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October 28
Plagued by bad press and a struggling stock, Bank of America Corp. tried Tuesday to buy some time by erring on the side of disclosure.
B of A offered up more than 125 pages of data in conjunction with its third-quarter conference call that covered the gamut: mortgage repurchases, foreclosures, overdraft policy, credit quality and other hot issues.
The move seemed to please observers for the moment, but the company has many hurdles to overcome after a quarter where revenues stalled and a massive goodwill charge dragged it back into the red. Those are in addition to the fallout from the foreclosure documentation controversy.
If anything, Tuesday's event summed up the tenure of Brian Moynihan, who has spent much of his first year on the job repairing strained relationships with investors, customers and the government. He tried to use the quarterly conference call and supplemental materials to further improve the company's rapport with analysts.
The effort contrasted with a year earlier, when former CEO Kenneth D. Lewis faced an accelerated retirement after accusations that B of A mishandled disclosures associated with its January 2009 acquisition of Merrill Lynch & Co. and the government assistance that facilitated the deal.
Moynihan said the detailed disclosures were a matter of giving investors what they want in order to determine how B of A is dealing with an ever-changing operating environment.
"This business is going through the transition in earnest," he said. "Part of the documents you see today are based on conversations we've had with many of you over the last few months. … We know these are key issues that are on your mind and on our mind as shareholders of what our franchise faces."
It seems, however, that every time Bank of America attempts to get ahead of an issue, other issues join the queue.
Three months ago, Moynihan warned that the company would record a huge goodwill impairment charge to cover revenue shortfalls from caps on debit card transaction fees, which played out Tuesday. But since then the industry has been hit hard with criticism over foreclosure practices and concerns about repurchase claims from entities that bought mortgages. Moynihan used the call to address those issues, too, saying for instance that B of A had double-checked procedures and was ready to move forward again with foreclosures where necessary. "We continue to do all we can to avoid foreclosures," he said.
Doug Kantor, counsel to the Merchants Payments Coalition, which represents 2.7 million U.S. businesses, questioned the timing of the $10.4 billion goodwill charge. "With a Federal Reserve decision on debit interchange rates not expected until mid-2011 … claims by Bank of America dramatically overstate reality," Kantor said in a press release. He called the charge "a feeble attempt to divert attention" from the debate over foreclosure practices.
But analysts by and large applauded Bank of America for its efforts.
"I think they gave us everything they realistically could, and it helped make their case," said Jeffery Harte, an analyst at Sandler O'Neill & Partners LP. "The only thing they could do differently is break out a crystal ball — there is no way to completely answer what the future holds."
Andrew Marquardt at Evercore Partners wrote in a note to clients that the decision to provide "greater clarity on the mortgage banking repurchase/warranty issue adds comfort that the situation is manageable." Keith Horowitz at Citigroup Inc. agreed that extensive details were "helpful in framing the issue" of repurchase risk, as investors were focused more on the company's total exposure rather than actual loss expectations.
Investors were warier about the situation, after reports that a group including Pacific Investment Management Co., BlackRock Inc. and the New York Fed had sent Bank of America a letter asking it to repurchase $47 billion in mortgage bonds. (B of A has a minority stake in BlackRock.) B of A shares fell 4.4% to close at $11.80, perhaps also reflecting by the company’s quarterly loss of $7.3 billion. Though the $2.3 trillion-asset Charlotte company would have earned $3.1 billion excluding the hefty $10.4 billion goodwill charge, revenue was down 8% from the second quarter and up just 2% from a year earlier, to $26.7 billion.
Charles Noski, B of A's chief financial officer, sought to allay some analysts' concerns over exposure to repurchase claims from Fannie Mae and Freddie Mac. He estimated that B of A had "already received more than two-thirds" of expected claims from those entities covering the 2004-8 period where most exposure exists. Overall expense tied to mortgage claims fell 27% from a quarter earlier, to $872 billion, and the company has $4.4 billion set aside to cover future repurchases, he said.
Moynihan addressed criticism over the industry's handling of foreclosures. B of A, which two weeks ago halted foreclosures nationwide to review procedures, is set to resume them in 23 states. A third of foreclosure sales involve vacant homes and 80% are instances where the borrower has gone a year or more without paying, he said.
"We have to get through this difficult work on foreclosures to help the real estate markets heal," he said. "Our job is to continue to help heal this process."
Regarding repurchase demands, Moynihan said the company would stand firm. "The one thing that we want to be clear is that when we look at the rep and warranty claims … we're not going to put this behind us to make us feel good. We're going to make sure that we'll pay when due but not just do a settlement to move the matter behind us."
Moynihan also defended a decision to eliminate overdraft protection for certain debit card purchases, acknowledging that some investors were concerned the company had sacrificed shareholder interests to become more consumer friendly. A report issued last month by Moebs Services found that opt-in rates have ranged from 60% to 80% in the two months since banks were required to obtain customer consent for overdraft services.
Though Bank of America was making money on overdrafts, Moynihan said internal concerns focused on 18% annual growth in closed accounts and complaints reaching "an all-time high" a year earlier. "The customer results … [were] hurting our franchise and long-term would hurt our shareholders."
In the third quarter, account closures fell 27% from a year earlier and complaints have been cut in half, the company said.
Credit quality was a bright spot yet again. The loan-loss provision fell 33% from the second quarter and 54% from a year earlier.
