美國銀行 (BAC) 2010 Q1 法說會逐字稿

Welcome to today's teleconference.

At this time, all participants are in listen-only mode.

(Operator Instructions) We will take questions in turn following the presentation.

And please note, today's call is being recorded.

It's now my pleasure to turn the program over to Kevin Stitt.

Please begin, sir.

Good morning.

Before Brian Moynihan and Neil Cotty begin their comments, let me remind you that this presentation does contain some forward-looking statements regarding both our financial condition and financial results, in 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.

Good morning, and thank you for joining us this morning.

I'm going to start by giving you a high-level review of the first quarter, and then I'm going to turn it over to Neil to take you through the core drivers of the business.

And as usual, we've included lots of details on each of the business segments in the appendix of the slides to answer your questions and Kevin and Lee and the rest of our team will be available to answer follow-up questions all through the day.

Starting on the first quarter before we get into slides, I think the results reinforce what I think will be the trends that we'll discuss over the next few quarters.

Decreasing charge-offs, potential reserve releases, and those types of things that dominate the credit discussion.

We see the modest growth in the economy through the rest of 2010 will continue to hold loan growth back, but on the good side of that we're seeing the consumer and commercial health return which we believe will continue as the year progresses and add some momentum.

As the economy continues to recover, we'll also see a switch in how we earn money in our Company, expecting our core banking earnings, the loans and deposits businesses, to pick up and supplement the currently strong capital markets, investment banking and wealth management businesses.

So let's drop into the slides.

Let's begin on page four.

Just to hit the high points and the summary for the quarter.

The credit costs and delinquency levels continue to improve with managed losses coming down about a $0.5 billion from the fourth quarter to $10.8 billion, which is a good sign.

The commercial criticized levels continue to drop also.

In addition, through the FAS 166/167, our reserves now stand at $48 billion, or about 4.8% of total loans.

All this makes us more confident that the worst of the credit cycle is clearly behind us at this point.

Our capital levels remain quite strong even after bringing in the 167 changes.

We currently expect to increase and add additional capital through earnings and asset sales through the year as we have talked to you about.

And we remain comfortable that through our past capital raises, our earnings and balance sheet management, our capital position remains strong and is sufficient.

We've also built our liquidity and Neil will talk to you about that later.

As we think about our business segment performance during the quarter, I would summarize as follows.

Our global banking and markets business had a very strong quarter.

There's two components to that business.

One is our global corporate investment banking team.

And it looks like they were second in overall fees received, they were strong in debt and equity capital markets.

We do have room to continue to improve in the M&A area; the [advice] side.

And then the core lending and cash management, that business remains strong.

Tom Montag, who leads that business but also leads our global markets business, had a tremendous quarter in the areas of sales and trading.

Strong results across all the areas.

With legacy asset write-downs now down to an immaterial amount, and that also shows the worst of the crisis is behind us we believe.

Switching to the other businesses, David Darnell's Global Commercial Banking business returned to profitability, which is a good sign, with a solid quarter as better credit results, coupled with a strong deposit and fee performance continue to offset what is weak loan demand from our core commercial customers.

In our Global Wealth and Investment Management area led by Sally Krawcheck, they had a solid quarter, as markets stabilized, core activity picked up and we stabilized the advisers and other areas in that business.

As we move to the consumer side, Joe Price and the deposit business had a stable quarter.

We'll talk to you about the challenges that group faces with the new regulations around the fees they can receive over [time] under the Reg E and other changes we made.

The good news is our core credit card business returned to profitability.

It was driven by reserve release but at the lower net charge-off levels are still a very good thing and that business is continuing to repair.

As I have said, the consumer card balances will take a few quarters to level off.

But given that and given our conservative underwriting we still produced three-quarters of a million accounts this quarter which is good performance.

Our work in progress remains mortgage.

Barbara Desoer and her team have done a good job on the modifications and getting ahead of some of the issues that were the talk of the industry early in the quarter, but we still face the issues that elevated home equity charge-offs that we think will continue for several quarters.

And I talked to you about that a few weeks ago.

On the production side, production levels have come down as the market slowed and Barbara and her team will adjust their costs likewise over the next several quarters.

As we think about Company from more of the offensive side and how we go to market we continue to drive this integrated model across the three customer groups we serve, consumers, companies, and institutional investors.

The model continues to require that we focus our consumer businesses more effectively as a group going against the customer, and Joe Price and his team recently announced further changes to integrate the card and deposits business.

We've also made changes in how we charge our customers.

While this impacts our short-term revenue along with the rule changes that have gone on, we believe this provides an investment in our franchise to maintain our position as the number one retail banking franchise in this country.

Our integrated model also continues to progress in the area of referrals.

Neil will take you through some of those numbers later.

Before we get into the numbers, let me add that we have added a new member to our management team.

Chuck Noski has joined us as CFO and we look forward to him starting in May.

Neil and his team have done a great job and Neil has done a great job in the interim and we look forward to Neil continuing to help us do a great job in the future.

So now let's go to slide five and we'll start talking about the numbers.

I'll take you through a couple pages, then turn it over to Neil.

On slide 5, you can see that we reported core earnings of $3.2 billion, or $0.28 per common share, versus a loss of $194 million or $0.60 a share in the last quarter.

That compares to $4.2 billion in earnings and $0.44 per share in the first quarter a year ago.

Earnings this quarter represented the breadth of our platform and the franchise strength.

In addition, to remind everybody, the payment of TARP eliminates approximately $900 million of recurring quarterly dividends that we didn't have in first quarter of 2010 versus the fourth quarter of 2009.

As will you note, compared to the past few quarters this is one of the cleaner quarters with little equity sales, other significant items and little or no significant items in the legacy asset mark-downs.

Also remember as you look at our numbers is that the managed basis is the appropriate way to think about things due to the FAS 166/167.

As we drop on to page six, you can see some of the details for the quarter.

Revenue was up 14% compared to managed results from fourth quarter driven mainly by very strong capital markets and trading results.

