美國銀行 (BAC) 2011 Q1 法說會逐字稿

Good day, everyone, and welcome to the Bank of America first-quarter earnings review.

At this time all participants are in a listen-only mode and later you will have the opportunity to ask questions during the question-and-answer session.

I will be standing by should you need any assistance.

It is now my pleasure to turn the conference over to Mr.

Kevin Stitt.

Please go ahead, sir.

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, as he did last -- three months ago, will be Neil Cotty our Chief Accounting Officer.

And with that let me turn it over to Brian.

Good morning, everyone.

Before we get started this morning I wanted to spend a couple of minutes on announcements that occurred this morning other than earnings.

Obviously we will cover in this call the announcement with the FSA assured on the monoline, but on the leadership side I just wanted to talk through what we have done there.

Last year Chuck came to me and due to an illness of a close family member in California, where he has lived, it was going to be clear that he may not be able to move and we decided to continue to talk about the situation.

He had made a commitment to move at the end of the school year, obviously, because he had a daughter who was a senior in high school.

But with that it became clear as we moved through this quarter that Chuck could not move so I asked Chuck to take another leadership position that could help us work on some client matters in the mortgage company and help with the transition to a new CFO.

So what we announced this morning was to have Bruce Thompson takeover for Chuck as CFO effective -- and that transition will be completed by the end of the second quarter.

Chuck will continue as a great judge [in perspective] to help Bruce continue to learn the tasks.

Chuck has served as the CFO at a time when we have had tremendous transformation in our financials.

He has been a great partner and we are glad that we came up with something that worked for everybody.

Bruce many of you know.

He has been the Chief Risk Officer; he has done a great job for us since last year doing that.

He ran our capital markets business for Tom and ran leverage finance and many other things in the Company over his 15-year career here.

As Chief Risk Officer he managed us through a difficult situation, including, as you will see in some of the pages later, a great reposition of the balance sheet.

In addition to those two changes, we also announced that Gary Lynch will join us as Global Head of Legal, Compliance, and Regulatory Relations.

My judgment was that we wanted to continue to add to the quality and capabilities of our management team.

As Gary became available, his reputation on the street, in legal circles, and regulators is well-known.

He has also been the Head of Enforcement at the SEC.

The relationships he has around the world -- he spent the last couple of years in London -- will help us outside the United States.

He will join us when his garden leaves -- expires later this year.

So with the management changes behind us, let's shift to the quarterly results.

With that I will start on slide four.

Rather than get into the some of the details on the page, let me just give you the themes for this quarter which are similar to those we related to in early March.

The franchise that we have built over the last 230 years in this company continues to deliver and you can see that in the numbers and the statistics this morning.

Obviously, the mortgage business is still in need of continued repositioning.

We will continue to work on that.

But what you have seen is solid customer activity across the board.

Our focus on changing the strategy and the consumer deposits business has led to the first quarter of net checking account growth, a return to profit in that business, improved customer satisfaction across the board, the best retention of customers in that business in many quarters.

In other areas, we continue to grow our FA headcount.

We have had strong referrals in the businesses across -- to each other.

The deposit growth through the whole franchise has gone over $1 trillion in total deposits, and as the economy has improved a bit we are starting to see some loan growth on a core basis in the middle market business with David Darnell.

And we will touch on some of that later but the key theme is the franchise continues to deliver.

As you back up to the second point, revenue rose from last quarter, expenses were flat on a gross basis to $20 billion including goodwill -- and I will cover it a little later -- up $500 million more in our core business.

But the absolute levels are elevated and I am going to talk about what we are doing what about that in a few minutes.

Overall, earnings improved to $2 billion or $0.17, but we are still impacted by charges as we continue to pull out through the financial crisis.

We had $5 billion in charges this quarter we absorbed and we also had $3 billion between reserve releases and higher private equity to the good side.

When we talked you at investor day we said we were shooting for pretax, pre-provision profits in the out -- as we normalize to $45 billion to $50 billion.

This quarter Chuck will walk you through the one-time items, but if you adjust for those you will get to a number of approximately $10 billion, which is up from last quarter.

And I think puts us in a position that we can see clearly how we build the bridge to the $45 billion to $50 billion level as we normalize.

That normalization requires the interest rate environment to change more fundamentally to a more normalized environment.

We have got to take the costs down across the board.

As the economy continues to plug away, we will continue to make progress in other revenue sources.

In addition, one of the things we talked about at investor day was the need to continue to drive down the legacy assets and risk in the Company.

During this quarter we took care of one of the monoline exposures, we absorbed the home price fall off and we also continued to have our loan portfolio run-off across all categories of portfolio we identified for you a couple quarters ago.

This quarter that portfolio ran down by about $6 billion, excluding the government-insured loans which we show you in the appendix.

The cost of that to the P&L was about $1.9 billion pretax this quarter.

Again, Tom and his team did a good job reducing legacy trading assets and we continue to make progress in that area.

When you look at the balance sheet, we continue to position the balance sheet.

Our reserves, even after release, remains strong -- 4.3% to loans, 1.63 times trailing charge-offs.

We made progress improving the capital ratios, lowering our risk-weighted assets again, growing liquidity, and reducing long-term debt.

All those important metrics we identified for you a few months ago.

We also continue to move forward to take advantage of the opportunities we identified for you.

We have a great opportunity as a company in the affluent and mass affluent segments, and between Joe Price and Sallie Krawcheck and the team they continue to see good growth there.

We continue to have opportunities on our international capabilities and I will describe the work we have done there over the last quarter.

And we continue to have opportunities in the business that will rebound as the economy continues to move forward in the investment management and capital markets areas, and we had solid quarters there.

Again this quarter, we continue to have to simplify the franchise.

This quarter we made progress, we sold a European small business card portfolio.

We have Balboa under contract, that will close late this quarter early next.

In addition, we continue to reduce our private equity positions across the board and we continue to sell some other small pieces to continue to fine-tune this franchise.

When we get to the broader economy this quarter what we saw is that the customers' health continues to move forward.

Delinquencies were down across all portfolios.

Consumer spending continued to increase this quarter over last -- in 2011 over 2010.

In March it increased 7%, to give you an example.

About 1.5% of that would have been gas price increases; the rest is sort of fundamental customer purchases moving forward.

We see loan demand in select areas and loan stability across the board, absent the run-off book.

Our affluent clients continue to take more risk in the market and we have seen growth in the area there, and the capital markets remain robust.

So with that let's drop to page five and get into some of the specific results for the quarter.

On slide 5 you can see we can start with the capital ratios.

We told you at the conference our share return model requires us to focus on building our balance sheet with a strong reserve position, driving optimization of our risk-weighted asset position and building capital through 2011/2012 as we move from Basel I to Basel II to Basel [II.5] to Basel III.

This quarter reflected the continued progress.

The tangible common equity ratio increased to 6.1% above the level we believe of the risk inherent to run the Company.

The focus that we also shared with you is driving tangible book value per share.

We moved that to $13.21 this quarter, as you can see in the upper right-hand corner of the slide.

Our regulatory capital ratios continue to improve.

We had a fairly sizable change in the DTA allowance period for regulatory capital treatment that caused the 27 basis points decline before we got the quarter started.

But even with that we still made progress.

The Tier 1 common ratio was up 4 basis points, or 31 basis points not taking into account the adjustment, and the Tier 1 was up 8 basis points gross.

On the lower right you can see we make progress by continuing to reduce RWA.

And as we have talked to you, we have significant mitigation coming later in the year in Basel calculations after planned implementation of technology, risk models, and other risk management opportunities we have been working on for the last couple years.

All this is critical in our ability to meet the Tier 1 Basel III common ratio goal of 8% at year-end 2012 as if Basel III was fully implemented and the move forward on capital management later this year and next year.

Now let me go to page 6 and then just to step back and think about the progress first quarter of 2010 versus 2011 in the core balance sheet of this company.

As you can see on this page, overall assets down 3%, our RWA is down 6%, our deposits are up 4% or $44 billion, our long-term debt has been reduced $77 billion, which is significant and has a significant benefit in our margin.

