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BofA quarterly earnings drop 68%

Stung by rising defaults, bank slashes dividend and will try to raise $10 billion with stock sale.

By Christina Rexrode
crexrode@charlotteobserver.com

Even the stalwarts stumble, as evidenced by Bank of America's third-quarter earnings, announced Monday evening two weeks ahead of schedule.

The Charlotte bank's earnings fell a precipitous 68 percent, to $1.18 billion, driven by rising defaults in mortgages, credit cards and small businesses. The bank also announced two unexpected initiatives to shore up capital, saying it will cut its shareholder dividend payout after raising it for 30 straight years and go to the markets to raise $10 billion. The latter action can also hurt shareholder value, by diluting the worth of existing shares.

“It is not a decision we made lightly,” chief executive Ken Lewis said, referring to the dividend cut. “However, we cannot pay out what we have not earned.”

Still, Bank of America is faring better than many peers that are losing money. “We're talking about earnings, not losses,” Lewis told analysts. “…These actions allow us to be positioned for business as usual and growth opportunities at the expense of others.”

Analysts speculated that Bank of America might be raising capital now before other banks flood the market with the same intent. “We don't look real smart today given what happened,” Lewis acknowledged, answering a question about the capital raise. “But we did think it was smart to get out there sooner rather than later.”

During the current economic turmoil, Bank of America has been regarded as one of the stronger players on the U.S. financial landscape. Three weeks ago, it announced it would snap up wounded investment bank Merrill Lynch. The Charlotte bank is the nation's leader in consumer banking, credit cards and mortgages. If its purchase of Merrill is approved, it will be the leader in wealth management as well.

Retail deposits increased $56 billion to $586 billion, partly due to the bank's July 1 purchase of Countrywide Financial Corp. Bank of America also attributed that increase to consumers' “flight to safety,” implying that customers are nervous about keeping their money in other financial institutions. Some investors had feared that the bank's purchase of Countrywide, a California mortgage lender known for exotic loans, would hurt its bottom line. Bank of America said that Countrywide added $259 million to the quarterly earnings.

However, credit quality in portfolios of mortgages, homebuilders, credit cards and small businesses continued to decline, and the bank said it made a $6.45 billion provision for credit losses – up from $2.03 billion a year ago. Lewis held out little hope that credit quality will improve soon. Any stimulus from Congress, he said, “will be more than offset” in the short term by the slowing economy.

He said he expects “minimal if any” growth for the rest of the year and defaults will likely rise “until well into 2009.”

The bank also took on one-time losses that are affecting most major financial firms. Bank of America wrote down $320 million of its $341 million ownership of Fannie Mae and Freddie Mac, the troubled mortgage lenders taken over by the government last month. It also took $313 million in losses on its commitment to buy back auction-rate securities from some clients.

Lewis said the current environment represents “the most difficult times for financial institutions that I have experienced in my 39 years in banking.”

Overall, profit fell to 15 cents per share from 82 cents per share a year ago. That was much lower than analysts' estimates of 62 cents per share, according to Thomson Financial.

Bank of America shares dropped in after-hours trading, after falling 6.6 percent to close at $32.22 during Monday's session.

The company had scheduled its earnings report for Oct. 20 but released them just minutes after the Dow Jones industrial average dropped 370 points to finish at 9,955.50, the lowest level in nearly four years. Financial markets around the world have been plunging due to a seize-up in lending.

Lewis weighed in briefly on the legal drama engulfing neighboring Wachovia. When asked about the increase in Bank of America deposits, Lewis noted that his bank is not known for offering the highest rates on deposits - which is sometimes one of Wachovia's strategies.

“If Wells Fargo were to get Wachovia, that would be very positive as it relates to rates,” Lewis said. “Because they (Wells Fargo) are a very rational pricer.

The Associated Press contributed.

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