Expense levels were up 8%, mostly for two items, the revenue and the global markets driving higher incentive comp, as you would expect, and also the cost of the retirement eligible grants which happen in the first quarter of every year.

Most other areas, we continue to manage expenses carefully, are relatively flat in the expense category.

On a managed basis, provision was down 25%, charge-offs were down 5%, and we released a billion of reserves which Neil will take you through later and how that ties into some of the changes in home equity accounts.

Net charge-offs were impacted this quarter by the write-down of collateral dependent home equity loans by $813 million and $140 million net of existing reserves.

We ended the quarter with Tier 1 capital of 10.23%, Tier 1 common of 7.6%, and tangible common of 5.24%.

And as I said before, reserves in excess of $48 billion.

That capital position, those reserve levels, when you compare year-over-year are very strong and hold us in good stead going forward.

We continue to hold strong liquidity and we added substantially to it this quarter.

On slide 7, you can see the top of the house trends for the Company.

Compared to a year ago, total revenue is down but is higher than the last few quarters.

Several revenue categories that Neil will take you through have performed favorably.

Service charges, investment brokerage services, investment banking, trading account profits, other areas are flattish and struggle a little bit more.

Some of the areas, net interest income are equity investment gains, mortgage banking compared to last year first quarter.

Pre-tax preprovision, or PP&R, reached $14.5 billion, a strong performance.

Credit costs decreased due to both lower charge-offs and a reserve release that Neil will talk about.

But what you really can see with this is that as credit costs subside you can see that the bottom line earnings come through and that's what we've all been waiting to see as we move beyond the crisis.

When we to page eight, just to touch on the business segments, you can see their performance this quarter.

I talked earlier about the more subjective read, but the key here is that all our business segments were able to make money this quarter except for one home loan and the global card service and global commercial bank have returned to profitability this quarter which is strong.

We clearly, on home loan investment, lost $2 billion.

We continue to have work to do, and the bulk of that was home equity provisioning and credit impaired reserving, and we are addressing those issues and Barbara and team are working hard and hopefully will correct over the next few quarters.

With that, let me turn it the over to Neil.

Thanks, Brian.

I will dig deeper on individual revenue line items starting on slide 10.

Net interest income on an FTE basis was $14.1 billion, down $300 million on a managed basis from the fourth quarter.

This was due to lower loan levels and spread compression in the trading book offset somewhat by improved pricing and deposits.

Additionally, there were three fewer days in the quarter.

During the quarter, the net interest yield of 2.93% decreased 11 basis points on a managed basis due mainly to lower credit card balances and spread compressions in the trading book.

Our balance sheet at the end of the quarter was relatively flat versus the end of last year after adjusting for FAS 166/167 and continued to remain asset sensitive.

Implementation of the CARD Act is expected to reduce net interest income due to reduced balances and an inability to reprice a risk as well as adversely impact card fees.

Total 2010 expected revenue impacts of the CARD Act including both margin and fees net of mitigation is now expected to be roughly $900 million after tax, including the recently announced reasonable fee provisions.

As you can see on slide 11, average loans, excluding residential mortgages, were down $13 billion, or 1.6% from Q4 after adjusting for FAS 166/167, while average deposits were also down 1.4%.

Excluding the Countrywide decrease of $2.4 billion, average retail deposits were up slightly as we maintained our pricing discipline.

Also shown is the increase in our discretionary portfolio on an average basis versus Q4, which I will touch on later.

Going forward, we expect net interest income to trend down throughout the year due to continued loan run-off and the impact of the CARD Act.

Overall, interest rate positioning continues to be asset sensitive as we are positioned to benefit should the yield curve end up being higher over the next 12 months relative to what is currently implied in the forward curve.

Turning to card income, on slide 12, revenue declined 9% from Q4 due to the seasonal impacts of lower retail volume and lower fees associated with the implementation of the CARD Act.

Debit card spending versus a year ago is up 10% while credit card spending versus a year ago is up 1%.

On slide 13, we show service charges were down $190 million to $2.6 billion, due mainly to seasonal trends.

As all of you know by now, we made changes to the overdraft policy last year which is costing us on average about $160 million a quarter.

Reg E will have an additional impact when it becomes effective later this year.

We believe that total impact of these changes will be reflected in the fourth quarter numbers.

We are currently estimating overall service charges in the fourth quarter to be around $2 billion, which will fully reflect Reg E versus the $2.6 billion this quarter.

Obviously, we'll look to mitigate this impact.

While we are not prepared to detail the mitigation today, you should expect that customers will have a choice of banking more efficiently, bringing more relationships to us or paying a maintenance fee.

Mortgage banking income, on slide 14, dropped from Q4 primarily due to lower production revenue on lower volumes, partially offset by higher servicing income.

Production income decreased $300 million on both lower margins and lower production volumes.

Production income includes the expense for reps and warranties which was flat with the fourth quarter at around $500 million.

Service income net of hedge results increased approximately $150 million.

The capitalization rate for the consumer mortgage MSR assets ended the quarter at 110 basis points versus 113 basis points in the fourth quarter.

Turning to slide 15, investment and brokerage fees were up slightly from Q4 as an increase in asset management fees were partially offset by lower brokerage fees.

Asset management fees of $1.5 billion were up 2% from Q4 due to market valuations, while brokerage fees decreased 1% due to lower transactional activity primarily due to three less days.

Assets under management ended the quarter at $751 billion, up slightly, as the improvement in the market deposit flows generated by advisors were partially offset by outflows in the Columbia cash complex.

We continue to experience continued stability and retention in the level of our wealth advisors.

We currently have 16,470 advisers comprised of 15,008 FAs and other wealth advisor roles of 1,460.

Our other wealth advisor roles include investment associates, financial solution advisors and US trust advisors.

This is the first quarter in several quarters where we increased the number of active households we serve, up approximately 12,000 to 3.1 million.

As you can see, we are adding new accounts at decent pace which is a nice turnaround from last year.

