美國銀行 (BAC) 2010 Q2 法說會逐字稿

Good day, everyone and welcome to the Bank of America quarterly earnings announcement.

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

Following our presentation, there will be a question-and-answer session.

(Operator Instructions).

Please note this call is being recorded.

I would now like to turn the conference over to Mr.

Kevin Stitt.

Good morning.

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

And 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.

Also joining us this morning will be Neil Cotty, our Chief Accounting Officer who served as our interim CFO, prior to Chuck arriving here, and Neil did much of the presentation last quarter.

With that, let me turn it over to Brian.

Good morning and thank all of you for joining us as we discuss our second quarter earnings.

I welcome Chuck to his first call as CFO and as Kevin said Neil is with us.

Just to start us off here on slide four, but in general, I'm just going to give a couple points of my perspective on the quarter.

We did make $3.1 billion in net income for the quarter, but importantly, with the earnings, we are continuing to move our core franchise forward.

Our credit quality continues to improve, in some cases faster than we anticipated as we came into this year.

As the management team and I put together the principles we're going to operate under to make sure that we can position this company now and in the future in the way it needs to be positioned, one of the principles we've been focused on is to continuing to strengthen our balance sheet.

We strengthened our capital this quarter and the reserve coverage ratios, even with the release so we have a stronger balance sheet.

We all saw the teams continue to work through reductions in legacy positions, whether that's in commercial real estate, capital markets, the former Countrywide franchise, or some of the loan products and card services.

Another principle that we've been focused on is narrowing the focus of our franchise, ensuring that every activity that we have at Bank of America is core to our core three customer bases, consumers, companies and institutional investors.

Along with that lines, this quarter we sold our interest in Itau and Santander, Mexico.

We sold the MasterCard shares, we had and today we announced we're selling Balboa Insurance, consistent with this strategy.

Additional principle that we've been managing to is to get ahead of the new capital requirements and we've been doing that this quarter by continuing to reduce positions, as some of the positions I just spoke about, and freeing up capital whenever we can to build our capital ratios in anticipation of the new BASL rules.

In addition this quarter we also sold some private equity positions to help us in this regard.

Another principle is that we think that we as we look back at the cycle at what went right and what went wrong, we have to be much stronger risk managers.

Go down, it was a nimble way in which Tom Montag, and Bruce Thompson and the team adjusted our trading positions, reducing the VAR and basically getting out of the way of the Euro crisis and sovereign debt crisis this quarter.

So we made progress on this core operating principles, but as we look ahead we're well aware that the headwinds we're going to continue to face and we need to deal with and to produce the revenue and profits this company needs to produce.

First, we continue to see an economy which our experts don't believe will be double dip.

They think that's a low probability, but we see an economy that's going to grow in the 2.5% range in the second half, which continues to be below trend.

Unemployment will remain at high levels, and as we look at the consumer, we're seeing even though the consumer spending has been up consistently quarter on quarter, we're worried about slowing momentum as the year-over-year comparisons get harder as the second half of the year was strong for the consumer.

And again, we continue to watch the housing market carefully and it stays in our focus.

As we look on the loan demand side, it continues to remain weak as the consumers continue to delever.

On the commercial side, the commercial customers remain conservative by holding large amounts of cash while awaiting signs of sustained demand for their products before they need capital growth.

Another area that is hitting our revenue and earnings is impact of sustained low rate environment on this core franchise.

It continues to impact the net interest margin.

Another major area, I'm sure you'll have lots of questions about this later, and Chuck will talk about the areas is the impact of new regulation, and as I look at the new regulation, a lot of people focus on the Dodd-Frank bill, but you've got to put it in the context of all the different things going on, whether it's the Reg E, the CARD Act and then the areas that will be affected by Dodd-Frank.

This will cause the most recent is the Durbin amendment in the interchange area, this is going to cause a significant reduction in revenue in the future and the carrying value change in our asset in the credit card business, and Chuck will address that later.

As you think about the quarter, it's more noise than we would have liked but some of that is inevitable as we continue to reposition this company and as we continue to hit some turbulent markets that we did during this quarter.

That said, we continue to make progress in positioning our Company now for the future.

On page five, you can see the progress we made in the various customer groups in our customer driven model.

We told you and will continue to tell you in the way we're managing this franchise is to take advantage of these very strong businesses that have superior positions in every part, in every capability they bring to the customer.

I'm not going to go through all the points in this page but I want to touch on a couple areas just to give you my perspective.

Obviously, Joe Price's consumer team has the core challenge to adopt a retail banking model in the United States to the new consumer banking reality, to mitigate the lost revenue and adjust the operating cost to meet the return holes we have in that business.

In our home loans insurance business, it lost money this quarter, less than it lost last quarter.

Sort of a tale of two cities.

On the one hand our production was number one or two in a given month or quarter with 20% market share on the production side.

At the same time, we're devoting a ton of effort and expense to working through defaults, short sales and modifications, and we're attempting to help every customer we can.

In spite of all that hard work, we'll continue to see elevated foreclosures, short sales and other liquidations for the next several quarters as we clean up the legacy Countrywide portfolio.

Moving to the commercial side of the business, domestic commercial loan demand remains muted as companies continue to generate solid earnings and cash flow.

But tell us that they are reluctant to expand, due to uncertainty they see in the future.

Importantly, as the Company has a global commercial franchise, that does match that the companies in Asia and Latin America and companies in the US that do business in those markets are demanding capital, and our business wins especially in corporate investment banking area show that, and that's why we continue even during these times to invest in our international growth and global capital markets business and the global corporate investment banking business.

The third area I wanted to touch on is the sales and trading area.

Tom Montag's team experienced a drop from a very, very strong first quarter.

And however, we still over $1 billion in global banking markets.

And the global markets segment produced about a third of those earnings.

We continue to be impressed with growth in the investor-client activity that Tom and his team have seen in both the US and outside the US around the world, but this quarter couldn't fight the macro slowdown, the Euro debt issues, the sovereign debt issues, so we got out of the way.

Our investment banking team's performance continues to be very strong.

It continues to improve on its number two ranking and is coming close to closing the gap to number one.

So all in all, as you can see on slide five, we continue to make progress on our core customer segments.

But the goal is not only perform well in each of these segments but to get the most from the entire segment group together.

So slide six is a slide I've shown you before.

Shows some of the successes we've had this quarter, leveraging this franchise, especially between Sally Krawcheck's wealth management business, Joe Price's consumer business, and David Darnell and Tom Montag's commercial businesses.

I'm not going to read all the numbers, but I will confirm to you and commit to you that we focus on these metrics every day and like the direction that they continue to head.

The principle that we are focused on is not only do we need to get everything out of each of our businesses and their component parts but in order to provide the right service to the clients and the right return for the shareholders we've got to do more on the whole thing.

And with that, let me hand it over to Chuck to go over the first quarter's numbers.

Thanks, Brian, and good morning, everyone.

As you can see on slide seven, we reported net income of $3.1 billion, or $0.27 per share, versus $0.28 per share in the first quarter and earnings of $0.33 per share in the second quarter a year ago.

Credit quality continued to improve with credit costs dropping $1.7 billion from the first quarter to $8.1 billion.

This quarter had several large items having both positive and negative impacts on earnings.

But we think results are representative of the challenging economy and difficult rate environment as we continue to bring down risk and position the balance sheet for the future as Brian outlined.

And we think that the next few quarters will also be about improving credit while addressing the negative impact from Reg E and the CARD Act.

Turning to slide eight, let me briefly summarize some of the material items this quarter that impacted earnings.

We had several announced asset sales during the quarter, some of which were related to our agreement to pay back TARP.

Our ownership in ITAU was sold for a pretax gain of $1.2 billion.

Our Columbia long-term business was sold for a pretax gain of $60 million but resulted in a reduction of goodwill and intangibles of approximately $800 million.

