Posted on: Thursday, August 16, 2001
Bank of America exiting businesses
By Paul Nowell
Associated Press
CHARLOTTE, N.C. — Bank of America Corp. is getting out of the car leasing and subprime real estate lending businesses, taking a $1.25 billion charge in the third quarter to cover its costs.
The nation's No. 3 bank holding company said yesterday it plans to liquidate its $26.3 billion subprime portfolio over the next seven to nine months. The bank said it will abandon the car leasing business immediately, although it said it planned to manage its $9.7 billion portfolio to the end of the term.
"Both of these businesses have very volatile earnings streams, have become unattractive from a risk-reward standpoint and have not produced required rates of return," said Kenneth Lewis, chairman and chief executive officer of the Charlotte-based bank.
Lewis told analysts on a conference call yesterday that shareholder value was one of the chief factors behind the decision.
"We have said before we want to be able to go full-speed ahead when the economy improves," he said. "We hope these actions today will help us move ahead sooner."
The charge is more than one half of what the bank earned in its second quarter. Last month, Bank of America reported second-quarter earnings of $2.02 billion, or $1.24 a share, in the three months ended June 30, down from $2.063 billion, or $1.23 a share, in the same period a year ago.
Analysts were impressed by the moves.
"I like the idea of getting rid of these volatile businesses without affecting the bank's earnings," said Ron Mandle, a banking analyst at Sanford C. Bernstein and Co. in New York. "I view it as a positive for a stock I like anyway."
John Moore, an analyst at Wachovia Securities in Charlotte, said discarding the two underperforming businesses will improve Bank of America's bottom line.
"One of my concerns over last several quarters was increased credit risk," he said. "This removes some major risks."
While it's also been a profitable business for lenders, subprime lending — writing loans for risky borrowers — also was a factor in seven of the last 19 bank failures, according to the Federal Deposit Insurance Corp. Among them was the collapse last month of Superior Bank in suburban Chicago.
The bank has found buyers for its entire subprime real estate branch network, and was seeking a buyer for its servicing business.
While Bank of America did not reveal any details about the buyers, Resource Bancshares Mortgage Group Inc., a mortgage banking company based in Columbia, S.C. yesterday said one of its subsidiaries, Meritage Mortgage Corp., had purchased 15 EquiCredit branches from a Bank of America subsidiary.
Terms of the sale were not disclosed.
According to Resource, the deal includes seven EquiCredit branches in the Midwest and eight on the East Coast.
An unexpected dip in the price of vehicles coming off lease has translated into large losses for banks and leasing companies. Estimates made three or four years ago of a leased vehicle's value now can be off by thousands of dollars.
Chief financial officer Jim Hance estimated the bank's loss on each leased vehicle at about $2,000. "That business is a non-keeper," he said on the conference call.
UBS Warburg's Diane Glossman said that Bank of America had 495,000 vehicles under lease. Though it generated $213 million in revenues for the first half of the year, Glossman said it has been generating losses due to write-downs.