Importantly, you can see our tangible common shareholders' equity is up $16 billion, our Tier 1 common equity is up $8 billion, and you can see the rest of the statistics on this page.

So in a year's time frame we have been able to significantly lower the risk, increase the capital, and increase the statistics on reserve coverage while at the same time managing the customer franchise.

As we move to the businesses, I just wanted to reflect quickly on those and then I will let Chuck take you through the detail and the numbers.

On slide 7 you can see the overall picture and it's a pretty simple picture.

You can see all the businesses have moved back to profitability except our mortgage business and we will talk in some detail about that later on.

As you go on each of the businesses, let's first take our deposit businesses starting on page 8.

The deposits team produced earnings this quarter of $355 million and that was versus a loss in the fourth quarter.

They had higher revenue and lower litigation expense compared to the fourth quarter.

Remember that in this business the fourth quarter was kind of the low point because the regulatory items affecting the deposits business by the Reg E and overdraft are fully in this business.

Our Durbin charges would go into our card segment and -- later this year if it becomes effective.

The return on tangible equity for our deposits business this quarter was 25%, which is above the rate -- our hurdle rates obviously, but we expect to go higher as the business continues to recover.

Average deposit balances were up $5 billion or 4% annualized.

The cost of retail deposits, both in this business and our wealth management business combined, were down 4 basis points to 33 basis points.

Importantly, new accounts reflect a continuing focus on quality relationships and retention.

As a matter of fact, we are seeing the lowest attrition in accounts we have seen in three years or more.

In this quarter we saw the first net account growth, based on the change in strategy that Joe Price and his team are accomplishing, in five quarters.

Account closures are down and our customer focus continues to work.

Early results in our pilots to reposition our franchise based on all the regulatory changes and the customer-driven analysis are still in early raw but are exceeding our expectations.

In adding a preferred customer solutions group, or Platinum Privileges offering as we call it, has worked well.

On the expense side, the team is working.

Branches are down 200 over the last five quarters, our cost of deposits ratio that we showed you at our -- in early March went down from 264 basis points, that is all the cost of operating the franchise over the deposits, to 260 which shows continued growth.

Our active online accounts exceeded 30 million, a record for this company.

Our mobile users are up 55% first quarter of 2010 to first quarter of 2011 to 6.8 million mobile users.

As we switch to card services that business earned $1.7 billion in the quarter on improved credit quality.

Its revenue is down as the portfolio keeps repositioning as we continue to run down the books of the loans we don't want in that business and the lower yields due to seasonal decline in retail volume.

The unit did benefit by reserve release, but the earnings are normalizing and we will see that happen over the next few quarters.

The retail volumes are down from the fourth quarter, but as I said earlier customer usage of cards has gone up year over year by in the 5%, 6% 7% range depending on the month.

Our net loss rates broke another level here as we fell below 8% for the first time in a while and from the peak of nearly 14% on card losses in the US credit card book.

New accounts in our US credit card book were up 26% in the fourth quarter, the highest level in six quarters, and credit quality of this new origination is very strong.

So as you think about our core consumer businesses, we have returned to profit in deposits and we expect to keep driving that forward and our card business continues to improve.

And both have upside as the interest rate environment and economy continues to stabilize.

When we move to the next page, slide 9, and our wealth management businesses, the global wealth management team turned in $531 million after-tax, up 69% from solid fourth-quarter results driven by an 8% increase in revenue and lower provision for credit costs.

Our pretax margin in this business showing the value of the integrated model across all the various products was up -- is reaching nearly 19% and the return on economic equity was 30%.

The growth in margin, as I said, is reflective of the loan and deposits growth, which grew 5% in the quarter.

It demonstrates that customers want to integrate their finances with us and that loan deposit growth led to NII growing 10% from the fourth quarter of 2010.

Now many times people ask us if that money is just money sitting on the sidelines, but during this quarter we have also seen the activity related to the investment side of the house grow nicely.

Client balances grew 2% and that is on a $2 trillion base, to give you a sense, so it's $45 billion in growth from clients and new product flows of about $14 billion in long-term assets under management were all good performance by this unit.

The growth in financial advisers continue to be steady, 184 new financial advisers were added.

We continue to have record low attrition in our advisor force.

And referrals by this unit, which is sort of a lynch pin to our referral strategy, continue to be strong and remain healthy with the other businesses.

On slide 9 we move to one of the -- at the bottom of slide 9 we talk about one of the core businesses that we have which is middle-market small-business lending which turned in another quarter of $923 million of earnings.

They were down slightly as they went from a release of provision to actually having provision this quarter.

The return on tangible equity for this business is 18% for this quarter.

Average C&I balances were up 2% and that is concentrated in the middle-market space and offsets declines in the commercial real estate business and dealer financial services business in this.

Average deposits also grew 2%.

The asset quality of the business was very strong through the cycle and continues to improve.

One of the things that you often ask that we saw here which is we saw revolver utilization of our companies move from 32% in the fourth quarter to 35%, which shows that companies are using credit ever so slightly.

Remember that normalized for that level that is probably in the mid-40%s so we have got work to go ahead of us there still.

If we move to slide 10, moving to our large corporate and capital markets and settlement trading team and global banking and markets, they earn $2.1 billion (sic - see Presentation Slides) for the fourth quarter.

Returns on tangible capital business were 28%.

The revenue was up 44% from the fourth quarter driven by increases in sales and trading, a robust quarter investment banking, and steady corporate banking revenue driven by treasury management growth of about 5%.

Corporate loans were up $3 billion for the quarter, about 12% annualized, driven by growth in our international lending business.

Now one of the interesting things here is our international market share in some of our business is now stronger than our US market share, which shows the effort the team has made to grow across the world with its global clients.

In equity capital markets and advisory we actually had higher shares outside the US this quarter than we did inside the US, which shows good progress on our international strategy.

And now we move to the business that we continue to have to do a lot of work on and that is our consumer real estate services business.

As you know, we split this business in two parts to focus the executives in the business to concentrate on two pieces.

Barbara Desoer and her team to concentrate on the front-end business and Terry Laughlin and the team to concentrate on the legacy asset business and running down.

In the business -- the legacy asset business obviously had a significant loss and the go-forward business had a slight profit.

And Chuck will talk you through that later.

Our production levels in mortgage banking fell to $56 billion but we maintained our market share.

To deal with the falloff we have announced today and have been reducing headcount by approximately 3,500 people.

About 2,000 of those contractors in that business and about 1,500 are teammates.

This is all on the goods side of the house and Barbara's side of the business.

In a legacy side we continue to deploy resources to get through the backlogs, the modifications, and foreclosures.

During the quarter we modified 64,000 loans bringing us to over 840,000 loans modified in the last few years.

On our legacy side, as you saw in our press release, we settled the exposure to one of the major monoline insurers and Chuck will cover that later.

Again, after the review the regulators conducted late last fall and our self-assessment, we have made significant progress implementing the changes to the solution on short sales, deeds in lieu, and foreclosures, and we will completed about 70,000 of those in this quarter.

The cost of delay in foreclosures and assessments related to that is reflected in the P&L this quarter as is increased servicing costs and our MSR valuation.

As we move to the subject of cost, which is something we have focused on, you can see on slide 12 that you can see that we have laid out for you sort of the fourth quarter and the first quarter in terms of the overall cost.

There is about $20 billion in reported costs but on a core basis we had about a $500 million increase from quarter to quarter.

We know that we need to do more on costs and we will continue to work on those.

If you look at the base run rate, it's approximately $17 billion and this is a run rate we have been facing consistent with what Chuck told you at the investor day about a $70 billion number.

So we have been managing costs to try to run it flat as the incremental one-time costs continue to hit us on a given quarter.

But the way we are managing that has been managing headcount.

Overall headcount grew on a point-to-point basis from December 31 to March 31 about 0.3%.

That is 0.3% or 2,700 people across our 285,000 -- 288,000 people with the mortgage business on the legacy side adding 2,700 people and the rest of the company going down by 2,000.

