美國銀行 (BAC) 2011 Q2 法說會逐字稿

Good day and welcome to today's program.

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.

Please note this call is being recorded and I will be standing by you 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 Bruce Thompson 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.

With that let me turn it over to Brian.

Thank you, Kevin.

Before I turn it over to Bruce I just wanted to make a few comments about the quarter.

As we discussed on the call on June 29 when we announced the settlement of private-label securities litigation, we have been working hard to put large pieces of uncertain risk behind us as a company and where we can do that on a basis reasonable to you as the shareholders.

This quarter, following actions we took in last year's fourth quarter on the GSEs, in the first quarter on the mono lines, we have put another significant part of the rep and warranty exposure behind us in other mortgage-related matters.

In all, as you can see from the materials, we took almost $20 billion in charges relating to the mortgage business.

That has translated into a $0.90 per share loss, in the range we gave you a few weeks ago.

Adjusting for the mortgage charges, our earnings were $0.33 per share, at the high end of the range we gave you in June.

Bruce is going to give you more details on those adjustments later on.

Switching to the important question of capital, the work we have done to improve our balance sheet over the last several quarters came through this quarter as even with a loss we reported capital ratios which are stronger than this quarter in 2010.

Our Tier 1 common ratio, which we said at the end of June would come in around 8%, actually came in at 8.23%, higher than we expected.

A drop of 20 basis points since the first quarter 2011, but improvement since last year.

Our tangible common equity ratio, which we estimated at the end of June to be about 5.7%, came in at 5.87%.

Again an improvement of what we said.

We achieved the ratios through the continued balance sheet optimization and repair that we have been going through in the Company over the last several quarters.

In all during the second quarter 2011 our RWA came down over $30 billion.

Bruce is going to take you through the actions we completed during the second quarter of 2011 and, more importantly, the actions that are still ahead of us in the quarters ahead -- all of which give us comfort and demonstrate that we don't need to raise capital as we continue on our plans to comply with Basel III.

As we look at the business lines and you can see how they perform, this quarter shows the power of the rest of our franchise, which has been covered up by losses from mortgage.

As you can see on slide five, you can see the results.

Each business line other than mortgage had solid earnings and returns earning in all over $5.7 billion after-tax.

The franchise and customer model continued to shine through.

In our deposits business we grew deposits.

We also grew accounts at two times the rate we grew them last quarter on net new checking accounts.

We paid less for our deposits this quarter in our deposits franchise, and we lowered our costs to operate the franchise in this quarter.

The transformation of this business unit continues to go well and we are growing our fees again, offsetting the overdraft regulations that came through last year.

In our card business, we had strong performance aided by the credit provision release, but we also increased our units in the United States this quarter to over 730,000 new cards.

The Durbin will effect this business in subsequent quarters and Bruce will lay that out later.

In our Global Wealth & Investment Management business we had another solid quarter.

We grew long-term assets, grew our advisory team, and continue to see strong performance across the franchise.

As we move into the corporate and commercial side of our house, we had strong earnings in our Global Commercial Bank as you can see.

That is our middle-market business led by David Darnell.

And we had a good quarter in our Global Corporate Investment Banking business, which is part of the GBAM unit led by Tom Montag.

That serves our larger corporate customers around the world.

The deposit and Treasury management revenues in these businesses were solid.

The loan growth outside the US was strong and our investment banking fees of $1.6 billion-plus were one of the best quarters we have had in this business since we came together several quarters ago.

Our efforts here also show that our international business investments are starting to bear fruit as the revenues outside the United States grew faster than the revenues inside the United States.

As we switch to our sales and trading portion of the GBAM, Global Banking & Markets, business we had a solid quarter, down from the first quarter of 2011 but up from the second quarter of last year.

We made money on 97% of the trading days, even in a choppy market.

Let me switch to two other areas of focus -- our credit and expenses.

On credit, we continue to see improvements in all portfolios and we still have upside as charge-offs will continue to fall.

Delinquencies in all portfolios continue to come down, despite the recent backup in some economic and unemployment statistics.

On expenses we continue to manage to flat core expense level that Bruce will show you in a few minutes, if you eliminate the large mortgage one-time charges in the expense base.

We have seen our headcount go down slightly this quarter.

