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BofA earnings a glimmer of hope

A 41 percent decline in earnings isn't normally a cause for celebration, but such a decline at Bank of America cheered investors and soothed analysts on Monday.

Though it's been a turbulent year for the financial industry, Charlotte's Bank of America showed signs that it may be pulling out of the credit crisis ahead of its peers.

The bank handily beat Wall Street expectations for the second quarter, posted record revenues and saw a significant decrease in mortgage-related writedowns – an area in which it got pummeled in the first part of the year. Chief executive Ken Lewis said he doesn't expect to cut the dividend or raise more capital, and he said in an interview that he expects the bank to add jobs, not counting previously announced layoffs related to its purchase of mortgage lender Countrywide Financial.

The bank also reaffirmed its controversial purchase of Countrywide, hushing naysayers by announcing that the lender would immediately add to the bank's profits – ahead of schedule.

“We weathered the storm pretty well,” Lewis said. The Charlotte economy leans heavily on his bank. With 15,000 workers, it's the area's third-largest employer and a major civic player.

The news is expected to be less rosy for Charlotte-based Wachovia, which announces second-quarter earnings today. Wachovia has said it expects to lose some $2.8 billion, not including a noncash accounting charge. Analysts expect Bob Steel, in his first earnings call as CEO, to announce cost-saving measures, perhaps including layoffs.

To be sure, Bank of America had its problem spots in the second quarter: Troubled loans and charge-offs – which are loans the bank doesn't expect to collect on – rose in virtually all segments. Credit quality among borrowers continued to deteriorate, especially in loans to consumers, small businesses and homebuilders. Much of Monday's good news was tempered by comparisons to a record quarter a year ago, before the credit crisis hit in full swing.

Earnings were up significantly compared with the previous two quarters but down 41 percent over the year. Shares rallied 4 percent to $28.56 on Monday, but were also down 41 percent from a year ago.

“A couple of years ago, these would have been abysmal results, but hey, we'll take what we can get in this market,” said James Early, an analyst at The Motley Fool.

In a difficult time for banks, Bank of America is “not as dire as others,” added David Hendler, an analyst at CreditSights.

Bank of America earned $3.41 billion, or 72 cents per share, in the second quarter, helped by fewer mortgage-related writedowns and growth in loans, which it partly attributed to decreased competition from other banks. Earnings increased 182 percent over the first quarter and were well above analysts' predictions of 53 cents per share. They were also far larger than the profits announced last week by other industry giants such as JPMorgan Chase ($2 billion), Wells Fargo ($1.75 billion) and Citigroup (loss of $2.5 billion).

For Bank of America, it was “a pretty decent quarter, given the environment,” Lewis said.

Lewis offered a fairly upbeat view of the economy, though he acknowledged that his views might seem “Pollyanna-ish” compared with the assessments of other industry leaders. “We have a ray of optimism now that we probably haven't had for a few quarters,” Lewis said. He said he expects “sluggishness but not a recession,” with some improvement starting in 2009 and housing prices bottoming out around the end of this year.

Keeping dividend intact

Lewis repeated a prediction he made earlier this month, saying he sees no need to cut the dividend to shareholders or raise more capital, which can dilute shareholder value. The bank has raised about $21 billion this year. Unlike many competitors, it has kept its dividend intact, paying 64 cents per quarter per share, up from 56 cents a year ago.

The bank's net revenue, a record $20.32 billion, was up 3.5 percent from a year ago and 19 percent over the previous quarter.

The bank got a boost from its recent acquisitions of U.S. Trust and LaSalle Bank. It also was helped by the Federal Reserve's cutting interest rates since last summer, which lowered the rates that the bank pays on CDs.

Mortgage-related and other writedowns were $1.22 billion, down significantly from $2.81 billion in the first quarter. The bank saw gains in service charges, investment and brokerage services, and mortgage banking income. And though it tightened underwriting standards, it saw consumer loans grow by 9 percent and commercial loans by 38 percent.

The bank made building deposits a priority this year, Lewis said. He also noted that fewer banks are in a position to build deposits.

“We've seen less people at the party,” said chief financial officer Joe Price.

Loss provisions

Provisions for current and future losses were up significantly over the year, though they appear to be tapering off. The bank set aside $5.83 billion for credit losses: $3.62 billion for current charge-offs, and $2.21 billion for expected losses.

Though that's more than triple the loss provisions of a year ago, it's down 3 percent from the first quarter. The added provisions were mostly in portfolios directly tied to housing, including home equity, residential mortgage and homebuilders.

Though Lewis indicated that the bank would slow down adding to reserves, analyst Andrew Marquardt of Fox-Pitt Kelton Cochran Caronia Waller said he thinks the increase in the reserve is not enough to cover future problems in the commercial sector.

Staff writer Rick Rothacker contributed.