Our MasterCard position was sold, resulting in a pretax gain of $440 million.

We entered into an agreement to sell our ownership interest in Santander, Mexico, which generated a pretax loss of approximately $428 million, before associated tax benefits.

All of the asset sales this quarter impacted Tier 1 common equity by $2.3 billion, and added 18 basis points to the Tier 1 common ratio.

Turning to slide eight.

Let me briefly summarize some of the material items this quarter that impacted.

Let me talk about asset sales.

Let me also add that we're exploring a potential sale before the end of the year of Balboa Insurance, one of the largest creditor-placed insurers in the US.

As most of you remember, we agreed to generate $3 billion of capital through asset sales or other actions in 2010, and have until December 31st to complete.

Other items in the quarter included the credit mark on the Merrill Lynch structured notes under the fair value option that resulted in a gain of $1.2 billion and is reported in other income but as you'll recall there is no additional regulatory capital benefit related to this gain.

We received a dividend of $535 million from our ownership stake in CCB, that is reflected in equity investment income.

A hike in the UK payroll tax resulted in increased personnel expense of $425 million.

And finally, we increased our reps and warranties expense by $722 million to $1.2 billion as a result of our continued evaluation of exposure to repurchases, including our exposure to repurchase demands from certain mono line insurers.

Although this expense and related reserve are based on a life of loan calculation, the environment around repurchases continues to evolve, and we will assess this reserve based on the facts available to us each quarter.

We expect a level of putbacks each quarter to remain quite variable.

Let me turn to slide nine and discuss some general financial highlights for the quarter.

Revenue of $29.5 billion was down 9% from the first quarter, and 18% from a year ago on a managed basis.

We had a drop in net interest income of $873 million from the first quarter, due to lower loan levels and the continued low interest rate environment.

Sales and trading revenue declined 55% to $3.2 billion, and I'll go into further detail on that in just a minute.

Expense levels were down 3%, but did include the $425 million in higher personnel expense due to the UK payroll tax.

Last quarter included annual retirement eligible expenses of $758 million and higher litigation expense while most other expense areas were relatively flat.

Our provision was down 17%, with net charge-offs down 11% and reserves reduced by $1.5 billion.

Commercial non-performing loans, leases and foreclosed properties decreased 5% from the first quarter, while commercial reservable criticized levels were down 9% reflecting three quarters in a row of decreases.

Net charge-offs were impacted this quarter by an acceleration of losses in our foreign credit card portfolio of $378 million to conform with how we account for renegotiated loans domestically.

Our allowance for loan and lease losses now stands in excess of $45 billion, or 4.75% of total loans and leases.

Versus a charge-off rate this quarter of 3.98%, and net charge-offs are expected to continue to decline.

The total reserve including the reserve for unfunded lending commitments is nearly $47 billion, compared to $48 billion last quarter.

We ended the quarter with higher and stronger capital levels, as Tier 1 increased 44 basis points to 10.7%, versus the first quarter, Tier 1 common was up 40 basis points to 8%, and tangible common was up 13 basis points to 5.4%.

Global excess liquidity increased roughly $20 billion to almost $290 billion, while tighter required funding stood at 22 months.

On slide 10 you can see trends for the past five quarters.

Pretax, preprovision earnings dropped to approximately $12 billion, reflecting the changes you can see on the slide.

Going forward, we believe revenue will benefit from sales and trading performance, however, this benefit will be offset by the impact of Reg E, the CARD Act, lower loan levels, low rates and potentially other regulatory impacts, not yet assessed or identified.

An additional benefit to earnings will be expected, decreased credit costs due to lower charge-offs and reserve reductions.

Switching to business segment slide on slide 11, I just want to point out that like last quarter, all business segments made money with the exception of home loans and insurance.

HLI had a smaller net loss than the prior quarter, $1.5 billion versus a net loss of $2.1 billion, despite higher reps and warranties expenses, $1.2 billion versus $526 million last quarter.

Now let's turn to net interest income on slide 13.

Net interest income on an FTE basis was $13.2 billion, down $873 million from the first quarter.

This was due to lower loan levels, lower yields on credit cards and the impact of rates in both our core assets and trading book.

During the quarter, the net interest yield of 2.77% decreased 16 basis points, due mainly to a shift in the mix of earning assets as higher yield assets are replaced with lower yielding assets driven by the lower rate environment.

Our average balance sheet for the quarter was down $20 billion versus the first quarter, reflecting decreases in average loans of approximately $25 billion.

Loans were down due to charge-offs, paydowns and derisking the portfolio, as well as weak demand.

Implementation of the CARD Act had a negative impact on net interest income this quarter due to reduced balances and an inability to reprice for risk.

We expect this impact to increase in both the third and fourth quarters.

As you can see on slide 14, average loans excluding residential mortgages were down $29 billion, or 3.8% from the first quarter, while average total deposits were up $10.6 billion or 1%.

Excluding the Countrywide decrease of $2.4 billion, average retail deposits showed organic growth of $8 billion or 1.3%, even as we maintained our pricing discipline.

Also shown is the increase in our discretionary portfolio on an average basis versus Q1.

Going forward we expect net interest income to trend down in the second half of the year due to continued loan runoff, the impact of the CARD Act and a low rate environment.

Our overall interest rate positioning continues to be asset sensitive relative to the forward curve.

Turning to slide 15.

CARD revenue began to stabilize as higher interchange offset the additional impact of the CARD Act.

Total interchange is up 10% from the first quarter and 19% on a managed basis from a year ago, due to higher consumer spending.

We expect the Durbin amendment as currently drafted and subject to final rule making to have an adverse impact on debit card interchange starting in the second half of next year, which I will discuss later.

On slide 16, we show service charges were relatively flat at $2.6 billion, and as we mentioned in prior quarters, we made changes to our overdraft policy last year, which are costing us on average about $160 million per quarter.

Reg E will have an additional impact to service charges when it becomes effective in the third quarter of this year.

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

We're 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 will look to mitigate some of this impact going forward.

Mortgage banking income on slide 17 dropped from the first quarter as result of higher reps and warranties expense.

Production levels in first mortgage increased to approximately $72 billion, from approximately $70 billion in the first quarter, and in core production revenue, we experienced higher margins and volumes.

Total reps and warranties expense in the quarter was $1.2 billion, and the reserve increased $600 million to $3.9 billion.

Core servicing income increased from the prior quarter and was offset by less favorable MSR results, net of hedges compared to the first quarter while the market driven decline in the MSR value of $4 billion was effectively hedged.

The capitalization rate for the consumer mortgage MSR asset ended the quarter at a low 86 basis points due to the drop in rates at the end of the quarter versus 110 basis points in the first quarter.

Reflecting the impact of increased home purchase transactions driven by the federal tax credit and seasonality, we saw an increase in the level of purchase mix in our funding to 53%.

Given the drop in rates over the past few weeks, we would expect production volumes to remain in line with the second quarter as refinance volumes offset the expected drop in purchase volumes due to the expiration of the first time home buyer program.

Turning to slide 18, as we said earlier, the sale of the Columbia long-term business generated pretax gain and reduced goodwill and intangibles.

Investment in brokerage fees were down 1% from the first quarter as an increase in brokerage fees was offset by the decrease in asset management fees related to the sale of the Columbia business.

Asset management fees of $1.4 billion were down 6% from the first quarter, while brokerage fees increased 4% due to higher transactional activity.

Normalizing for the sale of Columbia, we showed an increase in asset management fees of 6% driven by higher market valuations in the first quarter, as well as seasonal tax fees.

Clearly, given the market valuations at the end of the second quarter, this trend will reverse itself in our third quarter results.

Assets under management ended the quarter at just over $600 billion, down due to the sale of Columbia's equity in fixed income, lower market valuations and outflows from the former Columbia cash complex.