We continue to invest where we need and have to in this franchise.

Examples are the LAS buildout, the legacy asset services buildout, where we have had to invest to collect the delinquent mortgage loans.

But more importantly, on a revenue side, investing in more wealth managers in our Global Wealth & Investment Management Business, more FSAs or brokers in a branch and small-business lenders in our deposits business, our international franchise, and importantly technology invested throughout the franchise.

At the same time, we continue to take out expenses in other areas to help fund these investments.

For example, this quarter our branch count is down 63 from last quarter.

Our new BAC project, which is a companywide initiative on expenses, will be done this quarter, in the third quarter 2011, for about one half of the Company.

And we will give you the results of that in October and show you what we plan to do with the second half of the Company during the latter part of this year.

Suffice to say that the work so far has gone well and shows a great opportunity to make our company better and more efficient in the future.

With that I want to turn it over to Bruce to take you through the quarter.

Great.

Thanks, Brian, and good morning; if I could ask you to start with slide six.

As Brian referenced, during the quarter, on a reported basis, we had a net loss of $8.8 billion or $0.90 a share.

And if we adjust that for mortgage-related and other items, we reported net income of $3.7 billion or $0.33 a share.

We have scheduled down at the bottom of the page the one-time items coming through the P&L.

The $15.5 billion of mortgage-related revenue charges is comprised of $14 billion of reps and warrants and $1.5 billion of negative valuation effect on our MSR.

On the mortgage-related expense items of $2.6 billion, $1.9 billion of that litigation expense and $700 million of assessments and waivers.

Then we have scheduled out back on slide 30, the asset sale gains and other amounts that are comprised of a variety of items.

Before I leave this page I would like to touch briefly on taxes.

The effective tax rate for the quarter was 39.4%, excluding our goodwill impairment.

As you look out and think of the balance of the year, think about the effective tax rate in the 30% area excluding any unusual adjustments.

The other thing I would call your attention to here is during the third quarter we will have an $800 million hit to our UK deferred tax asset, given the reduction in UK taxes that we would expect to be approved during the third quarter.

Turning to page seven and looking at the balance sheet, assets during the quarter were down slightly while we continued to see growth in the deposits.

I would ask you to spend a minute and focus on risk-weighted assets.

Risk-weighted assets were down $40.7 billion for the quarter or 2.8%, which is consistent with our strategy of driving down risk-weighted assets as we look out to the new Basel capital rules.

To give you a sense of the magnitude of this reduction, it led to a 23 basis point benefit to Tier 1 common during the quarter.

As Brian alluded to, Tier 1 common at the end of the quarter was solid at 8.23% and tangible book value ended the quarter at 12.65%(Sic-see press release).

From an asset quality and a reserve perspective, ending loan-loss reserves after the release were $37.3 billion or 4% of loans and leases and over 1.6 times our annualized charge-offs that we saw for the quarter.

On slide eight, we walk through our net interest income for the quarter.

On an FTE basis, net interest income was down roughly $900 million for the quarter.

Net interest margin was at 2.5%, which is consistent with our previous guidance where we expected net interest income margin to trough in the 2.5% area.

As you think about the decline in net interest income, it was due to several factors.

The first on the consumer side, lower balances and lower yields; the second, the drop in long-term interest rates had a negative impact on our hedge results; and third, we had lower trading-related revenues.

As you think about our strategy with net interest income and managing OCI risk, we continue to be very focused on keeping the duration in our discretionary portfolio short as our asset liability management strategy is focused on managing interest-rate risk across the Company and minimizing higher -- minimizing OCI exposure to the extent we were to have a higher interest-rate environment as we move towards Basel.

If we flip to slide nine and look at the deposits business, net income in the deposits business was $430 million during the quarter, up $75 million or roughly 21% from the first quarter of 2011.

Average deposits were up 2% for the quarter and net new accounts were positive for the second consecutive quarter.

Brian referenced the rates paid on deposits and the cost per dollar of deposits.

Rates paid on deposits came down 3 basis points from 32 basis points to 29 basis points, and cost per deposit, which we define as non-interest expense over average deposits, came down from 2.6% in the first quarter to 2.44% during the current quarter.