We expect to complete the sale of our long-term asset management business of Columbia to Ameriprise in Q2.

It should have a minimal impact on P&L of goodwill and intangible reductions will aid capital by approximately $800 million.

Sales and trading revenue, which includes both net interest income and non-interest income, reflected a pretty decent quarter as you can see on slide 16.

The first quarter is usually the strongest quarter in sales and trading for the year.

Total revenue of $7 billion comprised of FICC and equities, increased $4.8 billion from Q4 and even topped last year's first quarter by $788 million which was a record quarter at that time.

Fixed income revenue was up more than $4.2 billion driven by rates and currencies, credit products, and structured products, offset by a decrease in commodities.

Equity revenue increased $580 million from a slow third and fourth quarter of last year.

This is the first time in several quarters where write-downs on legacy assets didn't have a significant impact on revenue.

However, this impact could fluctuate going forward.

Investment banking income, on slide 17, had a drop from Q4 which is mostly seasonable but is up almost 18% from a year ago.

Bank of America-Merrill Lynch was the most active global underwriter in the first quarter, completing more than 450 transactions across debt securities, equity, and loans around the world.

Over 100 deals more than our nearest competitor.

Compared to a year, investor appetite continues to return to more normal levels.

One of the biggest turnarounds was in the high yield market which was virtually closed at that time beginning of last year but jumped to near record volumes this past quarter.

Investment grade also turned around in a strong quarter.

The global equity markets started slowly this year but steadily gained momentum and finished the quarter with some large IPOs.

Our revenue remains concentrated in the Americas versus a more diversified global mix at some of our peers.

Consequently, we continue to focus on the opportunity with key hires and relationship building in important markets outside the US.

Turning to the remaining revenue categories on slide 18, equity investment income of $625 million was driven by improved market valuations somewhat offset by a $330 million loss from the sale of an equity portfolio in our discretionary portfolio.

Gains on the sale from debt securities were $734 million in the first quarter compared to $1 billion in Q4.

Other income reflected insurance revenue of $715 million, up a bit from both the fourth quarter and a year ago.

The credit mark on Merrill Lynch structured notes on fair value option resulted in a gain of $226 million.

Let me now say a few things about expense management on slide 19.

Total expenses increased $1.4 billion from Q4 due to the impact of expenses related to the retirement eligible stock grants of $758 million, an increased incentive comp of approximately $800 million based on the overall financial performance of the Company as well as certain business segments.

Excluding incentive compensation, expenses were down $221 million due to lower professional fees and occupancy.

Switching now to asset quality on slide 21, we continue to see an improving trend in total net losses.

Consumer credit and loss reductions in the unsecured lending portfolios reflected lower contractual losses and a more than seasonal decline in bankruptcies while consumer real estate continued to stabilize.

Commercial asset quality improved as well for the second straight quarter with net credit losses and criticized levels down across most portfolios.

Reserve levels increased almost $11 billion as a result of the adoption of FAS 166/167, and now totals almost 5% of loans and leases.

As you review our asset quality performance there are a few things you'll have to factor into your analysis to get a clear picture of the trends.

First is the impact of FAS 166/167, and we have listed on slide 22 the areas that are affected, primarily card and home equity receivables returning to the balance sheet.

In addition, during the quarter we implemented guidance which clarified the timing of charge-offs on collateral dependent home loans.

We have concluded that our carrying value should be based on the underlying collateral value as opposed to expected cash flows.

This increased our consumer real estate charge-offs by $813 million including $643 million in home equity, and $170 million primarily in residential mortgage.

A significant amount of these loans are still current, meaning the borrowers are making their contractual payments on a timely basis.

Finally, as we have done in the past, we repurchased government issued delinquent loans because it's more economical than to continue advanced principal and interest at a security rate.

These loans are still insured by the government but do in fact show up on our 30-plus performing delinquency measures.

I bring your attention to these items because in some instances they may mask the trends of improvement we are experiencing.

Turning to credit quality trends on slide 23, total net charge-offs of $10.8 billion decreased $550 million compared to net losses in Q4.

These net charge-offs included the previously mentioned $813 million of home loan charge-offs associated with collateral dependent modified loans.

Excluding this impact and the additional $170 million of home equity net charge-offs due to FAS 166/167, consumer losses versus Q4 were down $811 million and commercial losses were down $722 million.

Excluding the impact of FAS 166/167, the allowance for credit losses actually decreased $992 million.

This was driven by approximately $2.3 billion related to improving delinquencies and bankruptcies and in consumer credit card and unsecured consumer lending portfolios and about $160 million related to our dealer financial services portfolio.

These decreases were partially offset by $890 million of additional allowance associated with Countrywide purchased credit portfolio and approximately $640 million for consumer real estate loans.

The additional impaired loan reserving reflects the need to increase the life of loan loss estimates to take into account our deteriorating view on defaults on more seasoned loans in the portfolio, as well as the impact of our modification programs on these loans.

This impact was somewhat moderated by improved HPI in certain geographies.

On the commercial side, reserves were relatively flat for commercial real estate, primarily due to stabilization of portfolio trends and broad-based improvement across the remaining core commercial portfolios.

In small business, reserves dropped $270 million related to improved portfolio trends driven by the economy as well as changes in lending criteria implemented in 2008 and 2009.

On slide 24, we show you the trend in nonperformers.

In the consumer area, we saw an increase of $678 million, of which $231 million was related to FAS 166/167.

The pace of increase slowed from Q4 due to charge-offs of collateral dependent modified loans and an increase in the amount of TDRs returning to performance status.

Commercial nonperformers decreased almost $500 million from the end of the year as reductions outpaced inflows.

Almost all of the decrease was non-real estate related while real estate NPAs were essentially flat, call it up $35 million.

Approximately 95% of the commercial NPAs are collateralized and approximately 32% are contractually current.

Total commercial NPAs are carried at about 71% of the original value before considering loan loss reserves.

Now on slide 25, you can see that excluding the impact of delinquent government insured loans, consumer delinquency trends continue to improve at a faster rate.