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

Sales and trading revenue on slide 19 of $3.2 billion which includes both net interest income and non-interest income, dropped approximately 55% from a great first quarter, due to general market deterioration as a result of concerns around the global economy, lack of liquidity as sovereign debt fears and regulatory uncertainty fuel investor concerns.

Compared to the prior quarter, FIC revenue dropped 58% to $2.3 billion, driven mainly by lower results in credit products and rates and currencies and equity revenue also declined.

Net write-downs on legacy assets were relatively minor in both periods.

Investment banking revenue on slide 20 increased 6% from the first quarter, although down 20% from a very strong quarter a year ago.

Results were driven by an increase in M and A and leverage finance and our monthly results in the quarter followed a U shaped pattern as markets declined in May and global fee pools reached their lowest monthly totals since 2003.

Then revenues rebounded in June to the levels we saw in April.

Our overall global fee ranking remains stable at number two when compared to the first quarter, but we believe we substantially narrowed the gap between number one and number two this quarter.

Our revenue remains concentrated in the Americas versus a more diversified global mix as some of our peers and consequently we continue to focus on that opportunity with key hires and relationship building in important markets outside the US.

Let's turn to the remaining revenue categories on slide 21.

Equity investment income reflects the activity for the quarter I described earlier.

Net gains from the sale of debt securities were $37 million, and included losses of $711 million on sales of non-agency RMBS sold as a result of a change in certain portfolio objectives, to focus on capital management and credit risk reduction.

Other income also reflected insurance revenue of $678 million, down a bit from the first quarter, but slightly up from a year ago.

And also included the credit mark on a Merrill Lynch structured notes.

Let me say a couple things about expense levels on slide 22.

Total expenses decreased $522 million from the first quarter, due to the absence of $758 million in expense associated with retirement eligible stock grants we normally incur in the first quarter as well as lower litigation expense, offset by an increase due to the second quarter UK payroll tax.

Personnel expense compared to a year ago is up $1 billion, reflecting the UK payroll tax as well as higher expenses for the build-out of our global markets and GCIB businesses, as well as higher level of headcount and expense at home loans to address loan modifications and work-outs.

In addition, compared to last year, we are seeing the impact of deferred compensation in our markets businesses that was granted last year, and is hitting expense this year.

We're watching expense levels closely and will take appropriate actions if and when our outlook changes.

Excluding personnel expense, expenses were down 2% from the first quarter, and 8% from a year ago.

Before moving to credit quality, let me add a few comments around income taxes.

Due to capital gains from special items during this quarter, the effective tax rate of 17.7% included a $250 million tax benefit from the partial release of an evaluation allowance from the Merrill Lynch capital losses carry-forward.

Separately, you may have read that the UK has announced that it intends to lower its corporate tax rate in the third quarter by 1% effective in 2011.

Although this is good news from a cash tax cost perspective, this change when enacted will require us to write down our UK net deferred tax assets by approximately $400 million.

The UK Treasury has announced plans for further reductions in the UK tax rate in future years.

Similar charges to income tax expense would result upon enactment for each additional future 1% reduction in the UK tax rate.

Moving to asset quality on slide 24.

We continue to see an improving trend as net charge-offs decreased $1.2 billion, from the first quarter, to $9.6 billion.

Consumer improvement in the unsecured lending portfolios reflected lower losses while consumer real estate stabilized.

Commercial asset quality also improved as net charge-offs and reservable criticized declined for the third straight quarter.

Turning to slide 25.

As I mentioned during the quarter, in the foreign credit card portfolio, we had an acceleration of $378 million in charge-offs, to conform to our domestic charge-off policies.

Excluding this impact, foreign credit card charge-offs would have been $564 million versus $631 million in the first quarter.

In addition, if you remember last quarter, we had approximately $800 million of consumer real estate charge-offs on collateral dependent modified loans upon the implementation of new regulatory guidance.

The collateral dependent impact for the current quarter was $142 million, and also as we've done in past quarters, we repurchased government insured delinquent loans because it is more economical than to continue to advance principal and interest at the security rate.

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

Turning to credit quality trends on slide 26.

Total net charge-offs of $9.6 billion decreased $1.2 billion, compared to net charge-offs in the first quarter.

Excluding the impact of collateral dependent modified loans in the first quarter and the foreign credit card adjustment this quarter, consumer losses versus the first quarter were down $813 million, and commercial losses were down $134 million.

The allowance for loan losses decreased $1.5 billion through the provision.

This was driven by improving delinquencies, collections and bankruptcies in our domestic consumer credit card and unsecured consumer lending portfolios and improvement in our dealer financial services portfolio.

These reductions were partially offset by reserve increases associated with the consumer real estate portfolios, including $328 million for the Countrywide purchase credit impaired portfolio and $600 million for other consumer real estate loans.

On a commercial side, reserves on our core commercial portfolio decreased $350 million, as we've seen broad based improvement in customer credit profiles resulting in lower reservable criticized levels.

On slide 27 we show you the trend in nonperformers.

In the consumer area we saw an increase of $483 million, the pace of increase slow slowed from the first quarter as delinquency inflows have slowed in residential mortgage and home equity.

Commercial nonperformers decreased just over $700 million from the end of the first quarter, driven by paydowns, charge-offs and asset sales.

Almost all the decrease in NPAs was real estate related although most categories were down.

Approximately 95% of commercial NPAs are collateralized and approximately 40% are contractually current.

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

On slides 28 and 29 you can see that excluding the impact of delinquent government insured loans, consumer delinquency trends continue to improve.

30 plus delinquencies decreased approximately $3 billion, or 14%, excluding the impact of delinquent government insured loans.

Delinquent government insured loans added $2 billion to the 30 plus delinquency levels although they are still insured.

These government insured loans are primarily related to repurchases from Ginnie Mae securitizations for economic reasons.

We can finance these loans at a cheaper rate on our balance sheet and our risk exposure is the same whether we are the servicer or the holder of these assets since they are insured.

Commercial reservable criticized levels declined by $4.9 billion, or 9% versus a drop of $3.4 billion in the first quarter representing three straight quarters of decreases.

These decreases were broad based across all clients and industries.

Slide 30 shows you the trends of consumer charge-offs as you can see.

All categories continue to improve or stabilize, even with the acceleration of losses this quarter in the foreign credit card.

Going forward, we expect to see continued improvement.

On slide 31, you see that commercial charge-offs peaked in the third quarter last year, although we did see a small $30 million uptick in commercial real estate charge-offs this quarter.

Getting back to home equity, let me elaborate a bit on our home equity book on slide 32.

We covered this information last quarter and since it hasn't changed significantly we won't go into it in detail today.

I'll just remind you that although losses are still elevated, the vast majority of this book are not piggy-back loans for home purchase or refinance but rather loans that consumers used in most cases for non-real estate purposes.

Collateral and reserves exist to partially offset future losses and 94% of the loans with combined loan to values greater than 100% are current.

Turning to capital and liquidity highlights on slide 34, our liquidity position strengthened during the quarter as customers continue to delever and shift into more liquid assets in our discretionary portfolio.

Cash and cash equivalents were up $6 billion our global excess liquidity sources ended the period up about $20 billion from the end of the first quarter.

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 or banks and our broker dealers, which are readily available to meet our liquidity needs as they arise.

We think it is prudent given low interest rates to maintain a high level of liquidity, and we continue to be very measured in our approach to reinvestment.

As noted on our last call, we'll continue to be selective in going to the debt markets and diversifying our funding footprint, but we expect our benchmark issuance to be substantially less than our maturities.

In the third quarter, our GAAP capital levels will benefit from the initial mark-to-market of our ownership position in CCB, currently carried at cost.

This is because the shares become unrestricted in the third quarter of 2011, resulting in a mark in OCI beginning one year prior.

