Case Study I BAC

8/3/2019 Case Study I BAC

1/27

CASE STUDY ICASE STUDY I

FAIRHOLME

Ignore the crowd.


2/27

CURRENT INVESTMENT OPPORTUNITYWehaveidentifiedapubliccompany:

Tradesatlessthanonethirdbookvalue

Corebusinessesgenerating1%returnonassetsand10%returnonequity

Fortressbalancesheet

LargestU.S.

retail

deposit

market

share

and

serves

one

in

every

two

U.S.

households

Operatesinall50statesandservesclientsinover100countries

Essentialtoglobaleconomicsecurity

Soundinteresting?

FAIRHOLME Ignore the crowd.


3/27

Bank of America is a strong, wellled company...I am impressed

with the profitgenerating abilities of this franchise, and that they

are acting aggressively to put their challenges behind them.

WarrenE.Buffett

ChairmanandCEO,BerkshireHathaway

August25,2011

Wecertainly

think

so,

andwearenotalone.



4/27

InvestmentThesis

for

Bank

of

America

(BAC)

ReasonableExpectations

1% ReturnonAssets

10% ReturnonOwnersEquity

20% ImpliedAnnualReturnonInvestment

Thisisareasonable

aftertaxprofitincurrent

marketconditions.

Thisisareasonablereturn

evenatheightenedcapital

ratiosexpected

this

cycle.

Thisisareasonablereturn

whenyoubuystockatless

thanhalf

book

value.



5/27

BankofAmerica:A200YearHistoryExtensive

Reach,

Extraordinary

Breadth

*BankofAmericawascreatedthroughnumerousmergersandacquisitions

overthelasttwocenturies,someofwhicharedepictedabove.FAIRHOLME Ignore the crowd.


6/27

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Do

llars

(in

millions

)

WORLDWIDE PRESENCE AND ASSETGROWTH

TotalAssets

BankofAmericasGlobalFranchise 5,702Branches,17,817ATMs,and58millionconsumerandsmallbusinessrelationships

17,300FinancialAdvisorsserveclientsinover100countries


*BankofAmericaconductsglobaloperationsintheblueshadedgeographicareasdenotedabove.


7/27

$0

$10

$20

$30

$40

$50

$60

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Do

llars

Pe

rShare

BookValue MarketPrice Cash Revenue

Experiencedwith

financial

companies

Favorableearningspower

InvestinginourCircleofCompetence

Fixableproblems

Availableatattractiveprices

Initiatedpurchaseafter

thefinancialcrisis.



8/27

U.S.HousingMarketisStabilizingNew

Single

Family

Home

Sales

Trending

Upward


Source:National

Association

of

Home

Builders


9/27

U.S.JobMarketisStrengthening

InitialJobless

Claims

Trending

Lower

300

350

400

450

500

550

600

650

700

January February March April May June July August September October November December

Initia

lJobless

Claim

s(in

Thousan

ds)

2009 2010 2011



10/27

FDIC3Q2011QUARTERLY BANKING PROFILE:INSURED INSTITUTION PERFORMANCE

Netincome

rose

to

$35.3

billion

as

provision

expenses

fell

further

Loanlossprovisionsdeclinedforaneighthconsecutivequarter

Reportedrevenuesincludeaccountinggainsatlargebanks

Loanlossespostedfifthquarterlydeclineinarow

Noncurrent

loan

levels

fell

for

asixth

consecutive

quarter

Loanlossreservesdeclinedforsixthquarterinarow

Internalcapitalgrowthimproved

Commerciallendingactivityrose

Flowof

large

denomination

deposits

into

large

banks

increased

FinancialSectorFundamentalsAreImproving

Youvegot

to

admit

its

getting

better...



11/27

0

0.020.04

0.06

0.08

0.1

0.12

0.14

0.16

0.18

Tier1commonEquityRatio

Tier1RiskBasedCapitalRatio

TotalRisk

Based

Capital

Ratio

capital

ratio

$920,000

$940,000

$960,000

$980,000

$1,000,000

$1,020,000

$1,040,000

$1,060,000

Deposits

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

Charge

Offs

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

LongTermDebt

BACFundamentalsAreImproving

alittle

better

all

the

time.

