Bank of America Earnings Call Nuggets: Legacy Cost Outlook and Reducing Delinquents in LAS

Bank of America Corporation (NYSE:BAC) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Legacy Cost Outlook

Matthew O’Connor – Deutsche Bank: A couple of follow-ups. I guess starting on the expenses appreciate the outlook on the legacy costs. As we think about all the other expenses that you planned to of $13.3 billion with some seasonal stuff this quarter, maybe you could just frame what we can expect for that level or for that bucket for 2013?

Bruce R. Thompson – CFO: You’re saying expenses not including LAS and litigation?

Matthew O’Connor – Deutsche Bank: Exactly. Yeah, the $13.3 billion that you (pointed) in the fourth quarter

Bruce R. Thompson – CFO: I think as you look at that number and if we keep LAS out of this, obviously, that the big new savings bucket that we have is new BAC. We’d indicated that we are on a quarterly basis at $900 million a quarter. As we leave 2012 we expect that our new BAC cost savings when we get to the fourth quarter of ’13 will be at $1.5 billion per quarter. So, you could expect to see on a core basis with new BAC about a $600 million increase from where we leave 2012 to where we leave 2013.

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Matthew O’Connor – Deutsche Bank: So, as we think about that $13.3 billion, I guess we could take out $600 million for new BAC, but was there other bulk or how much I guess for the seasonal stuff is there that maybe we should adjust for?

Bruce R. Thompson – CFO: Well, the seasonal stuff, if you are going Q4 to Q4, you’d expect the seasonal stuff to be there, but as we indicated, we looked at, and for this quarter relative to the third quarter, there is $300 million to $400 million of stuff that we would characterize as seasonal.

Matthew O’Connor – Deutsche Bank: Just in terms of like underlying, call it inflation or just normal investments, if we take that $13.3 billion 4Q to 4Q, would you expect that to be down, so you have kind of minus $600 million from additional BAC savings and there’s always some offsets from inflation or investments, do you think that number will be down?

Bruce R. Thompson – CFO: We would expect that — and the one thing that we are being very cognizant of is that while we are investing in the business, we are not going to let inflation outrun the progress that we are working on new BACs. So, I think on a net basis thinking about that $600 million number from new BAC is a good assumption.

Matthew O’Connor – Deutsche Bank: Then just separately, if we look at the FICC revenue, a little bit weaker than maybe we’ve seen so far although it’s still early in the earnings process here and I guess I noticed that the asset level in the trading book went up, the VaR doubled quarter-to-quarter and just wondering if there was anything unusual in terms of positioning or that you would point to.

Bruce R. Thompson – CFO: Sure. I think it’s important when you look at the FICC business to go back and look at the progress that we’ve made during 2012. If you look at FICC revenues 2012 compared to 2011, pre-DVA they were up 36% year-over-year. If you go back and look at each of our quarterly releases in 2012, in each quarter in 2012 pre-DVA revenues were higher than 2011 at the same time that we were taking cost out. The third thing I would say is that, you have to realize that we run the FICC in overall debt underwriting business and look at that as one consolidated business and from a debt underwriting perspective at over $1 billion of revenue, we believe that was, as I indicated earlier, more than anyone else did this quarter on a global basis and so we feel very good about that. Your point on the VaR is a fair one and we did see VaR increase during the fourth quarter and we would expect to see the benefits of that VaR flow through during the first quarter of this year.

Matthew O’Connor – Deutsche Bank: Sorry, benefits meaning higher revenue?

Bruce R. Thompson – CFO: That’s correct.

Reducing Delinquents in LAS

John McDonald – Sanford Berstein: Bruce, does the goal of reducing the delinquents in LAS, the 150,000, does that include additional planned MSR sales that you might have in mind?

Bruce R. Thompson – CFO: It does not John, because I think the one thing when we announced these sales that you have to realize is that it’s very important that the transition of the loans that are being sold work through a process in going away that’s as consumer friendly as we can do it. So, there is a lot of work that goes through that. So, as we look at the servicing business, that does not include in any meaningful way incremental sales. There may be some small ones over and above that and at the same time, somebody could come and look to do something as well; but at this point, I would consider that 150,000 to be more organic reduction.

John McDonald – Sanford Berstein: What kind of pace throughout the year would you expect for reducing that 3.1 LAS expense by your goal of a $1 billion buy the fourth quarter? Kind of steady throughout the year or is it lumpy?

Bruce R. Thompson – CFO: I would assume that you should generally expect it to come out throughout the year. It’s not something you are going to have to wait for the fourth quarter to see.

John McDonald – Sanford Berstein: Then getting to Matt’s question earlier, if we just – a lot of moving parts on your expenses, if we look top of the house trying to think about a jumping off point for total BAC expenses, as you start the first quarter it seems like you might be in the $17 billion ballpark with the stock option expense. Does that feel like the right area?

Bruce R. Thompson – CFO: I’m hesitant to give you specific numbers in the quarter. What I would say is that, we gave you guidance as to how much of the fourth quarter was seasonal that we obviously wouldn’t expect in the first quarter. You have got the $900 million of stock compensation expense that will come through. Expect to see a little bit of benefit in the first quarter as we continue to implement new BAC and probably the biggest variable that you could see in the first quarter that I didn’t mention is really compensation expense that varies based on actual business performance. But I think if you think and look at those different metrics you will get pretty close.

John McDonald – Sanford Berstein: With the Fannie settlement this quarter how should we think about the rep and warrant provisioning going forward here? Will you need to add on a quarterly basis to the rep and warrant provision?

Bruce R. Thompson – CFO: If you look back over the course of 2012 absent any settlements or any unusual activity you had a run rate throughout the quarter of around $300 million per quarter in 2012 and with the Fannie settlements as well as obviously the fact that Freddie was settled at country wide, you would expect that number to be $150 million or so going forward.

John McDonald – Sanford Berstein: Then one last thing on NII was that a pretty clean number? Was there any impact from hedging our premium amortization in the NII number this quarter?

Bruce R. Thompson – CFO: There was a less than $100 million to the negative.

John McDonald – Sanford Berstein: Your guidance of $10.5 billion is the run-rate you think for the next couple of quarters, and that’s excluding any of that, right?

Bruce R. Thompson – CFO: Excluding any of that and realize that we’ve got a couple of less days in the first quarter this year.

A Closer Look: Bank of America Earnings Cheat Sheet>>