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Wednesday, July 29, 2009
Monday, July 27, 2009
Second Quarter 2009 Financial Summary
Revenue and Expense
Revenue net of interest expense on a fully taxable-equivalent basis rose 60 percent to $33.1 billion compared with $20.7 billion a year ago.
Net interest income on a fully taxable-equivalent basis rose 9 percent to $11.9 billion from $10.9 billion in the second quarter of 2008 due to an improved rate environment and the addition of Countrywide and Merrill Lynch. These improvements were partially offset by a shift in loan mix and the sale of securities. Net interest yield narrowed 28 basis points to 2.64 percent due to the addition of lower yielding assets from Countrywide and Merrill Lynch, sales of securities, and a shift in loan mix, partially offset by the favorable rate environment.
Noninterest income rose to $21.1 billion from $9.8 billion a year earlier. Higher mortgage banking income, trading account profits and investment and brokerage services income reflected the addition of Merrill Lynch and Countrywide. Additionally, the increase was driven by a $5.3 billion pretax gain on the sale of CCB shares. Bank of America continues to own approximately 11 percent of the common shares of CCB. Noninterest income in the period also included a $3.8 billion pretax gain from the completed sale of the merchant processing business to a joint venture. These increases were partially offset by $3.6 billion in losses related to mark-to-market adjustments including the Merrill Lynch structured notes as a result of narrowing credit spreads during the quarter. Card income declined due to higher credit losses on securitized credit card loans and lower fee income.
Noninterest expense increased to $17.0 billion from $9.7 billion a year earlier. This reflects higher personnel and general operating expenses, driven in part by the Merrill Lynch and Countrywide acquisitions and the FDIC special assessment. Pretax merger and restructuring charges rose to $829 million from $212 million a year earlier.
The efficiency ratio on a fully taxable-equivalent basis was 51.44 percent compared with 46.60 percent a year earlier.
Pretax, pre-provision income on a fully-taxable equivalent basis was $16.1 billion compared with $11.1 billion a year earlier.
Credit Quality
Credit quality deteriorated further as the economic environment weakened. Consumers remained under significant stress as unemployment and underemployment increased and individuals spent longer periods without work. These conditions led to higher losses in almost all consumer portfolios compared with the prior quarter.
Declining home values and reduced spending by consumers and businesses negatively impacted the commercial portfolios resulting in broad-based increases in criticized and nonperforming loans. Commercial loan losses rose from the prior quarter as commercial domestic and small business portfolios were impacted in sectors dependent on discretionary consumer spending. Losses in the commercial real estate portfolio also increased.
The provision for credit losses was $13.4 billion, flat with the first quarter. Credit losses were higher than the prior quarter and reserves, which were increased by $4.7 billion, were added across most consumer portfolios and the commercial portfolio reflecting the impact of the weak economy. Nonperforming assets were $31.0 billion compared with $25.6 billion at March 31, 2009, reflecting the continued deterioration in economic conditions. The 2009 coverage ratios and amounts shown in the following table include Merrill Lynch.
Credit Quality
(Dollars in millions) Q2 2009 Q1 2009 Q2 2008
--------------------- ------- ------- -------
Provision for credit
losses $13,375 $13,380 $5,830
Net Charge-offs 8,701 6,942 3,619
Net Charge-off
ratios(1) 3.64% 2.85% 1.67%
Total managed net
losses $11,684 $9,124 $5,262
Total managed net
loss ratio(1) 4.42% 3.40% 2.16%
At 6/30/09 At 3/31/09 At 6/30/08
---------- ---------- ----------
Nonperforming assets $30,982 $25,632 $9,749
Nonperforming
assets ratio(2) 3.31% 2.64% 1.13%
Allowance for loan
and lease losses $33,785 $29,048 $17,130
Allowance for
loan and lease
losses ratio(3) 3.61% 3.00% 1.98%
(1) Net charge-off/loss ratios are calculated as annualized held net
charge-offs or managed net losses divided by average outstanding
held or managed loans and leases during the period.
(2) Nonperforming assets ratios are calculated as nonperforming assets
divided by outstanding loans, leases and foreclosed properties at
the end of the period.
(3) Allowance for loan and lease losses ratios are calculated as
allowance for loan and leases losses divided by loans and leases
outstanding at the end of the period.
Note: Ratios do not include loans measured at fair value in accordance
with SFAS 159.