On slide 10, we walk through our Global Card business where net income was $2 billion, a $300 million improvement or 17% over the first quarter, as credit improvements more than offset lower net interest income from lower average loans and yields.

As we think about volumes, total purchase volume for debit and credit transactions was up seasonally 9% from the first quarter and 6% when we compare it back to the second quarter of 2010.

Credit continued to improve significantly as delinquencies improved and US charge-offs declined for the seventh consecutive quarter.

From an average loan and lease perspective, the $5.6 billion decline in average loans from the first quarter was due to higher payments, charge-offs, and continued run-off in our non-core credit portfolio.

In addition to that reduction, we exited approximately $2 billion in receivables at the end of the quarter with virtually no income statement effect.

Been a lot of questions about Durbin out there.

If we look at our second-quarter results and we look out to the fourth quarter, which will be the quarter in which Durbin is implemented, we would expect a negative $475 million revenue impact from Durbin out in the fourth quarter relative to where we were in this quarter.

On slide 11, we walk through the Global Wealth & Investment Management business.

Net income was $506 million, down $27 million or 5% from the quarter, based on higher expenses from increases in the investment in our financial advisors as well as higher credit cost.

Revenue for the quarter was nearly flat to record first-quarter levels that we saw during the first quarter of 2011 as record asset management fees driven by market and long-term AUM flows were offset by lower brokerage revenues reflecting lower market activity.

During the quarter more than 500 financial advisors joined the leading advisory force pushing the total number of FAs to over 16,000 for the first time since the Merrill Lynch merger.

Pending loans within the business grew for the fifth consecutive quarter and were up $1.6 billion.

Turning to slide 12 and looking at the Commercial Banking line of business, net income of $1.4 billion was up $458 million from the first quarter and was at its highest level since the second quarter of 2009.

Average deposits grew $6.3 billion or 4% during the quarter as customers in this line of business continued to remain highly liquid.

As we look at average loans, average loans declined $3.1 billion.

On the negative we saw commercial real estate decline by roughly $2.2 billion which masked the improvement in the increase in average loans that we saw in commercial and industrial loans in our middle-market business.

Once again very strong improvement in asset quality.

Within the commercial bank charge-offs declined $193 million or 38% from the first quarter, non-performers declined 11%, and we continue to see very solid performance in credit.

If we move to page 13 and look at the Global Banking and Markets business, net income for this business was $1.6 billion for the quarter and fell seasonally by $576 million from the first quarter on lower sales and trading results that were partially offset during the quarter by higher investment banking fees.

If we start -- look at sales and trading, the revenues for the quarter were $3.8 billion, a $1.1 billion decline from the first quarter but up approximately $666 million from the second quarter.

We have laid out the DVA gains that we saw during the three periods on this slide.

I think as you think about this business and think about the second quarter as far as how we ran the business, as market certainty increased towards the end of the quarter based on what is going on in Europe, global economic concerns, and, quite frankly, the lack of opportunity to make money, we reduced risk at the end of the quarter.

From a risk-weighted asset perspective within sales and trading they declined $37 billion as we reduced legacy assets, exited our proprietary trading business in its entirety, and continued to optimize the balance sheet as we look forward to Basel III.

If we move to investment banking, investment banking revenues of $1.6 billion, excluding any self-led transactions, were a record since the closing of the Merrill Lynch merger.

And we saw strong activity across all the investment banking products.

If we move to corporate banking, average loans and leases increased $5.8 billion or approximately 6% from the first quarter as we saw strong growth in our international commercial loans and trade finance, which is consistent with what we have spoken about before as we made investments internationally in 2010 and they have started to bear fruit in 2011.

The next three slides we are going to touch on are Consumer Real Estate Services.

On a consolidated basis you can see the segment reported a $14.5 billion loss.

If we adjust out all of the one-time items that I talked about at the beginning of the call, net loss for the quarter was $954 million versus the $399 million that we saw during the first quarter of 2011.

The adjusted loss of $555 million delta occurred as the revenue was impacted by the sale of Balboa, which closed on June 1, as well as higher operating costs within the legacy asset services area.

Would also highlight during the quarter the MSR decreased by $2.9 billion from $15.3 billion to $12.4 billion.