Dollars(in

millions)

Capital SufficientTier1Capital

*Seelastpageforsupplementaryinformation.

FAIRXHolding

Period

*

FAIRHOLME

LongTermDebtDecline

27%declinesinceQ12010

ChargeOffs

62%declinesinceQ12010

QoQdecreasesince2010

Deposits

6%increasesinceQ12010

Reflectsstrongcustomerbase

Ignore the crowd.


12/27

$27,000

$29,000

$31,000

$33,000

$35,000

$37,000

$39,000

$41,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2009 2010 2011

BACConsume

rSpending($MM)*

*

Source:

Bank

of

America

BACConsumerSpending

ShowingSigns

of

Improvement



13/27

TIER 1COMMON EQUITY ($B)

4.80%

9.86%

$63.3

$126.7

0%

2%

4%

6%

8%

10%

12%

14%

16%

$0

$50

$100

$150

$200

4Q08 4Q11

Tier 1 Common Equity Tier 1 Common Equity Ratio

2.93%

6.64%

$50.7

$136.4

0%

2%

4%

6%

8%

10%

12%

14%

16%

$0

$50

$100

$150

$200

4Q08 4Q11

Tangible Common Equity Tangible Common Equity Ratio

TANGIBLE COMMON EQUITY ($B)*

* Representsanon

GAAP

financial

measure.

Ourcapitallevelsareamongthehighest

theyveeverbeeninthisinstitutionshistory.

BrianMoynihan,PresidentandChiefExecutiveOfficer,BAC,August10,2011

BACisPrudentlyAccumulatingCapital

WellAboveRegulatoryMinimums



14/27

4Q2008 1Q2009 4Q2011

CounttheCashBACShortTermLiquidityhasdramaticallyimprovedsincethefinancialcrisis.

FAIRHOLME

$250,000

$200,000

$150,000

$100,000

$50,000

$0

$50,000

$100,000

$150,000

$200,000

$250,000

BACShort

Term

Liquidity(inmillions)

Cash&TimeDeposits NetTradingAssets NetDerivativeAssets

NetFederal

Funds

&

Repos Commercial

Paper

&

STBorrowings Excess

Cash

Ignore the crowd.


15/27

TrustButVerifyOurResearchhasbeenEnhancedbyUnprecedentedRegulatoryDisclosure

Youalsohavetorememberthatinourindustrywerenotalone,

sowehaveregulatorsandothersthatlookoverourshoulders.

BrianMoynihan,PresidentandChiefExecutiveOfficer,BAC,August10,2011



16/27

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

WellsFargo J.P.Morgan Citigroup BankofAmerica

5YearAveragePrice/Book CurrentPrice/Book

Historical15yearPrice/BookAverageforKBWBankIndex=1.83

BACPrice

/Book

=.29

ComparedtoitsPeers,

BACis

Exceptionally

Cheap

(MarketCap:$150+Billion) (Market Cap:$140+Billion) (Market Cap:$80+Billion) (Market Cap:$70+Billion)

MarketCapitalizationsasofJanuary30,2012.



17/27

MarketCap:$70bn

FutureCash

Flows

MarginofSafety:$7BuysYou$20+Investingisallaboutwhatyougiveversuswhatyouget.*

*BruceR.Berkowitz,MorningstarConference,June9,2011

MarketPricesasofJanuary30,2012.

In return for purchasing stock (above) at

historic lows, an investor in BAC receives

value (right) that far outweighs the cost.

This provides downside protection as wellas upside opportunity when the market

returns to a weighing machine, BACs

market cap will increase.

OwnersCapital:$200bn

Reserves:$50bn

GIVE =$7

GET =$20+



18/27

Currentheadlinesremainscary[and]companystockpricesattimes

becomeschizophrenic,butintheend,theyconsistently

revertto

reasonable

assessments

of

value.

BruceR.Berkowitz,LettertoClients,July2008



19/27

GlobalBanking&MarketsLEGACY CONSUMER REAL ESTATE SERVICES

MovingForwardAs

part

of

its

effort

to

generate

long

term

shareholder

growth,

BAC

is

continuingtoaggressivelyaddresslegacyCountrywidemortgageissues.