Capital Management
Total shareholders' equity was $255.2 billion at June 30. Period-end assets were $2.3 trillion. The Tier 1 Capital ratio was 11.93 percent, up from 10.09 percent at March 31, 2009 and from 8.25 percent a year ago. The Tier 1 Common ratio was 6.90 percent, compared with 4.49 percent at March 31, 2009 and 4.78 percent at June 30, 2008. The Tangible Common Equity ratio was 4.67 percent, up from 3.13 percent at March 31, 2009 and 3.24 percent a year earlier. Tangible book value per share of common stock was $11.66, compared with $10.88 at March 31, 2009 and $11.87 a year earlier.
During the quarter the bank increased its Tier 1 common capital by nearly $40 billion, easily exceeding the $33.9 billion Supervisory Capital Assessment Program (SCAP) buffer set by the Federal Reserve in May. Actions contributing toward that goal during the quarter included: issuing shares of common stock; exchanging certain non-government preferred stock for common stock; the sale of a portion of shares in CCB; and the sale of the company's merchant processing business to a joint venture.
During the quarter, Bank of America issued 1.25 billion, or $13.5 billion, of common shares. Bank of America exchanged the equivalent of $14.8 billion of non-government preferred shares for approximately 1 billion shares of common stock through private exchanges and a tender offer. A cash dividend of $0.01 per common share was paid. The company recorded $1.4 billion in preferred dividends, partially offset by $576 million related to the exchange of preferred stock in the calculation of net income available to common shareholders. Period-end common shares issued and outstanding were 8.65 billion for the second quarter of 2009, 6.40 billion for the first quarter of 2009 and 4.45 billion for the year-ago quarter.
Revenue net of interest expense on a fully taxable-equivalent basis rose 60 percent to $33.1 billion compared with $20.7 billion a year ago.
Net interest income on a fully taxable-equivalent basis rose 9 percent to $11.9 billion from $10.9 billion in the second quarter of 2008 due to an improved rate environment and the addition of Countrywide and Merrill Lynch. These improvements were partially offset by a shift in loan mix and the sale of securities. Net interest yield narrowed 28 basis points to 2.64 percent due to the addition of lower yielding assets from Countrywide and Merrill Lynch, sales of securities, and a shift in loan mix, partially offset by the favorable rate environment.
Noninterest income rose to $21.1 billion from $9.8 billion a year earlier. Higher mortgage banking income, trading account profits and investment and brokerage services income reflected the addition of Merrill Lynch and Countrywide. Additionally, the increase was driven by a $5.3 billion pretax gain on the sale of CCB shares. Bank of America continues to own approximately 11 percent of the common shares of CCB. Noninterest income in the period also included a $3.8 billion pretax gain from the completed sale of the merchant processing business to a joint venture. These increases were partially offset by $3.6 billion in losses related to mark-to-market adjustments including the Merrill Lynch structured notes as a result of narrowing credit spreads during the quarter. Card income declined due to higher credit losses on securitized credit card loans and lower fee income.
Noninterest expense increased to $17.0 billion from $9.7 billion a year earlier. This reflects higher personnel and general operating expenses, driven in part by the Merrill Lynch and Countrywide acquisitions and the FDIC special assessment. Pretax merger and restructuring charges rose to $829 million from $212 million a year earlier.
The efficiency ratio on a fully taxable-equivalent basis was 51.44 percent compared with 46.60 percent a year earlier.
Pretax, pre-provision income on a fully-taxable equivalent basis was $16.1 billion compared with $11.1 billion a year earlier.
Credit Quality
Credit quality deteriorated further as the economic environment weakened. Consumers remained under significant stress as unemployment and underemployment increased and individuals spent longer periods without work. These conditions led to higher losses in almost all consumer portfolios compared with the prior quarter.
Declining home values and reduced spending by consumers and businesses negatively impacted the commercial portfolios resulting in broad-based increases in criticized and nonperforming loans. Commercial loan losses rose from the prior quarter as commercial domestic and small business portfolios were impacted in sectors dependent on discretionary consumer spending. Losses in the commercial real estate portfolio also increased.
The provision for credit losses was $13.4 billion, flat with the first quarter. Credit losses were higher than the prior quarter and reserves, which were increased by $4.7 billion, were added across most consumer portfolios and the commercial portfolio reflecting the impact of the weak economy. Nonperforming assets were $31.0 billion compared with $25.6 billion at March 31, 2009, reflecting the continued deterioration in economic conditions. The 2009 coverage ratios and amounts shown in the following table include Merrill Lynch.