That 2,000 reduction is even with the investments we are making in small-business bankers and international capabilities at financial advisers and many other areas.

Our efficiency ratio is at 75%.

It's down from 92% in the fourth quarter but that is not the progress we would like to see.

We expect that to continue to recover as the legacy assets and some of the charges go down in the high 50s, low 60s, which is where we were earlier in 2010, but we need to do more to show we can hold expenses flat or reduce them as revenue rises to deliver the returns in this business and the Company we need to do.

To do that, as we told you at investor day, we continue to finish off at all the integrations and that will give us the time, the so-called piece dividend, and the effort to continue to drive this company forward.

We told you we could get back to the 55% efficiency ratio.

We have launched an effort this week using outside teammates who have worked at other companies and a significant amount of internal team called New BAC which will continue to work to take all the work in this company, examine it, and see the work that doesn't add value to our customers or our teammates and move it out of this company.

We will work on this effort for the next several months.

It takes two phases and leads us all the way into 2012.

The first phase completes late this fall and we will continue to implement it immediately thereafter to get the expense savings and keep the run rate down as the revenue and the economy recovers.

With that general overview, let me turn it over to Chuck to take you through in detail the quarter.

Chuck?

Thanks, Brian.

I appreciate your kind words and am looking forward to continuing to work with you and the senior management team in my new role as Vice Chairman.

I think Bruce will do a great job as the Chief Financial Officer and also Gary Lynch, who will be joining us later in the year, will be a terrific addition to Bank of America.

As some of you may know, I worked with Gary during the five years I served on the Board of Directors at Morgan Stanley and I found him to be a first-rate executive.

With that let's turn to the slides and begin on slide 13.

For the quarter, as Brian said, we reported $2 billion of net income or $0.17 a share after preferred dividends.

There were several significant items during the quarter which are detailed on slide 14.

Representations and warranties provision in the first half (sic - see Press Release) was $1 billion, of which slightly more than half was associated with the GSEs and the remainder was related primarily to recent experience with a monoline.

The provision related to the GSEs was driven by higher estimated repurchase rates along with the further deterioration in the Home Pricing Index, what we call HPI, in the quarter.

If you recall, when we announced our agreement with the GSEs earlier this year and adjusted the liability for future losses I noted that there could be further refinements from a number of factors.

A major factor in our estimate of the liability for future losses is the performance of HPI, which declined this quarter and impacted the severity of losses in our reps and warranties liability.

The credit mark unstructured liabilities under the fair value option resulted in a negative adjustment of $586 million, reflecting a tightening of our credit spreads compared to a negative adjustment of $1.2 billion in the fourth quarter and is reported in other income.

Equity investment gains during the quarter included a $1.1 billion gain from an investment in connection with the related IPO in the first quarter and reflected both the sale of shares as well as the fair value mark on the remaining shares we still hold.

We have $546 million in gains on the sale of securities during the quarter.

Trading-related income included a negative DVA impact of $357 million due to wider debt spreads.

Excluding fees paid to external legal service providers, litigation expense this quarter was $940 million, principally associated with mortgage-related matters.

During the quarter there were various mortgage assessments and waivers accrued for several areas of exposure driven by the foreclosure delays which totaled $874 million, including $548 million for compensatory fees that we expect to be assessed by the GSEs as well as costs incurred during the foreclosure process that we do not expect to recover.

Also included in the first quarter, as Brian mentioned, was approximately $1 billion of expense related to retirement-eligible stock-based compensation awards, so-called FAS 123(R), that we have every year at this time.

And merger-related and restructuring charges were $202 million.

Credit loss reserves were reduced by $2.2 billion in the quarter versus $1.7 billion in the fourth quarter.

The current period reserve number included $1.6 billion of reserve increases related to the purchase credit impaired portfolio.

One item not on the slide but which I want to highlight for you is our effective tax rate that this quarter was 26.3%.

At this time we would expect the rate for the rest of the year to be around 30%, plus or minus unusual items like a charge for the UK rate reductions expected later this year or more valuation allowance release benefits like we have seen during the last couple of years.

You may recall that we wrote down a portion of our deferred tax asset last year in the third quarter due to the 1% UK tax rate reduction resulting in a charge after-tax of nearly $400 million.

It looks like the UK is considering two more 1% tax rate reductions which could impact the third quarter of this year, so we are expecting a charged income tax expense of nearly $800 million upon enactment of those rate changes.

Because we would just be reducing deferred tax assets that are disallowed at the margin, the $800 million charge would not affect our regulatory capital levels.

On slide 15 you can see that average loans were down $1.6 billion from the fourth quarter while average deposits increased more than $15 billion.

Deposits remains a good story of growth as consumer balance wealth management clients continue to do more business with us and commercial customers continue to prefer to hold rather than invest cash.

In line with our comments over the past few months, ending long-term debt dropped $14 billion and we expect that decline to continue.

As you can see on slide 16, loans at the end of the quarter, excluding net charge-offs and run-off activity, were up $2.9 billion.

Consumer loans were relatively flat.

Commercial loans, ex-real estate, were up $3.5 billion or 1.4% driven primarily by growth in Asia and EMEA and commercial real estate loans declined $2 billion or 4.1% as reductions in high-risk assets continue to offset new originations.

Let's turn to net interest income on slide 17.

Net interest income on an FTE basis was $12.4 billion, down $312 million from the fourth quarter.

The impact of lower hedge income, lower consumer loan balances and yields, and fewer days in the quarter were offset partially by a reduction in long-term debt and other items.

Our average earning assets for the quarter were down $14 billion, mainly due to reduced customer financing activity in the repo area.

Average consumer loans were down as additional run-off in the card and home equity portfolios more than offset retained mortgage originations.

Average commercial loans were relatively flat as decreases in real estate and US commercial were partially offset by increases in both core loan and trade finance activity in our non-US corporate banking business, reflecting our growing international footprint.

As we have said for the past few quarters, we expect net interest income to be down again in the second quarter but anticipate stabilization in the second half of the year.

We are also on track to lower our long-term debt footprint by 15% to 20% by the end of 2011 relative to third-quarter 2010 levels.

Turning to slide 18, card revenue was down almost $300 million from the fourth-quarter results due mainly to the seasonal decline in interchange.

Decreases in retail spending were 6% versus the prior quarter, but versus the prior year reflected an increase of 6%.

Card revenue was down 7% from a year ago due to the impact of the CARD Act as the provisions became effective throughout 2010.

On slide 19 we show service charges were flat with the fourth quarter but down 21% from year ago due to overdraft policy changes, which as you know were fully embedded in our results as of the fourth quarter of last year.

Let me say a couple things that you should note before we move away from retail banking driven revenue.

Consumer spending is up, account closures are down, quality sales remain strong, deposits grew, and employment levels are higher, which all point to improving performance in our retail businesses in future periods.

Mortgage banking income on slide 20 improved by $2 billion from the fourth quarter as lower reps and warranties provision was partially offset by lower production volumes and margin as well as less favorable net MSR hedge results.

Production volume in first mortgage of $57 billion was down 33% in line with the drop in the overall market size from the fourth quarter while locked volumes were down 45%.

MSR performance net of hedges was negligible this quarter versus a positive $257 million last quarter.

The capitalization rate for the consumer mortgage MSR asset ended the quarter at 95 basis points versus 92 basis points in the fourth quarter.

Given the level of interest rates and our lower locked pipeline, we forecast production levels will be lower over the near term.

Turning to slide 21, you can see the total reps and warranties provision in the quarter was $1 billion, down from $4.1 billion from the prior quarter.

Much of the decrease was due to the impact of our agreements with the GSEs in the fourth quarter.

The $1 billion provision in the first quarter dealt principally with the GSEs and recent experience with the monoline.

On that note, as Brian made reference to this morning, we announced an agreement with Assured Guaranty to resolve all of the monoline's outstanding and potential repurchase claims related to alleged reps and warranties breaches involving certain first and second lien residential mortgage-backed secure trusts or assured provided financial guaranty insurance.

