Bank of America profits plunge 68%

Banking giant reports - more than a week in advance - worse-than-expected earnings. Dividend halved and $10B stock sale announced.

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By David Ellis, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Bank of America proved it was not invulnerable to the credit crunch as it reported a steep decline in earnings on Monday, and announced plans to bulk up on capital by slashing its dividend in half and raising $10 billion through a stock sale.

Making the surprise announcement just after the closing bell, the Charlotte, N.C.-based bank said its third-quarter net income fell to $1.18 billion, or 15 cents a share, down 68% from $3.7 billion, or 82 cents a share, a year ago.

That was far worse than Wall Street's consensus forecasts of a net profit of $3.22 billion, or 62 cents a share.

Bank of America (BAC, Fortune 500) shares, which fell 6.5% during the session Monday, tumbled more than 9% in after-hours trading on the news.

Fresh off its recent acquisition of Merrill Lynch, Bank of America also said it planned to raise $10 billion in capital through a common stock sale and that it will cut its dividend to 32 cents from 64 cents in recent quarters.

Kenneth Lewis, Bank of America's chairman and chief executive officer, told investors in a conference call the move would help insulate the company in the current market environment, which has been marked by the disappearance of several major financial institutions in recent weeks.

"We thought it was prudent," Lewis said.

In addition to Bank of America's purchase of Merrill Lynch, Lehman Brothers has filed for bankruptcy, JPMorgan Chase (JPM, Fortune 500) acquired failed savings and loan Washington Mutual and Wachovia (WB, Fortune 500) is in the process of being bought by either Citigroup (C, Fortune 500) or Wells Fargo (WFC, Fortune 500). Those two banks are battling in court over the rights to buy Wachovia.

Lewis reserved some of the blame for the dismal quarterly results for higher credit costs in such areas as its mortgage and credit businesses as more consumers found it difficult to repay their loans.

All told, Bank of America said it set aside $6.45 billion for credit-related losses, more than triple during the same period just a year ago.

Exacerbating that pain was a charge related to buying back auction-rate securities from clients, a $320 million hit from the company's ownership of preferred stock of Fannie Mae and Freddie Mac and more than $1.2 billion in writedowns related to mortgage-backed securities and leveraged loans.

Bank of America execs said they experienced some encouraging trends including new client relationships and a flood of new deposits as both consumers and commercial account holders looked for a safe haven to park their cash. Over the past 3 months, the company gained $21 billion in new deposits - almost three times the industry average.

But those highlights were tempered by a dour outlook. Lewis, who has served as CEO since 2001, warned that he expected loan losses to peak towards the latter end of 2009 and that the company would have to continue to set aside money for bad loans through the coming year.

As a result, Lewis acknowledged that consumers may find little relief in the months ahead when it comes to securing credit.

"That is going to continue for some period of time," he said.

The results, which was originally slated to be released on Oct. 20, come just as the company announced a massive $8.4 billion foreclosure prevention effort.

As part of a legal settlement with 11 state attorneys general who had sued the troubled mortgage lender Countrywide Financial, Bank of America said it would cut monthly housing payments, a move that is expected to keep as many as 400,000 borrowers across the country.

In January, Bank of America announced plans to acquire Countrywide and completed its purchase in June. To top of page

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