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Bank of America Corporation (NYSE:BAC)

Acquisition Call

September 15, 2008 8:00 am ET

Executives

Kenneth D. Lewis - Chairman, President, Chief Executive Officer

John A. Thain - Chairman of the Board, Chief Executive Officer of Merrill Lynch

Joe L. Price - Chief Financial Officer

Analysts

Matthew D. O’Connor - UBS Securities

Christopher M. Mutascio - Stifel Nicolaus & Company, Inc.

[Mike Holton - The Boston Company]

Jefferson Harralson - Keefe, Bruyette & Woods, Inc.

Ron Mandel - GIC

Nancy Bush - NAB Research

Operator

Good day and welcome to today’s conference call. (Operator Instructions) I would now like to turn the call over to Lee McEntire.

Lee McEntire

This is Lee McEntire, Investor Relations with Bank of America. Before we begin our comments this morning, let me remind you that this presentation does contain some forward-looking statements regarding both our financial condition and financial results. These statements involve certain risks that may cause actual results in the future to be different from our current expectations. Thos 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 our SEC documents.

I will now turn the call over to Ken Lewis.

Kenneth D. Lewis

Thanks for joining us for this important announcement. This combination of Bank of America and Merrill Lynch brings together two story brands and creates a company unrivaled in this breadth of financial services and global reach. The partnership with Merrill Lynch and its 60,000 employees is an ideal long-term fit for Bank of America.

With this transaction we get the premier brokerage and asset management firm including approximately a 50% ownership stake in BlackRock, over 16,000 financial advisors and a strong private bank. With our strong and [inaudible] retail franchise and customers who seek and need investment advice, Merrill Lynch brokerage provides us with an immediate platform with expertise, strength and delivery capabilities. We have retail banking distribution; they have financial advisors giving us the capability to provide client solutions across the full-range of both banking and investment products.

Merrill Lynch is also obviously a leading investment bank with a deserved reputation of excellence across a wide range of businesses doing business in 40 countries. Bank of America’s strength and domestic fixed income will now be enhanced with the global reaching capabilities of the Merrill Lynch platform as well as the global equities and M&A capabilities.

We also expect to gain management strength and leadership and deepen our existing strong talent base. Specific decisions about the structure of the new management team will be developed as we move through our integration process.

As you all know, the financial system is operating under almost unprecedented stress. The Federal Reserve and other regulators have taken positive steps. In addition to the Federal Reserve actions, in close coordination with the agencies the banks likewise have consolidated efforts to provide liquidity. Many strong companies have fallen victim to this environment while others have capitalized on opportunities as they have presented themselves. Merrill has been a strong respected competitor in the market place that we know well, but the market continues to question the viability of the stand-alone investment bank. This transaction helps ensure Merrill Lynch can continue to operate effectively for the clients on enhancing the long-term value we can create for Bank of America shareholders.

Let me provide you some additional context for the opportunity we see. First, the addition of Merrill Lynch further diversifies our business mix. It substantially enhances our investment banking capabilities. In particular, it establishes leading positions in global debt underwriting, global equities and global M&A advisory. You’ll notice I used the term global three times.

One of the great things about this transaction for Bank of America is that Merrill’s international operations complement our global corporate banking and treasury management services by significantly adding to our global investment banking capabilities. Combined, the two companies have almost 20,000 financial advisors and hold $2.5 trillion in client assets. As you know, one of Bank of America’s growth prodigies is the mass affluent segment. We will finally have enough financial advisors to fully take advantage of that opportunity. Merrill also brings global scale in investment management.

Bank of America today has an unparalleled consumer franchise. We serve 59 million consumer and small business households, about one in two American households. Our regional footprint covers 78% of the US population. You all know about our unrivaled distribution with 6,100 banking centers, 18,500 ATMs and leading online and mobile solutions. This unparalleled franchise has resulted in many positions in what we consider the three cornerstones of a banking relationship: Deposits, credit and debit cards, and home loans. With today’s announcement we strengthen what we think is the final piece with wealth management. We will now be able to more effectively serve the retail clients throughout their life cycle from college and home loans to payment vehicles to investments for college through retirement.

The opportunity is also significant in corporate investment banking. Where Bank of America has the leading list of clients from small businesses to large corporations, Merrill brings a number of capabilities that should allow us to deepen many of those relationships making us a more valuable partner and creating more value for shareholders.

