Blackwall Partners Research Note: Bank of America – CAMEL Analysis Update April 25, 2012

US Banks over the past three years have endured numerous attempts to be systematically undermined. This has been primarily in the form of over regulation at the hands of an overreaching Congress and Administration during 2009-2010. US banks have had to deal with a slew of new, egregiously impeding regulations and their potential economic damage. These have included the Credit Card Act, Dodd-Frank including the anti-trust debacle “Durbin Amendment,” the illogical Volcker Rule, the endless unrealistic and largely ceremonial "stress tests", Basel III's unfair capital surcharges as well as countless frivolous lawsuits from left-leaning politicians and unscrupulous “money grubbers” in the legal profession. The constitutionality of major parts of Dodd-Frank as well as some of the other regulatory overreaches is questionable to say the least.

As a result, a Funny Thing Happened on the Way to the Forum. U.S. banks have dramatically raised their capital levels, exponentially increased their liquidity; lessened risk and raised their balance sheets to ironclad status. In more recent days, the financial sector has continued to endure a litany of distractions including irrational French socialists espousing 100% tax rates for the 1%, and the continuation of the same Rain in Spain. Despite the potpourri of European distractions, the financial sector delivered a record quarter and shattered the Street’s expectations… Nevertheless, the pundits consistently find a reason to shun the sector…Let’s take a close look at the country’s largest depository and #1 small business lender… this is not some tiny obscure company… it may, in fact, be the world’s most hated stock.

The following is a review of Bank of America (BAC) as of the First Quarter 2012…

Capital Adequacy

• Tier One Common Equity (T1C) soared (the most conservative form of capital) to 10.8% under Basel I (the old minimum was 5% for Tier 1 RBC or a less conservative capital calculation than TIC)

• Under the much more strenuous European Basel III (designed to give an advantage to non-U.S. banks), BAC still posted its guide for YE2012 to 7.5% or 50% above the Basel III minimum due in 2019 (50% more and seven years early we might add)

• Our model has Tier I RBC at 15% by 2013 if Bernanke doesn’t let BAC start to pay out more dividends or buy-in stock

• By 2013, T1C will be 13% or 260% ABOVE Basel III

• T1C is $125 billion or 145% of the stock’s market value. Crazy!

• $406 billion is in cash-on-hand on BAC’s balance sheet or 320% of T1C and 460% of market value. Lunatic Fringe!

Asset Quality

• Dollar net Charge-offs (NCO’s) fell 7% just from the 4Q or 24% annualized from 3.6% in 2010 to 1.3% of loans, thus statistically DOWN 36%

• Further reserve releases are certain… The IRS will want their taxes (and given the current federal budget, they need it)

• Loan Loss Reserve (LLR) at 3.3% or roughly 300% of annualized NCO’s… This is very strong

• Loan Loss Reserve (LLR) to Non-Performing Loans (NPLs) is at 175% (difficult to lose 175% of declining non-performing loans)

• Despite mortgage put-backs from Countrywide and a ceremonial settlement with the states, NPLs continued to fall 65bp from December… thus fell 27% or 109% annualized

2

Management

• Nobody likes the current team… but we do. Current management did not create the problems of the past, but they are doing a great job of righting this large ship.

• The turn-around at BAC is dramatically underrated… the above numbers speak for themselves. The BAC train has left the station and few have noticed.

Earnings

• ROA and ROE are still way too low. However, this is NOT due to poor management. This is due to excess cash (liquidity) and capital in order for BAC to satisfy the misguided “stress tests” mandated by Dodd-Frank, an ill gotten piece of liberal legislation meant to punish banks, not regulate capitalism more effectively. The effect. Low returns on capital and no economic recovery!

• With normalized equity and cash deployment, BAC would be earning a 15% ROE and a 1.5% ROA; Dodd-Frank and Basel III are holding back BAC and thus holding-back economic growth in the U.S. PERIOD!

• Free cash flow (annualized) was $20 billion in 1Q12. Assuming a 6% T1C, the cash ROE is 20%. Thus, BAC’s earnings power is already present despite what you hear on television from momentum traders pretending to be banking analysts.

Liquidity

• $406 billion in cash! BAC could float Spain; Italy and Greece combined. Granted, they have no desire nor need to do so. Europe is an utter mess, but U.S. banks are unexposed as was proven by the recent Fed “stress test” and actual experience heretofore after three years of EU misery.

Valuation – 460% cash in excess of market value; 36% of book value; 4x free cash flow. BAC may be

the cheapest stock on planet earth. Our proprietary valuation model gets us to 300% upside in 3-4 years and 500% in seven.

Shock and Awe Conclusion – Our proprietary CAMEL rating is 1 2 2 1 1 for an overall rating of 1…

This may astonish those that watch a lot of financial TV. The TV pundits are too busy making excuses for why Apple missed on iPads and making excuses for lowered guidance. This is because fast money wants fast stocks. Not value.

Earnings power is a 1. The reality is that this is a budding 1 1 1 1 1 company. Dodd-Frank is holding-up cash and equity deployment into our economy. This company is dramatically undervalued… BAC currently trades for 4x free cash or a 25% unlevered cash yield; and this at a time when its balance sheet has never been more under tapped and stronger in its storied history.

The alternative is to buy a dramatically over-valued REIT, bond or bond proxies earning 2% to 2.5% thus 1/10th the yield of BAC… portfolio managers are over paying for REITs and bonds in an effort to avert volatility. When this reverses itself… it will be painful for those shunning volatility. Low volatility in a low rate environment is a risky proposition despite its pleasing optics presently; this is a misappropriation of risk-to-reward on a scale not seen since 1982 (Buffett) and 1917 (Schiller).

Regards,

Michael P. Durante

Managing Partner Blackwall Partners LLC