Credit Quality
(Dollars in millions) Q2 2009 Q1 2009 Q2 2008
--------------------- ------- ------- -------
Provision for credit
losses $13,375 $13,380 $5,830
Net Charge-offs 8,701 6,942 3,619
Net Charge-off
ratios(1) 3.64% 2.85% 1.67%
Total managed net
losses $11,684 $9,124 $5,262
Total managed net
loss ratio(1) 4.42% 3.40% 2.16%
At 6/30/09 At 3/31/09 At 6/30/08
---------- ---------- ----------
Nonperforming assets $30,982 $25,632 $9,749
Nonperforming
assets ratio(2) 3.31% 2.64% 1.13%
Allowance for loan
and lease losses $33,785 $29,048 $17,130
Allowance for
loan and lease
losses ratio(3) 3.61% 3.00% 1.98%
(1) Net charge-off/loss ratios are calculated as annualized held net
charge-offs or managed net losses divided by average outstanding
held or managed loans and leases during the period.
(2) Nonperforming assets ratios are calculated as nonperforming assets
divided by outstanding loans, leases and foreclosed properties at
the end of the period.
(3) Allowance for loan and lease losses ratios are calculated as
allowance for loan and leases losses divided by loans and leases
outstanding at the end of the period.
Note: Ratios do not include loans measured at fair value in accordance
with SFAS 159.
Capital Management
Total shareholders' equity was $255.2 billion at June 30. Period-end assets were $2.3 trillion. The Tier 1 Capital ratio was 11.93 percent, up from 10.09 percent at March 31, 2009 and from 8.25 percent a year ago. The Tier 1 Common ratio was 6.90 percent, compared with 4.49 percent at March 31, 2009 and 4.78 percent at June 30, 2008. The Tangible Common Equity ratio was 4.67 percent, up from 3.13 percent at March 31, 2009 and 3.24 percent a year earlier. Tangible book value per share of common stock was $11.66, compared with $10.88 at March 31, 2009 and $11.87 a year earlier.
During the quarter the bank increased its Tier 1 common capital by nearly $40 billion, easily exceeding the $33.9 billion Supervisory Capital Assessment Program (SCAP) buffer set by the Federal Reserve in May. Actions contributing toward that goal during the quarter included: issuing shares of common stock; exchanging certain non-government preferred stock for common stock; the sale of a portion of shares in CCB; and the sale of the company's merchant processing business to a joint venture.
During the quarter, Bank of America issued 1.25 billion, or $13.5 billion, of common shares. Bank of America exchanged the equivalent of $14.8 billion of non-government preferred shares for approximately 1 billion shares of common stock through private exchanges and a tender offer. A cash dividend of $0.01 per common share was paid. The company recorded $1.4 billion in preferred dividends, partially offset by $576 million related to the exchange of preferred stock in the calculation of net income available to common shareholders. Period-end common shares issued and outstanding were 8.65 billion for the second quarter of 2009, 6.40 billion for the first quarter of 2009 and 4.45 billion for the year-ago quarter.
Second Quarter 2009 Business Highlights
•Bank of America increased its Tier 1 common capital by nearly $40 billion through multiple actions during the quarter that included issuing shares of common stock, exchanging certain non-government preferred stock for common stock, and asset sales.
•Bank of America Merrill Lynch ranked No. 1 in high-yield debt and leveraged loans based on volume, and the firm was No. 2 and No. 3, respectively, in U.S. and global investment banking fees for the first half of 2009, according to second quarter league tables.
•Sales and trading revenue, excluding credit valuation adjustments on derivative liabilities and market disruption charges, rose to a record $6.7 billion.
•During the quarter, Bank of America announced the sale of its merchant processing business to a joint venture, which included First Data Corp. The transaction is expected to deliver next-generation payments solutions to merchants.
•Bank of America funded $110.6 billion in first mortgages, helping nearly 500,000 people either purchase a home or refinance their existing mortgage, including $24.3 billion in mortgages made to 154,000 low- and moderate-income borrowers. Approximately 29 percent of first mortgages were for purchases.
•Credit extended during the quarter, including commercial renewals of $55 billion, was more than $211 billion, compared with $183 billion in the first quarter. New credit included $111 billion in mortgages, $78 billion in commercial non-real estate, approximately $9 billion in commercial real estate, $4 billion in domestic and small business card, $4 billion in home equity products and more than $5 billion in other consumer credit.(1)
•During the second quarter, Small Business Banking extended more than $580 million in new credit comprised of credit cards, loans and lines of credit to more than 35,000 customers.