The agreement covers combined original collateral exposure of approximately $35.8 billion with a combined principal at risk of approximately $10.9 billion.

The agreement includes a cash payment of approximately $1.1 billion to Assured as well as a loss sharing reinsurance arrangement that has a current estimated fair market value of approximately $500 million.

Approximately $1.1 billion of that was reserved for these potential repurchase claims at the end of December with the remaining liability recognized in the first quarter.

This settlement gets behind us a sizable piece of home equity exposure along with some first lien exposure.

We currently estimate the upper end of the possible loss range related to non-GSEs to remain at around $7 billion to $10 billion over existing accruals.

Any reduction in our previously disclosed estimated range resulting from reserve accruals in this quarter were largely offset by the impact of HPI deterioration during the first quarter.

As a reminder, this estimated range does not represent our estimate of a probable loss and is based on current assumptions that are necessarily subject to change.

The liability for reps and warranties ended the quarter at $6.2 billion compared to $5.4 billion in the prior quarter.

Our unresolved repurchase requests increased $2.9 billion to $13.6 billion due to an increase in submissions from the GSEs on both remaining Countrywide originations not covered by the agreements we announced in January and legacy Bank of America originations.

Part of the increase was the result of lower submissions in the fourth quarter as we finalized the GSE agreements.

On slide 22 we have outlined in more detail the organizational changes we announced in the last quarter for our former home loans and insurance business.

And on slide 23 we have split out for you what we now call consumer real estate services into three pieces to provide a way to better understand the financial results and track our progress in those activities.

Home loans and insurance, as you can see, made $130 million this quarter and includes loan production activities, our servicing of current loans, insurance operations, and consumer real estate services home equity portfolio not included in the legacy asset servicing portfolio.

Insurance earnings drove the results, given the low levels of customer mortgage application activity in the quarter and the costs we incurred to fulfill the outstanding pipeline left over from the fourth quarter's low rate environment.

Legacy asset servicing lost $2.5 billion and is responsible for servicing delinquent loans and managing the run-off and exposures related to selected residential mortgage, home equity, and discontinued product loan portfolios.

The LAS results represent the net cost of legacy exposures, including reps and warranties provision, litigation costs, financial results of the home equity loan portfolios allocated to Legacy Asset Servicing, and financial results of the Legacy Asset Servicing portfolio service for others.

The LAS portfolios include both current and delinquent loans that met standards defined for inclusion in Legacy Asset Servicing.

The Other column is essentially the results of management of the MSR and includes the change in the value of MSRs net of hedges.

We will continue to refine how we present this information going forward.

Okay, now back to earnings on slide 24.

Our activity with wealth management clients is producing revenue that achieved post-merger highs which is where we generate the bulk of investment and brokerage revenues.

Investment in brokerage revenue was up $222 million, or 8% from the fourth quarter, due to high market levels, long-term assets under management, and higher transactional activity.

Asset managed fees were a record $1.5 billion, up 6% from the fourth quarter and brokerage fees were also a record, approximately $1.6 billion, up 9% from the fourth quarter.

Total client balances, including Merill Edge, grew $47 billion to $2.3 trillion during the quarter as a result of market activity and strong flows into long-term asset management products.

Sales and trading revenue on slide 25 of $4.9 billion, which includes both net interest income and non-interest income, increased approximately 93% from the fourth quarter but was down around 30% from last year's record quarterly results.

FICC results more than doubled from the fourth quarter led by credit products and rates and currencies.

Equity revenue was up 60% to $1.2 billion from the fourth quarter, driven by increases in all major lines of businesses.

An improved trading environment and client activity helped the equity derivatives businesses, while increases in both the S&P and Dow had a positive impact on the cash equity business.

Average VAR in the period increased 17% from the fourth quarter to $184 million versus a drop of 33% from a year ago.

Investment banking results on slide 26 were relatively flat with the fourth quarter, but compared to a year ago revenue increased 27%.

Our overall fee ranking remained at number two globally.

The results versus a year ago were driven by increases across all major product categories, particularly M&A and equities.

We were involved in numerous high-profile transactions during the quarter, several of which were outside the US.

Turning to expense levels on slide 27.

Total expenses, excluding the goodwill impairment charge last quarter, increased $1.4 billion from the fourth quarter.

As I discussed earlier, $874 million of the increase was due to several areas of exposure driven by the foreclosure delays.

Personal expense compared to the fourth quarter was up approximately $1.4 billion, reflecting again the impact of retirement eligible stock-based comp awards along with higher performance-based incentives and GBAM related to stronger results.

Higher levels of headcount and expense in consumer real estate services were related to default management staff and other loss mitigation activities in that business.

As we mentioned earlier, litigation costs of $940 million in the quarter dropped from $1.5 billion in the fourth quarter.

As we told you last month at our investor conference, we expect our expense levels for 2011 to remain elevated as we work through these issues and continue to invest in the franchise.

Highlighting what Brian said earlier, we have launched a comprehensive initiative focused on improving our financial performance by reducing expense levels and producing higher revenue.

Moving to asset quality trends on slide 28.

As they did through most of last year, delinquencies, excluding government-insured FHA loans, net charge-offs, criticized balances, and non-performing assets, continued to improve.

On slide 29, improving credit performance in most of our portfolios drove the decrease in net charge-offs.

Net charge-offs of $6 billion decreased $755 million compared to the fourth quarter.

Consumer net charge-offs were down $509 million reflecting improvement in most products and commercial asset quality also improved as net charge-offs dropped $246 million, or 26%, from the prior quarter with the biggest drivers being US C&I, including a legal settlement recovery, and commercial real estate.

The increase in net charge-offs in non-US commercial was due to a couple of large legacy credits.

And even with the decline in reserve levels, the ratio of allowance for loan losses to annualized net charge-offs was essentially flat compared to the fourth quarter at roughly 1.6 times.

In thinking about credit costs for the rest of 2011, we think provision expense should continue to edge down through the year as charge-offs continue to move lower, primarily in the consumer businesses.

We expect loan-loss reserve reductions will continue as long as portfolio performance and the economy continue to improve and our other credit metrics warrant lower reserves.

Moving to slide 30, our purchase credit-impaired consumer loan book, which is comprised of discontinued real estate, residential mortgages, and home equity, was $28 billion including the allowance.

We increased the reserve by $1.6 billion to reflect a more negative outlook for home prices.

Turning to slide 31; let me add before closing that we recognize that there are a number of items in the quarter that make your analysis a bit time-consuming.

From our view the positive underlying trends are improvements in credit, capital, deposits, and progress on redesigning our franchise to best serve our customer base.

We believe the interest rate environment will remain challenging and don't expect the mortgage picture to improve significantly for several quarters.

However, as you heard at our investor conference, we have articulated our strategy and we are executing against it.

So with that let's now open it up for questions.

(Operator Instructions) Glenn Schorr, Nomura.

Thanks very much.

Maybe if we could just take a minute to expand a little bit, you have just mentioned and you have it in slide 27 that the program to increase revenues and take out costs to drive profitability.

And I think later on you said something about material benefits in the second half of 2012 on the expense side.

Could we talk maybe a little bit about the largest contributors or the largest buckets that will see that expense savings over the two years?

If you think about it -- think about two different things going on, Glenn.

First, the largest improvement you are going to see over the next 24 months will be as we crest over the -- go over the crest on the mortgage servicing side for the delinquent assets and start to take those costs out, and likewise other places in the Company those similar costs exist.

So that -- if you remember what we showed you I think we had 70,000 human beings dedicated in the mortgage business including the contractors, 50,000 full-time employees.

We have gone from about 5,000 to 8,000 people who will service six days in out loans to a total of 30,000 over the last several quarters.

And again 2,500, 2,600 again this quarter -- 2,700 this quarter.

So one of the things you will see as we continue to get through the bubble of foreclosures, as delinquencies come down you really have a body of work to get through.

We had to stop the foreclosures; we restarted them.

As we get through that that will come down over the next several quarters.