And as we look at the cap rate on that MSR it was at 78 basis points at the end of the second quarter versus 95 basis points at the end of the first quarter.

On slide 15 we look at the home loans business, which is the ongoing mortgage operation within our bank.

You can see that net income for the quarter was $531 million.

If we back out the gain on Balboa, it was $86 million, up slightly from the $77 million in the first quarter.

Revenue in the quarter was helped by higher lock revenue that resulted from deliberate pricing actions that we took, as well as favorable channel mix, and was offset by lower production volumes.

On page 16 we look at the Legacy Asset Servicing business, which you will recall is the business where we moved a bucket of loans that are either significantly delinquent loans or products that we no longer are interested in participating in.

You can see once we adjust out the one-timers here, the net loss for the quarter was $1.4 billion compared to roughly $800 million during the first quarter.

The two principal reasons for the increased loss was the result of increased cost from staffing levels within the business, as well as an increase in provision.

As you monitored the progress in this business, this is obviously a discrete portfolio where we are both trying to work down the number of loans in the portfolio as well as reduce the number of delinquent loans in the portfolio.

And if you look in the bottom left-hand corner, you can see we made very good progress during the quarter.

Number of loans serviced was down about 3.3% and the number of 60 days -- number of loans 60 days delinquent in the portfolio was down roughly 5%.

On page 17 we look at all other, which is a net loss of $216 million.

That is the result of elevated credit costs related to valuation refreshes on our consumer loans as well as lower revenues.

As you look at the revenue line item for the quarter, three types of items that affected revenue for the quarter.

We had roughly a $200 million FPO adjustment on our structured notes, $831 million of gains on debt securities, and about $1.1 billion of equity investment income that was comprised of the dividends from our CCB investment, the gain on the disposition of the balance of our BlackRock interest partially offset by a $500 million impairment on a strategic equity investment.

During his opening remarks Brian touched on expenses; we have laid those out here.

Would like to say a couple of things.

If we exclude the selected items which we detail elsewhere in this presentation, the reported $22.9 billion of expenses was $17.7 billion, in line with the first quarter and relatively flat with the fourth quarter.

Expenses related to increased servicing costs in our mortgaging business as well as the additional client-facing professionals that we have talked about in this presentation were offset by reduced personnel in various other areas of the Company.

We referenced new BAC.

In May we initiated new BAC, which is an intensive effort on our part to create greater efficiency throughout the organization.

We are currently identifying ideas and action plans, and we intend to begin implementing those as we get closer to the end of the year.

While I know you want us to identify some potential benefits to the bottom line, all I can say at this time is we are very focused on expenses and we will update you on the progress as we meet certain milestones.

The next couple of slides I am going to talk briefly about credit trends which continue to be quite strong.

On slide 19 we look at consumer credit trends.

You can see net charge-offs, delinquencies, and non-performers continue to improve, and the total provision expense for the quarter for our consumer loan portfolios was $3.8 billion, which is comprised of $5.2 billion of charge-offs and a reserve reduction of $1.4 billion.

On slide 20 we look at mortgage and home equity delinquencies.

What I would highlight here is you can see delinquencies peaked in the second quarter of 2009 and we have seen five quarters of continued reductions in those delinquencies through the second quarter of 2011.

On slide 21 we look at non-performing assets within our residential mortgage and home equity books.

You can see that during the second quarter of 2011 both less-than-180-day as well as greater-than-180-day delinquencies improved in both residential mortgage and home equity.

With that being said I would make two additional points.

First, charge-offs do remain elevated due to refreshed valuation losses even though the frequency of loss continues to improve.

The second thing I would note is that we have started to see the greater-than-180-day backlog decline as the foreclosure activity has started, particularly in most non-judicial states.

On slide 22 we talk about home price impacts.

On the call on June 29 we said we would give you some greater color on that and what we have laid out here are those portfolios that are most subject to immediate changes in home prices.

As you think about home prices in our assumptions, once again we look at macro markets currently.

Our assumptions are very much in line with those.

We expect a little bit north of a 3% decline in home prices in 2011 and a 1% increase in 2012, largely during the second half.

As you think about the individual portfolios that are affected by home prices, we have roughly $40 billion of portfolios that are directly affected, $13 billion of non-performing loans that are more than 180 days past due that have been written down to net realizable value.

