Bank of America Corporation (BAC)
Q3 2009 Earnings Call
October 16, 2009 9:30 ET
Kevin Stitt - Director, Investor Relations
Kenneth D. Lewis - Chief Executive Officer
Joe L. Price - Chief Financial Officer
Christopher Kotowski - Oppenheimer & Co.
Betsy Graseck – Morgan Stanley
Matthew O'Connor – Deutsche Bank
Paul Miller – FBR Capital Markets
Edward Najarian – ISI Group
John McDonald – Sanford C. Bernstein
Nancy Bush – NAB Research
Jefferson Harralson – KBW
Michael Mayo – Calyon Securities
Jeffery Harte - Sandler O'Neill & Partners
Welcome to today's teleconference. (Operator Instructions) It's now my pleasure to turn the program over to Kevin Stitt.
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And with that, let me turn it over to Ken Lewis.
Kenneth D. Lewis
Good morning and thanks for joining our earnings review. Before we get started, I want to say a couple of things to the investment community. This is the first time I have addressed you since my announcement to retire and I just wanted to say thank you for the support you have shown me during my time with you, as well as the support you have shown the company. It's been a pleasure to lead Bank of America and to interact with all of you.
As I've said before, we have a vast amount of talent in the company and we have market-leading positions in geographies, businesses, and distribution capabilities that are the envy of the industry. I have no doubt that Bank of America will thrive and my absence will not slow the momentum that is starting once again to move this company forward.
Okay, while it's never easy to talk about earnings when you are reporting a loss, there are several things this quarter than indicate that there are better days ahead. Frankly, earnings this quarter were fairly consistent with the expectations we discussed three months ago. We indicated in July that profitability would be tougher in the second half of the year versus the first half due to the absence of several unusual positive items that helped first half earnings, as well as due to the normal seasonal drop in revenue that occurs in the second half.
We did experience the seasonal impact and although revenue overall dropped in the third quarter, results were better in some businesses than the normal seasonal pattern. Overall, the pace of deterioration in credit quality slowed and was somewhat better than expected in several portfolios.
On the negative side, earnings reflected the impact of the charge for terminating the government asset guarantee terms fee associated with the Merrill acquisition, as well as the negative accounting impact associated with the improvement in our credit spreads. But as I said last quarter, I would rather see the operating improvements and take the accounting lumps that come with our company's improving spreads.
For the third quarter of 2009 Bank of America had a net loss of $1.0 billion, before preferred dividends, or a loss of $0.26 per diluted share after deducting preferred dividends of $1.24 billion, including almost $900.0 million related to the government and TARP. The termination of the government asset guarantee term sheet resulted in an expense of approximately $400.0 million in the quarter. The mark on the Merrill-structured notes was a negative $1.8 billion and the mark on the company's own derivative liabilities was $700.0 million.
Total revenue on an FTE basis was in excess of $26.0 billion while pre-tax, pre-provision income was approximately $10.0 billion, including the impact of the $3.0 billion of negative items just mentioned.
There were several positive trends in the quarter. The balance sheet continues to be managed prudently, resulting in lower risk-weighted assets, increased liquidity, and improved capital ratios. As we experienced in the second quarter, Merrill Lynch continued to provide a significant contribution to operating revenue. The capital markets environment was better than expected and resulted in a 37% increase in sales and trading revenue and solid investment banking revenue, although down seasonally from the previous quarter.
Results in Global Wealth and investment management reflected higher asset management fees and brokerage income driven by increased client activity and stabilization among our financial advisors. New deposit generation maintained its positive momentum with overall corporate-wide average deposits up more than $14.0 billion. We continue to meet or exceed many of the milestones around both the Merrill and Countrywide integrations.
Finally, and not the least, we believe we may have peaked in total credit losses this quarter, although the levels going forward will continue to be elevated and certain businesses will still experience power losses.
Unfortunately, any earnings impact of these positives this quarter were more than offset by continued high level of provision expense, lower customer activity due to the economic environment, and the other items that I just mentioned.
Total credit extended in the third quarter was $184.0 billion, including commercial renewals versus $212.0 billion in the second quarter. The larger components were $96.0 billion in first mortgages, $66.0 billion in non-real estate commercial, and $8.0 billion in commercial real estate. The remaining $14.0 billion includes other consumer retail loans and small business loans.
Despite these new extensions, loan growth overall declined due to lower consumer spending and a resurgence in the capital markets, allowing corporate clients to issue bonds and equity, replacing loans as a source of funding. Additionally, companies continue to be very cautious and we are not seeing the level of seasonal inventory builds or capital expenditure spending at any meaningful level.
Provision expense in the third quarter decreased from the second quarter by $1.7 billion, but included a $2.1 billion addition to the reserves and that's versus a $4.7 billion in the second quarter.
Now, before I turn it over to Joe let me make a couple of comments about the current environment. Merrill Lynch continued to be accretive to earnings year-to-date as these market-sensitive businesses offer diversification to offset the core credit headwinds we are facing. Although expected to peak this year, net loss levels will continue to remain high going into 2010. Additions to the reserve will most likely continue at least through the fourth quarter, but as you saw this quarter, the level of reserve addition is down substantially.