What we are talking about -- we knew we were going to get that and so that we have identified, that is why we isolated it, and we will get that out.

What we also need to do is just to continue to look.

We sold 19 or 20 different pieces of the Company off.

We have built up a lot of stuff for businesses that no longer are here.

We have built processes and stuff when the Company was a different company.

We brought in a lot of new enterprises.

Our Six Sigma capabilities that we have put in because we have brought in over 100,000 different associates that are just -- who are new to all that.

We said we had to step back and take a look at every aspect of work in the Company.

Work that doesn't benefit the customers or associates has to go out, has to be taken out.

That process is a process many companies use and I have used earlier in my career, but the process is in two phases.

The first phase finishes late this fall, the second phase finishes early in the spring, and so we will begin implementing as soon as we have ideas.

That will take a little longer as we go through.

That is not stopping us from also doing things like in the branch team that I talked about.

We are down 200 branches, down 50 this quarter.

Round numbers, the cost of deposits ratio that we showed you at investor day dropped to 260 basis points, which we think leads the industry by a lot.

That concludes the FDIC expense, the whole nine yards in there.

So as you think about it, we are continuing on the core aspects we do on cost.

The other benefits will come through a little slower as the bad assets get better and the work gets done in the program.

So very much appreciate that, Brian.

On the mortgage servicing side it's a whole lot of people and I think we get that, but in general I think we saw by -- through JPMorgan's results, and I am expecting through others, in general the cost of servicing mortgages is still going to the moon on a run rate basis.

Is that thought process included in your cost saves in the second half of 2012 and does that have anything to do with the MSR, the way you mark the MSR?

Yes, in the valuation of the MSR over the last couple quarters has been a charge to increase servicing costs which decreases their cash flow, Glenn, and that is embedded in that valuation.

We are carrying 92 basis points or so, which is a conservative value we believe.

But embedded in that, in the performance in the last couple of quarters has been roughly $0.5 billion each quarter -- or $450 million or so each quarter for that.

So in that we have to price through to the street, for the lack of a better term, because the increased amount of work you have to do to service the mortgage loan.

Ultimately, we have to get paid.

I appreciate that.

All right, last one.

On reps and warranties, I think following the partial settlement of the GSEs I and others might have thought with $5 billion-plus in reserves we might see a leveling off on the provision.

But another $1 billion with over half going to the GSEs, I am assuming that that is for the Fannie stuff that wasn't settled.

And just curious on how you think about that as an annoying run rate that is with us for a few more quarters or you feel like what percent of the pipe are you through now on the GSEs?

Chuck?

Sure.

Glenn, there is a couple dynamics going on here.

We saw a slowdown in new repurchase requests from the GSEs in the fourth quarter, as you might imagine, as they were going through the settlement process, so there has a been a backlog that has built up by them in the fourth quarter that I think we saw hit us in the first quarter.

They also seem to be devoting more time to submitting claims and less time to resolving claims, which has tended to create a bit of an elevated level at the end of the first quarter.

So there is a bit of that going on.

A substantial portion, though, of that -- of the provision associated with the GSEs related to HPI deterioration, which was kind of funny.

Most of that -- I should say most of the submissions we have been referring to were Fannie rather than Freddy.

In terms of where we are on the overall pipeline, we said last quarter we were in 70% to 75% I would say in terms of being all the way through with respect to GSEs.

My guess is we are probably at the high end of that range now.

Okay, thank you very much.

Matt O'Connor, Deutsche Bank.

Good morning.

As we look at the mortgage-related hits in the first quarter, are there any estimates of what the impact will be from Wednesday's regulatory enforcement actions that were announced in terms of whether there is value in the MSR or just higher foreclosure costs?

Think about that order as being announced on Wednesday but actually the work took place in October, November, December -- the assessments in the supervisory work.

So we have implemented and that is why we have been adding people.

So the single point of contact, the requirements on the signing of affidavits in the foreclosure process, that has been embedded in our run rate as we have been building up.

And so that did impact, in both the fourth quarter and the first quarter, the valuation of the MSR because we already were getting ahead of this.

There is things that we identified in the work that we did in self-assessment and the regulators identified other improvements, so the run rate aspect of that will have some elements to it but a lot of it is in the system as we speak today.

Okay.

So outside of potential penalties for you and all the other banks, as part of this, you don't expect material costs related to the enforcement actions?

The outside significant penalties is the question.

And then remember, this is the bank regulatory environment and we will have to make an assessment as we get to the other people, if we get there, what other servicing requirements they may put on.

But the core of what the bank regulatory requirements do, the look back and the other things, are fairly consistent in our dialogues.

But we will see in terms of the run rate cost based on that, but from a standpoint of the bank regulators the piece left open is a C&P question.

Okay.

And then separately but still staying on the mortgage topic here, as we think about the sensitivity of some of these mortgage hits outside of credit to HPI declines, how much sensitivity is there?

For example, if HPI is 5% worse than expected, what do you think that would mean to the mortgage put back hits and the litigation hits and some of the other moving pieces?

Yes, HPI is going to impact us in several areas, one of them being PCI, purchase credit impaired.

It will impact us in terms of reps and warranties and then it also impacts us on the credit side with our residential mortgages that are 180 days past due.

You know, it really is difficult to do it on the purchase credit impaired because, as you know, it's a fair value of a life of loan and it not only requires what is going to happen to HPI this year but also assumptions about how long a recovery takes.

But if you did a shock this year of roughly 4% over all those portfolios I just mentioned, it would be probably about $1.5 billion.

But, again, it assumes on the purchase credit impaired that you got the shock of 4% this year with a gradual increase in home prices over several years but again not returning to 4% increase in home prices until well into the second half of the decade.

And then what about for the other buckets, like the mortgage repurchases and litigation, how much sensitivity is there to those two areas?

That was in there as well.

Okay, okay.

And then just separately last thing.

As we look at the net interest margin for the second quarter, I think the guidance in March had been you would bottom out around 2.5%.

Obviously 1Q came in a lot better than that.

Just wondering what the outlook is on the NIM percent and the net interest income dollars for 2Q.

Matt, we think it's -- we obviously think that the second quarter will be down, not clear that we are going to go down another 17 basis points to 250.

We did have, frankly, better performance in the first quarter than we expected.

Okay, thank you very much.

Betsy Graseck, Morgan Stanley.

Hi, thanks a lot.

A couple of follow-ups on the Assured.

Wanted to understand how much of the Assured relationship that you have has been settled at this point.

I mean you mentioned first and second liens were in this discussion, but it looked to me like maybe only you settled on the 21 deals that were the first liens.

We have basically resolved virtually all of the controversies between our various companies and Assured, and that is contemplated in this settlement.

Probably the only thing that is not contemplated would be those instances in which Bank of America or Countrywide or one of its affiliates might have sold a loan to another institution that then securitized that in a package of mortgages and then sold them to or then had them wrapped by Assured.

So the way that transaction would occur Assured would actually go to that third party and assert a potential reps and warranty claim, and then that third party in turn can come back to us.

That aggregate exposure in terms of mortgages is about $1.5 billion.

That was not addressed in this nor have we really had much, if anything, in the way of claims asserted in that regard.

But beyond that we and Assured are basically done.

So do I interpret, therefore, that in your settlement there is very little exposure or there is very little claims that you are making good on with regard to the seconds?

Yes, with respect to the seconds, we are done.

We had provided almost $1.1 billion as of the end of December relating to second lien exposure and we settled at basically what we had reserved for.

Okay.

And then as we look towards the remaining claims that are outstanding, you indicated $7 billion to $10 billion is still your figure so on a total basis, if we look at 4Q plus 1Q, the exposure would be higher by about $1.6 billion, is that right?

No, I think the way to think about that, Betsy, is that we have reassessed what the overall exposure is to the non-GSEs.

You would expect with a settlement and with additional accruals that that $7 billion to $10 billion would go down.

That has largely been offset by HPI deterioration.

Okay.

And then lastly, the Assured press release had a discussion about max loss cap dollar amount and your dollar amount and theirs are very different.

