Riding the bull

By corralling Merrill Lynch, BofA beefs up the split
between it and the other 99 on the Financial 100.
By Frank Maley


To say that Bank of America Corp. is big is an understatement of gargantuan proportions. Add up the 2007 revenue of the other 99 banks, thrifts and credit unions on Business North Carolina’s Financial 100 and the total doesn’t come close to BofA’s — just 60% of it. In assets, the other 99 largest financial institutions with headquarters in the state fall further behind.

The gap is about to get even wider. Charlotte-based BofA’s size, profitability and relatively healthy stock price in the midst of this fall’s global financial panic allowed it to strike a $50 billion all-stock deal for Merrill Lynch & Co. Inc. The struggling New York investment bank had posted three straight quarterly losses — totaling $15 billion — and had seen its share price drop into the teens for the first time this century.

Adding Merrill’s 2007 revenue to BofA’s would give it $181 billion — the other companies on the list, combined, grossed only 40% of that — and Merrill’s assets would give it $2.7 trillion. The other 99’s add up to only 36% of that total.

Not only is the chasm widening between No. 1 and the Other 99, so is the divide between No. 1 and No. 2 — and by more than the addition of Merrill. With the second-largest Tar Heel bank, Wachovia Corp., being sold, it will drop off the Financial 100 next year. If nothing else changes, that will bump Winston-Salem-based BB&T Corp. from No. 3 to a distant second. Put it this way: In 2007 assets, one Bank of America, with Merrill added, equals 3.5 Wachovias or 21 BB&Ts.

But BB&T shareholders have little cause for complaint. Earnings are down this year — 3% through the end of June — but given the difficult times for banks, they’ve been remarkably consistent. In the four quarters that ended June 30, net income went from $444 million to $411 million to $428 million before reaching $428 million again. And its share price ended September at $37.80, nearly $3 above BofA’s.

BB&T is one of a few banks strong enough to take advantage of the crisis afflicting the financial industry to go shopping for bargains, so it may grow considerably larger in 2009. “It’s a heck of a time to be buying banks, if you’ve got the money and the balance sheet to do it,” says Tony Plath, a banking expert and associate professor of finance at UNC Charlotte.

Raleigh-based First Citizens BancShares Inc. is another that could benefit from the troubles of other banks, buying boutique franchises in places such as Dallas or La Jolla, Calif., with wealthy, educated customers, he says. “You can find those little pockets all over the U.S.” But many other Tar Heel banks have been hammered by tight credit, sour mortgages and other issues. “Look at NewBridge,” Plath says. “Look at Bank of Granite. Anybody that’s heavy in real-estate lending. Look at First Charter, combined with Fifth Third. All of those entities are struggling.”

Second-quarter income at Greensboro-based NewBridge Bancorp fell 85% this year, and in early October, the stock was trading below $5. Ditto for shares of Granite Falls-based Bank of Granite Corp. (page 50), which lost $3.4 million in the second quarter. Cincinnati-based Fifth Third Bancorp, which bought Charlotte-based First Charter Corp. in June, lost $202 million in the second quarter.

Big as it is, even BofA is feeling the effects. It announced Oct. 6 that third-quarter earnings would slip 68% to $1.2 billion. It also cut its quarterly dividend in half — to 32 cents a share — to beef up its capital by $1.4 billion a quarter, and it hoped to raise $10 billion in a stock offering. “These are the most difficult times for financial institutions that I have experienced in my 39 years in banking,” CEO Ken Lewis said in a statement. “We believe it is prudent to raise capital to very substantial levels in this uncertain environment.”

Just a few days before, Congress had passed a $700 billion bailout of the financial industry, including help for companies with troubled assets. But industry observers were nowhere near ready to declare the danger over. “We are now at the rim of the abyss,” Plath says. “How deep is this going to go? I don’t know. None of us knows when this is going to end and whether a $700 billion bailout is going to be enough to arrest it.”