Highlights From BAC's Q2 Conference Call: $20 Billion in Charges Related to Mortgage Business

Bank of America Corp. (NYSE: BAC) reported Q2 EPS of $0.33, $0.04 better than the analyst estimate of $0.29. Revenue for the quarter came in at $13.2 billion versus the consensus estimate of $12.34 billion.

Highlights From BAC's Q2 Conference Call:

• (Brian T. Moynihan) In all, we took almost $20 billion in charges related to the Mortgage business. That is translated in a $0.09 per share loss in the range we gave you a few weeks ago. Adjusting for the mortgage charges our earnings were $0.33 a share, at the high end of the range we gave you in June.
  
• Our Tier 1 common ratio, which we set the end of June coming around 8% actually came in at 8.23%, higher than we expected. A drop of 20 basis points since the first quarter of 2011 but improvements since last year.
  
• In all, during the second quarter 2011, our RWA came down over $30 billion.
  
• Each business line other than mortgage had solid earnings and returns, earning in all over $5.7 billion after tax. The franchise and customer model continues to shine through. In our Deposits business, we grew deposits. We also grew accounts at two times the right we grew them last quarter on new checking accounts.
  
• In our Card business, we had strong performance aided by credit provision release. But we also increased our units in the United States this quarter to over 730,000 new cards.
  
• The Durbin will affect this business in subsequent quarters and Bruce will lay that out later. In our Global Wealth Investment Management business, we had another solid quarter. We grew long-term assets, grew our advisory team and continue to see strong performance across the franchise. As we move into the corporate and commercial side of our house, we had strong earnings in Global Commercial Bank as you can see.
  
• The [indiscernible] management revenues in these businesses were solid. The long growth outside the U.S. is strong and our investment banking fees of $1.6 billion plus were one of the best quarters we've had in this business since we came together several quarters ago. Our efforts here also show that our International businesses investments are starting to bear fruit as revenues outside the United States grew faster than revenues inside the United States.
  
• (Bruce R. Thompson) The $15.5 billion of mortgage-related revenue charges is comprised of $14 billion of reps and warrants and $1.5 billion negative valuation effect on our MSR.
  
• Risk-weighted assets were down $40.7 billion for the quarter or 2.8%, which is consistent with our strategy of driving down risk-weighted assets as we look out to the new Basel capital rules to.
  
• Tier 1 common at the end of the quarter was solid at 8.23% in tangible book value, ended the quarter at 12.65%. From an asset quality and a reserve perspective, ending loan loss reserves after the release were 37.3 billion, or 4% of loans and leases, and other 1.6 times our annualized charge-offs that we saw for the quarter.
  
• Net income in the deposits business was $430 million during the quarter, up $75 million or roughly 21% from the first quarter of 2011. Average deposits were up 2% for the quarter and net new accounts were positive for the second consecutive quarter.
  
• Rates paid on deposits came down 3 basis points from 32 basis points to 29 and costs per deposit, which we define as non-interest expense over average deposits, came down from 2.6% in the first quarter to 2.44% during the current quarter.
  
• From an average loan and lease perspective, the $5.6 billion decline in average loans from the first quarter was due to higher payments, charge-offs and continued runoff in our non-core credit portfolio. In addition to that reduction, we exited approximately $2 billion in receivables at the end of the quarter with virtually no income statement effect.
  
• Global Wealth and Investment Management business. Net income was $506 million, down $27 million or 5% for the quarter based on higher expenses from increases in the investments and our financial advisors as well as higher credit costs. Revenues for the quarter was nearly flat to record first quarter levels that we saw during the first quarter of '11 as record asset management fees driven by market and long-term AUM flows were offset by lower brokerage revenues reflecting lower market activity.
  
• Ending loans within the business grew for the fifth consecutive quarter, in rough $1.6 billion.
  
• Commercial Banking line of business, net income of $1.4 billion was up $458 million from the first quarter, and was at its higher level since the second quarter of 2009.
  
• Average deposits grew $6.3 billion or 4% during the quarter as customers in this line of business continue to remain highly liquid. As we look at average loans, average loans declined $3.1 billion.
  
• Once again, very strong improvement in asset quality. Within the Commercial Bank, charge-offs declined $193 million or 38% from the first quarter. Non-performers declined 11% and we continue to see very solid performance in credit.
  