Is that because of the probability of getting to that max loss, in your opinion, is low?

No, I think -- well, they may have a different view.

I think theirs is around -- I saw an earlier draft of it, I didn't see the final one.

My recollection is they are around the -- that they are thinking about draws; we are looking at the underlying reps and warranty exposure.

Got it.

Okay, great.

Super, thanks.

Paul Miller, FBR.

Yes, thank you very much.

You know going back to the AGO settlement, there is another big settlement out there with some other monolines.

Where you are -- and they are probably larger than probably the AGO.

Can you address that a little bit?

Paul, I am not sure what you are asking.

My guess is the MBI -- isn't there another monoline suing your guys for like $20 billion or something?

MBIA?

There are -- if you think about all the monolines, there is six companies we have basically -- we settled with two, we have worked with the other ones.

MBIA is the last one and that is a very complex relationship between us because of the -- across our company because of the -- there is elements in our sales and trading business.

It's out there and we will continue to work on it.

And I would note, Paul, that Assured, FSA Assured, was really the only one of the monolines not suing us.

Okay.

And then real quick, you mentioned I think in the presentation or in your -- that you have started your foreclosures in non-judicial states.

Where are you with the judicial states like Florida?

Have you started foreclosure processes in that state or [when] do you think you can start?

We have started foreclosure processes across the board.

Across the board?

Yes.

Thank you very much, gentleman.

Remember the difference between judicial and nonjudicial is you got to wait for the judicial process to take place in the judicial states.

In nonjudicial states it goes more quickly.

Okay.

So you are up and running across the board.

Thank you very much.

Moshe Orenbuch, Credit Suisse.

Great, thanks.

Two questions.

The first is you had good reduction in the loss rate on the credit card business but I think what is interesting is the industry as a whole is kind of moving faster into lower levels.

Can you talk a little bit about kind of what you think the pattern is going to be there over the course of the next several quarters?

On the credit card specifically, Moshe?

Yes, credit card specifically.

From a high-level, I will have the team address the specifics, but from a high-level remember that we were higher than they were and so we are coming down at a good rate.

It's just it's a lot -- I think we got 200 basis points maybe or even more above our peers.

We got up to a 14% charge-off rate.

So, yes, we have more upside as this keeps coming down.

The underwriting we did starting -- changing in 2008 has outperformed in a not-as-good economic scenario three years later.

And if you look at our emergence curves and stuff we are getting strong performance in the latter part of 2008, clearly 2009 and 2010.

So I think we have more room to go than prove, frankly, largely because we had a deeper hole, frankly.

And I will let Neil or Chuck fill in the exact reasons, but in a broad spirit it is that we were dealing with this issue that we just had a higher number to start from.

You know I think Brian summed it up best, ours went bad first and we tightened the buy box.

And also came down very fast.

Our early-stage delinquencies during the quarter continued to improve nicely.

We will see continued improvement going forward, but it will be at a slower pace.

But if you look back over the past four or five quarters our improvement has been dramatic.

So if you think about it in broad context we are sort of high 7s now and we should look to that -- we have underwritten to hit a target of 5, 5.5 and, frankly, the performance of the portfolio we [have been putting on] in time periods I talked about has outperformed that.

So this should be a continuous move, $13 billion in a single quarter at one point, so we have still got some room to improve but it has come down dramatically.

Yes.

Kind of on a separate issue, you talked a little bit about the capital generation and the deferred tax asset disallowance in the quarter, kind of keeping that lower than normal.

But even absent that it feels like, given the level of earnings, we would really like to see that pace pick up if you are really going to get to that 8% level in something less than two years.

So could you talk a little bit about what plans you have over and above what kind of the run rate of earnings?

Because it seems like there would need to be somewhat more.

And related to that any thoughts you might have on the SIFI buffers that might be assessed on you.

If you look at the balance sheet that we showed you from last year first quarter there is three or four (inaudible) coming down, but you have to remember -- if you think about our company, the issues that we had to face is our Basel II implementation is still in process.

We had to get this to all work right and that is one of the reasons why we have been pushing our expectation out of when this will all be ready to go till later this year or the next year was that we need to get some work done.

Part of that work is to continue to optimize the RWA calculation and the risk models and other things that will bring down RWA dramatically in our trading areas.

And that requires the systems work that has been going in and will continue to go during the course of this year; got a team working on that.

That is a major piece of the equation and then there is a lot of other pieces of the equation.

If you look at all the legacy assets sold and the private equity business being brought down and so we are just continuing to do that each quarter.

So we have a roadmap and it requires us to keep executing very well.

Then the earnings generation -- remember what is affecting the earnings is actually reductions in risk of a significant amount in terms of repurchase or even 0303 portfolios and things like that.

So you got to think of this a little bit, Moshe, in terms of timing.

Stuff we are pulling forward and taking now would have been stuff that we had taken over time, and so that helps us out.

But it really comes down to a lot of this is around the optimization of the balance sheet.

If you think about us, we run about 65% of RWA to assets today.

Our US peers that are on Basel II and been optimizing on the risk models and stuff are in the 50%s and are outside the United States peers that have been on it for a long time are in the 30%s.

And so there is a lot of work for us to do and that work is going on this year.

That is one of the bridges we have to have completed as we look to do the capital management we would like to do for you as shareholders.

Just on the SIFI, any thoughts as to how and when we are going to hear about that?

One ought to be over the course of the summer here.

We have -- obviously by using the 8% target we have sort of said it's going to be something I think -- fundamentally I think I would go back to what we told you late last fall, those of you that saw it at our conference where I talked about this, we will store that capital on the balance sheet.

So with if it's 100 basis points that is $18 billion or $1.80 a share.

If it's higher than that just you can do the math.

We will store that balance -- that capital on the balance sheet.

It will be embedded in [tangible] book value.

You can't put it to work, because if you do then you have to need more.

So if it's a higher number we will have to store more capital, but we will let that play out.

I think in terms of the broad policy I think we have got enough risk-based capital to run this company and even more than we need.

And I think we will continue to work on our discussions in the broadly broader policymakers about what the, quote, right answer is.

But, in fact, we have sort of accounted for 100 basis points.

If it's higher than that we will be storing the capital.

But it's all yours.

That is what we have been trying to make clear to you.

It's not going anywhere, it's not doing anything, it's not making acquisitions, it's not being put in the business.

It's all there.

The good thing is that even if it's a higher number what we haven't talked you a lot about is from -- we are trying to hit that 8% -- our math gets us there at the end of next year but -- and that is if Basel III was fully implemented.

If you think about a higher SIFI level, you really have 5, 6, 7 years to put it in.

But, importantly, what is not apparent to a lot of people is that the amount of optimization we actually have in latter years is still high because there are certain structured credit trades or certain -- the run-off portfolio still stands about half its balance after a couple years.

That will provide additional positive momentum, none of which is core to our business.

And so we have a roadmap even 2013, 2014, 2015 that there is significant RWA optimization available to us, largely if we can be there in a sense that these are structured credit trades that are going to run off and other aspects that will run off.

So I think if it goes a little higher we have other optimization.

And I think in terms of the shareholder view of that I think we would manage into it over time, be clear with you how we are building towards it, but we got the risk capital to run this company.

Thanks very much.

Ed Najarian, ISI Group.

Yes, good morning.

In terms of the $1.6 billion settlement with Assured, could you just walk me through how that runs through the income statement?

I am on looking at page 21 and looking at the repurchase reserve and I guess it's not clear to me how that is either coming out of the reserve or going through the income statement in some other way.

Sure.

Well, think of this in two elements.

We had provided right around $1.1 billion, $1.050 billion, for second-lien exposure, so that within our reserve as of the end of December.

We will make a payment of approximately $1.1 billion in the second quarter and beyond in order to satisfy that.

So that $1.1 billion reserve is in -- was in the $5.4 billion ending balance of the rep and warranty liability and is in the $6.2 billion.

Okay, so it's going to be netted against the $6.2 billion next quarter?

Yes.

