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Tuesday, October 7, 2008

BofA Cuts Dividend, Posts Lower Profit

Bank of America Corp., the consumer banking giant whose nationwide base of depositors has helped stabilize it through the current banking crisis, slashed its quarterly dividend and announced plans to raise $10 billion in new capital as it conceded that "recessionary conditions" are sending tremors though the bank.

The troubles hint at a horrific earnings season and show how much the deepening woes of consumers are weighing on the nation's biggest retail bank as it grapples with rising delinquencies in everything from mortgages to credit cards to small business loans.

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Bank of America CEO Kenneth Lewis, at a press conference last month in New York to discuss the bank's takeover of Merrill Lynch
As it turns out, even Bank of America's heft and diversity are not enough to get it through the worst financial crisis in at least two decades. The sacrifice of its long-sacrosanct dividend is further evidence that the nation's economic troubles could get worse before they get better.

"It's a damn disaster," Chief Executive Officer Kenneth Lewis told analysts, when asked about lending conditions. "We are making every good loan we can find" but "it's not going to be pretty for awhile."

The Charlotte, N.C., company, in an earlier-than-expected release of third-quarter results on Monday, said it will cut the dividend from $.64 to $.32 to add more than $1.4 billion in capital each quarter. The company also hopes to sell $10 billion in common stock, the goal being to keep the bank's Tier 1 capital ratio near 8% and cover the higher credit losses than are expected. Bank of America said net income in the quarter fell to $1.18 billion, down 68 percent from the same period a year earlier when the bank posed a profit of $3.7 billion.

Breaking from his past optimism about the nation's economics prospects, Mr. Lewis blamed "recessionary conditions" for the moves. "These are the most difficult times for financial institutions that I have experienced in my 39 years in banking," he said in a release.

The nation's largest retail bank reported net income of $1.18 billion, or 15 cents per share, down from $3.70 billion, or 82 cents per share a year earlier. The results were worse than expected. Credit losses on mortgages and credit cards dragged down the results. Its provision for credit losses was $6.45 billion, up from $5.83 billion in the second quarter. Net charge offs were $4.36 billion, as compared to $3.62 billion in the second quarter.

Nonperforming assets were $13.3 billion, or 1.42 percent of total loans, leases and foreclosed properties. The dividend cut at Bank of America, the country's largest bank in terms of deposits, mirrors similar moves by smaller banks across the country as they look for ways to cut costs and raise capital amid the volatility that has driven some of the country's biggest financial institutions out of business.

Anticipating displeasure from investors in response to the cut, Mr. Lewis said: "We cannot pay out what we have not earned."

Bank of America's many recent acquisitions -- the latest being a $44 billion purchase of Merrill Lynch & Co. -- have put pressure on its capital base. Bank of America's Tier 1 ratio, a key measure of financial strength, was 7.5% at the end of September. Regulators require the ratio be at least 6%.

"To say the least, these are turbulent times for the banking industry," Mr. Lewis said on a conference call Monday, with changes occurring at a "breathtaking"' speed. But the shake-out is "evolving much as we thought it would a couple years ago," with less than a handful of giant banks at the top, fewer banks in the middle and thousands of small players at the bottom.

Mr. Lewis expects turbulence to continue, with charge offs not peaking until "well" into 2009, he said. But Bank of America, he said, is "positioned to benefit as the economy stabilizes and starts to recover."

Some analysts remain confident in the bank's ability to weather the ongoing turbulence. Already, the bank's massive deposit base has served as a cash cushion to help it stay strong compared with competitors and muscle its way through acquisitions like the Countrywide and Merrill Lynch transactions. As customers continue to flee riskier investments in favor of retail bank accounts, that strength is expected to remain. Excluding deposits gained from its purchase of Countrywide, Bank of America gained $21 billion in retail deposits during the quarter. Due to a special offer, the bank took in $9 billion in 8 days, Mr. Lewis said.

"What you see at the bank is business from a cross section of retail and corporate America," said Nancy Bush, analyst with NAB Research LLC in Annandale, N.J. "So even if it is an ugly time, it's less ugly for them because of very strong core deposits."