• Global Banking and Markets business, net income for this business was $1.6 billion for the quarter, and fell seasonally from $576 million from the first quarter on lower sales and trading results that were partially offset during the quarter by higher Investment Banking fees. If we start to look at sales and trading, the revenues for the quarter were $3.8 billion, a $1.1 billion decline from the first quarter but up approximately $666 million from the second quarter.
  
• From a risk weighted asset perspective within sales and trading they declined $37 billion as we reduced legacy assets, exited our proprietary trading business in its entirety and continued to optimize the balance sheet as we look forward to Basel III.
  
• If we move to Corporate Banking, average loans and leases increased $5.8 billion or approximately 6% from the first quarter as we saw strong growth in our international commercial loans and trade finance, which is consistent with what we've spoken about before as we made investments internationally in 2010 and they've started to bear fruit in 2011.
  
• On a consolidated basis you can see the segment reported a $14.5 billion loss. If we adjust out all of the one-time items that I talked about at the beginning of the call, net loss for the quarter was $954 million versus the $399 million that we saw during the first quarter of '11.
  
• Number of loans serviced was down about 3.3% and the number of 60 days - number of loans 60 days delinquent in the portfolio was down roughly 5%.
  
• We had roughly a $200 million FBO adjustment on our structured notes, $831 million of gains on debt securities and about $1.1 billion of equity investment income that was comprised of the dividends from our CCB investment, the gain on the disposition of the balance of our BlackRock interest partially offset by a $500 million impairment on a strategic equity investment.
  
• We look at consumer credit trends you can see net charge-offs, delinquencies and non-performers continue to improve and the total provision expense for the quarter for our consumer loan portfolios was $3.8, which is comprised of $5.2 billion of charge-offs in a reserve reduction of $1.4 billion.
  
• We expect a little bit north of a 3% decline in home prices in 2011 and a 1% increase in 2012 largely during the second half.
  
• Commercial credit trends. Charge-offs, declined $180 million in the second quarter of '11 relative to the first quarter. Total provision was a benefit of $523 million and reflected a reserve reduction of $1 billion in the quarter. We'd also note you can see that both non-performers and reservable credit size declined 11% during the quarter as corporate credit continued to improve.
  
• (Q&A) I think it's good to see $200, $250 billion risk-weighted asset reduction expectations. Just curious of what you think the revenue or earnings associated with that are? (A) I think if you look at and you saw the individual books, one of the most significant contributors to that reduction of $2 to $250 billion is actually something over the last several quarters that we've taken losses on. I think if you think about the structured credit trading book, that's not something where you see significant amounts of income on as well. So I think the net of it is, while there is some income, there are also certain elements of that that have been expensive. So we really don't see any material level of impact to the income statement from reducing that $2 to $250 billion.
  
• Not bad. I noticed on one of your first slides that long-term debt was down a bunch. That's in line with I think your previous. I was just curious on what your refinancing schedule thought process is for the next six, 12 months. What you need to fund? What don't you? (A) Sure. The - I think as you look out, we obviously put on a 22 month to funding. I think it's important even though the mortgage settlement is uncertain, that 22 months to funding reflects the payment of the $8.5 billion associated with the mortgage settlement. We don't know exactly when that happens but we've assumed it will be within the funding window. What you haven't seen here is we have addition to take down debt. We continue to aggressively reduce our short-term debt with the goal of driving our commercial paper balances to zero. In the last comment I would make there is the reason the balances continue to remain as high as they are is we're preserving liquidity to be able to pay off the balance of our TLGP debt at the end of June. As you think about issuances, I would say we'll continue to be opportunistic as relates to getting the debt markets and at the same time, we're being very aggressive in looking to generate liquidity through selling parent company assets.
  
• So - and you did use the term trough for the NIM and I guess NII, too? Could you give us your outlook in the near term about where you see the NIM and NII heading? (A) Sure. I think we would clearly expect - let me start with net interest income. We would clearly expect net interest income, if not at the trough, to clearly be pretty close to that. On the NIM, there are two comments that I'd make. The first is, the rates that we're seeing with respect to the corporate loans that we've made have not shown any material deterioration. So the yields that we're see on the asset side continue to hold up. What I do want to caution you to a little bit is to the extent that we continue to generate the types of liquidity on the deposit side that we are, NIM will be affected to the extent that that happens because we're not going to chase long duration assets that have OCI risk and we're not going to chase assets that we don't feel comfortable with the credit. So realize that that margin may jump around a little bit depending on exactly how strong our deposit growth is.

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