•To help homeowners avoid foreclosure, Bank of America has provided rate relief or agreed to modifications with approximately 150,000 customers for the first six months of 2009, compared with more than 230,000 for all of 2008 for Bank of America and Countrywide. In addition, approximately 80,000 Bank of America customers are already in a trial period modification or were in the process of responding to an offer under the Making Home Affordable program through mid-July.
•Average retail deposits in the quarter increased $136.3 billion, or 26 percent, from a year earlier, including $104.3 billion in balances from Merrill Lynch and Countrywide. Excluding Countrywide and Merrill Lynch, Bank of America grew retail deposits $32.0 billion, or 6 percent, from the year-ago quarter.
(1) Preliminary data as of July 17, 2009
Transition Update
The Merrill Lynch integration is on track and meeting expected goals. The company in 2009 expects to achieve in excess of 40 percent of the previously announced goal of approximately $7 billion in cost savings, ahead of the original goal of 25 percent for the year.
Since June 1, approximately 6,500 affluent banking-only clients in Bank of America have been referred to Merrill Lynch financial advisors. Of that group, approximately 1,400 now have added an investment relationship with the company. Merrill Lynch financial advisors referred more than 1,100 clients to the commercial bank of Bank of America.
The Countrywide transition and related cost savings are on track.
The new Bank of America Home Loans and Insurance brand was introduced to consumers during the quarter as part of the transition.
•Bank of America Merrill Lynch ranked No. 1 in high-yield debt and leveraged loans based on volume, and the firm was No. 2 and No. 3, respectively, in U.S. and global investment banking fees for the first half of 2009, according to second quarter league tables.
•Sales and trading revenue, excluding credit valuation adjustments on derivative liabilities and market disruption charges, rose to a record $6.7 billion.
•During the quarter, Bank of America announced the sale of its merchant processing business to a joint venture, which included First Data Corp. The transaction is expected to deliver next-generation payments solutions to merchants.
•Bank of America funded $110.6 billion in first mortgages, helping nearly 500,000 people either purchase a home or refinance their existing mortgage, including $24.3 billion in mortgages made to 154,000 low- and moderate-income borrowers. Approximately 29 percent of first mortgages were for purchases.
•Credit extended during the quarter, including commercial renewals of $55 billion, was more than $211 billion, compared with $183 billion in the first quarter. New credit included $111 billion in mortgages, $78 billion in commercial non-real estate, approximately $9 billion in commercial real estate, $4 billion in domestic and small business card, $4 billion in home equity products and more than $5 billion in other consumer credit.(1)
•During the second quarter, Small Business Banking extended more than $580 million in new credit comprised of credit cards, loans and lines of credit to more than 35,000 customers.
•To help homeowners avoid foreclosure, Bank of America has provided rate relief or agreed to modifications with approximately 150,000 customers for the first six months of 2009, compared with more than 230,000 for all of 2008 for Bank of America and Countrywide. In addition, approximately 80,000 Bank of America customers are already in a trial period modification or were in the process of responding to an offer under the Making Home Affordable program through mid-July.
•Average retail deposits in the quarter increased $136.3 billion, or 26 percent, from a year earlier, including $104.3 billion in balances from Merrill Lynch and Countrywide. Excluding Countrywide and Merrill Lynch, Bank of America grew retail deposits $32.0 billion, or 6 percent, from the year-ago quarter.
(1) Preliminary data as of July 17, 2009
Transition Update
The Merrill Lynch integration is on track and meeting expected goals. The company in 2009 expects to achieve in excess of 40 percent of the previously announced goal of approximately $7 billion in cost savings, ahead of the original goal of 25 percent for the year.
Since June 1, approximately 6,500 affluent banking-only clients in Bank of America have been referred to Merrill Lynch financial advisors. Of that group, approximately 1,400 now have added an investment relationship with the company. Merrill Lynch financial advisors referred more than 1,100 clients to the commercial bank of Bank of America.
The Countrywide transition and related cost savings are on track.
The new Bank of America Home Loans and Insurance brand was introduced to consumers during the quarter as part of the transition.
