Some Good News for Bank of America
Anxious shareholders got a bit of good news Monday from Bank of America, which reported that its first-quarter net income more than tripled.
The bank said its profit rose to $4.2 billion in the first quarter, from $1.2 billion a year earlier, as it posted revenue of $36 billion. It also reported diluted earnings per share of 44 cents, compared with analysts expectations of about 4 cents a share. It added $6.4 billion to its loan-loss reserves.
“The fact that we were able to post strong, positive net income for the quarter is extremely welcome news in this environment,” Kenneth D. Lewis, the bank’s chairman and chief executive said in a statement. “It shows the power of our diversified business model as well as the ability of our associates to execute.”
“However, we understand that we continue to face extremely difficult challenges primarily from deteriorating credit quality driven by weakness in the economy and growing unemployment,” Mr. Lewis said.
Despite the reports, the news might not have come in time to save Mr. Lewis’s from angry shareholders.
For more than 70 years, through good times and bad, the Eliasberg family stood by their bank. Their tiny lender grew up to become part of what is now Bank of America — tying the family’s fortunes to that of the nation’s largest bank.
But now Richard Eliasberg, whose father helped found Baltimore National Bank, in 1933, says he is losing faith in Bank of America, and in Mr. Lewis.
Like a growing number of shareholders, Mr. Eliasberg is alarmed by the daunting challenges confronting Bank of America. Mr. Lewis, the chairman and chief executive, is under growing pressure, both from within and without, to turn things around fast.
“For the first time, I’m disappointed,” said Mr. Eliasberg, speaking before the earnings release. He owns a substantial number of Bank of America shares for an individual, though he has sold a third of his shares in the last year.
But Mr. Lewis, who built Bank of America into an industry behemoth by making a string of acquisitions, still has much to prove. Many of his investors are growing restive, and they are unlikely to be quieted by one quarter’s results.
Indeed, Mr. Lewis seems to be losing the support of an important constituency: Scores of longtime shareholders like Mr. Eliasberg, who have ties to Bank of America through businesses the bank and its predecessor acquired over the decades.
Of particular concern is Mr. Lewis’s latest conquest, Merrill Lynch. Bank of America shareholders signed off on the acquisition in early December, only to discover that gaping losses at Merrill would force Bank of America to seek assistance from the government for a second time. Some investors are suing, claiming that Mr. Lewis failed to fully disclose the risks of the deal.
Bank of America said Monday that “the Merrill Lynch integration is on track and expected to meet targeted cost savings” and that Merrill had contributed $3 billion to its net income. It also said the integration of Countrywide Financial, the mortgage lender it bought last year, “is on track. Cost savings from the acquisition are ahead of schedule.”
The bank also said it had added to reserves across “most” consumer portfolios and on commercial portfolios. Its nonperforming assets rose to $25.7 billion from $18.2 billion at the end of 2008, and from $7.8 billion on March 31, 2008.
Many worry that Bank of America’s board is too cozy with Mr. Lewis. Some are campaigning to push him out.
On Friday, two investor advisory firms issued reports recommending that shareholders vote to remove Mr. Lewis from the board. The bank’s proxy is in circulation in anticipation of what is likely to be a contentious annual meeting on April 29 in Charlotte, North Carolina, where Bank of America is based.
The reports, issued by the RiskMetrics Group and Glass, Lewis and Company, carry a lot of weight because some institutional shareholders follow the groups’ recommendations without exception.
A Bank of America spokesman said Friday that the company was disappointed with the conclusions of the reports, including an initiative to strip Mr.
Lewis of his chairmanship and another that would unseat him altogether. The spokesman also said that the bank believed that it had acted appropriately in its disclosures about the merger with Merrill.
Angry shareholders are not the only problem confronting Mr. Lewis. Bank of America is also awaiting the results of “stress tests” that federal regulators are administering to large banks. While Mr. Lewis has said his bank has sufficient capital, many analysts believe it will need to raise money. The bank also faces an inquiry into the Merrill merger by the New York attorney general.
Inside Bank of America, there is resentment over the Merrill acquisition.
Bank employees are also among the largest voices among individual stockholders.
Still, outside shareholders have been the most vocal. The Finger family, based in Texas, set up a Web site campaign bacproxyvote.com and broadcast television commercials urging shareholders to vote against Mr. Lewis. The family sold its Houston-based bank, Charter Bancshares, to Bank of America’s predecessor in 1996, and say they now control about 1.1 million shares.
The bank has tried to engage the Fingers, sending executives and a board member by corporate jet to visit the family three times in Texas.
The Fingers’ story line is familiar to others who became part of the Bank of America family tree. In the last few decades, the bank was cobbled together out of more than 50 financial companies, mostly local banks. The oldest was Massachusetts Bank, founded in 1784, which was absorbed through the company’s acquisition of FleetBoston Financial.
Another family, the Spanglers, controlled about 32 million shares as of spring of 2008, many of which were acquired when they sold their Bank of North Carolina to Bank of America’s predecessor, NationsBank, in the early 1980s. Assuming the family did not sell their stock, they would have lost more than $1 billion in the last year.
The Spanglers have not actively expressed a public opinion on the state of the company, though one member of the family stepped down from the bank’s board because she had reached retirement age.
The acquisitions were not only on the Bank of America side. Many of the companies that the bank acquired had built themselves up over the years in a similar fashion.
Tom Sharkey Jr., for instance, owns shares of the bank because his family sold its 100-year-old insurance business to FleetBoston in 2001, and then Fleet was acquired by Bank of America in 2004. Now, Mr. Sharkey says, he and several family members in New Jersey have lost significant wealth because of the bank’s “catastrophically bad mistakes.”
Some people, of course, support Mr. Lewis. The CtW Investment Group, which represents pension funds, is leading a campaign against Mr. Lewis, but the organization has received e-mail messages from people who believe the current management is good, according to a spokesman for the group.
“Please give Ken Lewis a chance,” wrote Luis F. Valenzuela, a shareholder who supported the bank in one of the e-mail messages provided by CtW to The New York Times. “He will prove you guys wrong. Don’t make the mistake of looking dumb.”
Mr. Valenzuela said in an e-mail message that he was a student in Arizona and that the bank’s past dividend helped him afford his education. Another person, Ivan Rudnitsky, wrote to CtW to say that the bank’s combination with Merrill has strong long-term value, which is the argument that the bank’s management gives for its actions. Mr. Rudnitsky did not reply to an e-mail inquiry.
Charles Elson, a professor at the University of Delaware, was given most of his tens of thousands of Bank of America shares by his father more than 30 years ago. Back then, the stock he owned was in Citizens & Southern Bank of Georgia, based in Atlanta, where he grew up.
“It was always a strong bank and a strong investment — something we’d never sell,” said Mr. Elson, whose father was on the board of the Atlanta bank before it was taken over in 1991 by a predecessor of Bank of America.
Mr. Elson, who teaches courses on corporate governance, has been concerned about the structure of Bank of America’s board since the late 1990s. He said he had once contacted the company about his concerns — to no avail.
“I knew it was there, the problems with corporate governance,” Mr. Elson said. “The biggest mistake I made was I did not sell. Put it this way: had I known this 40 years ago, I would have invested in something else.”
