Departing Chief Executive Kenneth D. Lewis had better hope Bank of America Corp.'s third-quarter results are not the final draft of his legacy.
Nearly all the company's big acquisitions of the past four years contributed to a hefty loss. Cards, mortgages and private banking were in the red; commercial lending suffered notable credit losses, and investment banking income dipped from the preceding quarter.
Lewis, whose acquisition binges have drawn intense criticism, was resolute in what could be his last comments as CEO. He declared that his dealmaking ultimately would prove itself sound.
"As I sit here at this moment … we have built the best financial franchise in the world," he said. "I look forward — it may be from afar, I guess — to seeing it play out over the next few years."
Lewis two weeks ago touched off a succession maelstrom by abruptly announcing a yearend retirement.
Though analysts predicted that the company will right itself in the long term, B of A must address a number of issues before it can recover. Credit-related losses must peak, and loan growth must return. The company must start repaying the $45 billion in capital it got from the Troubled Asset Relief Program in order to avert sizable preferred stock dividend payments.
Jeffery Harte, an analyst at Sandler O'Neill & Partners LP, said that recent acquisitions, though likely to benefit B of A down the road, are punishing the company now. "From a cyclical standpoint, the major problems are more a function of the purchases rather than the heritage franchise," he said.
During Friday's quarterly conference call, analysts repeatedly sought clarity on points of concern. For the most part, all executives did was express near-term caution and longer-term optimism. They gave only vague projections on when things would turn around at the $2.39 trillion-asset Charlotte company.
"Results in the fourth quarter are expected to continue to be challenging as we close the year," Lewis said in his opening remarks.
Joe Price, B of A's chief financial officer, talked in generalities of repaying Tarp, calling it a high priority since the company paid $893 million in dividends to the government last quarter. Hurdles remain, he added, including a vague reference to "more specific guidance" expected from regulators. "Nothing else has changed from what we said in the past," he said.
Another wild card is lending. The loan book shrank 3% from the previous quarter, to $914.3 billion. The company attributed the decline to lower consumer demand and competition from capital markets in luring business from large corporate clients.
"We are not seeing the level of seasonal inventory builds or capital expenditure spending at any meaningful level," Lewis said.
Price gave little hope that the lack of loan demand would reverse itself soon, predicting a continued "downdraft coming into next quarter." A rebound would depend largely on midsize companies and residential mortgage activity, he said, though declining to state a time frame.
Executives gave the most detail on credit quality.
Lewis said in his opening remarks: "We believe we may have peaked in total credit losses this quarter although the levels going forward will continue to be elevated."
Still, he warned that reserve building will continue in the fourth quarter and losses will "remain high going into 2010."
Price seemed to back off the optimism on credit losses. "We are not suggesting that chargeoffs have absolutely peaked. We think we are near, or somewhere near, from that standpoint."
Poor and volatile performance was evident across multiple business lines, most of them expanded by acquisitions in the past five years.
The result: Bank of America returned to red ink, losing $2.2 billion after preferred dividends, or 26 cents a share. The company made $2.4 billion in the second quarter and earned $704 million a year earlier.
Revenue fell 20.6% from the second quarter, though it was up 32% from a year earlier, at $26.4 billion. (Merrill Lynch was not a part of the company's 2008 results). The quarterly loss would have been much worse had it not been for $886 million in equity investment income and $1.6 billion in security gains.
Paul Miller Jr., an analyst at Friedman, Billings, Ramsey Group Inc., wrote in a note to clients that for the first time this year the company is falling short of a January projection by Lewis of $50 billion in pretax, preprovision 2009 earnings. Capital markets and mortgage revenue declines are playing a big role in the shortfall, he wrote.
Credit card services lost $1.04 billion. Mortgage and insurance lost $1.63 billion. Price also said that, for the first time since the downturn began, most commercial real estate losses came from outside the company's home builder exposure.
Investment banking income slid, off 30.2% from a quarter earlier, to $1.3 billion. Price attributed the decline to seasonal trends. Merrill Lynch also contributed to a $2.6 billion hit for writing down debt and other liabilities — a volatile line item since B of A closed the deal Jan. 1.
The loan-loss provision fell 17% from the second quarter but was up 83% from a year earlier, at $11.7 billion. Net chargeoffs rose 11% from the second quarter and more than doubled from a year earlier, to $9.6 billion. Nonperforming assets rose 9% from the second quarter and 149% from a year earlier, to $33.8 billion. Though worsening, the pace of deterioration showed signs of slowing down.
Harte, the Sandler O'Neill analyst, said he had thought the loan-loss provision would be closer to $12.85 billion, which could have cut deeper into the quarterly results.
Lewis was asked repeatedly by analysts about his decision to retire and his input on succession planning. Though he said he gave his opinion to the six-member selection committee, Lewis seemed to confirm the belief that he is on the outside looking in.
"I am assured," he said, "that there's a proper balance in getting it right and doing it with a sense of urgency."
More attitude bled through when Lewis addressed the reasoning behind his retirement.
"I always thought I would intuitively know" when to leave, he said. "Eight years as the CEO is enough."