BofA’s third quarter takes a hit

Times are turbulent for the banking industry but, at the same time, the banking industry is evolving. The company is experiencing a consolidation in the industry that is producing less than a handful of large banks at the top, fewer banks in the middle and thousands of smaller banks at the bottom. With the announced acquisition of Merrill Lynch, Bank of America will be one of just a few banks that early next year will hold collectively more than 30% of the deposits in the US, along with strong positions in commercial banking, investment banking and asset management.

With its size, scale and strong market share, Bank of America is positioned to benefit as the economy stabilizes and starts to recover. However, over the next several months and in to 2009, the company expects that continued market turbulence and economic uncertainty will produce less than normal earnings but also require ability to provide liquidity and support to commercial and retail customers.

Congress’ passage of the financial plan, as well as other programs put in place is a good start in stabilizing the credit markets and injecting liquidity in to the system. However, the company believes it will take time before substantial benefits receive and increase liquidity, reduce market volatility or improve investor sentiment. Therefore it is in the best interest of the shareholder to get the Tier-1 capital ratio to the targeted goal of 8% and improve the other capital ratios. In addition, at least in the short term, the company believes that it is wise to position dividend to better match the reduced earnings performance.

The company is reducing the quarterly dividend by 50% to $0.32 per share.

The company intends to raise $10 billion of common stock in an offering. Today’s actions will result in a Tier-1 ratio on a pro forma basis, including Merrill Lynch to be around 8%, the company’s target. Additional capital will insure the company can handle the economic scenario, continue to be a source of liquidity and still take advantage of opportunities to grow market share.

Given reported earnings for the third quarter and an economic outlook that shows a weaker economy going in to 2009, Bank of America views paying a lower dividend as prudent capital management.

Earnings for the third quarter of $1.18 billion or $0.15 per diluted share were disappointing.

Good performance in several of the businesses was offset by market turbulence, losses related to several one-time events and continued high credit costs.

Bank of America is seeing impressive execution in consumer banking as well as momentum in commercial banking both in lending and in treasury management. Offsetting much of this success was several events related to the market turbulence. These events including losses associated with exposure to Fannie and Freddie, support of the Columbia Cash Funds, a challenging trading environment, additional negative marks on certain balance sheet positions and potential losses related to the company’s auction rate security settlement.

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