A 41 percent decline in earnings isn't normally a cause for celebration, but such a decline at Bank of America cheered investors and soothed analysts on Monday.

Though it's been a turbulent year for the financial industry, Charlotte's Bank of America showed signs that it may be pulling out of the credit crisis ahead of its peers.

The bank handily beat Wall Street expectations for the second quarter, posted record revenues and saw a significant decrease in mortgage-related writedowns – an area in which it got pummeled in the first part of the year. Chief executive Ken Lewis said he doesn't expect to cut the dividend or raise more capital, and he said in an interview that he expects the bank to add jobs, not counting previously announced layoffs related to its purchase of mortgage lender Countrywide Financial.

The bank also reaffirmed its controversial purchase of Countrywide, hushing naysayers by announcing that the lender would immediately add to the bank's profits – ahead of schedule.

“We weathered the storm pretty well,” Lewis said. The Charlotte economy leans heavily on his bank. With 15,000 workers, it's the area's third-largest employer and a major civic player.

The news is expected to be less rosy for Charlotte-based Wachovia, which announces second-quarter earnings today. Wachovia has said it expects to lose some $2.8 billion, not including a noncash accounting charge. Analysts expect Bob Steel, in his first earnings call as CEO, to announce cost-saving measures, perhaps including layoffs.

To be sure, Bank of America had its problem spots in the second quarter: Troubled loans and charge-offs – which are loans the bank doesn't expect to collect on – rose in virtually all segments. Credit quality among borrowers continued to deteriorate, especially in loans to consumers, small businesses and homebuilders. Much of Monday's good news was tempered by comparisons to a record quarter a year ago, before the credit crisis hit in full swing.

Earnings were up significantly compared with the previous two quarters but down 41 percent over the year. Shares rallied 4 percent to $28.56 on Monday, but were also down 41 percent from a year ago.

“A couple of years ago, these would have been abysmal results, but hey, we'll take what we can get in this market,” said James Early, an analyst at The Motley Fool.

In a difficult time for banks, Bank of America is “not as dire as others,” added David Hendler, an analyst at CreditSights.

Bank of America earned $3.41 billion, or 72 cents per share, in the second quarter, helped by fewer mortgage-related writedowns and growth in loans, which it partly attributed to decreased competition from other banks. Earnings increased 182 percent over the first quarter and were well above analysts' predictions of 53 cents per share. They were also far larger than the profits announced last week by other industry giants such as JPMorgan Chase ($2 billion), Wells Fargo ($1.75 billion) and Citigroup (loss of $2.5 billion).

For Bank of America, it was “a pretty decent quarter, given the environment,” Lewis said.

Lewis offered a fairly upbeat view of the economy, though he acknowledged that his views might seem “Pollyanna-ish” compared with the assessments of other industry leaders. “We have a ray of optimism now that we probably haven't had for a few quarters,” Lewis said. He said he expects “sluggishness but not a recession,” with some improvement starting in 2009 and housing prices bottoming out around the end of this year.

Keeping dividend intact

Lewis repeated a prediction he made earlier this month, saying he sees no need to cut the dividend to shareholders or raise more capital, which can dilute shareholder value. The bank has raised about $21 billion this year. Unlike many competitors, it has kept its dividend intact, paying 64 cents per quarter per share, up from 56 cents a year ago.

The bank's net revenue, a record $20.32 billion, was up 3.5 percent from a year ago and 19 percent over the previous quarter.

The bank got a boost from its recent acquisitions of U.S. Trust and LaSalle Bank. It also was helped by the Federal Reserve's cutting interest rates since last summer, which lowered the rates that the bank pays on CDs.

Mortgage-related and other writedowns were $1.22 billion, down significantly from $2.81 billion in the first quarter. The bank saw gains in service charges, investment and brokerage services, and mortgage banking income. And though it tightened underwriting standards, it saw consumer loans grow by 9 percent and commercial loans by 38 percent.

The bank made building deposits a priority this year, Lewis said. He also noted that fewer banks are in a position to build deposits.

“We've seen less people at the party,” said chief financial officer Joe Price.

Loss provisions

Provisions for current and future losses were up significantly over the year, though they appear to be tapering off. The bank set aside $5.83 billion for credit losses: $3.62 billion for current charge-offs, and $2.21 billion for expected losses.

Though that's more than triple the loss provisions of a year ago, it's down 3 percent from the first quarter. The added provisions were mostly in portfolios directly tied to housing, including home equity, residential mortgage and homebuilders.

Though Lewis indicated that the bank would slow down adding to reserves, analyst Andrew Marquardt of Fox-Pitt Kelton Cochran Caronia Waller said he thinks the increase in the reserve is not enough to cover future problems in the commercial sector.

Staff writer Rick Rothacker contributed.

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