30-plus delinquencies decreased approximately $3 billion or 12% excluding the impact of delinquent government insured loans, in line with our expectations.

Delinquent government insured loans added $2.7 billion to the 30-plus delinquency levels although, again, they are still insured.

These government insured loans are primarily related to repurchases from Ginnie Mae securitizations for economic reasons, as I mentioned earlier.

Commercial reserve criticized exposures declined by $3.4 billion or 6% versus a drop of $1.4 billion in Q4 for the second straight quarter of decreases.

These decreases were broad based across clients and industries, although criticized levels in commercial real estate are not expected to stabilize for a few quarters.

Slide 26 shows you trends in consumer charge-offs.

As you can see, most categories appear to be improving or stabilizing.

The uptick in home equity was related to collateral dependent actions and the impact of FAS 166/167.

Going forward we expect to see continued improvement with perhaps home equity lagging the other products.

On slide 27, it appears the commercial charge-offs peaked in the third quarter.

Getting back to home equity, let me elaborate a bit on our home equity portfolio on slide 28.

You can see total outstandings at the end of March were $150 billion.

Approximately 90% of the outstandings were in stand-alone originations versus piggy-back loans.

Approximately $13 billion of the portfolio is included in Countrywide purchased credit impaired portfolio at the end March which is also discussed on the next slide.

For the non-purchased impaired portfolio approximately $26 billion in the portfolio is in a first lien position and obviously the rest are in a second lien position.

For the second lien positions, there are $39 billion that have CLTVs in excess of 100%.

However, that does not mean the severity of loss will be 100% of home equity loan in event of default.

Depending on the loan to value of the first lien, there may be collateral in excess of the first lien that would be used to reduce the severity of loss on a second lien.

So if you made an assumption that the proceeds would be 89% of the collateral value, we would estimate that there is collateral value available around $11 billion to reduce the severity of the loss on the $39 billion of second liens.

Also, on the total non-purchased impaired home equity portfolio our reserves are pretty significant at $8.3 billion or over 6%.

On slide 29, we give you a summary of what is in the Countrywide impaired portfolio.

The lifetime loss rates represent our current estimates of the portfolio loss expectations as a percentage of the original unpaid principal balance of the portfolio at acquisition date.

At the end March, the unpaid principal balance of the remaining portfolio is $46 billion.

Including the original credit market the acquisition and the additional valuation allowance we have established the portfolio was carried at $32 billion, or 69% of the unpaid principal balance.

On $29 billion, or 62% of the March 31 unpaid principal balance, we would not have experienced any charge-offs to date if these loans had been accounted for like our non-purchased impaired portfolio, and additionally, of this $39 billion, customers are up to date or current on their payments on $24 billion.

Home loan modifications are detailed on slide 50.

We service 14 million first and second lien mortgage loans.

Since the start of 2008, Bank of America and previously Countrywide have assisted customers with more than 800,000 home loan modification transactions including more than 289(Sic-see presentation slides) trial modifications, more than 82% of the customers in trial modifications have made three or more consecutive payments.

We have completed more than 530,000 through our own proprietary programs.

And through HAMP we have completed nearly 38 permanent modifications, and an additional 35 modifications are just awaiting customer signatures.

Turning to capital and liquidity highlights on slide 32, our liquidity position strengthened during the quarter as customers continue to delever and we have shifted to more liquid assets in the discretionary portfolio.

Cash and cash equivalents were up more than $20 billion.

Our global excess liquidity sources ended the period up about $50 billion from $214 billion we had at the end of the year.

Remember, that consists of both cash and highly liquid unencumbered investment securities such as US treasuries and agency mortgage-backed securities held at the parent, our banks, and our broker dealers which are readily available to meet our liquidity needs as they arise.

We think it is prudent, given the low interest rates, to maintain a high level of liquidity, and as Brian said, given our interest rate outlook, we continue to be measured in our approach to reinvestment.

Our parent company time required funding metric stands at 24 months of liquidity.

As noted on our last call, we'll continue to be selective in going to the debt markets and [diversing] our funding footprint.

But we expect our benchmark issuance to be substantially less than our maturities.

Keep in mind that FAS 166 and 167 did present a drag on select ratios in Q1.

As you can see on slide 33, Tier 1 ended the quarter at 10.23%, down 17 basis points from the end of the year.

Tier 1 common was 7.6% and tangible capital was 5.24%.

We view these levels as strong and we believe we can increase these levels over the next couple quarters.

For now, every dollar of net income earned over roughly $400 million over the year, roughly $400 million quarterly dividends paid is accretive to capital.

On slide 34, we listed several examples to demonstrate how we are gaining traction and referring existing customers to other parts of the bank.

Over the past year, several -- over the past several quarters, average retail deposits experienced strong organic growth in Merrill Lynch Global Wealth Management.

The pace of the consumer referrals and sales to Merrill Lynch Global Wealth Management accelerated in the first quarter reaching 275,000 referrals since the merger.

More than 7,100 have been made by FAs to the commercial bank generating more than $27 million of revenue.

We expect these types of opportunities to continue.

Before we open it up for questions, let me reiterate that 2010 is starting off in line with the opinions expressed in January.

The improvement in credit quality is probably better than our expectations in January and our outlook for the rest of the year has also improved.

However, we do have revenue headwinds in the second half of the year as customers continue to delever, and we realize that the full adoption of the CARD Act and Reg E that will impact net interest income, card income and service charges.

From an earnings perspective, it will be the dynamic of how fast credit improves and expenses are kept under control versus the drop in revenue.

However, by the end of the year we should start to see some stabilization in revenue levels at which time we may be able to talk about growth due to improved consumer and commercial activity.

With that, we'll open it for questions.

Thank you.

Thank you, sir.

(Operator Instructions) We'll pause for just a moment to give everyone an opportunity to join the queue.

We appreciate your patience.

We'll take our first phone question momentarily.

And we'll go first to the site of Matthew O'Connor from Deutsche Bank.