We haven't made the -- we did not make the payment March 31.

We signed the agreement yesterday with Assured.

We will begin making payments coincident with the signing of that agreement and into the future.

So that is one element of it.

We also entered into a reinsurance arrangement with respect to the first lien mortgages principally because there is very little experience associated with that.

We had some modest reserves set aside for that for a portion of that, but there is very little experience.

Assured has put back to us a relatively small number of those mortgages.

And so rather than pay them for something that may never happen we thought it was more prudent to enter into a reinsurance arrangement where we have taken a view, as they have, with respect to how those drawdowns will occur and how we might participate in those.

We estimated the cost of that reinsurance arrangement, as we have said, at about $500 million.

And that was accrued as a part of our consideration of the first-quarter rep and warranty liability.

Okay, thanks.

And then maybe Brian can put some context around this secondary question.

I mean you mentioned that you feel like you are at sort of a core pretax, pre-prevision run rate of about $10 billion, which as I go through your non-recurring items we get pretty close to that number as well.

Then I sort of think about looking forward.

This was a reasonably good trading quarter, you are going to have some net interest margin pressure, at least in the second quarter, and maybe lower net interest income.

And then we at least get about a $500 million or maybe more a quarter hit from the implementation of the Durbin amendment, although obviously that could get delayed, but at this point I guess we will see.

That sort of brings me down to no more than sort of an annualized run rate of about $38 billion, 9.5 times 4.

And so it strikes me as a challenge -- and maybe you can just walk me through some of the bigger items of how you think you are going to get to a $45 billion to $50 billion pretax, pre-provision run rate, because sort of the middle of that range is about a 25% increase from $38 billion.

So I am just maybe looking at context around that.

Sure.

I think you got to maybe behind that is make sure your timeframe is right.

We said that was beyond the 2011 and 2012 timeframe out there.

So if you think about what would happen between now and then, you would have the mortgage costs come down, you would have an interest rate environment change, and so we may do better next quarter, as Chuck said.

With 267 on the margin, we told you it might bottom at 250.

We may do better mathematically and the numbers would be higher.

But if rates rise, and I assume that at some point the core estimates of the market, our core estimates rates rise up to a modest Fed funds rate of a couple of percentage points, that is hugely beneficial to our company and ought to push us back up to 275 and higher in the margin.

If you start to do the math on our size balance sheet that is significant.

So the cost structure comes down, that happens, and then on top of that while we had a reasonably good trading quarter at $4.5 million that is the run rate that Tom needs to produce on a quarterly basis.

If you look at how we are getting that now, it is all core customer driven business that is just coming through, coming through.

Last year's elevated levels and last year's decline levels had more to do with sort of circumstances outside their control.

But that is that.

Then if you go to the other core businesses, remember as the economy grows we have had no loan growth.

We are continuing to run them down; the run-off portfolio which costs us $1.8 billion, $1.9 billion this quarter, half that number out there.

So it's really continued credit costs, a continued cost structure improvement.

It's really the interest rate environment not going crazy but just improving a little bit which really helps the core deposit business.

And then grinding on the growth of the franchise that we see in the revenue line based on the fees and other factors.

And so the restructuring in the consumer deposit accounts, which will be effective this year into next year, you will see lift.

And as we said, the expenses are unavoidable on the mortgage side now, but we will get those out and then we will work on the rest of it.

So I think the (inaudible) around rates, expenses, and then the economy.

If you have said the economy is going to go into a decline that is a different question.

But assume the economy gets up to more of a trend growth of 3%, 3.5% type of numbers, you will see the general earnings of the Company lift because of loans and other things.

Okay, thank you.

And then last quick one, over the last two quarters the period end share count has gone up by approximately $50 million a quarter.

Is that a share creep up rate based on, I guess, employee comp that we should continue to think about?

Neil, why don't you --?

Yes, it's comp.

It's pretty much comp.

(multiple speakers)

Okay.

And we should expect some kind of creep up like that each quarter, not just (multiple speakers) in the first quarter?

Ed, in the average shares, too -- if you are looking at average shares we also had two preferred issues that flipped into common in fourth quarter that pushed up the average comp.

Okay.

The mandatory converts we had.

Correct.

So I think, Ed, what we haven't been able to do and what we will be able to do as we move down the road is the issue of being able to neutralize the comp related stuff, which was -- we get to the point where we can capital manage, we will do that as one of the first things.

Okay, thank you very much.

John McDonald, Sanford Bernstein.

Yes, hi.

One more question on the Assured Guaranty.

Chuck, are there reasons to believe that their success rate would be higher than claims you will receive from other private investors, perhaps if they have stronger rep and warranties, or anything you can point to there?

No, I don't -- it's not a contractual issue, John, it's -- just keep in mind they are about a third of our home equity exposure and that second lien home equity exposure is probably some of your most riskiest stuff.

Okay, so just higher loss content due to the mix of the home equity?

Yes, it is dominant part home equity here for this counterparty, where as you get the private label it is really all first.

Okay, and then as a reminder in terms of Basel and dividends as a reminder for us, you have said that you feel like you can get to the 8% Basel [II.5] and III.

Just over what timeframe was that and is that assuming kind of no phase-in?

Can you just remind us of what you are looking at for your outlook there?

What we said to you was 8% Tier 1 Basel III common at year-end 2012.

That is the goal under the Basel III standards with no -- and then -- and so we are there above the standards, depending on the SIFI buffer discussion, that would be phased in over time.

But our goal is to hit that at the end of 2012.

Okay.

And have you said anything about where you think you will be on that by the end of this year?

We have not said on the Basel III level but as Basel [II.5] becomes effective we would be above 8% under those standards at that point I think is what we said earlier.

But we have not sort of given you pro formas and we will continue to look at doing that.

Okay.

And Brian is there any comment you can make regarding the dividend, the Fed process, any specific areas where they were looking for more clarity where they wanted to see things get clearer before saying yes to your dividend increase request?

We didn't ask them for an increase until the latter part of this year because we knew we had to get the work done I mentioned earlier around -- continue to get the systems integrated, the risk management down, and, frankly, taking care of some of the issues like we took care of this morning and clarity there.

And so we continue to make progress in that.

And that leads to -- but that is really -- the core issue is us getting a lot of -- getting the work done that we promised to do in the context of implementing the risk management standards in the Company.

They have been in agreement with us, our work plans all the way along.

It's their process and how we can resubmit stuff is up to them.

But on the other hand I would tell you that we have a clear path that we know what we need to get done and we are doing the work.

That is why we knew we had no chance and told you back in January we are not going to ask for anything in the first part of this year because we knew we had to get this work done and they knew we had to get this work done.

Okay.

The last thing here just could you explain again, you might have said it, the greater disallowance of the DTA in your regulatory capital ratios, what drove that?

Well, when we acquired Merrill Lynch the regulators gave us a two-year look forward period.

Excuse me, three-year look forward period.

It has been -- last year it was two years, now it's one year in terms of the amount of, in effect, allowable DTA that we can include in our regulatory capital calculation.

Just so you don't make the same mistake I keep making, keep thinking we are making, this has nothing to do with the tax position.

This is purely what you can count in regulatory capital.

When they went back to this during the height of the crisis remember they widen the standard because of the reality of earnings streams and now we have gone back to the pre-crisis standard.

But the actual tax position is a separate thing.

Right, which is one year.

We are not losing any deferred tax benefits as an enterprise.

It's what you can count in the regulatory capital calculation.

Okay, carryforward from the merger, carrying forward.

Yes, and this was all contemplated in all the steps and everything we had.

So no -- you don't see risk of this happening again, it's kind of done?

No, we are down to the one-year look forward period which is the more traditional one.

Okay, thank you.

One more thing, can I ask one more quick thing?

On the expenses, Brian, do you have a longer-term target and is that something you eventually think you will talk about, whether as $75 billion expense base or a $70 billion or $65 billion is kind of the right number for the Company?

You baked something in to the investor day when you talked about $45 billion to $50 billion like pre-prevision earnings.