Bank of America Earns $3.2 Billion in Second Quarter
Strong Pretax, Pre-provision Income of $16 Billion
Another Good Quarter in Capital Markets and Home Loans
Enhanced Capital Strength, Tier 1 Capital Ratio at 11.93 Percent
Extends More Than $211 Billion in Credit in the Second Quarter
Adds $4.7 Billion to Credit Loss Reserves
CHARLOTTE, N.C., July 17 /PRNewswire/ -- Bank of America Corporation today reported second-quarter 2009 net income of $3.2 billion. After deducting preferred dividends of $805 million, including $713 million paid to the U.S. government, diluted earnings per share were $0.33.
(Logo: http://www.newscom.com/cgi-bin/prnh/20050720/CLW086LOGO-b )
Those results compared with net income of $3.4 billion, or diluted earnings per share of $0.72 during the year-ago period.
For the first half of 2009, Bank of America earned $7.5 billion, or $0.75 per share.
Results were driven by continued strong revenue performance in the wholesale capital markets businesses as well as in home loans, complemented by the previously announced gains on the sale of China Construction Bank (CCB) shares and the sale of the company's merchant processing business to a joint venture. These positives were somewhat offset by continuing high credit costs, including additions to the reserve for loan and lease losses, as well as significant negative credit valuation adjustments on certain liabilities including the Merrill Lynch structured notes and the impact of a special Federal Deposit Insurance Corp. (FDIC) assessment.
Bank of America finished the second quarter with its strongest capital position in recent memory, with a Tier 1 Capital ratio of 11.93 percent as well as a leading liquidity position among global banks.
"Having positive net income in an extremely challenging environment speaks to the diversity and strength of our business model as well as the extraordinary effort put forth by all of our associates," said Kenneth D. Lewis, chief executive officer and president. "Our goals during this difficult time have been to enhance the strength of our balance sheet and capital position and to continue to improve our earning power while dealing with the credit issues facing our industry due to the recession.
"Difficult challenges lie ahead from continued weakness in the global economy, rising unemployment and deteriorating credit quality that will affect our performance for the rest of the year and into 2010," Lewis said. "However, we are convinced that Bank of America will weather the storm and emerge as an acknowledged leader in financial services in the United States and around the world."
"Most importantly, we continue to serve our customers and clients around the world every day, helping them with their accounts, meeting their financial needs and adding new business," Lewis added.
Another Good Quarter in Capital Markets and Home Loans
Enhanced Capital Strength, Tier 1 Capital Ratio at 11.93 Percent
Extends More Than $211 Billion in Credit in the Second Quarter
Adds $4.7 Billion to Credit Loss Reserves
CHARLOTTE, N.C., July 17 /PRNewswire/ -- Bank of America Corporation today reported second-quarter 2009 net income of $3.2 billion. After deducting preferred dividends of $805 million, including $713 million paid to the U.S. government, diluted earnings per share were $0.33.
(Logo: http://www.newscom.com/cgi-bin/prnh/20050720/CLW086LOGO-b )
Those results compared with net income of $3.4 billion, or diluted earnings per share of $0.72 during the year-ago period.
For the first half of 2009, Bank of America earned $7.5 billion, or $0.75 per share.
Results were driven by continued strong revenue performance in the wholesale capital markets businesses as well as in home loans, complemented by the previously announced gains on the sale of China Construction Bank (CCB) shares and the sale of the company's merchant processing business to a joint venture. These positives were somewhat offset by continuing high credit costs, including additions to the reserve for loan and lease losses, as well as significant negative credit valuation adjustments on certain liabilities including the Merrill Lynch structured notes and the impact of a special Federal Deposit Insurance Corp. (FDIC) assessment.
Bank of America finished the second quarter with its strongest capital position in recent memory, with a Tier 1 Capital ratio of 11.93 percent as well as a leading liquidity position among global banks.
"Having positive net income in an extremely challenging environment speaks to the diversity and strength of our business model as well as the extraordinary effort put forth by all of our associates," said Kenneth D. Lewis, chief executive officer and president. "Our goals during this difficult time have been to enhance the strength of our balance sheet and capital position and to continue to improve our earning power while dealing with the credit issues facing our industry due to the recession.
"Difficult challenges lie ahead from continued weakness in the global economy, rising unemployment and deteriorating credit quality that will affect our performance for the rest of the year and into 2010," Lewis said. "However, we are convinced that Bank of America will weather the storm and emerge as an acknowledged leader in financial services in the United States and around the world."
