Bank of America Corporation (BAC)

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Bank of America Corporation (BAC)

August 10, 2011 1:00 pm ET

Executives

Brian Moynihan - Chief Executive Officer, President, Director and Member of Executive Committee

Bruce Berkowitz - Founder and Portfolio Manager

Bruce Thompson - Chief Financial officer

Analysts

James Sinegal - Morningstar Inc.

Rajat Jain - Litman/Gregory Research, Inc.

James Mahoney - The Daily Oil Bulletin

Presentation

Operator

Good afternoon. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fairholme Conference Call with Brian Moynihan, Chief Executive Officer of Bank of America. Moderating today's call is Bruce Berkowitz of Fairholme Capital Management. Before we begin, please note this call will last 1.5 hours and is being recorded. Once the conference call has been concluded, please refer to www.fairholmefunds.com for a transcript and a replay of the call.

Let me remind you that today's discussion may contain some forward-looking statements by Bank of America regarding its financial condition and its 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. For additional factors, please see Bank of America's SEC documents. [Operator Instructions] Thank you. Mr. Berkowitz, you may begin your conference.

Bruce Berkowitz

Well, thank you. I'd like to begin by thanking all participants and the Bank of America team, Brian Moynihan and staff, for doing the call. We're going to start the call. We have a lot to do, so we're going to start quickly. We're going to start the call, ask Brian to give us updates about Bank of America since the earnings call. Once that's done, I will ask Brian the toughest questions that were frequently asked during our e-mail process. Once that is finished, we'll open up the call for the remainder of the time allotted.

So with that, thank you, Brian, for joining, and please begin.

Brian Moynihan

Thank you, Bruce. I have Bruce Thompson here, our Chief Financial Officer is here with me, as well as Lee McEntire, one of our senior executives of Investor Relations. We set this call up about a month ago, and it's hard to imagine, when we set it up, it was going to be the market volatility we've all seen with the various activities that have taken place in the last couple of weeks. So we are glad to have a chance to answer your questions today and talk to you, Bruce, and your shareholders about the company.

Before we begin, I just wanted to make sure that we left you with the 3 or 4 points that are key about what we're going to talk about today. Number one, our core franchise continues to perform in the market, is growing market share in its core businesses. When we look at our array of businesses, they are the strongest positions that anybody has across businesses or consumers, companies and institutional investors.

The second point is we continue to execute on a broad scale transformation of this company. We do that through focusing on the core strategic customer basis, selling noncore assets, and that helps our focus and also generates capital, and moving from product sales to customer-focused execution in each of our businesses.

The third point is our capital levels are among the highest they've ever been in this institution's history. They're sufficient to run the company even after we took $20 billion in the second quarter, which Bruce will discuss later, to help with the mortgages issues behind us. We have a clear path on implementing the new rules under Basel III, the new banking regulatory capital rules. We're going to execute on that path, and that path involves a continued transformation of the balance sheet of the company.

The fourth point is the focus on the key issues we're managing through. Those issues are obviously continuing to clean up the mortgage issues related to the Countrywide acquisition, get our operating cost down across the board, and that has to be especially true on the tough revenue and extended low interest rate environment, which isn't that favorable to some of the core banking activities, and to continue to lower the risk in our company across the board.

Before I jump in, I'd like to say a few words about what we're seeing in the economy, which I think people may be interested in. As we look at our consumers in 1 or 2 households, we have millions of debit and credit card holders. And each month, we look at what they spend on and how they spend their money. In the month of July 2011, those consumers spent about $37 billion on their cards, 5% more than they spent in July 2010. This shows that the core customer base continues to push along, consumers are continuing to spend money, maybe not as fast as people have projected, but this is about the 15th to 16th month of continued increases.

Gas prices contributed about 1.5% to 2% of that growth. The rest is core spending growth. Credit demand across our portfolios continues to be slow, but credit risk continues to improve. And we've seen the trends of improved charge-offs and delinquencies that we saw in the second quarter of 2011 continue in July.

Now in the market side. The market continues to reflect tremendous uncertainty in demand for products and economic growth prospects for companies and economies, uncertainty about the debt burdens of the U.S. and other nations and the overall macroeconomic factors here and around the world. The equities and markets continue to reflect that concern. We can see it everyday on our screens.

However, if you think about it, the fundamentals are so much better in our country and in our company and in our industry than they were 4 years ago when last the financial crisis hit. There's a lot less leverage, whether it's for consumers' leverage, companies' leverage, leverage in the financial system and leverage across the world.

The recent statements regarding the prospects for American growth, as the background of which, all of us in our industry and we, in particular, have to manage our company. We expect that as the market continues to show, that this is going to be a slow and steady but grinding recovery. That's going to have steady, low interest rates. But it continues to move forward, and we have to continue to manage through it.

Before we talk a little about the specifics of how we did in the second quarter in the franchise, let's take a look at the last 1.5 years. If you think back where we started when I took over on January 1 last year, in 2010, we've just come off an aggressive acquisition phase and the financial crisis. And in the acquisition phase between 2006 and 2008, the company bought MBNA, U.S. Trust, La Salle, Countrywide and Merrill Lynch.

Just to give you a point of reference. Post-Merrill Lynch, the combined Bank of America Merrill Lynch on 1/1/09 had $70 billion of tangible common equity, $1.7 trillion of risk-weighted assets and total assets of about $2.5 trillion. Today, we have $128 billion in tangible common equity, $1.4 trillion in risk-weighted assets and $2.2 trillion in total assets.

Simply put, we have twice the capital we did back then. But as I took over in 2010, I had to focus on how we built that capital. Still on capital during 2009, we had to incur dilution. We issued over 3 billion shares and brought our share count to over $10 billion -- 10 billion shares. Even after that substantial dilution, we began 2010 with a tangible common equity ratio of about 5% and a Tier 1 common ratio under Basel I of about 7%. These ratios were not sufficient even with the 50% more shares outstanding. We simply cannot continue on the course of diluting our shareholders to build capital. So as I said, our #1 priority is to transform the company and its balance sheet, to rebuild that balance sheet to be able to support growth, navigate through a cycle that would come someday without a dilution and, frankly, align the franchise to the core strategic customer-focused businesses. We had to bring down risk across the board in our consumer portfolios, our commercial estate portfolios and our trading risk. So we started on an asset transformation.

Our first priority is to set a clear customer-focused strategy. We serve 3 groups of customers in our company: consumers from those individuals to the wealthiest people in the world, companies from the smallest companies to largest companies in the world and institutional investors. We sell them the core products, and we have top tier positions to do that. Our second priority was to shed noncore assets. A priority which continues today, and we'll continue to work on through the balance of the next couple of years. The third was to continue to transform the balance sheet in terms of assets, equity and the reserve position. And the fourth was to focus on driving returns outside the balance sheet from that balance sheet.

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