Highlights From BAC's Q1 Conference Call: Improved Capital Ratios and Reduced Risk-Weighted Assets

This morning, Bank of America Corporation (NYSE: BAC) reported Q1 EPS of $0.17, vs. the analyst estimate of $0.27. Revenue for the quarter came in at $27.1 billion versus the consensus estimate of $26.88 billion. Shares are currently up 1%.

Highlights From BAC's Q1 Conference Call:

• (Brian T. Moynihan) Revenue rose from last quarter, expenses were flat on a gross basis to $20 billion including good will and I will cover it later. Up $ 5 million in the core business.
  
• We made progress improving the capital ratios, lowering our risk-weighted assets again. Growing liquidity and reducing long-term debt. All those and important metrics we identified for you a few months ago.
  
• When we get to the broader economy this quarter what we saw is that the customers health continues to move forward. Delinquencies were down across all portfolios, consumer spending continued to increase this quarter over last in 2011 over 2010 and in march, it increased 7% to give an example, about 1.5% of that would have been gas price increase, the rest is sord of fundamental customer purchases moving forward.
  
• We told you the conference to our share return model requires to us focus on building our balance sheet with a strong reserve position, driving optimization over risk weighted asset position and building capital over 2011-2012 as you moved from basil 1 to basil 2 to Basel 2.5 to Basel 3. The ratio increased to 6.1%, above the level we believe that-- of the risk inherent to run the company.
  
• RWWA is down 6%. Our deposits are up 4% or 44 billion, our long-term debt has been reduced $77 billion which is significant and has a significant benefit in our margin. Importantly, you can see our tangible share in equity is up $2616 billion.
  
• Tier 1 equity is up $8 billion and you can see the rest statistics on this page. If a year's timeframe, we have been able to significantly lower the risk, increase the capital and increase the statistics on reserve coverage while at the same time manage the customer franchise.
  
• Our active on-line accounts exceeded 30 million, a record for this company. Our mobile producers are up 55%, first quarter '10 to first quarter '011 to 6.8 mobile users. As we switch to card services that business earned 1.7 billion in the quarter on improved credit quality and the revenue is down as we continue positioning as we go through the books and business we don't want in that business and retail volume.
  
• Our wealth management businesses and wealth management team turned in 530 million after tax. Up 6.9% from solid fourth quarter results driven by an 8% increase in revenue and lower provision for credit costs.
  
• Our pre-tax margin in this business showing the value of the innovative model across the various products is reaching nearly 19% and a return on economic equity was 30%. The growth in margin, as I said, is reflective of the loan and deposits growth which grew 5% in the quarter and it demonstrates the customers want to integrate their finances and that loan deposit growth led to NII growing 10% in the fourth quarter 20610.
  
• Client balances grew 2% and that's on a $2 trillion base to give you a sense and it's $45 billion in growth from clients and new product flows of about $14 billion in long-term assets under management were all good performance by this unit. The growth in financial advisors continues to be steady, 180 new financial advisors were added.
  
• Small business lending which turned in other quarter of $923 million of earning. They're down slightly as they went from release of provision to actually having provision this quarter.
  
• Return on tangible equity of this business is 18% for this quarter. Average C&I balances were up 2% and that's concentrated in the middle market space and offsets declines in the commercial real estate business and dealer financial services business. Average deposits also grew 2%.
  
• Returns on tangible capital business were 28%. The revenue is up 44% from the fourth quarter driven by increases in sales and trading. Robust quarter in investment banking and steady growth of revenue driven by treasury management growth of about 5%. Corporate loans were up $3 billion for the quarter, about 12% annualized, driven by growth in our international lending business.
  
• Our production levels fell to 66 billion but we maintained our market share to deal with the falloff, we announced today that we have been reducing head count by approximately 3,500 people. 2,000 of those contractors in that business to about 1,500 teammates.
  