Given they are at net realizable value, every 1% decline in home prices will have a correspondingly immediate effect on this portfolio.

Within purchase credit impaired, which is carried at $0.66,(Sic-see presentation slides) we have $27 billion of carrying value.

That portfolio, on average, is about 40% delinquent.

So as you think about a 1% decline in home prices, it will be immediately affected but not to the entire magnitude of the decline in home prices.

Outside of that which is on our balance sheet, we are affected by home prices in the GSEs.

If you think about how we are affected by the GSEs, to the extent home prices go down it affects the collateral losses which they bear.

We obviously share in those collateral losses to the extent that we have defects.

We currently estimate that about every 1% change in home prices is $125 million relative to the GSEs.

We have not touched on or talked to how changes in home prices can affect our core portfolio.

That obviously is something that happens over a period of time and we provide reserves over and above what our modeled reserves are to try to reflect those types of risks that are out there.

On 23 we look at commercial credit trends.

Charge-offs declined $180 million in the second order of 2011 relative to the first quarter.

Total provision was a benefit of $523 million and reflected a reserve reduction of $1 billion in the quarter.

Would also note you can see that both non-performers and reservable criticized declined 11% during the quarter as corporate credit continued to improve.

Let's now shift from credit to capital on 24.

We have laid out our Basel I Tier 1 common, which Brian alluded to at 8.23% and, as I mentioned earlier, 23 basis points of benefit based on the improvement in risk-weighted assets under Basel I.

On page 25 we show tangible common, which remains very strong at just under 6%, and tangible book value at $12.65 at the end of the quarter.

As we look out at Basel III, we have laid out on slide 26 the phase-in schedule.

What I would say here is we continue to very actively mitigate both the numerator and the denominator effects as we approach Basel III.

We will be well above all of the minimums that are required under Basel and once again, as we told you at the end of June, we have a goal of 6.75% to 7% of Tier 1 common as we enter into 2013.

On slide 27, as we think about Basel mitigation, we show you the different things that we have completed since we became very focused on this at the beginning of 2010.

If you look at the bottom left, we talk about the things that we have accomplished during the first half of 2011.

Risk-weighted assets under Basel I down by over $60 billion due in part to reducing our legacy capital markets risk exposures.

Our MSR, as I referenced, is down $2.5 billion and we have completed asset sale gains generating $1.3 billion of Tier 1 common gains and reducing risk-weighted assets by $5 billion during the first half of the year.

As we look out at the activities that we are focused on to meet the guidance that we have given at year-end 2012, on the numerator side under Basel III we see additional mitigation of $200 billion to $250 billion that will enable us to get to our targeted Basel III risk-weighted assets of $1.8 trillion.

The way that we will get there is to continue to reduce our capital-intensive assets, rebalance our portfolios, and optimize our models to be able to get to where we need to for Basel III.

We will also continue to very aggressively, as I talked about in interest rate, to manage the OCI risk associated with our net interest income.

The last point here, future mitigation efforts; we have obviously heard the question that is out there.

You are 6.75% to 7% at the end of 2012, where do you go beyond that as you look to get to the fully phased-in number of 9.5% by the end 2019?

Even with all of the actions that we have talked about, we have significant additional actions we can take in 2013 and beyond.

We have laid out three portfolios of assets here that we would expect to reduce aggressively.

We have a loan run-off portfolio of $70 billion that we would expect at the end of 2012 that runs off by roughly 20% a year.

We have a structured credit trading book that is roughly $30 billion at the end of 2012 that will run-off over a five-year period as well, and we have a private equity portfolio that is roughly $50 billion under Basel III that will be out there at the end of 2012 that we would expect to run-off over the several years beyond 2012.

In addition to that you can expect to see us continue to reduce assets in the way that we have done over the course of the last six quarters.

If we move now from the denominator to the numerator, two things I want to touch on here.

The first is the MSR.

We referenced that the MSR is $12.5 billion at the end of the second quarter.

You can expect to see us taking two types of actions with respect to the MSR going forward that will benefit the numbers beyond the 6.75% to 7% range I quoted.

The first is we are taking a very close look at the types of activities we are originating and servicing.

