BankAmerica Corp., in a stunning lurch off the comeback trail, reported a second quarter net loss of $640 million Wednesday due to a huge increase in its reserve for future loan losses.
Citing lower oil prices and a glut of office buildings in San Francisco and Los Angeles, the big lender boosted its loan-loss reserve by $600 million to $2.2 billion, or 2.67% of total loans outstanding.
The $640-million loss was the second-largest quarterly deficit for a U.S. bank since the Great Depression, behind only Continental Illinois Corp.'s $1.16-billion loss in the second quarter of 1984. That loss led to a run on the bank and a bail-out by the Federal Deposit Insurance Corp.
Unlike Continental Illinois, which relied heavily on uninsured "jumbo" deposits, BankAmerica's large base of retail depositors means that its ability to retain funds remains strong.
'Move We Had to Make'
"As shattering as it is to our shareholders," said Samuel H. Armacost, president and chief executive officer of the holding company, "this is a move we had to make." He called the $600-million loan-loss reserve addition "pro-active," adding that it reflects "the unmistakable reality" of poor economic conditions in the energy and commercial real estate sectors of the economy.
The embattled executive spoke at a press briefing that was dominated by questions about his future with BankAmerica, where Armacost's tenure as chief executive officer has coincided with a five-year slide in earnings and assorted financial embarrassments.
"I've never been concerned about my job," he said in response to one question. "I've made no plans other than to continue the job we're doing," he said in response to another.
In March, Armacost relinquished the presidency of Bank of America, BankAmerica's principal subsidiary, to Thomas A. Cooper in a realignment that left Cooper in charge of the bank's day-to-day operations.
Cooper has won high marks from some analysts for pruning expenses--1,200 positions were eliminated during the second quarter--and for revamping the bank's procedures for monitoring loans.
Wednesday's announcement sent chills through BankAmerica's workers, whose ranks will be cut by another 3,900 to 4,000 over the next six months.
"We'd been under the impression that the worst was over," said a first-line manager who asked to remain anonymous. "This is very demoralizing."
Analysts and some bank insiders suggested the poor second-quarter results reflected this step-up in monitoring as well as deterioration in the quality of the bank's loan portfolio.
Problem loans climbed during the second quarter to $4.12 billion from $3.8 billion, despite the fact that the bank wrote off as bad debts a total of $388 million in loans. Worse, "it doesn't look to me like problem loans have peaked," said Joseph Arsenio, senior vice president and research director of Birr, Wilson Securities Inc., San Francisco.
Normally cautious securities analysts used such words as "shocking," "frightening," "horrible" and "dreadful" to describe the bank's results.
Given the bank's track record, "How can you have confidence that the worst is finally behind them?" asked Morgan Stanley & Co. banking analyst Arthur P. Soter.
The huge second-quarter loss was all the more surprising because BankAmerica had posted a modest profit of $63 million in the first quarter after the bank's 1985 net loss of $337 million.
'Prospects . . . Are Good'
In a section titled "Outlook Is Good," Armacost himself told shareholders in a May 12 letter that "with moderate economic growth in a reasonably stable environment, prospects for continued progress in reducing loan losses and improving earnings are good."
Top managers began learning otherwise as the second quarter drew to a close. "This thing emerged at the end of the quarter," said John Poelker, chief financial officer.
The amount of bad loans written off as uncollectible "dramatically worsened" in June, he said. With those charge-offs came increasingly gloomy assessments from various field units on the quality of other loans, especially those tied to energy and commercial real estate, Poelker added.
Asked whether top officers should not have known about the problems sooner, Poelker said: "You're talking about 1,000 loan officers around the world. You can't call them all up every month."
Expenses Held Level
During the press briefing, Armacost pointed repeatedly to BankAmerica's expense-control program, noting that first half expenses were about level with last year's first half.
"The basic strategy is in place and operative," Armacost said. "I feel terribly positive about that." He said he expects that the company will return to profitability in the second half of this year.
Armacost said "I doubt it" when asked whether the bank's directors would now be more open to overtures to be acquired. Directors in March rebuffed investor Sanford Weill's offer to infuse $1 billion in new capital in exchange for Armacost's job; more recently, they've turned aside overtures from Los Angeles-based First Interstate Bancorp.
Armacost said he had specific "action plans" to boost BankAmerica's shareholder's equity, although he provided few details.
BankAmerica's loss, equivalent to $4.25 a share, sliced shareholder's equity to $3.99 billion from $4.64 billion at the end of March. In New York Stock Exchange composite trading, BankAmerica's stock was off 50 cents a share, to $14, on volume of 1.4 million shares.
The relatively modest drop reflects the stock's already sharp discount from the $21.15-per-share stated value of BankAmerica on the company's books and may mean that some investors expect renewed overtures from outsiders to take over the firm.
The sale of assets--including BankAmerica's 50% interest in the twin-towered Arco Plaza in Los Angeles--will continue, he added.
"We're dealing with four well-financed buyers," Armacost said, but he declined to identify them. BankAmerica has already sold its San Francisco headquarters building.
'Not for Sale'
But he said BankAmerica's Charles Schwab & Co. discount-brokerage unit and its Seafirst Corp. banking unit in Washington state "are very strategic properties" and "are not for sale."
The executive also insisted that he is not bothered by skepticism in the financial community. "Analysts are entitled to be cynical because that's their business," Armacost said.