Joe will take you through the financial story but one important point is how this transaction serves to further diversify our earnings stream. You can see on the slide that the additions to our markets in wealth management businesses make them bigger in relation to our consumer and small business segment.

Before John Thain spends a few minutes talking about the strengths of the Merrill Lynch platform, I want to reiterate that this was a unique opportunity to acquire a high-quality company that will not only greatly enhance our long-term prospects but truly creates a firm that is unparalleled in the industry.

I’ll turn it over to John.

John Thain

I just want to add to Ken’s comments about what a tremendous strategic fit our businesses are here and what great opportunities we see for the future of this combined franchise.

As you know, Merrill Lynch is the leading wealth management firm in the world and one of the leading investment banking sales and trading firms. And if you look at our revenue generation capability even in a difficult market environment, the combination of our wealth management business and our investment banking sales and trading businesses generated in the second quarter of this year $7.5 billion of revenues and just under $2 billion of pre-tax income before any marks or credit valuation adjustments.

The business is a diversified one that’s split between our wealth management and our investment banking sales and trading with 41% wealth management, 3% through our investment management, and then split between investment banking equities and fixed income. It’s also a very international business.

On the investment banking sales and trading side, over 50% of our revenues our outside the United States and we see very attractive growth opportunities in those faster-growing parts of the world. We have a very strong footprint in India; we are building out our presence in Brazil; we see great opportunities in China; we have a small but growing operation in Russia; and we’re in the process of building our business in the Middle East. So the combination here of our businesses and Bank of America’s I think will allow us to expand our international presence.

The last point I want to make is about our financial advisor network. No matter how you measure Merrill’s financial advisor system, we are the leading wealth management operation in the world. We have over 16,000 financial advisors; there has been a consistent growth in that. We have continued to add net new assets. Over the last 12 months in spite of the difficult market environment, we added $55 billion of net new assets. We’ve also continued to increase the percentage of revenues in our wealth management operation that are annuitized. Over 70% of our revenues come from recurring sources. And whether you look at revenues per financial advisor or assets per financial advisor, our wealth management system is by far the best in the world.

So we believe this combination offers us great opportunities and we’re very excited about the prospects for our combined companies.

I’ll now turn it over to Joe.

Joe L. Price

Let me take you through the transaction terms. First of all it’s an all-stock deal. We will exchange 0.8595 shares of Bank of America stock for each Merrill Lynch share. This equates to a little more than $50 billion in total consideration based on Friday’s closing price. As a result we will issue just over 1.5 billion shares after considering stock options, restricted stock and convertible securities. The price represents roughly 1.8 times stated tangible book value. It’s roughly 12 times Merrill Lynch’s 2009 projected earnings based on the first call consensus estimates.

While the price paid reflects a 70% premium to the deflated price of last Friday’s close, it’s a 29% premium to the average of the last five days which we think is a much better indicator. Obviously Merrill Lynch’s stock was much higher prior to the current market turmoil.

The transaction requires approval by shareholders of both companies and the appropriate regulators. Both Boards have approved the transaction and we expect to close by the end of the first quarter of 2009 if not earlier.

Now let me go through some of the assumptions we considered to help you analyze the transaction. We used the first call consensus estimates as a base for modeling the transaction and we assumed an early first quarter 2009 close so you should include Merrill’s results as part of our numbers for that entire year.

We expect cost savings of approximately $7 billion pre-tax fully realized through 2012. These savings represent roughly 10% of the expense base of the combined company. The savings in year one represent just over 20% being realized accelerating to become fully realized in the fourth year. Now the savings would be centered in the areas you would expect with headcount reductions across both platforms including overlap and back office and support functions and processes as well as vendor leverage. We will also be optimizing much of the real estate of the two companies.

Also included in our assumptions are amortization costs or expenses of roughly $450 million for deposit and other intangibles created in the deal. We estimate the restructuring charges will be around $2 billion after tax and have excluded the impact of those charges from our modeling for EPS accretion. Some of this will go through the income statement and some will only impact the balance sheet.

Taking all of these factors into consideration, we estimate the transaction to be 3% dilutive in the first year and break-even to slightly accretive in the second year before restructuring charges.

Just to touch on a few other things of importance in the transaction before taking questions, from a risk or due diligence perspective as you heard Ken say we competed against Merrill Lynch and have known them well for years in addition to discussing business opportunities several times. We sent in a large team to review areas such as asset valuations, trading positions and the like. We also were joined by a team from J.C. Flowers that had done extensive due diligence over some time in reviewing other potential transactions, so they were very familiar with Merrill Lynch’s books.