So on the front end you will see actions where we look to scale back that which we have put on our books to service.

Secondly, we are very focused on looking out and moving MSR assets through sale in those instances where it makes sense.

We had roughly $70 million of gains on MSR sales during the second quarter of this year.

The last thing I want to highlight on the numerator is the deferred tax asset and the multiplier effect with respect to that.

As I think everyone knows, the deferred tax asset flows through the Basel calculations in several different ways depending on whether or not it's an NOL DTA or a timing DTA.

As you think about the leverage though and the benefits that we will have from the reductions in DTA through 2012 and significantly but beyond -- at the end of June we will have roughly $30 billion of a net deferred tax asset.

Roughly two-thirds of that is associated with NOLs and one-third is associated with timing.

The net effect of that is that we would expect our Tier 1 common to grow at a rate that is above that which is improved just by the generation of net income.

As we look to wrap up and close, we continue to work very diligently in getting the legacy assets -- or the legacy issues as well as the legacy assets behind us while we reposition our business for future growth.

If you think about the earnings this quarter, they demonstrated that our businesses outside of mortgage are producing attractive returns even with the headwinds of low interest rates.

Deposits continue to grow as we make progress on our customer-focused relationship strategy.

Credit quality continues to improve.

We have solid capital ratios, our liquidity position is very strong, and we expect to grow capital going forward.

We look at the opportunity each day to make progress and that is what we are all about.

And with that let me open it up to questions.

(Operator Instructions) Glenn Schorr, Nomura.

Thanks very much.

Quickie, I think it's good to see the $200 billion, $250 billion risk-weighted asset reduction expectations.

Just curious what you think the revenue or earnings associated with that are?

I think if you look at and you saw the individual books, one of the most significant contributors to that reduction of $200 billion to $250 billion is actually something over the last several quarters that we have taken losses on.

I think if you think about the structured credit trading book that is not something where you see significant amounts of income on as well.

So I think the net of it is while there is some income, there are also certain elements of that that have been expensive so we really don't see any material level of impact to the income statement from reducing that $200 billion to $250 billion.

Not bad.

I noticed on one of your first slides that long-term debt was down a bunch.

That is in line with, I think, your previous thoughts.

Just curious on what your refinancing schedule thought process is for the next, say, six, 12 months.

What do you need to fund, what don't you?

Sure.

I think as you look out we obviously put out a 22 months to funding.

I think it's important -- even though the mortgage settlement is uncertain that 22 months to funding reflects the payment of the $8.5 billion associated with the mortgage settlement.

We don't know exactly when that happens, but we have assumed it will be within the funding window.

What you haven't seen here is in addition to taking down debt we continued to aggressively reduce our short-term debt with the goal of driving our commercial paper balances to zero.

And the last comment I would make there is the reason the balances continue to remain as high as they are is we are preserving liquidity to be able to pay off the balance of our TLGP debt at the end of June.

And as you think about issuances, I would say that we will continue to be opportunistic as it relates to getting the debt markets and, at the same time, we are being very aggressive in looking to generate liquidity through selling parent company assets.

John McDonald, Sanford Bernstein.

Bruce, how much did the loan rates hit the hedge component in 1Q and in the second quarter?

How much did that hedging component hurt NII and NIM?

You mentioned that was a factor.

It was about $300 million, John.

Okay.

And you did use the term trough for the NIM and I guess NII too.

Could you give us your outlook in the near term about where you see the NIM and NII heading?

Sure.

I think we would clearly expect -- let me start with the net interest income -- we would clearly expect net interest income, if not at the trough, to clearly be pretty close to that.

On the NIM, there are two comments that I would make.

The first is the rates that we are seeing with respect to the corporate loans that we have made have not shown any material deterioration.

So the yields that we are seeing on the asset side continue to hold up.

What I do want to caution you to a little bit is to the extent that we continue to generate the types of liquidity on the deposit side that we are, NIM will be affected to the extent that that happens because we are not going to chase long-duration assets that have OCI risk and we're not going to chase assets that we don't feel comfortable with the credit.

So realize that that margin may jump around a little bit depending on exactly how strong our deposit growth is.

John, we have been consistent for several quarters, and we actually the last couple quarters did better than we thought on a reported basis and the net interest income line.