Your line is open.

Good morning.

Good morning, Matt.

If I could just ask a clarification question on the $813 million of charge-offs related to the loan modifications.

Is that a one-time catch-up, or is some of that $813 million recurring?

Yes, I would look at it as a lot of it, or the majority of it has been previously provided for through provision, and it was actually in our allowance, so look at that as just moving into charge-offs.

And so it would be a one-time catch up to charge-offs of that magnitude.

Okay, so then going forward, as we think about the home equity losses specifically, should we use the current run rate and adjust that up or down for wherever we trend from here, or do we back out that $600 million and go from there?

You adjust that number; back it out.

Okay.

So all-in, home equity losses should decline from reported 1Q levels you would think then?

Yes, as we get to the second quarter.

If you look back to the historical trend, a $1.5 billion, up to $2 billion was a trend we were running at.

This was sort of outside.

Okay, that's helpful.

And then just separately, the card balances continue to come down, the home equity comes down.

Any sense of when those might bottom and at what levels and then, of course, what will you do with all the cash that's being freed up?

I think, as you think about the consumer portfolio, just to frame it a little bit in cards, and it's a major driver, but if you think we had about $430-odd billion of loans in the first quarter last year, now we have a little under $400 billion, so we dropped $37 billion, $38 billion in loans.

$33 billion of that actually is due to charge-off credit.

And so what's driving the loan balance down in large part is still charge-off credit.

As charge-offs come down, which they are, we'll see stabilization from that.

Also as we run off the portfolios we didn't want to have around we'll see stabilization.

So I think it will take us probably, I would say, three, four quarters where you will see it.

But underneath this the trends of the core stuff that we are going keep and drive for value over time is very stable.

It's just that you have these sort of extra factors that we're dealing with in the short term.

The pure issue of charge-offs taking loan balances down, then secondly running off some of the portfolios, which were -- we accumulate which are not as attractive.

So look three or four quarters for it, okay?

Okay.

So hopefully by the end of this year you would think overall loan balances could start to inflect?

Yes.

I think the key on the overall loan balances, away from card which will be a driver, is to remember a couple things.

One is that we have the portfolios, the Countrywide acquired portfolio which we're continuing to run, that's a mortgage portfolio that runs relatively -- is not going to run that fast.

Then we've got the in-home equity.

Again, I wouldn't expect that to grow, and it will bounce around.

But remember on the commercial side what we've seen is in the, David Darnell's portfolio, if you look year-over-year, his loan balances as are down fairly dramatically, and that is due to customer demand.

There's no other explanation.

That's because customers are not feeling the need to draw on our lines because they don't see economic demand.

We have seen that, I would argue, stabilize somewhat very recently, and so we're not sure -- a short period of time doesn't make a trend.

But our belief is that as the economy stays stable that number ought to sit where it is, and then the draw rate, which is reached in the mid-30s as opposed to mid-40s, ought to come back up as people build more inventories, hire more people, have more cash flow needs.

So I would say that's probably, watch over the next couple quarters, but it is -- we feel better about it here than we did probably a quarter ago.

Okay, thank you very much.

We'll go next to the site of Paul Miller from FBR Capital Markets.

Your line is open.

Thank very much.

I just want to commend you guys on your disclosure on both the modifications and the HELOCs.

I really like it a lot, it helps us tremendously.

On the provisions, you guys, you took your provisions up roughly $10 billion to adjust to that FASB 166 and you have a big chunk of provisions out there now, close to $48 billion.

How should we look at provisions going forward?

I know a lot of people on the street are really looking for provisions to drop off.

How are you looking at that and when should we start to see a lot of provision release going forward?

So on the actual charge-off levels, I think you can see the trend lines, Paul.

And you can look at them.

We're facing still unemployment that's very sticky.

And so the numbers yesterday, I think, all give us pause in new claims and stuff that we aren't seeing quite the improvement that people could mathematically get to and stuff.

So I would be -- it's going to -- they will keep coming down.

If you look [fairly] stated quarter-over-quarter, billion dollar range, actual charge-offs, I think we will see continued improvement there.

But I'd be careful until we see unemployment break that we see that.

In terms of reserve releases, we're trying to be conservative here, we're trying to watch because we still have uncertainty in the economy.

And we're sitting with strong reserves.

We built the reserves up significantly year-over-year.

We'll continue to hold those reserves.

So I would be careful about assuming huge reserve releases near term until there's more certainty in the economy.

But the core on-line trends are strong.

Like I said at the beginning, this will be the discussion we're going to have each quarter as sort of the tradeoff here.

But we're going to try to make sure we don't have any probability of needing to build reserves because the economy has a little blip in it or something.

Thank you very much.

We go next to the site of Mike Mayo from CLSA.

Your line is open.

Good morning.

Hi, Mike.

Just to follow up to that last answer, so you have uncertainty in the economy, unemployment is sticky, but credit was better than expected for this quarter and better than you think you had expected before for the year.

How do we reconcile those two thoughts?

Strong collection activity, getting ahead of it last year, and some of the credit expense we took last year in areas like bankruptcy and stuff.

When people are filing now, we've already charged them off.

Some of the policies we've adopted.

And then lower balances, you have to remember the balances we've run off were of a kind that were sort of net risk adjusted margin, probably negative or very neutral at best.

And so we're running off more risky balances, and the balances we're retaining are the more solid balances, for lack of better word.

So all those dynamics, you're seeing it.

I think the real thing you need to focus on is if you look at the early stage delinquencies, that improvement -- those are real improvements, frankly of the last six, eight quarters, more and more conservative policies on anything you can do with the customers that have been implemented by us.

So those are very strong improvements.

So I think that's how you reconcile it.

The unemployment levels are high but as long as there's not a lot of new people going in we don't see it affecting us, we're just cautious.

And then going to trading, why is trading so high, I mean, externally, it's hard to figure this out.

Is it proprietary trading?

Is it derivatives?

Do you have some markups there, what's going on?

