Bank of America Corp. tiptoed out on a limb Monday and said the days of shoveling ever-increasing amounts into loan-loss reserves may finally be over.
The Charlotte company's "extraordinary" reserve increase — a $13.4 billion provision that more than doubled net chargeoffs — may correlate to "the height of the recession," Kenneth D. Lewis, B of A's chairman, president and chief executive, said in a conference call with analysts and reporters to discuss first-quarter results.
"We would expect further reserve build, but not of that magnitude," he said.
While B of A forecast that commercial real estate losses will level off soon, it expects offsetting pressure from the commercial and industrial portfolio. And Lewis made it clear that bad loans will continue to translate into losses.
"Credit is bad, and we believe credit is going to get worse before it will eventually stabilize and improve," he said. "Whether that turns later this year or in the first half of 2010, I'm not going to hazard a guess."
Investors sold off the stock. (See related story.)
Several areas of concern remain in terms of sizable — and growing — credit fissures, making it clear that the $2.32 trillion-asset company has not reached a turning point within its traditional banking operations. Its card business lost $1.8 billion in the quarter, and the mortgage and insurance unit lost $500 million.
Losses in the credit card portfolio equalled 8.6% of outstanding balances and made up nearly 30% of the net chargeoffs in the consumer book. B of A also added $850 million to its reserve for mortgages originated by Countrywide Financial Corp., which it bought in July.
Nonperforming assets continued to climb, jumping 41.2% from the fourth quarter and more than tripling from a year earlier, to $25.7 billion. (Those totals were affected by B of A's 2008 deals for Countrywide and Merrill Lynch & Co. Inc.) Every major asset class deteriorated from the fourth quarter.
Jason Goldberg, an analyst at Barclays Capital, said the surge in nonperforming assets puts B of A at a disadvantage against its biggest competitors.
"We saw NPA increases slow at Citigroup and JPMorgan Chase and accelerate at B of A," he said. Provision expenses remain at "very high levels, so even if they show improvement, they are still going to post very high" provision expenses.
Anthony Polini, an analyst at Raymond James & Associates who has been a long-time company proponent, counted himself among those who were not impressed with the showing. Polini said the "alarming rate" of credit deterioration raises "concerns about the potential for dilutive equity issuance once the stress test is made public."
Bart Narter, an analyst at Celent, a Boston market research unit of Marsh & McLennan Cos., said B of A's retail bank — not the often-criticized Merrill Lynch acquisition — poses the biggest risk for Lewis. "They have a huge retail franchise, and they need to make it profitable."
Investment banking income was solid, rising 44.2% from the fourth quarter, to $643 million, and marks in the combined books for B of A and Merrill fell significantly from previous quarters.
Lewis also touted some traction tied to the Countrywide purchase, including $85 billion of first-quarter origination volume. The mortgage and insurance unit's revenue rose 60% from the fourth quarter, to $5.2 billion.
Overall, he said, B of A extended $183 billion of credit during the quarter, or slightly more than it did in the fourth quarter, with mortgages making up the lion's share. Another $71 billion was tied to commercial lending, and $11 billion was tied to commercial real estate. Such activity is being closely tracked by critics of the Treasury Department's Troubled Asset Relief Program, where B of A has already received $45 billion of capital.
Despite the new lending, Lewis said his company has been reducing its loan portfolio by letting relationships run off or securitizing more credits to strengthen liquidity.
Unlike JPMorgan Chase, B of A said it would sell some assets through the Treasury's Public-Private Investment Program, though Price described that plan as a "small trial run to see what it yields."
B of A is also becoming more aggressive in managing deposits. Joe Price, B of A's chief financial officer. said it is closing "low-balance, less profitable" accounts. Net new demand deposit accounts fell by half from a year earlier. Customers contributed to the decline, he said, since more are consolidating accounts to reduce fees.
Dividends tied to Tarp-related preferred stock reduced the profit available to common shareholders. In the first quarter B of A paid $1.43 billion of dividends, including $402 million to the Treasury, cutting into its $4.25 billion profit, which at 44 cents a share still beat the average estimate analysts by 40 cents, according to Thomson Reuters.
By comparison, B of A posted a $1.79 billion loss for the fourth quarter, when Merrill lost $15.84 billion.
B of A relied on a number of items to make its first quarter profitable, including $2.2 billion of mark-to-market adjustments tied to the Merrill purchase, $1.9 billion from selling China Construction Bank stock, and $1.5 billion from selling mortgage-backed securities.
The company indicated during the earnings call that more maneuvers could be made to make money this year.
Price told analysts that B of A is "engaged 100% in leveraging" all aspects of the company "to be profitable on an EPS basis and add to our capital levels." And Lewis confirmed that it is in talks to sell First Republic Bank, a private bank inherited from Merrill, though he would not discuss other potential divestitures.