Bank of America Corporation (NYSE: BAC) has decided to issue earnings early and capital raising initiatives.  The banking giant said that quarterly net income was $1.18 billion, or $0.15 EPS.  The good news is that it made a profit.  The not good news is that it is a sharp drop from final year’s Q3 of $3.70 billion or $0.82 EPS.  Targeting an 8% Tier 1 capital ratio, B of A is going to sell $10 billion worth of common stock.  As you will see below, the bank is seeing tighter and tighter performing assets and its comments are getting very cautious to nearly alarming.

It is additionally setting that quarter’s dividend of $0.32 per share, which is a 50% dividend cut.  It says
that cutting its quarterly dividend of$0.64 would add more than $1.4
billion to capital each quarter.  Retail deposits increased $56 billion
to $586 billion in the quarter including the addition of $35 billion
from Countrywide. 

While CEO Ken Lewis describes the worst environment he has experienced,
the metrics at the end of that pretty much show you how much credit is
getting worse in recent weeks.  CEO Ken Lewis has offered very cautious
comments.  He famous, "These are the most difficult times for financial
institutions that I have experienced in my 39 years in banking…. We
know many investors in our stock are fairly disappointed with a dividend
reduction…"

Credit quality continued to weaken and the economy has moved

to a
recessionary environment, and the risk of a prolonged recession has
increased.   Higher levels of bankruptcies are occurring and
delinquencies and losses have increased in all consumer portfolios.
Increased loss and delinquency trends have now spread into the first
mortgage, unsecured consumer lending and credit card portfolios.  B of
A has added nearly $2 billion to the allowance for loan and lease
losses during the quarter through provision.  Provision for credit
losses was $6.45 billion, up from $5.83 billion in Q2 and net
charge-offs were $4.36 billion (1.84% of total average loans and
leases) compared with compared with $3.62 billion final quarter.
Nonperforming assets were $13.36 billion or 1.42% of total loans,
leases and foreclosed properties, compared with $9.75 billion just on
June 30.  The allowance for loan and lease losses was $20.35 billion,
or 2.17% of loans and leases measured at historical cost compared with
$17.13 billion at June 30.

Shares closed down 6.5% at $32.28 and shares are down another 7% at
$29.90.  Until those credit metrics get marginally better or show some
sign of slowing trends, there are many who will be questioning why they want to
own any bank stocks.

Jon C. Ogg
October 6, 2008