"Most importantly, we continue to serve our customers and clients around the world every day, helping them with their accounts, meeting their financial needs and adding new business," Lewis added.
Bank Beats Forecasts, Reassuring Investors
After so much bad news from the nation’s financial industry, Bank of America heartened Wall Street on Monday with quarterly profits that easily surpassed analysts’ gloomy forecasts.
While results from a slew of other banks this week could yet disappoint investors, the report from Bank of America, the nation’s largest retail bank, added to the sense of cautious optimism that some big banks are starting to find their footing.
Bank of America, with its $3.4 billion second-quarter profit, was the fourth major bank to report stronger-than-expected results in recent days. While that result represented a 44 percent decline from the same period a year earlier, it nonetheless exceeded most forecasts and left investors impressed by the company’s ability to offset hefty credit losses with higher lending margins and fees. Bank of America’s share price rose almost 4 percent in heavy trading.
“We see things improving sequentially,” Kenneth D. Lewis, Bank of America’s chairman and chief executive, said during a conference call with investors. “We have a ray of optimism now that we haven’t had for a few quarters.”
Mr. Lewis said that while consumer loan losses were rising, he expected them to peak in the next two or three quarters. He forecast that the economy would remain sluggish for the rest of 2008 and slowly recover during the first half of next year. And he suggested that for Bank of America, at least, the days of enormous dollar write-offs on loans for corporate buyouts and for complex mortgage investments would end soon.
Few analysts say the banking industry as a whole has turned the corner. Nearly every major institution is wrestling with surging losses tied to real estate, credit card and construction loans. But investors are starting to recognize that the losses may not be as severe as they had initially feared. They are also realizing that banks may have the earnings power to offset bad loans and absorb further write-downs.
“It is too early to say things are getting better, but this is coming off extreme fears,” said Mark Fitzgibbon, the director of research at Sandler O’Neill & Partners in New York.
Financial shares have swung erratically during the last week and a half as the Bush administration moved to bolster the nation’s two largest mortgage finance companies, Fannie Mae and Freddie Mac, and federal regulators seized a large California lender, IndyMac Bancorp. But the sector roared back late last week after Wells Fargo, JPMorgan Chase and Citigroup reported strong results.
Bank of America has another reason for optimism: The Countrywide Financial Corporation, the troubled mortgage lender it recently acquired, is now expected to turn profit this year, Bank of America said Monday. When the acquisition was announced in January, Bank of America said the deal would have no impact on earnings this year.
Still, investors fear that losses from Countrywide’s $111 billion loan portfolio could spiral higher, and that Bank of America could be saddled with billions of dollars in litigation costs stemming from Countrywide’s business practices.
But Mr. Lewis said on Monday that given Bank of America’s current analysis of the environment, he was confident that Countrywide’s losses would total about $18.9 billion. Some analysts have previously estimated they could reach $30 billion or more.
Mr. Lewis also told investors that Bank of America’s dividend was safe for now. And with about $26 billion in unrecognized gains related to its ownership stake in China Construction Bank, Bank of America executives said they felt good about their company’s financial position.
While Mr. Lewis has struck a more optimistic note than several other bank chiefs, he said in an interview that he was trying to be “realistic.”
“Even what we think would be reasonable comments are thought to be Pollyanna-ish” in today’s bearish environment, he said. “The psychology in the market is worse than things really are.”
Even so, Bank of America’s credit losses are rising sharply. On Monday, the bank said that it would set aside $2.2 billion more to cover future losses tied to real estate, credit card and construction loans. The bank is also experiencing heavy losses from loans made to small-business customers. And though losses might peak in the coming quarters, many investors expect them to remain high for some time.
Bank of America still has several billion dollars’ worth of buyout loans to sell, and some Wall Street analysts worry the bank has been slow to mark down the values of those loans on its books. The bank took write-offs of $64 million on buyout loans and an additional $645 million on complex mortgage investments it could not sell.
Recent acquisitions are likely to keep Mr. Lewis from pursuing another blockbuster deal in the near future. Bank of America has its hands full integrating Countrywide and LaSalle Bank, a Midwest lender it bought last year, and is brushing up against a federal cap on deposits.
“The focus now is on profits sequentially and building our capital back to our targets. It’s an inward focus on one sense,” Mr. Lewis said. “We are actually having great success in the marketplace given that others are so inwardly focused.”
While results from a slew of other banks this week could yet disappoint investors, the report from Bank of America, the nation’s largest retail bank, added to the sense of cautious optimism that some big banks are starting to find their footing.