In terms of capital, the transaction creates roughly $23 billion in goodwill and $6 billion in other intangibles. We estimate the impact of Tier 1 capital at 20 to 25 basis points. Now you may remember that we ended the second quarter at 8.25% for our Tier 1 capital ratio and then said the impact of the Countrywide deal that closed on July 1 would be 60 to 65 basis points. So as you can see we remain well above the well capitalized minimums but below our stated target. We will continue to work back towards the 8% target considering both capital options and reductions in our risk-related assets.

One last thing. Merrill Lynch has about $100 billion in deposits at the end of the second quarter. None of these count towards the deposit cat limit as thrift and ILC deposits are excluded from that computation.

As both Ken and John said, this transaction moves the ball forward many yards in our wealth management and investment banking businesses on both a domestic and global front. The advantage a company like Bank of America has is that with our strength, diversity and scale we can continue to manage through today’s tough environment and still be positioned to take advantage of rare opportunities to expand our franchise for the long-term benefit of shareholders.

I thank you for your attention, and we’ll now be happy to field any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Matthew D. O’Connor - UBS Securities.

Matthew D. O’Connor - UBS Securities

Longer term it seems like this deal has the opportunity to be a homerun but obviously there’s a lot of near-term uncertainty. And I think a lot of people will view Merrill stock as selling off today and this week if the deal hadn’t been announced. I guess the question is why pay $29 at this point?

Kenneth D. Lewis

That’s an obvious good question. You can think of several scenarios. One, probably the more likely, is that Merrill had the liquidity and capacity to see this through; not necessarily easy because of just the times, but more likely than not they would have seen this through and come out on the other side. Secondly, there’s always the possibility of investment in Merrill Lynch by others so then others would have that opportunity. And then finally, we could have rolled the dice and possibly could have gotten it at a cheaper price. We thought Matt the long-term benefits were so overwhelming, it was such a strategic opportunity that we elected not to roll the dice and to go ahead and do it at this time. I don’t know anybody who’s perfect at picking the absolute bottom and we thought we had a compelling situation for the shareholder over the long term and at the time we did.

Matthew D. O’Connor - UBS Securities

Maybe if you just provide a little more color on some of the due diligence that was done, and obviously there’s a lot of speculation that you were also doing some work with respect to Lehman. And I’m just wondering how much work you could have done with respect to Merrill? And also what kind of protection do you have if say six months from now the environment proves that much worse than we are right now?

Kenneth D. Lewis

Joe, do you want to go over it again? And the J.C. Flowers piece is key because they were renewing an effort that had already gone on and had been very, very extensive.

Joe L. Price

Matt, to kind of reiterate but maybe give you a little bit more. Clearly we’ve had a tremendous amount of historical knowledge both as a competitor with Merrill Lynch but also have reviewed and analyzed the company over the years. As Ken referenced, we did have several advisors, among them J.C. Flowers with pretty extensive knowledge of the company.

While none of us like the market turmoil we’ve been through in the last year, it has caused us all to be much more attuned to the quality of particular name credits and/or other asset classes. So it’s not as if we don’t have a very significant knowledge of the markets around the asset classes that are most problematic. In addition, as you would expect we deployed the team that we would ordinarily deploy in these types of situations which had well over 45 people from our team on site as well as others off site, outside counsel and the like. So collectively with that group and quite frankly the progress that Merrill Lynch had made in reducing the risk exposures and analyzing them and having all that laid out given the efforts that the management team has made over the last period made it possible for us.

Kenneth D. Lewis

One reference was that in comparing it to a previous review that is was night and day, that John and his team had made incredible progress since the first time they had looked at it.

Matthew D. O’Connor - UBS Securities

You mentioned the capital ratios below your target. You think you’ll be in the low sevens on a Tier 1 pro forma for Countrywide and Merrill, which is obviously still well above the 6% well-capitalized. But how do you anticipate rebuilding the capital? And my guess is you’d want to build in some cushion in case the environment deteriorates more than we’re looking for.

Kenneth D. Lewis

Matt, as I said we’ll continue to evaluate all the opportunities we have to rebuild that capital. I mean as we referenced a few minutes ago, we do have dimunition because of the Countrywide transaction. Remember this transaction is likely not to close until the first quarter also, so there’s some time lapse between now and then. But we’ll continue to evaluate the asset level management, any other opportunity we have to rebuild capital during that period as well as the ongoing earnings of the company.

