Bank of America Corp. used $290 million of one-time gains and other nonrecurring revenue to spruce up its third-quarter results, two analysts at Credit Suisse First Boston said Tuesday.
Bank of America beat analysts' average third-quarter target of $1.21 per share by 2 cents by including in operating income $61 million from securitizations and loan sales, $140 million of venture capital investment gains, $10 million from the sale of Taiwanese retail operations, and $79 million from the sale of carfinace.com, an Internet lender. The $79 million was disclosed in a Securities and Exchange Commission report, but not to some analysts, according to Credit Suisse First Boston analysts Michael Mayo and David Trone.
Without the one-time items, the Charlotte, N.C. bank would have missed consensus by 5 cents, the analysts said.
"We don't routinely list every nonrecurring item every quarter, unless it is a big one," said a Bank of America spokesman. "You can't look at one gain and say that they used that to beat consensus - not when you have a big company like this."
The analysts generated controversy earlier this week with a similar report on First Union Corp. They said their analysis of Bank of America is further evidence of the poor quality of bank earnings. "This is endemic in the industry," said Mr. Trone. "More than a few banks do this. It takes some serious arm twisting" to get banks to fully disclose their non recurring income. A Bank of America spokesman said that the company did not disclose the price of the sale because the conditions of the deal forbade it.
Earlier the analysts took First Union Corp. to task for failing to disclose a $23 million one-time gain when it originally reported its earnings on Oct. 14. The $23 million gain equaled 2 cents a share, which enabled them to meet their third-quarter earnings estimates of 84 cents a share. First Union said that the one-time gain was offset by the sale of two loans and the leasing operations of their auto finance business.
The $290 million was offset by $120 million in discretionary spending, and therefore the quarterly result should have been reported as 5 cents below the consensus, the analysts said.
"They were massaging the numbers," said Mr. Trone.
Bank of America Corp. obtained the car loan unit through the January 1998 sale of Barnett Banks Inc. to a predecessor company, NationsBank Corp. of Charlotte, N.C. NationsBank merged with the old BankAmerica Corp. in April 1998.
Bank of America told Mr. Trone and Mr. Mayo that it had offset the gains with "discretionary expenses," such as improving a securities unit and e-commerce capabilities, Mr. Trone said. "They did not have to take those expenses this quarter."
"Just because they are discretionary does not mean that they are not nonrecurring," said Mr. Trone. "One-time gains should not be used to meet earnings. If anything, they should be considered icing on the cake.
"The reason why this is a big deal is because a company should meet its earnings expectations without the help of one-time items. And the dollars are big enough that investors care."
Bank of America shares closed down $1.625 Tuesday, or 2.53%, at $62.625.
"Companies should also always be up-front with their one-time items," said Mr. Trone referring to the $79 million. "Let the investors decide."
Some analysts were more upbeat than Mr. Mayo and Mr. Trone, saying that Bank of America's divestitures were strategic and would make the company stronger.
"We think this should be differentiated from the operating difficulties of First Union and the possibility and that First Union may not meet their 2000 earnings objectives, " said Carla D'Arista, a bank analyst at Friedman, Billings Ramsey & Co., Arlington, Va.
"Bank of America, on the other hand is in the midst of a massive integration projection comprised of a lot of moving parts and strategic divestitures. We expect that to continue for the next several years."