The mark impacts GAAP capital, not regulatory capital, and the related unrealized gain at June 30th was roughly $12 billion pretax.

Moving to slide 35, I've already pointed out our increased regulatory capital levels.

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

On slide 36, we have listed several pieces included in regulatory reform.

We've already discussed the impact of the CARD Act and Reg E.

And we're still gauging the impact of derivative and proprietary trading reform.

Although we're still waiting for more clarity, we believe the impact will be manageable begin that we do distinguish between fiduciary and trading businesses.

In addition, a large part of our revenue and earnings is generated by client focused businesses versus proprietary activity.

As for the Durbin amendment, let's turn to slide 37.

All of our consumer and small business card products including our debit card business are part of an integrated platform within the global card services segment.

When the financial reform bill is signed into law, the Durbin amendment will impact the future revenues generated by our debit card business.

We estimate that our debit card revenue for 2010 will be approximately $2.9 billion.

Although subject to final rule making over the next year, we estimate that the decrease in annualized revenue before mitigation could be as much as $1.8 billion, to $2.3 billion, starting in the third quarter of 2011.

The estimated shortfall in revenue would impact the carrying value of the $22 billion of goodwill currently included in the global card services segment.

Using these revenue estimates, we estimate that the impairment of goodwill to be reported in the third quarter of 2010 could potentially be in the range of $7 billion to $10 billion.

We will continue to explore mitigation initiatives, not all of which will be reflected in the global card services segment.

The amount of impairment recorded in the third quarter will be after consideration of the value of mitigation initiatives applicable to global card services that exist at that time.

Before we open it up for questions, let me reiterate that 2010 is an environment where earnings and capital formation are the goals.

The economy and the consumer at the present time are still delevering so core revenue growth is difficult.

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

However, we do have revenue headwinds that we highlighted in the second half of the year as customers continue to delever and we realize the full adoption of legislation.

As we mentioned in the first quarter 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.

We are focused on internal investments and service levels that continue to benefit our customers, and believe that the long-term business model of the Company positions us well to emerge much stronger competitively.

With that, we'll now open it up for questions.

Thank you, sir.

We will begin our question-and-answer session.

(Operator Instructions).

We'll take our first question from Matt O'Connor at Deutsche Bank.

Good morning.

Good morning.

Can you give a little more clarity on the outlook for net interest income.

It was down about $900 million this quarter.

Some of it's obviously from trading.

That piece is always hard to project.

Your comment it's going to trend down going forward, do you think we would have similar declines to what we had this quarter or more modest?

Well, they'll certainly be similar.

We don't expect them to be quite as significant the last half of the year.

Of course, that will depend upon the environment.

Keep in mind, as you watch the reduction in loans and quarter to quarter, some of the core loans, the economy continues to retract, some of it also are portfolios that we're trying to run off.

In these portfolios typically very high yields but they also have a high credit cost.

That demand has been going on for several quarters.

It starts to mitigate as you get over the next few quarters because those portfolios are being run down.

Separately, what are the assumptions that you're using in terms of how much the debit card revenues might be decline on a growth basis.

Seemed like a pretty big decline.

Keep in mind, the numbers that we gave reflect no mitigation actions and obviously over the forthcoming months and as we watch the rule making by the Fed, we'll be adjusting our business model to attempt to mitigate as much of that as we can.

Okay.

Seems like one potential offset for the industry would be bringing down the rewards.

Can you just remind us, do you have rewards attached to your debit cards?

Is that a pretty big cost?

That's not a significant part of our debit card business.

On a credit card it would be, but not on a debit card as much.

Okay.

And then just lastly, if I may, the non-performing assets were relatively flat quarter to quarter.

And it's still early in the earnings season but we're seeing declines in other banks.

Just wondering if you have any thoughts on why the pace of improvement there is maybe taking a little bit longer than in some other places?

I think it's largely the impact of some of these legacy portfolios that Brian was referring to.

Okay.

All right.

Thank you.

Thanks.

Our next question comes from Betsy Graseck at Morgan Stanley.

Hi.

Good morning.

Good morning, Betsy.

How are you?

Good.

So a couple of questions.

One is just on the FIC line.

Was there any one-timers in there this quarter.

You have peers who were down about a third Q on Q, and you were down more than that.

Just wondering what was in there.

Have impacts of CDA and other things that Betsy it's hard to say they're one time or not one time.

We just had a very strong quarter in the first quarter so I think I'd look at it more there are pluses and minus in the first quarter, plus and minus in the second quarter, I think it's our relative strength in the first quarter from our franchise that made our potential due to market conditions come down further.

Okay.

But you can get into 42 line items about ins and outs.

I think it's better said we probably had a very strong quarter first quarter compared to what we had had prior quarters.

Just when I look at your FIC line in trading relative to the underwriting, it looked like the way we think about multiples there, the multiple came down a bit.

You indicated the trading team was nimble, ahead of the European market correction.

Just wondering if there was anything they did that might have been a near term -

To give you a sense, we run about $300 million round numbers, about $280 million, $300 million of average VAR in the first quarter, we were down to about $180 million in the second quarter.

They took the risk down because they weren't sure of the direction and that gives them opportunity if they would have gotten it right.

I think it was more making sure that we managed the risk down than it was -- we just thought it was so volatile.

Tom and his team thought it was so volatile, they just got out of the way.

Okay, and then just separately, I know you spoke about the commentary around Durbin rate but maybe I could ask it from a slightly different angle.

Which is what are the key drivers to the assumptions that come up with the 1.8 to $2.3 billion reduction, the 60 to 80% reduction in that line item?

Well, it's largely our interpretation of the law, Betsy.

If you look at the rule making flexibility of the Fed, it's actually pretty narrow.

They have some definitional opportunities there, but as we've assessed it, they don't have a lot of wiggle room in terms of being able to modify what's written in the amendment.

Again, I want to emphasize that that estimate assumes no mitigating actions and as you might imagine, Joe Price and his team are working diligently to determine the appropriate ways to mitigate the impact of.

Some of those mitigating actions may occur in other business segments of Bank of America and wouldn't necessarily be reflected in the CARD segment.

Because basically the Fed's required to look at what the cost to provide the service is.

And so is it fair to assume, therefore, that your revenue decline brings down your debit fees to the cost to provide that service?

Yes, we made some assumptions.

We believe we're probably the most efficient provider of that service.

But we do have some expectations that the Fed is not going to require a merchant to offer different rates, if you will, for every single credit card that a consumer might bring to its store.

I mean, it's a -- that's a margin in isolation is a very profitable activity.

When you go from full recovery of revenue to only cost recovery, the impact is substantial.

The issue is it's not a severable activity in the sense from all the other things that customer does for us, so there's other ways to make money and other ways to mitigate, but when you look at that narrow revenue stream, it's a fairly profitable revenue stream because they're varied leverage because you're not taking into account any of the cost of originating the customer, servicing the accounts, running the 18,000 ATMs that they have access to and 6,000 branches.

That's part of the conundrum in the statute, quite frankly.

The Durbin amendment, Betsy, remember, allows us to recover incremental cost.

And as Brian said, the cost of bringing that, the aggregate cost of bringing that service to the customer, the fixed cost we have and the overhead are substantial.

Right.

Okay.

And so reward program you mentioned is not as big as in credit card.

But there is some reward program associated with debit?

I think it's very minor.

We'll get you that Betsy but don't think of that as a relevant question.

The goodwill charge would come when?

When the President signs -- in the quarter in which the President signs the bill.

Right.

So it would be in the third quarter of 2010?

Yes.

Even though the rule making could change and you're just taking that -- your scenario as the base case scenario?

Our judgment, Betsy, as we look, again, at the degree of flexibility that the Fed has to write the rules, it's fairly narrow.

Right.

In terms of flexibility.

