BankAmerica, parent of the nation's largest bank, reported Wednesday that it lost $338 million in the second quarter, the third-largest quarterly loss ever by a U.S. financial institution.
The news is the latest shock to a company that has been suffering from declining earnings since 1980 and contrasts sharply with the near-record profits being reported by its competitors.
Comparisons to Others
Of the nation's financial companies, only Chicago's Continental Illinois Corp. and Financial Corp. of America, based in Irvine, have reported worse quarterly figures--a $1.16-billion loss in the second quarter of 1984 for Continental and $512.1 million in last year's fourth quarter for FCA.
BankAmerica's announcement carried indications that it faces further problems. Analysts now are predicting that it will show a full-year loss for the first time since 1932. The firm had not posted a losing quarter since it began reporting quarterly earnings 15 years ago.
The company said most of the loss resulted from the need to set aside $892 million for bad loans--$527 million of that being added to the reserve for possible future losses. That fund now totals $1.5 billion, it said.
The company said it also lost $60 million on operations.
"We're frustrated as can be with the loan loss situation," BankAmerica President Samuel H. Armacost said in a telephone interview. "I wish I could wave a wand and make it go away, but I can't.
"The problem we face is that the loan quality issue just overrides everything else we're doing. It's absolutely obliterating all the other progress we're making."
Traders in Europe said Wednesday that before BankAmerica reported its earnings, rumors that the results would be even worse had contributed to a sharp drop in the value of the U.S. dollar in early trading.
However, analysts and bank officials said, large though the reported loss was, it would not put the company's solvency at risk in the way that Continental Illinois' problems required a $4.5-billion federal bail-out.
San Francisco-based BankAmerica is the holding company for Bank of America, the nation's largest bank. New York-based Citicorp is the biggest U.S. bank holding company.
Under Close Scrutiny
Bank of America is under close regulatory scrutiny. Many of the loans now being written off and a substantial share of the additions to the reserves for bad loans were ordered by federal bank examiners who are now completing an audit of the bank.
Bank officials and analysts said regulators are taking an unusually harsh stance toward questionable loans and indicated that relations between the auditors and the bank are less than friendly.
"The examiners are proceeding with a vengeance to have a better accounting of troublesome loans," said George M. Salem, chief bank analyst at the New York securities firm of Donaldson, Lufkin & Jenrette.
"If the examiners are playing hardball, there's a reason for it," said analyst Mark Biderman of Oppenheimer & Co. "There's no indication from the numbers that the worst is over. These are just tentative estimates."
The $338-million second-quarter loss contrasts with profits of $110 million for the same period a year ago. The company showed a net loss of $224 million for the first half of 1985, compared to profits of $211 million in the first six months of last year.
Its ratio of loan losses to total loans--a key measure of its credit quality--stood at 1.83% at June 30--three times the bank industry average. Overhead and personnel costs at Bank of America also are considerably higher than at its competitors.
So far this year, the company has set aside $1.1 billion to cover current and future bad loans, compared to $861 million for all of last year.
Broke With Tradition
The company broke with tradition six weeks ago and announced expected results before the end of the quarter. At the time, it said that it anticipated doing no better than breaking even.
However, Armacost said Wednesday, loan losses far exceeded expectations, particularly in agriculture, commercial real estate, shipping and loans to private foreign borrowers.
"Some of the loans were bad when they were written, but most of the losses were the result of disinflation in these sectors," he said. "The recession was the most brutal since 1930. The credits were premised on an economy that (has since) changed cyclically and structurally."
BankAmerica has suffered one shock after another since Armacost became chief executive in 1981. He has taken controversial steps to reduce overhead costs by closing branches and laying off employees for the first time in the bank's history.
Bank employment is down 10,000 since 1982, but those reductions have been offset by the acquisitions of Charles Schwab & Co. discount brokerage in 1982 and troubled SeaFirst Bank in Seattle in 1983.
"We've fundamentally restructured and improved the whole organization," Armacost said. "Our strategy is to keep shrinking the institution in relation to our capital base. We've got to stay with our strategy and just keep doing what we've been doing, but more of it and faster."
The company's weak performance has led to speculation that Armacost's future is in jeopardy, but so far it has only been fueled by rumors. Board members have refrained from public criticism of the chief executive, and Armacost said he has no intention of quitting.
"He inherited an organization that in hindsight was very sick and very vulnerable to outside events," analyst Salem said. "The one thing you can say is he's been a little slow in kicking rear ends."
A major move to further reduce Bank of America's size and scope is expected within days. The world banking division, which includes most of the bank's operations outside of California, will be restructured, with a loss of as many as 2,500 jobs.
Stock Trading Heavy
Trading in BankAmerica stock was heavy Wednesday, with more than 3.4 million shares changing hands, but the price dropped only 25 cents, closing at $17.62 1/2. However, BankAmerica's common shares lost $1.125 per share Tuesday, also on heavy volume. The bank informed its directors of the earnings figures after the market closed Tuesday.
"They've got their work cut out for them," said James McDermott of Keefe, Bruyette & Woods, a Wall Street investment firm specializing in bank stocks. "There is probably not only a management shake-up but a considerable reorganization in the offing."
BankAmerica's bad news resurrects questions about Sam Armacost's future. Part IV, Page 1.