Countrywide Accounting Boosts B of A

Due to purchase accounting approach, the banking giant sees the acquisition of the devastated mortgage lender as accretive this year, rather than n...
Roy HarrisJuly 22, 2008

Bank of America Corp. has significantly boosted its 2008 projections of the earnings impact of the July 1 acquisition of Countrywide Financial, thanks to the effects of purchase accounting.

B of A’s $3.41-billion net income in the second quarter — yesterday’s strong report, despite being off from the year-earlier record $5.76 billion — did not include the bank’s surprisingly positive evaluation of the result from the Countrywide purchase.

Attached to the B of A release was a section listing Countrywide’s second-quarter net loss as $2.33 billion, including nearly $4 billion in credit-related losses. Because purchase accounting records certain assets and liabilities at fair value, including a related estimate of future credit costs, the costs for the fair-value items generally would not run through future income statements, B of A noted.

B of A said the Countrywide transaction “immediately adds to Bank of America profit,” and said that the purchase is expected to be accretive for 2008. “When the acquisition was announced in January, Bank of America estimated Countrywide’s addition would be neutral toward per-share earnings this year,” the bank said. At the time, it said that the deal would first be accretive in 2009.

“The estimated cost savings have been significantly increased from the after-tax $670 million projected in January,” B of A added. In a conference call elaborating on the earnings report, the bank explained that it had written down the value of Countrywide’s assets by $12 billion to $13 billion, according to press accounts. So as long as future credit losses don’t exceed $13 billion, they won’t appear in future income statements.

According to Standard & Poor’s Equity Research analyst Stuart Plesser, quoted on the MarketWatch site, the approach to writing down Countrywide assets represented an attempt by B of A to absorb the hit immediately from the home-lender’s mortgage losses, rather than having them hurt future earnings. “Under purchase accounting, they have to do this,” said Plesser. “But the question is, how much do you write down? You try to be aggressive so losses won’t flow through the income statement.” He added, “But it’s not as if it’s not happening. It’s still a loss.”

According to Plesser’s calculations, however, losses on Countrywide mortgage assets still could reach $20 billion, excluding litigation costs, meaning that $7 billion or more in additional losses might still have to be recognized in quarterly income statements.

Bank of America said it “is continuing the trend begun by countrywide earlier this year to expand loan modification and workout resources to address foreclosure issues.”