We made a judgment that under any reasonable range of outcomes, we think we'll have an impairment of goodwill and under the accounting rules, when you've got that -- when you've reached that judgment, then you've got to measure it as best you can and take the charge.

Matter of transparency, it's a law of the land when he signs it.

The question of exactly when it impacts could be subject to some interpretation.

We've got to take it when it becomes the law of the land.

During the quarter as we evaluate mitigating actions, we will come back with our best estimate at the end of the third quarter.

That will be the charge we take.

We will continue to work to improve the performance of that business through other mitigating actions but to the extent that those mitigating actions occur in a different business segment, we really can't take credit for it in making this goodwill impairment measurement.

Sure.

Do you know when the timing of those mitigating action announcements would end up being?

Do you have any -- ?

This is going to be in my mind a one, two, three year type of work.

It's going to be a changing -- as I said in my comments, Betsy, Joe and the team have been hard at and will start to roll out changes in the core way the customer accounts operate of which this is a part.

So it's not an overnight thing.

It's going to be over a series of the next six to 12 quarters before we can identify and get it back in the P&L.

Okay.

Great.

Thank you.

Richard Ramsden at Goldman Sachs, your line is open.

Richard, how are you?

Hello?

Richard, your line is open.

We'll move on.

We'll go to Ed Najarian at ISI Group.

Good morning.

Good morning.

I guess two questions.

First, I think is a fairly easy one.

When you talk about the $1 billion aftertax for the CARD Act, could you indicate to us how much of that might already be embedded in the 2Q run rate?

About a quarter of it.

Okay.

Thank you.

And then secondarily, given the different types of re-Reg related headwinds that we've discussed and you've discussed on the call, have you given any thoughts on reconsidering your stance on Reg E and sort of going back and reconsidering whether you might work to change that policy and get customers to opt in to try to recover some of those overdraft charges?

I think we're the largest consumer franchise and especially in the sort of core consumer markets.

As we looked at the change we made in Reg E, we were very comfortable we made the right changes and for the good of the customer and I think even if a customer opts in, quite frankly, the next time they overdraft and hit four, five overdraft fees for a cup of coffee and a few things, they're going to realize that that was not the choice they want to make.

It's clear from the customer research we do.

The way to go is to move away from the penalty that the intersection of the overdraft charges, the toughness in the economy, people stretching their paychecks as far as they can and then the way the charges worked, and think that through and go to less penalizing a certain group of customers and spread it across a broader group of customer base so we can achieve a return on the business, because the outcome of the specific customer interactions we had, a small percentage of customers are paying a good chunk of the fees.

When you look at it in hindsight, it's not the right way to treat them.

I don't think them opting in is going to change that dynamic and I think they'll be upset once they opt in down the road.

I think the better course is to get it over with and start to charge a better way and we're seeing our customers respond from our attrition rates are way down and the -- if you actually look at the overdraft fees they have come down some over the last couple quarters but they're stabilizing and stuff and the customers are understanding and we expect it to continue to drop as Reg E comes in.

On the other hand, it's the best thing for the customer.

Other people have taken different positions and we'll see.

We've taken a consistent position.

We won't have such a penalty orienting pricing in this franchise, or else we're destroying the value of the franchise in the long-term.

Thanks, Brian.

Lastly, if you could just maybe give a little bit of a big picture answer to sort of the question of we're obviously seeing you throughout the banking industry a lot of revenue headwinds related to lack of loan growth, net interest income is coming down, we've got all these re-Reg related headwinds that we're discussing.

What would be the big picture opportunity for Bank of America to kind of go back through and really take a hard look at its operating expense base and bring down operating costs related to some of these revenue headwinds?

If you look at -- you have to sort the businesses I think into different parts of that.

If you look at the consumer business and you just look at the numbers of brands we had four quarters ago versus now you'll see they're down a couple few hundred.

If you look at even trimming some of the ATMs, changing the functionality of the ATMs.

There's no question that Joe Price and his team are hard at work on the cost structure, how to mitigate this by revenue and by cost and he has to do that, he knows it and he's working on it.

If you back up in the broader picture to all consumer segments, we're still suffering in the card business, in the mortgage business, the impacts of the delinquency servicing cost for lack of a better term.

To give you a sense, it's probably a good loan's $30-ish to service or something like that and a tough loan is $700 or $800 to service.

That has brought costs way up likewise in the credit cards.

In those businesses, the cost structures are being worked on as we speak and will have to continue to be worked on with the caveat that until we sort of break the back on the hard work around foreclosures and defaults and the delinquencies, the last thing you would want us to do is to pull back on the resources dedicated to that.

Let me completely flip that to the other side to the comms business.

The comms business is a revenue business and you can see it in the quarter to quarter in terms of the $3 billion plus in profit in the first quarter, $900 million in this quarter, that the challenge there is all about people.

And so what you don't want to do is to go pick at the cost as we're building out and driving the business and driving the profitability on the basis of one downdraft in the quarter.

So as I look at it, each business is different.

We will have to drive the cost down but it's differentiated -- our personnel expenses I think are down 8% on a linked quarter basis.

We'll continue to do that.

But I think we have to be careful about which business and how.

And then in the broadest context, one of the reasons we're getting rid of some of these non-core activities is the restructuring that not only has a value of capital but also has a value on a more straightforward Company.

To the extent we can get that out, we can take down some of the costs attributable to that from unique operations which are not sort of scalable into the broader base.

You're absolutely right, over the next several years costs are going to be an issue for our industry, especially on the consumer side.

Thank you.

We'll take our next question from Mike Mayo at CLSA.

Good morning.

Good morning.

What was the loan utilization in the second quarter?

I don't think it changed significantly on the revolving credit lines to be -- different numbers, but sort of core middle market credits used to run 40s, now they're running 30s.

So the [actualization rate] is a little different (inaudible) smaller business credits.

And if you think about a core middle market Company, it's not moved up.

So it's still -- I had 37% in the first quarter.

Is it still 37%?

Yes, in the aggregate.

I think, Mike, as I look at it I always focus on sort of that as the lower sized companies.

I look at the core middle market companies, it's even lower than that and it's been steady.

There's no loan demand because there's no demand for the products.

It didn't get worse, just stayed flat.

As we look out, Mike, I think that that -- we've seen some stability in the applications in our small business credit.

We've seen some stability in those numbers.

But the operative word is stability, not optimism yet.

If you went back two quarters, you were still coming down.

And you're shedding a lot of assets.

What about CCB and BlackRock?

CCB is a strategic asset for us and we'll let you know when we make the decisions about various things but I think that the CCB asset, we have a strategic relationship that's broadening as we speak and we benefit by it.

BlackRock as I said many times is a great Company and we're very happy with them.

Back to the NPA question, seems like the prime mortgage NPAs went up by a few percent this quarter.

Why is that staying up?

And do you think we're going to have a double dip?

And when does that come down?

I mean by double dip in housing.

Our experts don't -- our internal economists think the probability of a double dip is low, that applies to both the housing and the general economy.

The question, the NPA, make sure I understand exactly the question.

I missed you right at the beginning.

Sorry.

Just the NPAs in residential mortgage were up linked quarter.

And I'm just wondering when you think you might see a turn for the better in that category?

I think we're still a few quarters away.

I mean, it's cut in half from the first quarter.

So I think over the next couple quarters I'd say you'd start to see that mitigate, so if you look, it was $1.1 billion growth in the first $677 million, on page 27, you can see it, Mike.

But I still think we're a few quarters away on that.

When you think about what's happened, the card business turned around sort of first because it frankly is the easiest to move, to reposition.

The commercial business turned around, the C&I business broke through pretty quickly again because the team did a great job in underwriting for the cycle.

The real estate related stuff is just slower moving and consumer real estate, commercial real estate will take us a little longer to completely break the backs of the credit in total even though they're coming down a little bit.