Bank of America, with its $3.4 billion second-quarter profit, was the fourth major bank to report stronger-than-expected results in recent days. While that result represented a 44 percent decline from the same period a year earlier, it nonetheless exceeded most forecasts and left investors impressed by the company’s ability to offset hefty credit losses with higher lending margins and fees. Bank of America’s share price rose almost 4 percent in heavy trading.
“We see things improving sequentially,” Kenneth D. Lewis, Bank of America’s chairman and chief executive, said during a conference call with investors. “We have a ray of optimism now that we haven’t had for a few quarters.”
Mr. Lewis said that while consumer loan losses were rising, he expected them to peak in the next two or three quarters. He forecast that the economy would remain sluggish for the rest of 2008 and slowly recover during the first half of next year. And he suggested that for Bank of America, at least, the days of enormous dollar write-offs on loans for corporate buyouts and for complex mortgage investments would end soon.
Few analysts say the banking industry as a whole has turned the corner. Nearly every major institution is wrestling with surging losses tied to real estate, credit card and construction loans. But investors are starting to recognize that the losses may not be as severe as they had initially feared. They are also realizing that banks may have the earnings power to offset bad loans and absorb further write-downs.
“It is too early to say things are getting better, but this is coming off extreme fears,” said Mark Fitzgibbon, the director of research at Sandler O’Neill & Partners in New York.
Financial shares have swung erratically during the last week and a half as the Bush administration moved to bolster the nation’s two largest mortgage finance companies, Fannie Mae and Freddie Mac, and federal regulators seized a large California lender, IndyMac Bancorp. But the sector roared back late last week after Wells Fargo, JPMorgan Chase and Citigroup reported strong results.
Bank of America has another reason for optimism: The Countrywide Financial Corporation, the troubled mortgage lender it recently acquired, is now expected to turn profit this year, Bank of America said Monday. When the acquisition was announced in January, Bank of America said the deal would have no impact on earnings this year.
Still, investors fear that losses from Countrywide’s $111 billion loan portfolio could spiral higher, and that Bank of America could be saddled with billions of dollars in litigation costs stemming from Countrywide’s business practices.
But Mr. Lewis said on Monday that given Bank of America’s current analysis of the environment, he was confident that Countrywide’s losses would total about $18.9 billion. Some analysts have previously estimated they could reach $30 billion or more.
Mr. Lewis also told investors that Bank of America’s dividend was safe for now. And with about $26 billion in unrecognized gains related to its ownership stake in China Construction Bank, Bank of America executives said they felt good about their company’s financial position.
While Mr. Lewis has struck a more optimistic note than several other bank chiefs, he said in an interview that he was trying to be “realistic.”
“Even what we think would be reasonable comments are thought to be Pollyanna-ish” in today’s bearish environment, he said. “The psychology in the market is worse than things really are.”
Even so, Bank of America’s credit losses are rising sharply. On Monday, the bank said that it would set aside $2.2 billion more to cover future losses tied to real estate, credit card and construction loans. The bank is also experiencing heavy losses from loans made to small-business customers. And though losses might peak in the coming quarters, many investors expect them to remain high for some time.
Bank of America still has several billion dollars’ worth of buyout loans to sell, and some Wall Street analysts worry the bank has been slow to mark down the values of those loans on its books. The bank took write-offs of $64 million on buyout loans and an additional $645 million on complex mortgage investments it could not sell.
Recent acquisitions are likely to keep Mr. Lewis from pursuing another blockbuster deal in the near future. Bank of America has its hands full integrating Countrywide and LaSalle Bank, a Midwest lender it bought last year, and is brushing up against a federal cap on deposits.
“The focus now is on profits sequentially and building our capital back to our targets. It’s an inward focus on one sense,” Mr. Lewis said. “We are actually having great success in the marketplace given that others are so inwardly focused.”
Bank of America Downgraded by Fox-Pitt Kelton
Bank of America (BAC) shares were downgraded this morning by Foxx-Pitt Kelton from Outpeform to In Line after the bank reported earnings last week.
The firm believes major banks will struggle throughout 2009 and profits will be unlikely when excluding one-time gains. Citigroup (C) announced earnings last week that showed the bank had turned a profit in the quarter, but after one-time gains from the brokerage unit partnership with Morgan Stanley (MS) were removed, the bank actually had a loss in the quarter.