Matthew D. O’Connor - UBS Securities

And those options I assume would include monetizing some of China Construction Bank, re-evaluating the dividends?

Kenneth D. Lewis

All options Matt. The only thing I’d say about China Construction Bank is what I always say. The one constant thing that we like to say is we plan to have a substantial position in China Construction Bank for a long time and we don’t go much further than that.

Operator

Our next question comes from Christopher M. Mutascio - Stifel Nicolaus & Company, Inc.

Christopher M. Mutascio - Stifel Nicolaus & Company, Inc.

Matt just answered my question. I was going to follow up with Ken on your comments on global on several occasions during the presentation. Does that mean you’re less likely to sell China Construction Bank? But I think you just answered it.

Operator

Our next question comes from [Mike Holton - The Boston Company].

[Mike Holton - The Boston Company]

If you look at Merrill’s balance sheet as of today, the resi real estate assets are almost $44 billion, commercial real estate assets are just over $17 billion, and then there’s a little bit less to CDO. I’m curious what your assumptions are for the marks that you’re likely going to need to take on those and are marks on those assets included in any of the numbers that you guys presented today?

Kenneth D. Lewis

The numbers that we presented today, we had considered marks on the assets as well as planned actions that Merrill Lynch has either executed or had in the works during the quarter as they continued to make progress in risk reduction. So those have been done. I would tell you that again going back to the point on things such as CDOs, we have very similar methodology valuations and we have very similar marks to structures. We’re dealing with the same counterparties on things. So again back to the earlier point, we’re pretty familiar with the types of assets and feel pretty good about the progress that Merrill Lynch had made itself. And John you may want to elaborate on that.

John Thain

Yes. Let me just add. As you know we have been consistently reducing the risky assets on our balance sheet. The biggest single transaction was the sale of the $30 billion notional amount of CDOs. But subsequent to the end of the second quarter and subsequent to that sale we have continued to sell risky assets. So you will see when we report, on our third quarter balance sheet you will see a further reduction in those risky assets most of which has already been completed.

[Mike Holton - The Boston Company]

Can you quantify approximately how much you think will have been taken off the balance sheet by the end of the third quarter above and beyond what you publicly announced?

John Thain

Not before we report for the third quarter.

Kenneth D. Lewis

In a few days.

Operator

Our next question comes from Jefferson Harralson - Keefe, Bruyette & Woods, Inc.

Jefferson Harralson - Keefe, Bruyette & Woods, Inc.

I want to follow up on Mike’s question about the marks. Can you quantify the marks that you are taking out of the Merrill balance sheet in order to rata your Tier 1 capital protection?

Kenneth D. Lewis

Not at this time. We’re not prepared but all the marks are preliminary and obviously given the public information in those marks, we do not want to create a situation where it causes pre-release of Merrill Lynch’s numbers. Obviously the quarter’s not over. So a lot of it’s based on those forecasts so I’m not prepared to go into any more detail at this time on them. But again I think the progress that has been made in reducing the risk positions as well as the items that John just described substantially take care of most of the marks that we were looking at.

Jefferson Harralson - Keefe, Bruyette & Woods, Inc.

Can you talk about a pro forma tangible capital ratio at BAC for this deal?

Joe L. Price

Let me get back to you, only because I don’t have the stuff in front of me. We were focused on Tier 1. Obviously though the capital stack that Merrill Lynch has made progress with in recapitalizing has a significant component of common compared to some other institutions, so that will obviously contribute to. And this being an all-stock deal obviously helps also.

Jefferson Harralson - Keefe, Bruyette & Woods, Inc.

Is this going to be accretive to your current tangible book value, tangible equity capital ratio?

Joe L. Price

Let me come back to you guys when we do earnings and we’ll provide that for you.

Jefferson Harralson - Keefe, Bruyette & Woods, Inc.

And lastly, do you have any thoughts on stay bonuses for the retail brokers at Merrill?

Kenneth D. Lewis

We have the capacity to do that and we plan to do something because it is the crown jewel of the company.

John Thain

I would add that this transaction is actually quite positive from the financial advisors point of view and I think gives them a lot of comfort with the long-term both financial stability of the combined institution but also the great opportunities that they will have when they have access to all of the customer base of Bank of America.

Kenneth D. Lewis

Think about it. The sweet spot for Merrill Lynch is our premier group. That’s about 700,000 clients in the clients managed piece and about 8 million in the mass affluent market that’s in the branches that are client served. The financial advisors need to get ready to begin resaving a lot of referrals.

