First quarter Bank of America profit falls on credit losses.

Bank of America Corp , the largest U.S. retail bank, posted a 77 percent decline in quarterly profit on Monday, as a growing number of consumers and real estate developers failed to repay loans.

Profit dropped for a third straight quarter and slid more than analysts expected, dragged down by what Chief Executive Kenneth Lewis called a “litany of negative issues,” including more than $5 billion of write-downs and credit-related costs.

Bank of America said the housing market will remain weak all year, as credit problems once concentrated there spread into other areas such as credit cards.

My Comment: This spillover into credit cards was bound to happen. And in a weakening jobs environment, card losses are going to skyrocket.

The bank also quintupled the amount it set aside for bad loans to $6.01 billion and said the economy might grow little or shrink this quarter.

“It would be too early to strike up the band and sing ‘Happy Days Are Here Again,”‘ Chief Executive Kenneth Lewis said on a conference call.

My Comment: Happy Days? A recession has just started. It will last longer and be far deeper than nearly everyone thinks.

First-quarter net income fell to $1.21 billion, or 23 cents per share, from $5.26 billion, or $1.16, a year earlier. Results included a $776 million pre-tax gain from credit card network Visa Inc’s initial public offering last month. Excluding merger costs, profit was 26 cents per share, below the average analyst forecast of 45 cents, according to Reuters Estimates.

My Comment: Notice how they are excluding onetime costs but including onetime gains. Subtract that $776 million and the quarter missed by a mile.

Bad Loans Soar

The $6.01 billion set aside for bad loans stemmed in significant part from credit costs in home equity, small business and home builder portfolios.

Bank of America added $3.29 billion to its reserves for credit losses. Net charge-offs nearly doubled to $2.72 billion and nonperforming assets nearly quadrupled to $7.83 billion.

“Credit was a lot worse than expected,” wrote Jeff Harte, an analyst at Sandler O’Neill & Partners LP. “Management added meaningfully to reserves, but this may be a necessary evil.”

My Comment: Credit losses are going to be even worse next quarter and once again analysts will be surprised. As for “meaningfully to reserves” … I think they are on the light side given the doubling of charge-offs and quadrupling of nonperforming assets.

The bank said credit card losses in particular were rising in areas hit hard by housing troubles, including Arizona, California, Florida and Nevada.

“Credit card borrowers are feeling some of that strain,” Chief Financial Officer Joe Price said in an interview. “It’s most acute in states with the greatest home price depreciation, although you see some stress across the nation where you have impact from the economic slowdown.”

My Comment: This isn’t strain, this is busting at the seams. Consumers have had it and many have given up trying to pay. Look for bankruptcies to soar.

Results also included write-downs of $1.47 billion for collateralized debt obligations and $439 million for loans to fund leveraged buyouts. Trading losses declined to $1.31 billion from $5.15 billion from the fourth quarter.

My Comment: Perhaps banks ought not be trading in the first place.

“We have not changed our philosophy” about the bank’s $2.56 per-share annual dividend, but could review it if the environment got “noticeably worse,” Lewis said.

The bank has raised its dividend for 30 straight years. Among rivals to lower their dividends in 2008 are Citigroup, Wachovia, Washington Mutual and National City Corp .

My Comment: Look for Bank of America to slash its dividend.

Provision For Losses Is Inadequate

Increasing losses have just begun at Bank of America. It has its hands full and them some with a questionable pending purchase of Countrywide Financial.

In a too little too late scenario Bank of America-Countrywide to curb risky mortgages.

Bank of America Corp (BAC) said on Tuesday it plans to stop offering some riskier mortgage loans after it finishes buying Countrywide Financial Corp (CFC), the largest U.S. mortgage lender.

The second-largest U.S. bank said the combined businesses will not offer “option” adjustable-rate mortgages, which let borrowers pay less than the interest due. It also plans to “significantly curtail” other non-traditional mortgages, including some loans that don’t require borrowers to fully document income or assets.

My Comment: Why did it take this long for CFC and BAC to stop Pay Option ARMs?

“We recognize this tightening, by definition, restricts the availability of credit to some borrowers,” said Bruce Hammonds, Bank of America’s global consumer credit executive. “However, this will help ensure that those who get loans can afford to repay them.”

My Comment: They should have thought about customer’s ability to repay loans long ago. But ability is one thing, willingness is another. Walking Away Is The Next Mortgage Crisis.

In January, Bank of America agreed to buy Countrywide, in a transaction valued Monday at about $4 billion. The U.S. Federal Reserve on Tuesday is holding in Chicago the first of three public hearings concerning the planned purchase. The Fed also scheduled hearings for April 28 and 29 in Los Angeles. Bank of America expects to close the merger in the third quarter.

My Comment: The Fed will rubber stamp this. They do not want Countrywide to go bankrupt, which it would do without the merger.

BAC Halts Letters Retailer Letters of Credit

In other credit tightening news, BAC ends Letters of Credit with Sears, Talbots.

Retailer Sears Holdings Corp said on Friday a credit agreement with Bank of America Corp would come to an end after the bank would not agree to renew it under existing terms. Sears, controlled by hedge fund manager Edward Lampert, said the termination of the agreement was not expected to have any effect on its liquidity. The agreement was for a 364-day secured facility with a commitment amount of up to $1 billion.

the banks’ decision not to renew it comes after two other retailers ran into credit troubles this week.

Shares of women’s clothing retailer Talbots Inc (TLB) fell nearly 40 percent in the two days after it disclosed Bank of America and HSBC (HSBA) would stop providing it letters of credit. Home goods retailer Linens n’ Things, which is trying to restructure its debts, said on Friday it was working with recently formed committees of its noteholders and vendors.

Next Earnings Nightmare For Banks

The Wall Street Journal is writing about the New Threat: Loan Losses.

The next earnings nightmare for banks has begun.

Until now, losses at many banks have come from multibillion dollar write-downs on toxic debt. But analysts believe the costs of building bad-loan reserves could cause just as much pain — and for a lot more banks.

Banks establish bad-loan reserves as a cushion against expected losses on defaulted loans. Additions to these reserves, called “provisions,” get booked as an expense in a bank’s income statement and reduce earnings.

If defaults at Bank of America continue to go up, it may turn out to be under-reserved. “Based on what we know today and what we’re seeing in the market, we believe our reserves are adequate,” a BofA spokesman says.

Wells Fargo reported earnings April 16. Oppenheimer analyst Meredith Whitney argued Monday that Wells Fargo’s bad-loan reserve looked too low.

A Wells Fargo spokeswoman declined to comment on the report but referred to the bank’s first-quarter earnings statement, which said: “We believe the allowance was adequate for losses inherent in the loan portfolio at March 31, 2008.”

“Based on what we know today and what we’re seeing in the market, we believe our reserves are adequate,” a BofA spokesman says.

The question is not what is known today, but what will be known tomorrow. Based on what they knew in the first quarter of of 2007, they only needed a $1bn. provision, which in hindsight turned out to be wildly optimistic.

How the new level of provisions fares in this regard remains to be seen, but given that that BAC has swallowed CFC, it is saddled it with a big slice of the still evolving housing bust.

Ending those letters of credit was a smart decision but about the only one that I can see. And as credit card losses mount and provisions for loan losses soar, look for Bank of America to be sporting losses later this year.

There are simply too many negative issues surrounding BAC for it to overcome. BAC’s 30 year record of raising dividends will soon be history.

Mike “Mish” Shedlock
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