Is that -- as you go through this expense initiative and efficiency you will talk a little bit about what you think the right expense number is?

I think we gave you an efficiency ratio target of getting back down to 55%.

You can see across the quarter the efficiency ratio is bouncing all over the place.

Right now 58% second quarter, 100% I think the third quarter, 92%, 75%, but this is because of the one-times in and out.

Remember, we are getting hits to revenue on these rep and warranties are actually revenue offsets not expense.

But the goal is -- we can see that as that just settles and that pushes you down into the 60%s.

With all the work we are doing over the next couple of years we push down to 55%.

We express as an efficiency ratio because you got to be aware that as revenues rise we want to deploy the expenses and continue to build this franchise, so we want to make sure we are matching the chances our international capabilities, the chances to grow small business bankers, the chance to grow more financial advisers to serve clients.

We do not want to cut back on that while we are taking expenses out of places that need to have them taken out of.

Okay, fair enough.

Thank you.

Mike Mayo, CLSA.

A few clarifications.

So what did HPI do over the quarter, what had you expected, and what do you expect going forward?

As far as HPI going forward, we expect gradual improvement over the second half of the year, further deterioration next quarter but not dramatic, but gradual improvement over the balance of the year is where we are at.

As far as the deterioration in the first quarter, it's on a three month lag but off the top of my head I want to say we had about 1.5% for the quarter.

I am sorry, that is what it went down?

That is correct.

And you had expected, I guess, to be stable or so?

Well, I mentioned a three-month lag so we had some catch-up because of the fourth quarter.

Okay.

And then as it relates to the dividend, I am still not crystal clear on exactly what happened.

You said all along you didn't expect a dividend increase till late this year.

You go ahead and submit a capital plan with the dividend increase and then the Federal Reserve comes back and says you are denied.

I guess I just don't understand the procedure aspect.

I think the procedure aspect I will have to leave to the people who design -- the Federal Reserve designed the process.

But we asked them -- and I think the idea they were approving something six months in advance of when we have done the work we need to do I think that is what they basically said, keep doing the work and go on.

That is why I think it's a little bit hard to explain, but in our dialogues with them the idea was just done and then we get the approval if we get the work done right and continue to improve the Company's prospects during the first half of the year.

The process they designed and the answer they gave us was what we disclosed, but I think the theme of my dialogues with the team, and they have been with us the whole way, is to get the work done and then we will be ready to get approved.

But they weren't going to approve it in advance of that work being done.

So you can still get your dividend increase by the year-end?

I mean do you think --?

We don't know what the process will be for resubmission, but as soon as when we figure that out we can tell you.

But would you say there is still a chance for a dividend increase by the end of the year?

We should pull back, Mike, and make sure.

I said that we got to get the process down with Fed.

But if you step back, what we have tried to make clear to you guys is for 2011 and 2012 this is a modest dividend idea because we have to get to that 8% Basel III Tier 1 common level which requires us to maintain most of the capital.

Then after that we are in a position to start returning the capital.

But all the capital that we accumulate is in our tangible book value, is on the balance sheet, and is going for the benefit of the shareholders.

We are not -- we can't -- we are not using it to do anything else.

So I think whether we get the dividend in the second quarter, third quarter, fourth quarter, first quarter, whatever -- next year, this year, I think what we are trying to be clear to you is we are doing the work we need to do.

We have been repositioning this company and improving it, and as soon as we -- and the regulators and the process is set we will let you know where we stand.

I am sorry, last follow up on that.

But you will resubmit a capital plan that would, at least, propose a dividend increase by the end of the year; the question is whether or not it would get approved?

The capital plant is a two-year -- we have all the submissions in it for two years and we will resubmit that when the process allows you to do it.

All right.

Then separately, as far as the piece dividend, you said several times over the call in a couple years, in a couple years.

You have a new process in place to take a look at expenses.

I am just wondering if we will see a little bit more of the efficiency pick up over the next couple quarters.

I know a lot of it's dependent on credit, but aside from credit what confidence can you give us that you have an eye on expenses quarter after quarter, even after acknowledging the international small-business FA investments?

Well, take a look at the headcount across the last few quarters.

This quarter on a period to period we are 0.3% change on 288,000 people.

If you look at that it was 700 total human beings, 2,700 adds in the home loan investment to work on the -- that we geared up during the quarter to continue to work on that, 2,000 down in the rest of the Company including net of all the investments we made.

So we are managing the heads down in the places.

Barbara, as we talked about earlier, just announced on the production side of the mortgage company we are down 3,500 people, 2,000 of them are contractors; we obviously would take the contractors first.

So as you know think about -- we are managing these expenses down as we speak.

But running through those expense lines are litigation expense and other things which throw it out on a given quarter.

$1 billion, round numbers, in some of those items this quarter.

So those will come down quickly once we sort of get through some of this stuff.

The headcount we are bringing down, which is the number one thing we can control and drive to, while we are making investments we added many small business bankers, 200 FAs, and things like that in the same quarter where overall heads were flattish and we added 2,700 people.

So we are working on it every day.

We are not waiting for the white smoke to rise from this process and we continue to drive at it.

The 50 branch closings in the quarter, the 2.60 all-in cost of all the call centers, all the online to our deposits that I challenge you to ask anybody in the industry if they are close to that.

I was talking to somebody who told me they are at 4.25, 4.5.

It's a thing to scale in this business, but we keep grinding at that that down 4 basis points.

Every where we can we continue to work on expenses.

What we are now allowing for is a process that will help us accelerate that.

Then last question, the syndicated loans are hot recently.

What were your fees from being an arranger on syndicated loans and how much did the syndicated loans help your loans in global banking?

We will get back to you on that.

I don't know that off the top of my head.

We are one of the leaders in that business and have always been.

All right, thank you.

Given the time limit we will allow one more question.

Vivek Juneja, JPMorgan.

Hi, couple of questions just on trading.

Tom Montag talked about being down 15% to 20% at the investor day.

Can you give a little more color as to what happened in March that you have done a little bit more than that, which categories changed?

And secondly, on IB it seems like your market share and volumes has moved up faster than fees.

Can you -- it seems like a couple of big deals you got into.

Can you talk about what is going on on fees in that respect?

I would say as you think about it the 15% to 20% down that Tom talked about off the $8 billion obviously was still in the quarter.

You had to see what took place in March and there has been some stuff in and out.

But on the other hand also, as we went through March, the DBA and other things which were clearly significant would have been taken the last month of the quarter.

But, overall, if you think about from the fourth quarter to the first quarter we doubled the fixed income revenue and the equity revenue, I think it went up by 40%, 50%, 60%.

So he has had a reasonable rebound.

When you go to investment banking fees, I only count what people pay us so the [leak] tables are -- having had that group for a couple of years I talk to him about when somebody pays us I know I have got cash.

That is the interesting part of the business.

And I think what I we did about $1.5 billion steady with the fourth quarter last year, which had some good activity, up from $1.2 billion last year first quarter.

We continue to have a strong and robust pipeline.

If you have seen some of the offerings going out on the comp -- IPOs and things like that -- and we expect us to be continuing to improve those fees.

But we got $1.5 billion in fees.

Every quarter for the last eight or nine we have been second based on fees received and we expect that -- my guess is that will continue.

And on the trading side, Brian, if you just break that down a little by products versus rates, FX, services, securitized for us, can you give us some color as to how you did on that year on year linked quarter?

And in terms of March what got weaker, which category?

We will get Lee or Kevin to fill some of that in for you, but in broad stating a place that we still need to make improvements in the commodities business.

That is one of the differences between us and some of our peers and -- but on the other hand, we have done a good job in the rates and currencies in other areas.

So it's really -- one of the big differences would be just gross dollar amount between us and others as our commodities business is just smaller and not performing so well.

And so we will -- Lee can fill you in on some of the details but overall that is one of the big, easy identifiable differences.

Okay, thanks.

Thank you, everyone, and look forward to seeing you next quarter.

This concludes today's conference call.

You may disconnect at any time.

Thank you and have a wonderful day.