Furthermore, Foxx-Pitt does not believe Bank of America will be in the financial position to repay its $45 billion loan from the US Treasury by the end of the year as CEO Ken Lewis had hoped.
The firm believes major banks will struggle throughout 2009 and profits will be unlikely when excluding one-time gains. Citigroup (C) announced earnings last week that showed the bank had turned a profit in the quarter, but after one-time gains from the brokerage unit partnership with Morgan Stanley (MS) were removed, the bank actually had a loss in the quarter.
Furthermore, Foxx-Pitt does not believe Bank of America will be in the financial position to repay its $45 billion loan from the US Treasury by the end of the year as CEO Ken Lewis had hoped.
Bank of America stock plummets
Bank of America Corp.’s stock, which had already dropped more than 27 percent this month, fell another 18 percent in Thursday trading.
BofA’s stock, which has traded between $10.01 and $45.08 over the last year, closed at $8.32 per share Thursday, down from Wednesday’s closing price of $10.20.
Bank of America has 61 branches and deposits of $5.7 billion in the four-county region, according to the most recent report issued by the Federal Deposit Insurance Corp. Bank of America at the time of the report had the top spot in local marke tshare at 18.9 percent. Since that report, however, Wells Fargo Bank, which had 17.7 percent deposit market share has taken over the operations of Wachovia Bank, which had 9 percent deposit market share.
The bank's shares drop in value follows a report from The Wall Street Journal late Wednesday that the federal government may commit billions more in aid to BofA as it acquires Merrill Lynch & Co. Inc.
According to the report, which cites individuals familiar with the situation, discussions over the funds began last month when BofA told the U.S. Treasury Department it might not acquire Merrill because of the securities firm’s larger-than-expected losses in the fourth quarter.
The government agreed to a plan that includes new federal funds because it was concerned that a failed deal could affect the financial markets.
The report says details are slated to be released Tuesday when BofA announces its fourth-quarter earnings.
A possible arrangement might protect BofA from some losses on Merrill’s bad assets, the newspaper says.
A BofA spokesman had no comment on the Journal ’s report.
So far, BofA has received $25 billion through the federal bailout of the nation’s financial system. Under the Troubled Asset Relief Program (TARP) program, the Treasury Department is purchasing up to $250 billion in preferred stock in U.S. banks. The program was designed to stabilize the ailing financial system and to encourage banks to increase lending and stimulate the economy.
The bank received $15 billion in late October. Another $10 million was originally intended for Merrill. Because BofA acquired the securities firm Jan. 1, the Charlotte-based bank (NYSE:BAC) got the $10 billion. Treasury forwarded the funds through the Troubled Asset Relief Program on Jan 9.
Concerns have grown about BofA’s financial position in recent weeks. The $2.7-trillion-asset bank has enormous exposure to consumer loans, which are deteriorating along with the economy. It also is juggling two merger integrations in Countrywide Financial Corp. and Merrill, eliminating 42,500 jobs across the company tied to those two deals.
This week Citigroup Inc. (NYSE:C) analyst Keith Horowitz said he expected BofA to post a $3.6 billion loss in the fourth quarter, and he also believes the company will cut its dividend again, to 5 cents from 32 cents. In the third quarter the bank cut its dividend by 50 percent.
In a research note last night, Standard & Poor’s analyst Stuart Plesser said that even with additional government funding, BofA’s capital levels will still be low relative to peers. Banks are required to maintain a certain amount of capital to protect against loan losses, and Plesser expects BofA will likely have to raise additional equity capital in the coming months and cut its dividend again. A capital raise via a common stock offering would dilute existing shareholders’ equity further; in October the bank raised $10 billion in new capital through a common stock offering. Plesser continues to rate BofA’s shares a “sell.”
Christoper Mutascio, an analyst with Stifel Nicolaus, says he is reserving judgment on the latest capital infusion from the government. In a note this morning, Mutascio says while “the initial take on this is negative,” the devil will be in the details and terms of the capital infusion. If the government assistance is “punitive, then it is a bailout of (BofA), which is not good. If it is advantageous then it would appear that (BofA) earned some ‘goodwill’ from the federal government and any initial negative reaction would be premature.” Mutascio rates the shares a “buy.”
BofA reported net income of $1.17 billion in the third quarter, down from $3.7 billion a year earlier. Analysts polled by Thomson Financial expect the company to report fourth-quarter earnings of $1.2 billion, or 8 cents per share.
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