I mean, let me characterize it, I'll let Neil fill in.

If you look first quarter last year it was strong, too.

There's been very strong markets.

The spreads have narrowed but the activity level has been very high, especially in the fixed income areas.

We've been able to take advantage of it.

We don't have a big [prop] book.

The fixed income stuff you see is all driven by customer activity that we're moving around for them.

It's just very active issuance, and there's very active secondary market going on.

The first quarter is always the best year -- best quarter of the year in this business, and you'll see it.

The equity business continues to be very steady.

So I think it's really all good performance.

The actual VAR and risk we're taking is relatively flattish through the last five quarters.

It's equivalent to what you are hearing from other people in the market.

It's strong performance.

We're watching the risk carefully, make sure we don't have that reverse on us.

Tom Montag and his team have done a good job.

Neil, do you want to add anything?

Yes, as Brian said, we can all argue how good VAR is, but it's up slightly from the end of the year, probably 276 versus 255 million.

We look at a three-year trailing, so it's going to be a little higher than others that might report who use a one-year.

But it was sort of up and down the P&L.

As I mentioned, other than maybe commodities, the growth.

But you are just seeing strong customer flow repositioning of balance sheets, and it was steady throughout the quarter.

Obviously, I mean, not obviously, but January is strong, tailed off somewhat in February, March, but just steady each and every day.

Just on the VAR, to be careful, is the three-year VAR obviously picks up the worst stress period in history in the 2008, and the one-year would not.

So on a one-year basis we'd be between $65 million and $75 million, to give you a sense.

And then last question, I know you just got a new CFO, but what are the financial targets for Bank of America?

Well, Mike, I think we are -- we saw -- we still are dealing with making sure we understand all the different things that are hitting us in terms of capital level and stuff.

If you think about a 5% return on equity, where you are not satisfied, you think about a 10% return on tangible equity, we're not satisfied.

I'd say we're less than halfway home.

I think we'd expect to have returns on equity in the low teens area, and we'd expect to exceed that in tangible equity.

But it's good to be where you're starting to see a relative core earnings level, then you can build off it as the economy improves.

Thank you.

we'll go next to the site of Betsy Graseck from Morgan Stanley.

Your line is open.

Thanks, good morning.

Good morning, Betsy.

Question on capital, your common tier 1 ratio went down very slightly.

Obviously a function of the FAS 166/167.

Could you just give us a sense as to what you would be managing the Company to and when -- what the trigger point is for you to start share buybacks, I know it might be out a ways, but I just want to get a sense as to what you are thinking about?

Well, just to be clear, when I talked to a lot of you at a conference a few weeks back, we thought originally the net impact of this was sort of 50, 60 basis points.

With a better earnings and stuff you saw that impact mitigated tremendously.

So we accrete capital pretty quickly right now.

Neil made that point.

I think we've got to have two or three things clarified.

We need to know where the [BAH's] rules sit.

We need to know the economy is stable and continues to go north.

Then -- so I think we need to get these levels probably slightly higher through some retained earnings, then he we'll feel comfortable.

Clearly we're very comfortable in a range.

There is some uncertainty about how you are going to count things going forward.

The one I'd look at is the tangible common equity, I think we've got to get it up to 5%, 5.5% range, and probably close to 5.5% is what we've got to get to, but that will come pretty quickly with some earnings.

And then we can talk about that because I think as we go through the next two or three-quarters you will see certainty on the [Bosal 3], certainly on the sort of economy, then I think we've got to have a good discussion but I think it's still a few quarters premature.

Okay.

And then just a couple of more detailed questions.

You outlined the expected impact from the card fees, $900 million after tax.

What's in the run rate in 2Q?

In 2Q or 1Q?

I'm sorry, 1Q.

Sorry.

It's not a lot yet because most implementation will actually happen in February, and so that's why we're trying to give you sort of the long-term view.

So you expect most of the implementation costs we talked about, there's some there from some changes we made (inaudible) --

I think it's about $150 million, $160 million, pre-tax.

$150 million to $160 million pre-tax?

And by the way, that's after mitigation.

Right.

And the mitigation you're talking about is what exactly?

Just a whole bunch of techniques and how you put credit on.

Remember, the core thing with the CARD Act says you can't price for risk once you put the credit on until the person is delinquent.

What we're doing is how we're pricing up-front, some of the fees and other things that we can do to make up for it, but that's the core charge.

But you are looking at that $900 million versus like an 2008 number, or an 2009?

It's a 2009 number.

Okay.

And then on the service charges, on page 13 I think you outlined that.

Could you give us a sense -- that $2 billion run rate that you could potentially be coming close to in 4Q is before any mitigation.

Could you talk a little bit about what you are thinking about with regard to mitigation and the sizing of mitigation?

We won't talk about the sizing because we're still working on it.

But one of things, Betsy, that -- the total deposit base on the retail side is $600 billionish.

So if you think about the lost dollars as a percentage of that you can see that you need to make up the fees -- between the fees and the deposit spread, you need to make up the amount.

And this is all about taking what was a pricing attribute that hit a small group of people hard and spreading it.

So the mitigation will be around product design to help customers and use more automated means and do that.

We've launched some of those products already.

The discussion of whether you have monthly maintenance fees is in the mitigation consideration.

But also as rates rise and deposit pricing, I think we will be more conservative to achieve back some of that spread across everybody and so people only look at fee versus fee.

But there's actually -- you have to think about all the revenue sources from a transactional count that we can get it from.

So we'll detail those for you in subsequent quarters as we're putting them in, but I think the core issue is that we just want to make sure that people are clear that we get down around the $2 billion line.

Okay.

And then lastly, on liquidity and the cash that you have on balance sheet, what are the triggers for reinvesting that cash and bringing that liquidity down?

I think philosophically we're going to be carrying more liquidity.

I'm not sure this much is the right answer long term, but I would be careful of a lot of people making assumption that can be put to work and earn a lot more.

If it's liquidity, it's not going to earn a lot because it has to really be liquid, especially under our standards and under the rules.