Are there any other factors that are influencing that?

You mentioned the elevated foreclosures as you clean up Countrywide.

Anything else related to government intervention that's changing and, therefore, that's impacting the outlook?

Quarter to quarter, the government programs are basically the same.

We've modified our 600 plus thousand.

What we have done is in the -- during the second quarter, I forget exactly which month, but basically we started releasing people who aren't going to qualify for permanent mods into the foreclosure process, and so that, remember that 7,000 total mods is a drop of 6,000, and largely that was relief.

The process is moving through the system.

It's a difficult process.

But there's been no substantive change in terms of government support for the modification programs.

We're finishing up on the work that we're doing there and continue to originate modifications in accordance with the currently outstanding programs.

Last question.

With the new CFO, maybe just any philosophical change on how you approach the position or any changes that we might see.

I'll let Chuck answer that.

I think that was directed at him.

Yes, Chuck, go ahead.

Brian and I have certainly talked about this so none of this will be a surprise to him, Mike.

If I think about my priorities, open and direct communication with our shareholders and other constituencies, doing the right thing, doing it the right way, a disciplined approach to our finances, focusing on returns, not absolute size.

Committed to a strong balance sheet, strong capital with adequate liquidity through the cycle.

We're going to focus on our core businesses.

We're not going to get diverted into other activities.

And obviously focus on strong controls and expense management.

So those are my -- that's my focus.

Those are my priorities.

All right.

Thank you.

Thanks, Mike.

We'll take our next question from Nancy Bush at NAB Research.

Good morning, guys.

Nancy, how are you?

Couple of questions here.

Brian, you spoke several times about derisking the Company.

Could you just go through and sort of summarize the major areas that are being, quote, derisked?

And if there's any way -- I realize this is very difficult to sort of size the impact that that derisking may have had on second quarter results.

Just in a broad context, I think going through the customer groups, on the consumer side when we talk about taking out the risk, in the unsecured lending products, card products, we had a consumer lending portfolio which is high point well over $20 billion.

Is now down to $16 billion and will continue to effectively run to zero over the next few years.

We had obviously the legacy assets from Countrywide which we are continuing to run down, some of which are in the consumer segment, some of which are in the central segments but we're running those down.

The home equity book, we're continuing to let drift off some of the tougher areas we probably originated credit to unfavorable terms though the customer.

Very small business area, that was an area if the you remember our charge-off rates ran up 18% to 19%.

That's come down.

It's down to about $12 billion in the second quarter.

At the high point I'd say it was $15 billion or $17 billion.

So in the consumer, it's more running off non-core portfolios, portfolios that have risk in them.

So I can't off the top of my head say exactly what happened but it is taking up revenue and frankly some of those yields on those portfolios are actually higher yields than the core consumer card would be.

When you look at the commercial side of the business, our core middle market business is very strong and we're doing everything we can to grow loan balances, just not a lot of demand.

But on the commercial real estate side for example, we had in loans we have a couple of these large deals, one of them we liquidated in what we used to call large floaters.

When we liquidated this quarter, we expect to liquidate the rest of them.

So we're stuck on large commercial real estate deals.

And then the rest of David's portfolio has actually been very strong.

When you go to the large corporate portfolio it's performed very well, meaning lending portfolio in Tom's world.

And Tom's world is really the legacy trading assets, CDO rundown, wrapped asset one rundown and we continue to run that off.

From an asset portfolio side it's a whole bunch of pieces.

I could ask Kevin and those guys to try to take a stab at it.

Let me go back to a broader perspective over the next few quarters.

What I think we owe you over the next few quarters Nancy and part of it's just working through it, make sure we have a good handle is sort of the core, non-core view as we work out as to where the loan portfolios that we expect to carry and want to carry and how they are behaving versus portfolios that aren't and we'll do more in each quarter, in the quarters going forward.

It's just been as we've been making the transition here, it's been harder to isolate them and getting Chuck on board and getting it put together.

Lot of other things going on.

We will do a better job showing you as we come out of this year and the economy stabilizes what the core asset side looks like and try to highlight that for you.

Also, there was a story yesterday in The Wall Street Journal about some of the initiatives that are taking place in the branch network and I'm wondering when Joe is going to address -- is going to speak to us about what's going on there, or you're going to do any kind of sort of strategic review of what's going on in retail and is there any expense associated with that?

I think we told you, told you I think in the last call is our anticipation would be to come to you in the early next year with sort of a complete layout of the Company, Investor Day that we haven't done in a few years to lay it all out.

I'm sure frankly between then and now Joe will be in situations where he'll talk about it.

The thing is, things change.

We're here 90 days ago, the idea of interchange being a relevant question I don't think was on anybody's mind.

We're trying to make sure we get the rules of the road set and then we can react to them.

Last call would have been Reg E and CARD Act.

This call it's interchange.

And the questions we got -- sort of make sure that we have the cement forming under the rules and then we can do it.

So it's going to take a few quarters.

It's not that they're sitting on their hands.

We pilot the products in Georgia and in other areas where the all electronic products, we piloted some of the monthly fee products and things like that.

So they will be making some of those changes even as we move to the transformational new product set around the core consumer checking which will roll out next year.

They're starting to put some of those changes in, all consistent with the core thought process that shifts from more penalty oriented pricing to more broad based pricing, with the thought process we have to provide a return for you and our shareholders in consumer banking, ROEs at 11%, that business has to produce a lot more for us to do what we need to do in our balance sheet.

It's all the levers.

We'll pull them all.

As the quarters go on, we get more used to what the rules really say, we'll be able to show you more.

And just one final question, I think Mike Mayo used the term cleaning up Countrywide and I would just ask how far through that process do you feel like you are at this point and when do we get to Countrywide sort of looking like, quote, a normal mortgage Company.

I think if you separate in two pieces, I think the front end we're finishing the last part of the integration of the systems and implementing the full image base systems and stuff.

One of the things we don't talk about, we've had some of the largest systems work ever done in our Company's history going in on the weekends now with Merrill Lynch and Countrywide and completed very well and stuff.

From the front end, they completed that work so from a production side, they're still about a month away from having it fully done, a couple months in terms of last pieces of it and we had to slow down to make sure it was really working right.

From the production side, we're 20% market share, month in, quarter in, quarter out.

That's sort of behind us.

One brand, in the market, core products, what we want to do, adjusted all the buy box, so-to-speak.

Adjusted the product parameters.

That's done.

It's really now the back ends.

Think about it as a one million, two million, three million, four million loans that we have just to work through and subsequent work through those loans which may need to be touched again.

It's sort of bifurcating in two pieces right now.

I'd say it's still probably, I think this year, next year and into 2012 before you see that back end really go over the edge and you see significant reduction past the point we get to normalized sort of default practice.

Okay.

Great.

Thank you very much.

We'll go next to Moshe Orenbuch at Credit Suisse.

Go ahead, please.

Great.

I've got basically two questions.

Expanding on the Durbin, could you maybe flush out what kind of actions you would take both inside the card business and outside the card business to mitigate that?

And kind of a corollary is, as compared to the overdraft where you didn't take kind of goodwill write-downs when Reg E cut your overdraft fee revenues, why would you take them now, before this is fully flushed out and your mitigating actions are in place?

Could you kind of differentiate between the two?

Let me take the back half of that question and leave the front half for Brian.

What we do each quarter for our key businesses, where we have substantial goodwill balances, is go through an assessment, a two step assessment as required by the accounting standards to determine whether or not the carrying value of our goodwill holds up, and so that's an incremental kind effort and frankly, when the first round of regulatory changes came into effect or were announced, we had plenty of head room, if you will, in our goodwill impairment calculations.

The impact of this most recent set of legislation was more significant and so we have been doing this evaluation regularly, but with the consideration of the Durbin amendment, it did trigger the signals to us that we had an impairment.

