data compiled by Bloomberg.

Bank of America said it couldn’t collect payments on 4.9% of its $75.9-billion credit card portfolio as of March 31, up from 4.5% at the end of the previous quarter. The bank is the nation’s biggest issuer of credit cards.

As much as 2.5% of the bank’s $118-billion home-equity portfolio may be uncollectable this year, mainly because of lower home prices in California and Florida, Chief Financial Officer Joe Price said.

Assuming 2% of the bank’s home-equity loans are charged off this year, the cost may be $2.3 billion, Fitch Ratings analyst John Mackerey said in a March 14 report. If the bad loans reach 5%, the damage could total $5.9 billion, he said.