• On the legacy side, we employed resources to get through the back log and modifications and foreclosures. During the quarter we he modified 64,000 loans bringing to us 840,000 loans modified in the last few years. On the legacy side, as you saw in the press release, we settled the exposures of one of the monoline insurers and Chuck will cover that later.
  
• There's about $20 billion of reported costs but on a core basis, we had 500 million increase from quarter to quarter. We know that we need to do more on costs and continue to work on those. If you look at the base run rates, approximately $17 billion and this is a run rate that we have been facing consistent with what Chuck told you investor day about the 70 billion number.
  
• (Chuck H. Noski, Chief Financial Officer) For the quarter, as Brian said, we reported $2 billion of net income, or 17 cents a share after preferred dividends.
  
• The credit mark on structured liabilities under the fair valuual resulted in negative adjustment of $586 million, reflecting a tightening of our credit spreads compared to negative adjustment of $1.2 billion in the fourth quarter and is reported in other income.
  
• Equity investment gains during the quarter included a $1 point 1 billion gain from an investment in connection with the related IPO in the first quarter and reflected bow the sale of shares as well as the fair value mark under the remaining shares we still hold. We have $546 million in gains on the sale of securities during the quarter.
  
• Also included in the first quarter, as Brian mentioned, was approximately $1 billion of expense related to retirement eligible stock-based compensation awards, so-call faz 123R, that we have every year at this time. And merger-related and restructuring charges were 202 million.
  
• Credit loss reserves were reduced by $2.2 billion in the quarter versus $1.7 billion in the fourth quarter. The current period reserve number included $1.6 billion of reserve increases related to the purchase credit impaired portfolio.
  
• On slide 15, you can see that average loans were down $1.6 billion from the fourth quarter while average deposits increased more than $15 billion. Deposits remains a good story of growth as consumer balances grew, wealth management clients continue to do more business with us and commercial customers continue to prefer to hold rather than invest cash. In line with our comments over the last few months, ending long-term debt dropped 14 billion and we expect that decline to continue.
  
• Commercial loans ex-real estate were up $3.5 billion, or 1.4%, driven primarily by growth in Asia and AMEA and commercial real estate loans declined $2 billion, or 4.1%, as reductions in high risk assets continue to offset new originations.
  
• We are also on track to low your our long-term debt footprint by 15 to 20% by the end of 2011 relative to third quarter 2010 levels.
  
• Card revenue is down 7% from a year ago due to the impact of the CARD Act as the provisions became effective throughout 2010. On slide 19, we show service charges were flat with the fourth quarter but down 21% from a year ago due to overdraft policy changes which as you know were fully embedded in our results as of the fourth quarter of last year.
  
• Consumer spending is up. Account closures are down. Quality sales remain strong. Deposits grew. And employment levels are higher which I'll point to improving performance in our retail businesses in future periods.
  
• Mortgage banking income on slide 20 improved by $2 billion on the third quarter as lower reps and warranties provision were offset by lower production volumes and margin as well as less favorable net MSR head results. Production volume and first mortgage of $57 billion was down 33% in line with the drop in the overall market size from the fourth quarter while lock volumes were down 45%.
  
• Liability for reps and warranties ended the quarter at $6.2 billion compared to $5.4 billion in the prior quarter. Our unresolved re-purchase requests increased $2.9 billion to $13.6 billion due to an increase in submissions from the GSEs on remaining countrywide originations not covered by the agreements that we announced in January and legacy Bank of America originations.
  
• Investment and brokerage revenue is up $222 million, or 8% from the fourth quarter due to higher market levels, long-term asset under management and higher transactional activity.
  
• Asset managed fees were a report 1.5 billion, up 6% from the fourth quarter and brokerage fees were also a record approximately $1.6 billion, up 9% from the fourth quarter. Total client balances including Merrill edge grew $47 billion to $2.3 trillion during the quarter and as a result of market activity and strong flows into long-term asset management products.
  