But I think would it shrink the balance sheet and, therefore, free up capital is a better way to think about it over time.

Again, until we see the new rules on liquidity, which are the Bosal [3] proposal, which are tough, not tough, which are fair and will require a lot of liquidity, we want to make sure we're holding enough but it will come down.

But I wouldn't just assume you could put it into a 100-basis-point earning asset because it really would just be paid down and reduce the size of the balance sheet.

Okay.

But you have been putting some of your liquidity into treasuries, right, which is a little bit better yield than what you've been getting in the past?

In increments, yes.

Okay.

Thanks.

Yes, importantly, Betsy, we're putting them into treasuries.

But it's not like we're opening up the interest rate gap significantly.

We're also putting hedges on against some of those.

Yes, so we bring them back to current.

Tens of basis points as opposed to any big spread on them.

Okay, got it, all right, thank you.

We're going to run the balance sheet, Betsy, very carefully.

So the discretion portfolio and stuff this is a key, to use the capital wisely going forward.

So we'll be clear on that as we get clarity on some of the rules.

Just to Brian's point, I manage the balance sheet closely, I've sort of covered the sale and the loss of $331 million of equities.

Again, that was one of the actions we took during the first quarter to tighten up on the balance sheet.

Got it.

Okay.

Thank you.

We'll go next to the site of Glenn Schorr from UBS.

Your line is open.

Hi, thanks.

A little bit further on the whole liquidity conversation.

I don't know if it's just timing or if it's just a rate thing, but commercial paper went from $70 billion up to $85 billion.

Just curious with so much liquidity, the thought process on tapping that as a source of funds?

And then just maybe in conjunction with that, just talk about maybe the size of run-off in the CD portfolio that might be coming off, and how those work together?

The CD portfolio I would put more in a -- more in a business line strategy question as opposed to a corporate level planning on liquidity strategy.

It's more the theme, as CDs mature, people go in the short terms, they don't want to commit to duration.

And also we still have behind the scenes, as many of you know, over the last couple years we have the Countrywide CDs and other things we're running off.

So that's more the CDs.

I wouldn't try to equate that up to the commercial paper.

Neil, on the commercial paper --

Yes, on commercial paper, we're looking at various, during the quarter, various areas to tap the markets, and just felt diversification and a mix at good rates was the way to go.

Okay.

And then when looking at deposits, they were reasonably flat enough from last quarter.

In listening to your comments about some of the loss mitigation efforts you might make in retail, implicit in there, it sounds to me like competition is reasonably rational, and your clients are staying put.

But I just want to see if you agree with that comment?

Yes, we've done fine on deposits.

If you think about it broadly, we've done fine on the retail side in terms of the relative to our position in the industry.

And then on the -- but if you go to the affluent side we've done very well and built a lot of deposits.

There's $500 billion deposits that are in our Merrill Lynch customers or in other banks, and get through the relationship management practice we should be pulling those in so you will see that, Sally and her team, continue to drive that.

And that was strong again this quarter.

And --one step further there is traditionally, if and when rates rose, people sometimes migrate out of the deposit side.

Are you preparing for that?

Is that part of the big liquidity boost as well?

We think of the customer holistically that they will have liquidity; choices to put their investments.

And so if money market rates became competitive again we have that platform to put them in also.

I think we're a bit of a distance away from that outcome because you've got the fee waivers and stuff on that side of the business that we've got to recover from first.

As the yields come up, the net yield of the customer will take a little while to come through.

Okay.

And rating agencies have been vocal lately on additional levels of support and how they might react if resolution authority is made official, which is probably already official.

I don't necessarily agree with the magnitude, but the concept, does that contribute to your boost in the liquidity levels?

And how do you think about what happens if there was a notch or two of support taken away?

Listen, we've had ongoing conversation throughout the quarter.

We always do with the rating agencies.

And obviously we're focused on liquidity levels to return them to the sort of levels that we wanted to pre all the disruption that went on.

So I would say, yes, we've been having dialogues.

It is in the back of our mind.

And, again, our focus is on having a strong balance sheet and very liquid.

Again, just when there's uncertainty with regard to the economy.

The uncertainty, as Brian mentioned, with regard to Bosal 3 and other things that are being passed or discussed.

We just want to be well prepared for anything that may come at us.

Okay, thanks, I'm good.

Thank you very much.

We'll go next to the site of Ed Najarian from ISI Group.

Your line is open.

Yes, good morning.

Just a couple of quick questions on credit quality.

Any insight on why their first lien mortgage charge-off ratio went down this quarter despite some of your comments regarding additional charge-offs related to the underlying value of the collateral?

That would be question number one.

And then question number two, should we expect this quarter to be the peak in the credit card loss ratio?

It looked like your March Master trust data was pretty significantly improved in terms of both charge-offs and delinquencies relative to the January and February.

We have JPMorgan forecasting an improvement in the second quarter so I'm just interested in your outlook 2Q versus 1Q there on the credit cards?

Thanks.

Overall, I'd say our overall caution -- I'll have Neil fill in some of the elements here.

We still are fighting the denominator effect on these ratios on a given quarter.

So the key is to focus on nominal delinquencies, nominal run then make sure we stabilize the platforms as we go through the quarters.

I'm not sure next quarter I would predict it but over the next several quarters it's bound to stabilize.

And as delinquencies and charge-offs keep coming down you'll see the ratios improve.

We feel we've broken the back of it and it is coming the right way from the front end, from the early stage through, so that's the key.

Neil, why don't you --

I think we've been attacking the credit card side for quite some time and you should see improvement going forward.

On the residential side, it went down slightly, but when you adjust for all the items that we've talked about, I don't think it's down significantly.

But the most encouraging thing I would say, if you look at the 30-day past-due percentage it actually did decline on the card and has been declining, which is running ahead of it.

And that's good news going forward, and that's why we take some solace in terms of what you should see over time there and frankly why the line of business level release the reserves.