If you think about the CARD Act, that was taken into account in the evaluation as of the June quarter.

We were to the plus.

It's next quarter we all anticipate the President will sign the law next week.

The difference also is the segments.

The overdraft fees in the consumer segment, remember, this goodwill comes from the purchase of MBNA, we've got to start back there.

That was a card Company.

We put our payments business together under the leadership of Bruce Hammonds and Ric Struthers and now Susan Faulkner back then, and put the two together.

So the segment was reported separately.

In the retail business business where the overdrafts go, there's a whole bunch of revenue streams including a whole bunch of margin, obviously, on the deposit business which supports the goodwill, and which was actually less than this business, so it's just not been an issue.

And Brian, sorry to harp on this, but you didn't buy a signature debit business with MBNA, so where is that goodwill -- how is that goodwill coming from that acquisition?

It was on -- it's on the enterprise which is our payments, our consumer payments business which is a combination of debit card business, credit card business.

That was put together two or three years ago.

Our global card segment has both debit and credit in it.

Has for a significant period of time.

Right.

And so as changes have occurred in legislation, affecting either debit or credit, they've affected our future projections and valuations of goodwill and this was -- this most recent action is the one that --

So it tipped you over the edge with respect to the valuation.

Exactly right.

As far as the mitigating actions that you, inside and outside of the segment, could you talk about that a little bit?

For the overdraft and the debit interchange, basically think about it you have a checking account and you have how you're going to charge for the checking account.

You can pick up revenue obviously by the spread on deposits.

You can pick up revenue by the fees.

The mitigating actions from the revenue side are along those dimensions, which is different types of fee structures, higher minimum balances, still charging for overdrafts and other things that occur on the check side and things like that.

And then potentially new products that they're working on that will provide some of the benefits that people wanted from overdraft, prepaid debit and things like that.

So we're working on those.

It's all around either the fee side, monthly fees, et cetera other the spread side.

On of the issues is when total rates rise, the spread side is relatively inelastic because on the checking you're charging zero.

The value will come as the core structure moves up.

And then the issue as we said before, some of that falls in the deposit line of business and some of it falls in from the standpoint of how customers think they're paying for a checking account.

6,000 branches, 18,000 ATMs, et cetera, et cetera, et cetera.

Okay.

Just kind of a follow-up on a different issue and that is you talked about the compensation line but with a significant reduction kind of linked quarter, $4 billion roughly in trading profits, I guess shouldn't we have expected to see a little more of a reduction on the personnel expense accruals, I guess maybe could you flush out that versus the deferred comp that you alluded to in the press release.

Well, given the variability between the two quarters, I think you really have to look at on a year-to-date basis.

And on a year-to-date basis, we're in the sort of mid to high 30s in terms of our accrual.

In terms of a percentage of revenues.

And depending on how the rest of the year goes, that seems like a good year-to-date kind of number.

Got it.

Thank you.

Thank you.

Jefferson Harralson at KBW, your line is open.

Thanks.

I think I heard you talk in the past about the pretax, preprovision earnings power of the Company eventually being $52 billion to $60 billion, with this quarter, the Durbin bill, maybe hitting by $2 billion with maybe the margin, the spread was down by $1 billion, that's $4 billion annualized.

The fee income included, the DVA of over $1 billion.

Rep around warranty moved up a little bit higher.

Does this quarter or Fin Reg details make you change how you think about the $52 billion to $60 billion or do you think that needs to lowered a bit?

I think -- I'm not sure if I ever talked about that number but that's -- in the past, because I think we saw $14 billion round numbers, and then $12 billion and what we try to make sure people don't annualize $14 billion off the first quarter because we thought trading had an outsize.

I think as you look forward, I think the idea of in that high range would be, based on everything we know today, that would probably be more than we would expect.

On the other hand, we have time to work through some of this mitigation, some of these provisions.

So I think our view is that if people are up at the high end of that range, I think they are high compared to the things that hit us since even like interchange hit us since the time we made that.

So I think as we look in the future, in near term future quarters, I think we've been clear that the $12 billion which had some pluses and minuses in it, trading stuff in, more in the range of what we're talking about, $11 billion to $12 billion for the near term with some pluses and minuses each quarter going through.

We'll go next to Chris Mutascio at Stifel Nicholas.

Go ahead, please.

Thanks for taking my question.

Brian, could you -- I hope you don't think I'm harping on this or anyone else is.

On the Durbin amendment, just trying to struggle to see what assumptions you're using in which the Durbin amendment knocks off 70% of debit interchange fees.

Could you share the assumptions that you're using?

The broad assumption is you went from an ability to charge to an ability to only be able to recover your costs.

Incremental costs.

Incremental cost of supplying the service.

You've been tearing apart the assumptions that get us there.

Neil could add to it.

From a broad perspective, you have to read what that law says which says you can recover incremental costs.

This is why we were so as an industry trying to make sure people understood that because it's an unusual event for someone to regulate a particular transaction between two businesses.

To only allow you to recover your costs.

That's a very unusual event in American history.

Chris, appreciate, this is -- If you read the rules carefully and there's still some wiggle room with the Fed in terms of their rule making, we're able to recover incremental costs.

So the overhead, the infrastructure, a lot of the things that we offer our retail customers in the banking centers is not incremental and so this was a particularly lucrative business for us.

As Brian said, this is not going to benefit the consumers at all.

This is simply a movement between different businesses of profitability.

Amazing.

Brian, one follow-up.

I think Betsy had earlier.

In FIC trading, was there any issues with European sovereign debt that might have brought down the trading amount in the quarter?

Seemed like you were lower than what I've seen from maybe Citi and JPMorgan.

I know you kind of qualified that by saying you took risk off the table during the quarter but was there any type of items related to foreign or sovereign debt issues in the quarter that impacted it more significantly?

Not anything significant.

Nothing on sovereign debt.

We didn't have a lot of exposure.

We managed it well.

If you look at that revenue line on the chart there, you can see that the numbers run on the fixed side, $5.5 billion last quarter.

If you look back over the other quarters, you can see that was an extremely strong quarter for us.

We think of Tom's business as being quarter in, quarter out, on average and it will move by seasonality more like $5 billion.

And that's what I in the earlier question, he needs to hit about $5 billion on revenue, $20 billion on revenue for the year.

We think that's a solid performance for that business.

As you look back, you can see you can get to the $5 billion average but it bounces around a bit based on some of the seasonality and some of the opportunity.

The $7 billion in sales and trading revenue last quarter was a significant outsized performance and most of it as you can see, the equity business is more of a, derivatives, but generally is a $1 billion, $1.5 billion business because of the cash nature of it and the way it works as well as the derivative, but sort of more of an annuity stream for lack of a better term and FIC is where you have the volatility.

It's not a sovereign risk issue.

It's more related to the lack of opportunity in terms of the up side and then any hits we took were around the classic sort of CDA issues, counter parties and things like that.

Any thoughts on the Lincoln amendment going forward as relates to that type of $5 billion average per quarter?

We don't think -- again, there's lots of regulations and this one's harder to understand because it's not so discernible.

Because we're customer driven and Tom, frankly, the last 18 months has been pushing out some of the vestiges of proprietary trading between Volcker and Lincoln we don't see this as being as significant on this side of the house at all and, frankly, there's some benefits into it of counter party risk and things like that that will help.

We have not -- this has not been our major concerns.

Obviously with numbers we put out and the other stuff, that's what concerned us.

Thank you very much.

We'll go next to Carole Berger at Soleil Securities.

Good morning.

A couple of small things.

On the reps and warranties, the increase, I'm not too clear whether we're going to a new level of expenses, I mean, you were at the lower level of about $0.5 billion for several quarters.

Is this a new level.

Is part of this a reserve build?

