On July 16 BankAmerica Corp. surprised the financial community with its report that it lost $640 million in the second quarter after absorbing loan losses of $388 million and increasing its loan loss reserve by $600 million. The quarterly loss revived speculation about the future of Samuel H. Armacost, Bank America's 47-year-old president. Armacost was interviewed about the bank's problems 10 days ago by San Francisco Examiner business editor Mark Potts and writer Rose Ragsdale. Edited excerpts of the interview follow:Q What do you tell customers and shareholders after losing $640 million of their money? A Well, to be frank, we haven't had a problem with that to date.
It's a complex issue to try to explain that in essence a large part of this adjustment is taking money you've already earned in the past and moving it through your income statement from your equity account into your loan loss reserve.
The purpose of the loan loss reserve is to sit there as another prevention layer of capital, more or less, specifically dedicated to future loan losses if they should occur. Our responsibility is always to ensure the adequacy of the loan loss reserve. And in the process of setting that, you have to kind of look at all the facts and conditions and make that determination, quarterly at the minimum, that the inherent losses in your total portfolio are covered in some sense by that reserve.
But I think most of our customers probably feel more comfortable, as a matter of fact, with big reserves than with low reserves in place. Q BankAmerica has nearly $5 billion worth of bad or nonperforming loans on its books. Is the reserve as it is now big enough to cover that, or would it have to be expanded in the future? A You can't ever be prospective about the future to that degree, because you live in a dynamic world. So you have to keep making that judgment in the light of whatever the world is like next month or the month after that.
We made a very careful determination, I think, with the reserve at 2.67 percent of loans outstanding and $2.1 billion, and we feel quite comfortable. Q The huge reserve and loss surprised the investment community. Many securities analysts are complaining that this raises questions about your credibility as an organization, because they were told there would be a small profit and then there was a huge loss. A Those aren't inconsistent. Our process is to pull together at the end of the quarter everything we know about the trend lines in nonperforming loans and losses. . . . We pull that together literally in the last couple of weeks before and after the quarter, before we produce our results.
Seeing that trend line in the second quarter, we felt we had an obligation . . . to recognize that trend line in the nonperformers by taking the reserve now rather than wait until the losses occur, if they occur sometime in the future. It's as simple as that. Q Why is B of A different than other big bank holding companies? Everyone else has energy loans that are suffering from the low price of oil, everybody else that is in real estate has had problems there, other banks have had agriculture problems. Do you just have more? Why aren't we seeing the other major banks reporting the same kind of problems? A Go back and read very carefully the other banks' earnings announcements and you'll find a lot of comment about raising loan loss provisions, raising losses. Q When you became chief executive in 1981, you essentially had identified and outlined many of these problems. Here we are almost six years later, and many of the problems still are affecting the bank. A Are they there in the world at large? Q Well, they're there for B of A. A They're there for the world at large. . . . If you look over the last five years, our operating income has continued to grow each year. You separate that from our loan portfolio. . . . It's painful as heck -- we've been dealing continually with a stressful portfolio.
In the early 1980s -- '81, '82, '83 -- there was a tremendous recession; the first time California really faced the impact of that. We felt that very hard in the core business of this company. What was the core business of this company? Agriculture, single-family real estate, and kind of middle-market credit. All got hammered badly in the early '80s. We finally worked ourselves through those portfolios. . . . Q So does the fact that BankAmerica is so large and so broad limit your options? A Absolutely it does, in any great big institution. . . .
This institution, I think, was kind of laughing at its competitors -- not in any kind of snide sort of way -- when everybody else in the early '70s was kind of gasping at the impact of that recession in the middle '70s. And that's when we were showing 30 percent-per-year earnings increases. . . .
We were feeling pretty good about that. . . . But when commodity prices went like this, and when oil prices went like that, and when the impacts of that were felt by California farmers who had been roaring through the '70s . . . that was a change in the competitive equation. It's not to cry about, it's to restructure the business. Q How many more surprises can the company take? A Well, when you say surprises, our job is to deal with reality. When you say surprises, market surprises I guess, we have found that the marketplace understands and perceives what we are doing in terms of prudent balance-sheet management, probably better than you are portraying. . . .
Nobody likes surprises. I've got to tell you, you're looking at the guy who hates surprises. . . . We don't want to be surprised."