Just as a follow-up, is there any reason to think that that first lien mortgage ratio was a little bit inordinately low this quarter and could be -- even though you're getting ahead of it could be up maybe in 2Q and 3Q before we get a more consistent down trend?

You've got to be careful looking at the ratios because you do have noise in there because of, as mentioned earlier, the collateral dependence that we talked about.

Right.

But that would have added to it, not detracted from it.

Yet it was still a little lower than expected?

We could get back.

I'm not sure we'd expect either mortgages or home equity to move dramatically from where we are at this point, okay, in terms of dollar amounts and in terms of how it affects the P&L and percentage.

We are running the mortgage portfolio down overall because there's, in the grand scheme of things, there's a big chunk of it that is a run-off portfolio that will keep coming down.

Okay, all right, thank you.

And we'll go next to the site of Chris Kotowski from Oppenheimer.

Your line is open.

Hey, just picking up on that last comment, one of your big competitors at a recent analysts day classified about 70% of their home equity portfolio as being, quote, a run-off portfolio, and almost 90% of their prime mortgage portfolio as being a run-off portfolio.

And I took that kind of as a big vote of no confidence in those products.

Do you see it similarly?

And what is your outlook for the future of those products?

I wouldn't say it -- if you heard Neil talk earlier, 90% of our produced home equities on our book are to clients who got a home equity to fund a kid's education, whatever it was for, it's a core product.

So we did $2 billion this quarter in new origination.

The reality is that, $2 billion originations versus what we were doing before is that portfolio will come down a little bit.

But it is a core product.

It's just -- we're -- where we're in, there's not as much equity in people's homes and things like that but it's a core product.

It's for people to use, for more affluent customers to use, quite frankly, to tap the equity for near-term use, to fund a kid's education, as I said.

Fund something else and then pay it off over time.

So it is a core product for us.

We wouldn't expect that those kinds of numbers would be there.

On the first mortgage you have to remember, we have first mortgages on the books for various reasons.

Part of is it the portfolio we produced, and that is jumbo and other things for our wealthy and affluent clients.

That is core business and it will continue to grow.

We then have another portfolio of mortgages that we have as part of our discretionary activities to balance our book.

That will go up and down depending on what we need at the time.

What I was talking about more clearly was that as we bought Countrywide we inherited portfolios which are not core and those will run off.

The first two categories will stay in the business.

It's just that impaired portfolio and things will run off over time.

Okay, and as a follow-up, how do you determine what's collateral dependent versus non-collateral dependent?

I hadn't heard that term used in quite this way before.

What drives that decision and the attendant charge-offs with it?

You look at are there other sources of collection against the loans, such as earnings of the debtor.

Okay.

And then just lastly, you highlighted on a couple of occasions that you were asset sensitive.

And I'm just kind of curious is there a way to gauge what would -- the impact on your margin if you had, say, 100-basis-point increase in rates gradually over the course of a year?

Yes, there's a page in the deck that we issued that has the traditional bubble charts in there.

I believe it's page 60, it's in the appendix.

We've got the bubble charts, and I think there's also some sensitivity in the chart on the next page, page 62, which would give you that.

You've got remember, that's off the forward curve.

All right, thank you.

And it's also, the other thing, that's also on a base of $50-odd billion of yearly NII, and so the number is relatively small for all those different rates.

Okay, thank you.

We'll go next to the site of Chris Whalen from the IRA.

Your line is open.

Good morning.

Going back to your return on equity target in the low teens, there's an awful lot of talk in the analyst community about normalized earnings and a return to the normal trend.

When you look at the real estate market, as you've already discussed, the opportunities available; the equity in homes.

When you look at the addition of Merrill Lynch, how should we think about the industry past the crisis, past the credit issues in terms of return on equity as opposed to what we saw in, say, the previous five to seven years?

Well, I think we're carrying it on a gross equity, a fair amount of equity.

We have a fair amount of intangibles.

That number is going to be suppressed in some respects in our category just because of the difference in return on stated common versus tangible common.

I think, as we've said, we'll be figuring a lot of that out, but I think this is a good industry.

I think we have the best position in it, and I think that if anybody can earn money, we'll earn money.

I'm comfortable that when we look at all the rules that we should hit the targets that are in those lines that I talked to you about.

But just to follow up, low teens is much lower than we were, obviously, with a very large mortgage securitization flow.

You guys at BA and also at Merrill have been doing a lot of work on covered bonds in Washington and trying to shape what comes out or may not come out of that legislative effort.

How do you see the non-conforming private label market over the next couple of years fitting into your model and the industry model as far as revenue?

I think we have to find a solution for those customers, and putting all non-agency business on the balance sheet of the bank industry is a difficult task.

We have to find a market and figure out a way to securitize those assets, and with the skin in the game and all the proposals, one of the things we need to keep balance on is the judgment of how it will impact those markets which are important to the customers.

And as things stabilize and people have the debate about Fannie and Freddie and what will go on and stuff like that, they could become even more important.

So I think we are mindful and trying to help shape the proposals and policy that will end up with a strong secondary market for mortgages that would allow this country to continue to fund this mortgage debt appropriately for all customers not just the agency qualified or government qualifying customers.

Thank you for that.

I also want to echo Mr.

Miller's thanks regarding the disclosure.

Thank you.

And due to time we have no more time for questions.

I will turn the call back to our presenters for any closing remarks.

I just -- thank you for your time.

I think that, again, with the summary, I sort of left off, it was a solid first quarter.

You can see the earnings come through as the credit costs mitigate.

The economy is still something that we are mindful of and it has solidified, it's stable, and it's having a good impact on our Company.

As we look out, we expect the recovery to continue.

It's good to see that all our businesses except for the one are profitable, and we're working on that one hard.

And that business had a strong sales and trading but what you are starting to see is as credit costs mitigate the core banking side of our platform starts to generate earnings and balances back out the Company.

Thank you for your time, and we'll talk to you soon.

And this concludes today's teleconference.

Have a great day.

You may disconnect at this time.