48,500DEDICATED EMPLOYEES $2BILLION IN EXPENSES PER QUARTER



20/27

FROM TO

MortgageBusinessTransformationBAC

is

fundamentally

transforming

its

mortgage

business

to

reduce

risk,

improveperformance,andeliminateinefficiencies.

INTEGRATED INTO CONSUMER FRANCHISE 38KHomeLoanreferralstoConsumerBankingin3Q11

162KConsumerBankingreferralstoHomeLoansin3Q11

DIRECT TO CONSUMER ExitedWholesaleandCorrespondentchannels

REDUCING MSRS Asof3Q11,completedsaleofservicingon150Kloans

Additionalsalesexecutedin4Q11

ExitofCorrespondentchannelwillresultinaddinglessMSRsin

thefuture

LEGACY ASSETSERVICING ESTABLISHED

MORTGAGE MARKET SHARE DRIVEN

MULTICHANNEL PRODUCTION

ADDING MORTGAGE SERVICING

RIGHTS (MSRS)

REGULAR AND DEFAULT SERVICINGTOGETHER

ANCILLARY BUSINESSES EXITING NONCORE ACTIVITIES (E.G.,BALBOA,

REVERSE MORTGAGE,ETC.)



21/27

1.0 X

2.1 X

0.0

0.4

0.8

1.2

1.6

2.0

2.4

$0

$10

$20

$30

$40

$50

4Q 2008 4Q 2011

Allowance Allowance to Annualized Net Charge-offs

$0

$5

$10

$15

$20

$25

$30

4Q 2008 4Q 2011

ALLOWANCE FOR LOANS AND LEASES ($B)AND COVERAGE OF ANNUALIZED NET CHARGEOFFS

REPRESENTATIONS AND WARRANTIES RESERVES ($B)*

*Representations

and

warranties

reserves

do

not

include

litigation

accruals

established.

BuildingaStrongCushionBAC

is

conservatively

managing

its

legacy

mortgage

exposures

by

increasing

chargeoffallowancesaswellasputbackandliabilityreserves.

$23.1

$33.8

$2.3

$15.9



22/27

ConsumerRealEstateServices

LegacyAssetServicing

DEPOSITS CARD SERVICES GLOBALCOMMERCIAL

BANKING

GLOBAL BANKING &MARKETS

GLOBAL WEALTH &

INVESTMENT MANAGEMENT

CONSUMER REAL ESTATE SERVICES

PowerfulFranchisesWithongoingreductionsinriskandexpenses,NewBACwillbepropelledbythe

strongperformanceofitsprofitablefranchises.



23/27

InSum

Its earnings power has been disguised by the

intense provisioning for loan losses. But when theprovisioning gets back to a normal level, youll start

to see that incredible earnings power come down to

the bottom line. And its as simple as that.



24/27

Djvu?

Its earnings power has been disguised by the

intense provisioning for loan losses. But when theprovisioning gets back to a normal level, youll start

to see that incredible earnings power come down to

the bottom line. And its as simple as that.

BruceR.

Berkowitz

OutstandingInvestorDigest

November25,1992



25/27

%

200%

400%

600%

800%

1,000%

1,200%

1,400%

1,600%

1,800%

Cu

mu

lative

Return

WellsFargo S&P500

StartedtoBuy

WellsFargo

%

200%

400%

600%

800%

1,000%

1,200%

1,400%

1,600%

1,800%

Cu

mu

lative

Return

WellsFargo S&P500

BanksHaveBeenHereBeforeWiseinvestorsdonotpermitMr.Marketsdailyfluctuations

toaffect

their

understanding

of

fundamental

value.



26/27

StayingtheCourseCourage

of

Conviction

Our inclination remains to run from the popular

and embrace the hated where prices tend to reflect

such mistrustwe eventually get it right by seeing

beyond temporary conditions and by avoidingdiversification that leads to mediocrity.

BruceR.

Berkowitz

SemiAnnualReport

May31,2011



27/27

Case Study I BAC

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