Company Watch

ANALYSIS OF BREAKING NEWS

Bank of America:
Losses, But Look Ahead

January 22, 2008 - Bank of America Corp. (BAC-NYSE) announced earnings. They were way down, to a nickel a share, compared to $1.16 last year in the fourth quarter. Analysts thought it would be 18 cents a share. For the year, earnings were $3.30, down 27% from 2006.

The CEO, Kenneth Lewis, was optimistic about 2008. He stated that earnings should exceed 2007's on mild economic growth. He added, "Performance has not been what it should have been," blaming bad credit decisions and "the toughest environment" he has experienced since he became CEO in April 2001. But Mr. Lewis said the economy is likely to grow 2% this year while the bank's earnings should top $4 a share, with most of the growth focused in the second half of the year, according to the Wall Street Journal.

He went on to say that the Countrywide Financial purchase is still on track but some terms of the deal could change to reflect market conditions. The original deal was for the bank to pay $4.1 billion of stock for Countrywide. But some observers feels Countrywide's subprime mortgages will cause more damage than originally calculated, and the deal may collapse.

To help its deteriorating equity, the bank will raise $2 billion of capital, most likely in the form of convertible and preferred shares. Some possible investors include foreign governments such as China, Singapore and maybe the Saudi prince who owns a large chunk of Citigroup. More capital may come from the sale of certain assets such as its equity prime brokerage business which works with hedge funds, and by reorganizing its international business. While it has plenty of capital (6.87% of assets at yearend), it fell below its target level of 8%. Bank regulators like to see this number as high as possible. It's the cushion that protects the FDIC from having to pay out in case there are real problems at a bank.

In spite of the current weakness, the bank has no plans to cut its dividend. In fact, it expects to continue raising it, as it has for the past 30 years.

The recent 75 basis rate cut will aid in the bank's recovery. Long term loan rates should grow faster than short term interest paid on deposits, raising the net interest margin for the bank.

The company has increased its loan loss reserve to $3.31 billion, double a year ago, bringing its total reserves to levels somewhat adequate to its troubled loans. Loans that were charged off, considered no longer collectable, went to .91% of the portfolio, up from .82% while all non-performing assets rose to .68% of total assets from .26%.

BAC hasn't avoided the subprime mess. It's paid a price for making bad loans. Now it's focusing on more prudent lending and fewer ancillary services such as investment banking. The main purpose of the bank is to lend money, then collect it with interest. You'll be seeing BAC, as well as many other banks, doing more of that the rest of this year.

- Company Web site: www.bankamerica.com

- Ted Allrich