"Last year was a necessary repair and rebuilding year."
That's how Bank of America Corp.'s chief executive, Brian Moynihan, tried to reassure investors after reporting the company's $1.2 billion fourth-quarter loss. Absent from Moynihan's comments or B of A's numbers, however, was a convincing case that 2011 won't be yet another such year.
Underlying Bank of America's heap of one-time gains and charges in the quarter was a sizable decrease in revenue and, in many consumer businesses, loan balances. Though Bank of America has made concrete progress in spinning off unwanted lines of business, cutting Fannie Mae and Freddie Mac liabilities, and reducing boom-time lending losses, its fourth-quarter results suggest that it is still in the thick of addressing legacy troubles.
"It was not a great quarter," said analyst Michael Mayo of Credit Agricole Securities. "If you have two or three quarters like this in a row, then you raise some big issues. … The cleanup is not done, but it is progressing."
Revenue dropped 11% year over year, with management citing limited short-term opportunities to make up for the fee income lost to new regulatory restrictions. Moynihan conceded that the 13,000 extra employees it has working through the mortgage mess at its Countrywide unit aren't going anywhere soon, and Bank of America expects its net interest income, now at 2.7%, to fall in the first half.
Though the company made progress in the fourth quarter in tackling government mortgage put-back risks, it also appeared to be bracing for continued fights. Its litigation reserves — a "disproportionate" percentage of it tied to Countrywide — rose to $1.5 billion from $500 million.
When asked to forecast this figure, Moynihan said, "it's hard to think about a run-rate for litigation expenses."
Year over year, Bank of America's progress appears more concrete. Over the course of 2010 the company divested 20 business lines that sold for $19 billion. Its Tier 1 capital ratio rose 1.5%, to 8.6%.
For the fourth quarter B of A reported $5.1 billion in credit-loss provisions — half what it set aside in the year-earlier quarter. And its net chargeoff rate dropped nearly a full percentage point, to 2.87%.
Quarter to quarter, however, the improvement was much less dramatic.
Though some of the difference is likely attributable to seasonal issues, B of A lowered its credit-loss provisions only slightly, from $5.4 billion to $5.1 billion. And total nonperforming loans showed similarly modest quarter-over-quarter declines, from $34.6 billion to $32.7 billion.
Loan growth was weaker than at some rivals. The company's overall average loan book grew 0.7%, to $940.6 billion, from the previous quarter. In commercial and industrial lending, average balances increased by 2% from the third quarter, a sign of "stability," B of A said.
But Carole Berger of Soleil Securities wrote that "The only thing that was truly better this quarter is credit quality."
"They're more highly skewed toward the consumer than anybody else," the analyst said in an interview. "What you saw at other banks was healthy growth on the commercial side, and not too much on the consumer side."
B of A compensated for weakness on the consumer side by increasing the volume of mortgages it holds on the balance sheet, Berger said, but that's not a sustainable source of growth.
"You can't put too much of that stuff on balance sheet, because it's long-duration assets," Berger said.
After paying $3 billion in the quarter to put to rest the majority of its outstanding repurchase requests from Fannie and Freddie, B of A tried to further reduce the overhang of mortgage litigation threats by giving analysts a worst-case estimate of the damage: $7 billion to $10 billion.
That amount does not represent what Bank of America expects it would realistically have to pay to resolve such claims, the company's executives said. Instead, it was produced in response to investor demands for quantification and the wide-ranging liability estimates that analysts have recently tossed around.
The company will not be setting aside reserves to cover that potential hit, Moynihan said, because the likelihood of being forced to pay those claims is too small to be considered "probable" and thus accounted for.
"As a reminder, there are significant procedural hurdles that parties would have to overcome before any of these amounts become probable," said Charles Noski, the chief financial officer.
Bank of America executives were cautiously optimistic in the earnings call that it had regained sufficient stability to begin returning capital to investors.
"We continue to believe we are in a position to modestly increase our dividend in the back half of 2011, but of course we need our regulators' approval to do so," Moynihan said.
He also argued that Bank of America was now dealing with a much simpler set of problems.
"Next quarter will complete the final touches of the Merrill [Lynch] integration, and for the first time in many years we will not have any merger and integration work to do in this company," Moynihan said, citing gains in focus as the expected result.
Moynihan also assured investors that Bank of America would not again be blindsided by mortgage-servicing troubles.
Asked to guess what it would take to settle the investigation by 50 state attorneys general into servicing practices, Moynihan demurred. But he said he was confident that the company had bettered its practices.
"We identified what we need to do to make sure that we could erase from anybody's memory that there was a lack of the precision, integrity, discipline in the process," he said.
"We've restarted the process based on that, and we've dedicated lots of people, lots of work to make sure there will be no question about it."