Bank of America Corp. would consider selling its retail-branch network in Texas and its U.S. Trust wealth-management unit if the giant bank is forced to raise capital in a market shock or severe economic downturn, according to a document provided to U.S. regulators.
The Charlotte, N.C., company submitted the hypothetical scenarios as part of a list requested last year by the Federal Reserve, said people familiar with the situation. The list is part of an emergency-planning exercise requested by regulators, who are conducting "stress tests" at 31 large U.S. banks early this year. It isn't clear if other large banks were asked last year to prepare similar plans.
No sales are imminent or actively under discussion, and Bank of America executives don't think they will be forced to pull the trigger on the contingency list, said people familiar with the situation. The executives don't want to shed the businesses and still consider them core to the bank's operations, these people said. Even in an emergency, the bank could choose to issue common stock before selling key chunks of its business.
The bank and the Fed declined to comment.
Still, the list is a reminder that the bank could be forced to make some hard decisions if regulators decide not enough has been done to prepare for a future downturn. The Wall Street Journal reported last month that bank executives also have told the Fed they would consider issuing shares tied to the performance of its Merrill Lynch securities unit and retreating from certain sections of the national footprint it spent the past two decades assembling.
Leaving Texas, which the bank entered more than two decades ago with a savvy deal at the height of the savings-and-loan crisis, would be particularly striking. The 1989 purchase of the remains of First Republic Bank put the banking industry on notice for the national ambitions of the company's then CEO, Hugh McColl, and a top lieutenant who succeeded him at the helm, Kenneth Lewis.
Brian Moynihan, who took over for Lewis in 2010, is slowly undoing that growth-by-acquisition strategy as he reduces risk and scales back the bank's size and reach.
A sale of U.S. Trust, a 159-year-old bank whose early clients included the Astor, Whitney and Corning families, would also be jarring. When Bank of America paid $3.3 billion for U.S. Trust in 2007, buying it from Charles Schwab Corp., the deal turned the bank into the country's largest manager of private wealth.
Moynihan later went out of his way to declare U.S. Trust untouchable. "We are not selling U.S. Trust, just to be clear," he told employees during a Dec. 17, 2009, town hall meeting held to introduce him as the next CEO.
Many analysts are expecting the big banks, including Bank of America, to pass the stress tests without a problem. Bank of America's stock has rallied 45% this year as investors grow more confident about the institution's strength.
The company has sold more than $50 billion in assets since the start of 2010 as part of an effort to shore up its balance sheet. Bank of America's key capital ratios now stack up more favorably against its biggest rivals: Its Tier 1 common-capital ratio hit 9.86% at the end of the fourth quarter, up from 8.65% at the end of the third quarter. That compares with 10% at J.P. Morgan Chase and 9.46% at Wells Fargo & Co.
The stakes in this year's stress test are particularly high for Bank of America, one of the few institutions restricted last year from increasing its dividend. The company's health has improved, with the bank posting fourth-quarter earnings of $2 billion and swinging to $1.4 billion full-year profit from a year-earlier loss. Even so, Bank of America didn't request approval this year to raise its dividend or buy back stock, said people familiar with the situation.
The First Republic deal, which was done at the urging of U.S. regulators who allowed the bank to benefit from nearly $1 billion in tax credits, came to symbolize the company's appetite for opportunistic takeovers of distressed financial firms. Today, Bank of America is the second-largest bank in Texas as measured by deposits, with $77.6 billion, after J.P. Morgan Chase. Bank of America has 462 branches in Texas, according to Federal Deposit Insurance Corp. data from June 30, accounting for about 8% of its total U.S. network. Only California and Florida have more locations.
Texas landed on the bank's contingency list largely because "the costs of buying it were low, which means the profit would be larger," said one person familiar with the contents of the list. A Texas selloff would be a "big capital contributor."
Private investors recently inquired about a potential sale and were firmly rebuffed, said people familiar with the situation. Last year, Bank of America was more willing to listen to the same inquiries, they added.