Profit Up, Bank of America Chief Cites Acquisitions [NYT]
By LOUISE STORY
nytimes.com
Bank of America reported first-quarter earnings of $4.2 billion on Monday, and the bank said those earnings were bolstered by two controversial acquisitions.
The bank has faced immense criticism for buying the mortgage giant Countrywide Financial and the troubled investment bank Merrill Lynch. Some shareholders say they believe that Bank of America overpaid for both companies.
Financial shares, however, slid sharply Monday because of investor concerns that much of the profit reported by the banks was from one-time gains or accounting adjustments. Bank of America was down 15.5 percent, while Citigroup was down 14.7 percent. But bank executives emphasized on Monday that their strategy for integrating those companies was on track and providing profits.
“The results this quarter are a testament to the value and breadth of the franchise,” Kenneth D. Lewis, the bank’s chief executive, said in an earnings call. “The additions of Countrywide and Merrill Lynch have clearly been accretive to earnings as these market-sensitive businesses offer diversification.”
The bank’s profit was up significantly from the first quarter a year ago, when it earned $1.2 billion. Revenue was $36 billion. The earnings of 44 cents a share beat analysts’ expectations of 4 cents a share. The bank added $6.4 billion to its loan-loss reserves, which Mr. Lewis called an “extraordinary reserve build” in anticipation of further fall-out in consumer and corporate loans.
Bank of America’s earnings follow positive earnings reports last week from rivals JPMorgan Chase and Citigroup.
But Bank of America’s results were helped by some one-time items that analysts said pushed results into positive territory from break-even. Those included a $1.9 billion pretax gain on the sale of shares in China Construction Bank shares, in which the bank continues to hold about a 17 percent stake. Bank of America also benefited from changed valuations of some investments. In particular, it gained $2.2 billion from an adjustment to the value of structured notes at Merrill, and a benefit of about $1.5 billion in its trading books.
“The stock is down because it was a break-even quarter if you back out all these gains,” Jason Goldberg, an analyst at Barclays Capital, said, referring to the one-time items.
Mr. Goldberg also said investors are concerned because nonperforming assets increased 40 percent, the result of problems with consumer mortgages and commercial real estate.
One key question is whether the bank needs more capital. The bank said its tier 1 capital ratio, a measure of financial strength, was 10.09 percent, up from 9.15 percent at the end of 2008.
“We absolutely don’t think we need additional capital,” Mr. Lewis said.
Regulators are currently evaluating the “stress tests” of Bank of America and other banks.
When asked about the conversion of preferred shares in the bank to common stock, Mr. Lewis said: “We think we’re fine, but again this is in the hands of the regulators at the moment.”
Though the bank said its integration with Merrill was on track, the news might not assuage all of its shareholders, many of whom want the company to reshuffle its board and possibly its management. One of the most vocal shareholder groups is the Finger family, based in Texas. They have set up a Web site campaign at bacproxyvote.com, and have broadcast television commercials urging shareholders to vote against Mr. Lewis. The family sold its Houston-based bank, Charter Bancshares, to Bank of America’s predecessor in 1996, and say they control about 1.1 million shares.
The bank has tried to engage the Fingers, sending executives and a board member by corporate jet to visit the family three times in Texas.
The Fingers’ story line is familiar to others who became part of the Bank of America family tree. In the last few decades, the bank was cobbled together out of more than 50 financial companies, mostly local banks. The oldest was Massachusetts Bank, founded in 1784, which was absorbed through the company’s acquisition of FleetBoston Financial.
Many shareholders stuck with the company for decades. The Eliasberg family, for instance, has held their stock for more than 70 years. Richard Eliasberg’s father helped found Baltimore National Bank in 1933, and that bank grew up to become part of what is now Bank of America.
But in an interview before the release of the quarterly report, Mr. Eliasberg said he was losing faith in Bank of America, and in Mr. Lewis.
“For the first time, I’m disappointed,” said Mr. Eliasberg, who owns a substantial number of shares for an individual, though he has sold a third of his stock in the last year.
Of particular concern is Mr. Lewis’s latest conquest, Merrill. Bank of America shareholders signed off on the acquisition in early December, only to discover that gaping losses at Merrill would force Bank of America to seek assistance from the government for a second time. Some investors are suing, claiming that Mr. Lewis failed to fully disclose the risks of the deal.
Bank of America said Monday that “the Merrill Lynch integration is on track and expected to meet targeted cost savings” and that Merrill had contributed $3 billion to its net income. It also said the integration of Countrywide Financial, the mortgage lender it bought last year, “is on track.”
On Friday, two investor advisory firms issued reports recommending that shareholders vote to remove Mr. Lewis from the board. The bank’s proxy is in circulation in anticipation of what is likely to be a contentious annual meeting on April 29 in Charlotte, N.C., where Bank of America is based.
The reports, issued by the RiskMetrics Group and Glass, Lewis & Company, carry weight because some institutional shareholders follow the groups’ recommendations without exception.
A Bank of America spokesman said Friday that the company was disappointed with the conclusions of the reports, including an initiative to strip Mr. Lewis of his chairmanship and another that would unseat him altogether. The spokesman also said that the bank believed that it had acted appropriately in its disclosures about the merger with Merrill.
Inside Bank of America, there is resentment over the Merrill acquisition. Bank employees are also among the largest voices among individual stockholders.
Some people, of course, support Mr. Lewis. The CtW Investment Group, which represents pension funds, is leading a campaign against Mr. Lewis, but the organization has received e-mail messages from people who believe the management is good, according to a spokesman for the group.
“Please give Ken Lewis a chance,” wrote Luis F. Valenzuela, a shareholder who supported the bank in one of the e-mail messages provided by CtW to The New York Times. “He will prove you guys wrong. Don’t make the mistake of looking dumb.”
Mr. Valenzuela said in an e-mail message that he was a student in Arizona and that the bank’s past dividend helped him afford his education.
The acquisitions were not only on the Bank of America side. Many of the companies that the bank acquired had built themselves up over the years in a similar fashion. Tom Sharkey Jr., for instance, owns shares of the bank because his family sold its 100-year-old insurance business to FleetBoston in 2001, and then Fleet was acquired by Bank of America in 2004. Now, Mr. Sharkey says, he and several members of his family in New Jersey have lost significant wealth because of the bank’s “catastrophically bad mistakes.”
Charles Elson, a professor at the University of Delaware, was given most of his tens of thousands of Bank of America shares by his father more than 30 years ago. Back then, the stock he owned was in Citizens & Southern Bank of Georgia, based in Atlanta, where he grew up.
“It was always a strong bank and a strong investment — something we’d never sell,” said Mr. Elson, whose father was on the board of the Atlanta bank before it was taken over in 1991 by a predecessor of Bank of America.
Mr. Elson, who teaches courses on corporate governance, has been concerned about the structure of Bank of America’s board since the late 1990s. He said he had once contacted the company about his concerns — to no avail.
“I knew it was there, the problems with corporate governance,” Mr. Elson said. “The biggest mistake I made was I did not sell. Put it this way: had I known this 40 years ago, I would have invested in something else.” |
