Bank of America's profit plunges 77%

Drop in earnings far sharper than forecasts, although No. 2 bank stays in black despite writedowns.

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By David Ellis, staff writer

Higher loan loss provisions and writedowns in the company's investment banking unit dragged down Bank of America's results.
I am most concerned about the cost of
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NEW YORK ( -- Bank of America Corp.'s quarterly profits plunged 77% as the bank set aside more cash for bad loans and took another writedown on its mortgage-related portfolio, the company said Monday.

The Charlotte, N.C.-based bank managed to stay in the black: Net income fell to $1.21 billion, or 23 cents a share, from $5.26 billion, or $1.16 a share, a year ago.

The first-quarter results, however, were worse than expected, as analysts surveyed by earnings tracker Thomson Financial had forecast profits of 41 cents a share.

"These results clearly did not meet our expectations," said Chairman and CEO Kenneth Lewis. "The weakness in the economy and prolonged disruptions in the capital markets took their toll on our performance."

The company also took $1.9 billion in writedowns on the value of its collateralized debt obligations and leveraged loans, although that amount was less than the writedowns in the fourth quarter.

Those losses helped create a significant drag on results in the company's corporate and investment banking division, where profit dived 92% during the quarter.

Credit and capital

While Bank of America's investment management division also suffered, much of the quarter's dismal results stemmed from loan troubles in the bank's consumer and small business division.

During the quarter, the company set aside an eye-popping $4.78 billion in response to growing troubles in its home equity, small business and homebuilder portfolios.

"I think adding reserves in this environment was the responsible and right thing to do," said David George, senior research analyst at Robert W. Baird & Co. Inc. "It probably will continue but maybe not to the degree of this quarter - credit quality is still incrementally worsening."

Banks worried about further erosion in the economy - namely the drop in consumer spending and rise in unemployment - have been working to fortify their balance sheets against further losses in consumer-related loan portfolios.

Still, Bank of America appeared relatively well-capitalized.

Bank of America said its Tier 1 capital ratio, a gauge of the bank's ability to absorb huge losses, was 7.51% - down from a year ago, but up from the previous quarter after a $13 billion preferred stock sale in January.

Both regulators and investors have lately kept a close eye on capital levels as banks struggle to stay afloat.

Joe Price, the company's chief financial officer, said he expected those levels to improve later in the year. It has been widely speculated that Bank of America is planning to sell it prime brokerage business, which services hedge fund clients, and is even considering trimming its 9% stake in China Construction Bank to raise capital, the Financial Times reported Monday.

CEO Lewis, on a conference call, said the company would most likely issue preferred shares if it needs to raise more capital. But he did not rule out cutting Bank of America's attractive dividend if the company found itself in the midst of a prolonged recession. Right now, the company pays a quarterly dividend of 64 cents, or 6.81% of the stock price - by far the largest payout of any Dow Jones Industrial Average company.

"If things really got bad, then we would look at the dividend," said Lewis.

Looking forward

Lewis on Monday echoed the comments of other financial services firms, saying that the industry was in the "last innings" in terms of writedowns. But he warned that ongoing problems in the housing market and broader economy would pose hurdles.

"Second quarter will be a critical quarter for us to see if earnings return to more normal levels," said Lewis.

But playing into that outlook, was the health of the American consumer.

In his prepared remarks, Lewis said the company was "concerned" about consumers because of the ongoing woes in the housing market, rising unemployment and higher fuel and food prices.

At the same time, the firm reiterated its earlier statement that it planned to close on its planned $4 billion purchase of troubled mortgage giant Countrywide Financial Corp. (CFC, Fortune 500) in the early part of the third quarter.

The deal, which was announced in early January, still has to meet approval of both shareholders and federal regulators. The Federal Reserve is sponsoring two public hearings on the merger in Chicago and Los Angeles starting Tuesday.

Bank of America is ranked second largest in assets, behind only Citigroup Inc. (C, Fortune 500), which had far worse results in the quarter, posting a loss of more than $5 billion. Other financial firms to report losses in the first quarter include Washington Mutual Inc. (WM, Fortune 500), Wachovia Corp. (WB, Fortune 500) and brokerage firm Merrill Lynch & Co. (MER, Fortune 500). JPMorgan Chase & Co. (JPM, Fortune 500), the nation's No. 3 bank, reported lower earnings that, unlike Bank of America, beat forecasts.

Shares in Bank of America (BAC, Fortune 500) fell more than 2% in midday trading on the New York Stock Exchange. To top of page

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