• Sales and trading rev gnaw on slide 25 of $4.9 billion, which includes both net interest income and noninterest income increased approximately 93% from the fourth quarter but was down around 30% from last year's record quarterly results. Results more than doubled led by credit products and rates and currencies. Equity revenue is up 60% to $1.2 billion from the fourth quarter driven by increases in all major lines of business.
  
• Turning to expense levels on slide 27, total expenses excluding the good will impairment charge last quarter increased $1.4 million from the fourth quarter.
  
• Net charge-offs are $6 billion decreased $755 million compared to fourth quarter, consumer net charge-offs were down $509 million proven in most products and commercial asset quality improved as net charge-offs 26% from the prior quarter with the biggest drivers being USC&I, including legal settlement recovery and commercial real estate.
  
• (Q&A) Maybe if we could take a minute to expand a little bit. You just mentioned and you have it in slide 27 that the program to increase revenues and take out costs to drive profitability, and I think later on, you said something about material benefits in the second half of '12 on the expense side. Can we talk maybe a little bit about the largest contributors or the largest buckets that will see that expense savings over the two years? (A) If you think about it, think about two different things going on, Glenn. First, the largest improvement you are going to see over the next 24 months will be as we crest over-- go over the crest on the mortgage servicing side for the delinquent asset and start to take those costs out and like wise, other places in the company those similar costs exist. If you remember what we showed you, we had 75,000 humans dedicateed in the mortgage business and 20,000 full-time employees and we have gone from about 5 to 8,000 people who serve six days and out loans to a total of 30,000 of the last several quarters and again, 25, 2,600-- 2,070 this quarter. One of the things you will see as we continue to get through the bubble of foreclosures is delinquencies come down and you have a body of work to get through we have to stop the foreclosures and as we get through that, those will come down the next several quarters and we knew we would get that and we have identified and that's why we isolated it and we will get that out. What we need to do is continue to look. We sold 19 or 20 different Pieces of the company off. We have built up a lot of stuff for businesses that are no longer here. We have bill processing stuff when the company was a different company. We brought in a lot of new enterprises. Our Six Sigma capabilities that we have put in because we brought in over 100,000 different associates who are new to all of that. We had to step back and take a look at every aspect of work in the company. Work doesn't benefit customers and associates. Have to be taken out. That process is a process many companies used and not used early in my career. The process is in two phases. The first phase finished and the second page finishes early in the spring and so we'll begin implementing as soon as we have ideas and that will take longer as we go through. That is not stopping us from doing things in the branch team that I talked about. We are down 200 branches, down 50 this quarter and round numbers the cost of deposit ratio that we showed you in investor day dropped at 260 basis point wis we thinks leads the industry by a lot. That includes the FDIC expense, the whole nine yards in there. As you think about it, we continue on the core aspects and the other benefits come through slower as the assets get better the work gets done in the program.
  
• So very much appreciate that, Brian. On the mortgage servicing side to a whole lot of people and I think we get that, but in general, I think we saw through J.P. Morgan's results and I'm inspecting, in general, the cost of servicing mortgages is going through the moon on a run rate process. Is that thought process included in your cost savings in second half of '12, and does it have anything to do with the MSR and where you mark the MSR? (A) Yeah, in the valuation of the MSR the last couple quarter has been a charge to increase servicing costs which decreased cash flow and that's embedded in that valuation. We're carrying 92 basis points or so which is a conservative value, we believe, but embedded in that in the performance in that last couple quarters whats been roughly half billion or 450 or so each quarter for that. So in that, we have to price through to the Street for lack of better terms because the increased amount of work you have to do and service of mortgage loan, we have to get paid. Good last one. On reps and warranties, I think following the partial settlement with the GSEs, I and others might have thought with 5 billion plus in reserves, we might see a leveling off on the provision, but another billion with over half going to the GSEs, I'm assuming that's for the Fannie stuff that wasn't settled, and just curious on how you think about that as a, you know, an annoying run rate that's with us for a few more quarters or you feel like what percent of the pipe are you through now on the GSEs?

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