Bank of America (BAC)

Q3 2011 Earnings Call

October 18, 2011 8:30 am ET


Bruce R. Thompson - Chief Financial Officer

Kevin Stitt - Investor Relations

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


Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

Matthew O'Connor - Deutsche Bank AG, Research Division

Nancy A. Bush - NAB Research, LLC, Research Division

John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division

Glenn Schorr - Nomura Securities Co. Ltd., Research Division

Moshe Orenbuch - Crédit Suisse AG, Research Division

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

Brennan Hawken - UBS Investment Bank, Research Division

Betsy Graseck - Morgan Stanley, Research Division

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division



Good day, everyone and welcome to today's call. [Operator Instructions] Please note this call is being recorded. [Operator Instructions] It is now my pleasure to turn the conference over to Mr. Kevin Stitt. Please go ahead, sir.

Kevin Stitt

Good morning. Before Brian Moynihan and Bruce Thompson 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. For additional factors, please see our press release and SEC documents.

And with that, let me turn it over to Brian

Brian T. Moynihan

Hi. Good morning, and thank you for joining us. Today, we reported net income of $6.2 billion or $0.56 a share after preferred dividends. There were a lot of moving parts that impacted numbers, and we'll get to those through the discussion here. In addition, our earnings benefited from our own credit spreads widening. It related to fair -- positive fair value adjustments and DVA gains. Those items, Bruce will cover along with the other significant items in the rest of the presentation.

Our core revenues continued to be adversely impacted by a challenging environment, as low interest rates and the European debt crisis persist. It is especially evident in our fixed income trading results for the quarter.

As we think about the third quarter, I think of 3 core areas. One of the areas is the continuation of the master strategic repositioning of our franchise. Another of the areas is the core operating platforms progress that we made in the quarter in each line of business. And the third area is the focus on the slow economy, and its impact on how we're going to run the company going forward. So let's first talk about the first area, the strategic transformation of the company.

During the quarter, we made steady progress repositioning our business to focus on our core customers and clients. We finalized the reconfiguration of our Credit Card business that we began in 2009 to focus solely on U.S. core credit card customers, exiting non-U.S. portfolios such as Spain and Canada and now exited the U.K. We also sold off some of the financial institutions platforms in the United States which enabled competitors to offer cards to compete against us.

In our mortgage area, we've exited our correspondent, previously exited our wholesale channels, which when you put all together focuses solely on a direct-to-retail channel. This is a position which enables to serve our core customer base and do it on a basis consistent with driving our franchise. In addition to repositioning those businesses, we've taken all our consumer businesses from our core consumer business through our Wealth Management businesses and put them under our new co -- one of our co-CEOs, David Darnell, to drive those businesses on a customer and client-focus basis.

During the quarter, we also sold half our interest in CCB, lowered our private equity investment substantially and made further progress on noncore assets dispositions. As we move from a strategic transformation of the company to the line of the business, we continue to see momentum in our core lines of businesses. We extended approximately $141 billion in credit for the third quarter. Our average deposits continue to grow. Our average commercial loans increased in all our regions, although our consumer loans are still declining mainly in the noncore areas. Our net checking accounts grew for the third consecutive quarter and attrition remains low. We're seeing good progress with initiatives to grow through adding financial services advisers in our branches and Small Business Bankers in our broad consumer areas. We're seeing steady progress in our Wealth Management businesses, U.S. Trust Merrill Lynch where we continue to add advisors and push forward these leading areas.

We continue to see solid performance on our commercial and corporate lending businesses, including Global Commercial Banking and Global Corporate Investment Bank. In addition, we retained our second place position in investment banking and produced solid international customer growth in that area.

Our credit quality and delinquencies continue to improve, while reserve coverage remains at high levels.

As we think about the third area that we focused on, and how to manage in a slow or long-term recovery, we're doing everything we can to continue repositioning the earnings of our company as we look forward. We continue to focus on driving growth in select areas, very select areas, but we're also focused on reducing expenses. Expenses remain elevated in large part due to nearly $2 billion in quarterly operating expenses at Legacy Asset Servicing. We hit our peak and headcount in July across the entire company, are now managing down across all areas. LAS is at its peak staffing level showed more of that overall staffing reduction should come through the bottom line. Our New BAC efficiency initiative is making progress. During the quarter, we completed a Phase I evaluation and now we're implementing. And you'll see the results as we come through the fourth quarter. The Phase II evaluation begins this month, and it will bear a strong fruit.

With that, let me turn it over to Bruce to go through the financials.

Bruce R. Thompson

Thanks, Brian, and good morning, everyone. If I can ask you to flip to Page 5, and we'll start on the income statement. As Brian referenced, we made $6.2 billion for the quarter or $0.56 a share, and these numbers were affected by several significant items that I'll walk you through and go through in more detail as we get into the presentation. The quarter did include a credit mark on structured liabilities under fair value option that resulted in a positive mark of $4.5 billion as a result of our credit spreads widening and as you look at our financials you'll see that in other income. Keep in mind that mark, whether it be positive or negative, does not impact regulatory capital ratios such as Tier 1 common but does affect GAAP capital. The widening of our credit spreads also generated a DVA gain of $1.7 billion related to our trading liabilities within our Global Banking and Markets business, and I'll get into more detail on that later in the presentation.

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