Bank of America Corporation Q2 2009 Earnings Call Transcript

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Bank of America Corporation (BAC)

Q2 2009 Earnings Call

July 17, 2009 9:30 ET

Executives

Kevin Stitt – Director, Investor Relations

Kenneth Lewis – Chief Executive Officer

Joe Price – Chief Financial Officer

Analysts

Meredith Whitney – Meredith Whitney Advisory Group

[Adam Hirtch – Jetter Advisors]

Matthew O'Connor – Deutsche Bank

Paul Miller – FBR Capital Markets

Michael Mayo – Calyon Securities

Edward Najarian – ISI Group

Betsy Graseck – Morgan Stanley

Jefferson Harralson – KBW

Joe Morford – RBC Capital Markets

Christopher Kotowski – Oppenheimer & Co.

[Nancy Bush – NAB Research LLC]

Presentation

Operator

Welcome to today's teleconference. (Operator Instructions) It's now my pleasure to turn the program over to Kevin Stead.

Kevin Stead

Good morning. Before Ken Lewis and Joe Price begin their comments, let me remind you that this presentation does contain some forward-looking statements regarding both our financial condition and financial results and that these statements involve certain risks that may cause actual results in the future to be different from our current expectations.

These factors include among other things, changes in economic conditions, changes in interest rates, competitive pressures within the financial services industry, and legislative or regulatory requirements that may affect our businesses and for additional factors, please see our press release and SEC documents. And with that, let me turn it over to Ken Lewis.

Kenneth Lewis

Good morning, and thanks for joining our earnings review. The past several quarters have been quite tumultuous given the economic headwinds. For the first time in awhile, we feel less constrained by economic events and more capable of demonstrating progress and momentum.

Driving this attitude were several accomplishments this quarter in areas of balance sheet strength, solid core operating performance and on-going integration and positioning of our businesses.

During the quarter, we increased our tier one common equity by more than $34 billion and the total results of our capital actions, approximately $40 billion exceeded the capital buffer required by the Supervisory Capital Assessment Program by approximately 17%, all while again, substantially adding to our credit reserves.

In addition, there were several discernable positive trends in many of our businesses including robust activity in mortgage lending, investment banking and capital markets along with stronger deposit growth. Much like our first quarter results, we were able to generate earnings in the second quarter from various businesses and investments to offset the significant impact from abnormally high credit costs and the negative accounting impact from the improvement in our credit spreads.

On the credit spread point I won't go into my opinion here on the counter-intuitive accounting of certain liabilities, but suffice to say I'm pleased with both the improvements in the markets and the progress we've made that enabled us to benefit from this increased market confidence, and I would rather see the operating improvements and take the accounting loss that comes with our company's success.

For the second quarter of 2009, Bank of America earning $3.2 billion before preferred dividends, or $0.33 per diluted share after deducting preferred dividends of approximately $800 million. Total revenue on an FTE basis was in excess of $33 billion while pre-tax pre-provision income was approximately $16 billion.

Positive drivers in the quarter include a particularly favorable capital markets environment which produced a 56% increase in investment banking revenue versus the first quarter and trading results that exceeded strong first quarter results. Mortgage banking income remained elevated due to high levels of home loan production.

Benefits were recognized from the partial sale of our investment China Construction Bank and again from the sale of our Merchant processing business to a joint venture with First Data Corporation.

Momentum continued in new deposit generation and we focused on prudent balance sheet management which included lower risk rated assets and significantly higher levels of tier one common equity which enabled us to end the quarter with a tier one ratio of 11.9%, a tier one common ratio of 6.9% and a tangible common equity ratio of 4.7%, up 154 basis points from March.

These benefits to common equity also pushed our tangible book value percent up 7% to $11.66. The earnings impact of these positives were offset by a continued high level of provision expense, an expense related to the FDIC special assessment for deposit insurance, the negative impact from improvement in our credit spreads and lower consumer and commercial customer activity across many of our businesses.

As we experienced in the first quarter, Merrill Lynch and Countrywide continue to provide a significant contribution to revenue, and more important, both businesses position Bank of America very well to benefit as the global economy stabilizes and begins to grow.

Total credit in the second quarter was $211 billion including commercial renewals versus $183 billion in the first quarter. The larger components are $111 billion in first mortgages, $78 billion in commercial and $9 billion in commercial real estate. The remaining $13 billion includes consumer retail loans and small business loans.

Provision expense in the second quarter was in line with the first quarter and includes $4.7 billion reserve increase versus $6.4 billion in the first quarter. Average retail deposit levels for the quarter, excluding Countrywide, were up $`10.5 billion or 1.7% from the first quarter, which we believe is above industry growth.

Deposit levels at Countrywide continue to drop as anticipated driven by the alignment of pricing strategies. I would note that almost all our growth was associated with transaction counts versus CD or savings accounts.

Before I turn it over to Joe, let me make a couple of comments about our thinking given the current environment. The additions of Countrywide and Merrill Lynch continue to accretive to earnings to date at these market sensitive businesses offer diversification to offset the core credit headwinds we're facing.

For the rest of the year, the build up in late stage delinquencies and continued economic pressures will cause charge offs to continue to trend upward, although not at the pace we've experienced recently. Our largest jump in early stage delinquency late last year, essentially hit the 180 day charge off period this quarter, and we haven't seen such early stage jumps since then, as Joe will discuss.

At this point I would say consumer charge offs may be close to peaking in dollar terms around year end, although we believe it will stay elevated post the peak. Consequently, reserve increases will most likely continue for the remainder of 2009, although not at the levels we experienced in the first six months of the year.

We continue to position the balance sheet to ride out the recession which you can see in our de-leveraging actions this quarter, adding long term debt and capital, shrinking certain asset positions and substantially adding to reserve levels. Having said that, we're actually seeing a lot of business activity as demonstrated by the credit originations I referenced a minute ago.

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