Could you flesh that out a little.

Carole, as you might imagine, there's real variability in the degree of dialogue between us and the various mono lines.

In some cases, we're in a very constructive discussion where we have an ability to understand our exposure and measure it and accrue for it.

In other cases, there's litigation involved and a lack of communication because of the condition and the circumstances of those mono lines.

So what we've tried to do as we would each quarter is make our best judgment and our best estimate around that exposure.

Last quarter we told you that as it related to mono lines, we didn't have enough information to make an accrual.

We have more information this period, this quarter, to make an accrual.

It will depend upon the dialogue with the mono lines or the lack of dialogue and the kind of work we do to see if we change our estimates.

So what I communicate in my prepared remarks was it's going to be a bit lumpy.

It's going to be a bit variable.

And it will -- there's not a run rate concept here, given the behavior of the mono lines.

I think, Chuck, in the second quarter, the actual cost, the actual cost was really flat with the first quarter.

This is the additional was a reserve of expected future costs.

This roughly $700 million addition was reflective of that.

Okay.

That's helpful.

Also, do you have any of the aftertax numbers on some of these larger asset sales?

Because it seems to me even after I adjust your tax rate for that $250 million tax credit, I still get a pretty low tax rate in the quarter.

My recollection, Carole, and we can get back to you more specifically, my recollection is that the aggregate impact of all of these on the quarter aftertax was about -- was a benefit of a -- a net gain of about $1.1 billion, $1.2 billion.

Aftertax.

Aftertax.

Aftertax.

Of the three -- of the Itau, MasterCard and Columbia.

Yes.

Okay.

And lastly, --

Carole, one other thing too.

We did have some additional tax benefits associated with the Santander, Mexico.

In addition to DTA impact.

Oh, okay.

The $1.2 billion, I mean, the -- yesterday on JPMorgan call, Jamie Dimon also said that in addition to large corporates having a lot of cash on their balance sheets, that he thought small and mid-sized companies were also sitting on a lot of cash.

Is that your experience as well?

I would say mid-sized, yes.

I would say very small companies I'd be careful because it depends on what industry, whether they're successful or still struggling.

So if they're in pure retail, restaurants and stuff, no, but if they're in retail restaurants or construction, things like that, those companies are still struggling.

Mid-market companies have done a great job through this cycle getting themselves delevered and very good shape.

If you talk to those mid-market customers, they're ready to go.

They just need to see opportunity.

Those who have business in Asia and stuff are actually seeing revenue growth than those that have business in the United States, they're moving along but they're worried about Europe if they have business there.

So it's no different from the general economic picture.

But they have got themselves and they're sitting on all that cash.

If the catalyst exists for demand, they'll be able to fill the demand very quickly.

That doesn't really bode well for your loan growth prospects?

I think that's a point that we talked about earlier.

We've seen stability in the draw rates I think Mike asked about earlier.

Stability is better than what we were seeing say in the second half of last year.

But we're not saying that we're seeing --

Understood.

Attributes setting up to grow yet because of the issues you talked about.

They have the cash.

If you look at the NFIB surveys and stuff, people are not -- it's not access to credit.

It's not cash.

It's opportunity and uncertainty that's on their minds and so it would take a little while for loan growth engine to pick back up.

Okay.

Thank you.

Thank you.

Our next question comes from Chris Kotowski at Oppenheimer & Company.

Hi.

Most of my questions have been asked.

But on the repurchases, I wonder, can you talk about -- is it still mainly the 2005, 2006 and 2007 vintages that are at issue here with this quarter's bump-up or is it an issue that 2003, 2004, 2008, and 2009 are being infected as well?

No, it's the vintages you would expect.

It is all in the vintages?

Yes, there's no new news there.

Intuition would tell you, somebody's paid us for three or four years, starting to age behind us and you seal a group of activity and a group of loans that we're going to have to work out in the next several years from all aspects, not just rep and warranty but generally working through.

I'm not sure I'll get any further than anybody else has, but on the potential offsets to like the debit card interchange fees, are there levers that one can pull in terms of either demanding increased free balances from customers or fees or anything like that?

Yes.

We've got fees.

We've got the spread and then we've got the sort of activity per account which would be raising balances and any other cost side.

We are working on all those dimensions, so raising minimum balances and things produces a more efficient.

In other words, if that customer has to give you more to keep an account adds to efficiency.

All those are on the table.

The law that was passed yesterday is not even law yet.

It will take time to retool the whole franchise and have the dialogue with customers to do it, but every aspect will be done, and the one thing I'd say that is one of my things that I get asked a lot about is how come this is such a great area for banks, low rate environment, it's not good for deposit franchise.

And so we don't pay on checking accounts and issues when rates are effectively zero the value of that for our Company is less than it is when the short rates are 2.5 to 3%.

As rates rise that will also be an offset.

I think importantly, when you think about the mitigating actions, think about which ones will occur within the card segment and which may occur in other segments of Bank of America.

That has a real impact on the accounting judgment we were making for the third quarter.

Do you mean like -- well, never mind.

If you take actions in the deposit -- our deposit segment to begin to mitigate this, it doesn't help our goodwill write-off measurement, because that relates to the card segment.

Okay.

All right.

So if you can recover, the point you're implying is if you can recover the revenue from the merchant some how then that mitigates the goodwill write-off?

No.

No, if we did something in our deposit taking business and our checking accounts and in the kinds of actions and mitigations that Brian alluded to, that don't result in incremental revenues inside the card segment, it doesn't affect the goodwill write-off judgment.

But we run the business in order to optimize the enterprise, not the segments.

I mean, what you're concerned about, what we're concerned about, the balance sheet adjustment we made are not at a level -- that's done.

The real question is what's the business model going forward on the consumer side and that is all the mitigating factors.

No matter where they come in, you'll get the benefit as the shareholder.

Whether it's spread, whether it's fees in any segment, whether it's minimum balance requirements to make us more efficient and taking the costs out.

The team is working on it.

It will take time to do it as we move through the deposit franchise over the next several quarters.

All righty.

Thank you.

And due to time constraints, we will take one last question.

Our final question comes from Matt Burnell at Wells Fargo.

Good morning.

I'll try to make these quick.

Just a couple of administrative questions I guess.

First of all, in terms of the TDR trends, looks like TDR balances were increased by a much lower amount this quarter.

Can you provide any color on what the trends are there, what you might see in the third quarter?

You're absolutely right.

They did decline this quarter.

And they will probably decline going forward.

Okay.

Focusing on the investment bank for a second, you mentioned that you're intending to grow staff outside the US.

Can you give us a sense as to what impact that might have on expenses in the Global Wealth and -- I'm sorry, in the global markets business?

A lot of people are being hired as we speak so they'll come in their own rate.

I think the numbers of people we're adding relative to the whole size of the business it will be an impact, but not a huge impact.

And the way we accrue is against the profits and revenue so it will work out in terms of the operating dynamics.

I wouldn't say it's going to -- changes in cost structure in Tom's business, that materially over the next several quarters.

It's replacing people we lost and adding people but it's against a total base of 10,000 to 15,000 people, it's in the hundreds type of thing.

And then last question, in terms of your potential sale of Balboa, my numbers suggest that there's a little more than $3 billion of assets in Balboa, a $2 billion in capital.

Assuming you are able to execute the sale, what effect should we see from that in terms of assets and/or capital getting freed up?

We'll fill people in on that I think over -- Kevin and those guys can fill you in specifically.

We just today put it in the market and so I don't have a quick answer for you off the top of my head, but it will be a sale, we'll get a gain, it will be behind us, contribute to earnings.

Our view is, why are we selling it?

We're selling because it's not a core activity of making mortgages and we're continuing to fine-tune the franchise.

Great.

Thank you.

With that, I'd like to thank everyone for joining us this morning and have a good day.