Operator

Our next question comes from Ron Mandel - GIC.

Ron Mandel - GIC

I was wondering if you could talk a little bit more about the cost savings. You said the $7 billion is 10% of the combined expense space. I was wondering what expense base? And it strikes me as a lot given that Merrill’s costs were always about $6 billion in the latest quarter. Also the restructuring charge is smaller than the savings. Typically it’s equal to the savings. And then I guess the last question on the amortization expense of $450 million. I assume that’s pre-tax?

Joe L. Price

On the last question yes and driven principally by the identifiable intangibles, obviously which would entail customer lists both institutional as well as retail side and some deposit premium on the deposit base.

Ron Mandel - GIC

On the cost base, that’s 10% of what?

Joe L. Price

Combined annualized cost base.

Ron Mandel - GIC

Cost base of Bank of America’s corporate and investment bank? I’m not sure.

Joe L. Price

Combined institution base.

Ron Mandel - GIC

It just seems like it’s very large given how different the companies are and relative to the restructuring charge as well.

Joe L. Price

We do intend to be very aggressive on the cost side or the efficiency side. We think that we have the scale opportunity here to drive that and look at it. I guess the other point I would make in addition to the cost side was Ken’s earlier reference that we haven’t really assumed anything on the revenue synergy side here and there’s a tremendous opportunity for us. We intend to be very aggressive after these costs but to the extent that we have a little dimunition on that side, we have not contemplated anything on the other side that we clearly know will be there.

Kenneth D. Lewis

Including also an investment banking, that huge corporate customer base that we can now sell into with a much wider range of products.

Ron Mandel - GIC

What about revenue from people who are doing business with both Merrill Lynch and Bank of America now that may want to diversify their vendors?

Kenneth D. Lewis

There will be some I’m sure but again if we over estimate any way on cost savings I think we’ve underestimated on the revenue side. And secondly, we’re good at this. This isn’t our first time. More often than not, if not always, when we say we’re going to get X amount of expense savings, we get them.

Ron Mandel - GIC

And that’s the last question about the size of the restructuring charge relative to the expense savings?

Joe L. Price

A number of reasons but let me give you a typical one that will help you a little bit Ron. Because of the longer term nature of getting the cost saves out, we’ll be able to handle maturing contracts versus penalties and may be able to handle attrition in some cases more than potential several type issues. So there are a number of factors based on the pace and scale of the attributes that we feel will contribute to that.

Operator

Our next question comes from Nancy Bush - NAB Research.

Nancy Bush - NAB Research

Can you just comment on the position or the holding in BlackRock and whether there are any quirks that are going to be encountered in this deal with regard to the BlackRock holdings?

Joe L. Price

We hold just under 50% of BlackRock. As of last week it had a market value of about $14 billion. There are no particular quirks as it relates to that holding.

Nancy Bush - NAB Research

Secondly Ken, I think a lot of people are going to be asking this question. You have had sort of a varying attitude toward investment banking over the years. You’ve liked it; you’ve not liked it. Can you just bring us up-to-date on where you stand on the whole subject of investment banking and how big an investment bank you want Bank of America to be?

Kenneth D. Lewis

First, obviously Merrill Lynch is much, much more than an investment bank. It’s the best wealth management company in the world. But the frustration I think we’ve had is that maybe in some way we were in no man’s land and I don’t know that but we would have what I called a mission creed. We would stay focused but it was very hard to stay with a narrow framework and not start getting out away from that and wanting to go international or wanting to get other businesses. And so it has been frustrating frankly and we have had some stops and goes obviously. But this solves that. This creates the company instantly that would have taken decades to build and I’m not sure in hindsight if in fact you would ever spend that much money as quickly as you’d need to do it to get there. So we probably would have been frustrated for quite some time and this just changes that. It really does. The fact that we have the breadth of products that we have now and capabilities, it has to be the largest corporate banking franchise in the world is just an incredible combination. So I like it again.

Nancy Bush - NAB Research

And I guess I would ask both of you, the other significant piece of news of course this morning is the failure of Lehman. What your exposures are, have you been able to clear counterparty positions, and what is the debris I guess going to be from that over the few days and weeks for the two of you?

John Thain

From our side we have nominal exposure to Lehman.

Kenneth D. Lewis

As do we.

Operator

There don’t appear to be any other questions at this time.

Kenneth D. Lewis

I think we’re done. Thank you.

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