But if we still stay consistent where we have been, it troughs in the second and third quarter of this year, and then ought to come out from there.

That's the net interest income, Brian, you said, drops?

The dollars that Bruce talked about.

And then NIM, Bruce?

Your answer there to summarize on the NIM percentage could bounce around either way, give or take, depending on what happens on liquidity?

I think that is fair.

Once again it's going to be a function of liquidity versus the assets that are available.

But we are going to be very sensitive to both OCI risk and credit risk with respect to that.

Okay.

So then on Basel III and, Brian, the question about the capital raise.

You have consistently stated you don't need to raise capital.

Could you again just kind of walk through your reasoning on that?

Is that because you have gotten a sense from regulators that a Basel III fast-forward is not going to happen and that you will be allowed to meet the requirements as they are actually phased in?

I think that the sense we get from the world regulatory community is that the phase-in was a phase-in put in purposely when it will be put in this fall.

But importantly, I think -- what, I think, John, we got a lot of people focused on was from here to 2012.

And what, I think, Bruce was trying to lay out earlier is beyond 2012 there is significant mitigation both on the numerator and denominator side.

So a lot of the discussion about how you get from the 7% level to the 9.5% over that course of the five, six years.

People -- the pace at which you move in the first couple of years of that is high because of the amount of numerator improvement you get through the DTAs and other things.

So what we tried to do today is to show you that we believe that we can get to the 7% -- 6.5%, 6.75% to 7% we said by year-end 2012 continuing to improve well beyond that.

And that takes into account us continuing to make the great improvements in the optimization on both the RWA side and the numerator.

Everything we hear that is consistent with where we need to go.

The sheer amount of capital we have, if you just step back and think about it compared to where we were 12 months ago or 24 months ago, is quite high, including -- both on a ratio side and raw dollars.

So we continue to make improvements that makes us feel comfortable, and we got to continue to show you that bridge each quarter as we execute.

So there is no pressure to raise capital from a regulatory side of things?

No.

Okay.

And then, Bruce, on the January 1, 2013, 7% goal that is assuming -- you are hitting yourself on the numerator deductions there, right?

If you didn't have the numerator deductions, because those don't start till 2014, do you have a sense of what your Basel III actual number would be as reported and required on January 1, 2013?

I would think about that number, John, as being well above 8%.

Right.

And that is what you would actually be reporting when it starts, right?

That is correct.

Okay.

There would be no numerator deductions.

The way to think about it is that each year's numerators deductions are coming in over the pace beginning in 2014 and beyond.

We will have made numerator improvement before that, and so that is a fully frontloaded as if it were 1/1/2019 number, the 6.75% to 7%.

So why -- you are showing us this lower one of 6.75% to 7% just because the market is asking for it?

The regulators haven't asked you to fast forward that; you are just doing it to show a more conservative number?

I think we all basically said if we show you that number that shows you there is no -- you don't have to wait for it to come in and I think that is the goal there is -- our peers have all been showing it to you.

We have been showing it to you, so we will continue to show that.

But I think as we move through each period the reported number will be much higher than that and that is what you have pointed out.

So it's not a question of capital adequacy under any standard that we measure, because remember the standard at the end of 2012 is 3.5%.

So if you think about that in our context you have $100 billion of capital more than the minimum, so it's not a (inaudible).

We are doing it to show you what the fully phased-in number is so you can compare us against other people.

Betsy Graseck, Morgan Stanley.

Thanks.

A follow-up question on capital.

So risk-weighted assets came down under Basel I by about $40 billion in the quarter.

What was the effective Basel III RWA decline?

We don't have an exact number on that, Betsy.

What I would say is that in almost all cases the Basel III number is going to be higher than the Basel I number, but we don't have that exact number.

Okay.

Because it just looks like you are $200 billion to $250 billion RWA under Basel III; on a quarterly basis comes out at roughly the same amount.

Yes, there are some fundamental steps to that -- Betsy, in terms of -- think of going from I to II.5 to III and the optimization around model developments and ways it works in the trading books.

So it will not be as ratable as you may see by dividing it out, but the math works.

But it will come in bigger chunks I think, frankly, over the next couple, three quarters as we get some of these models fully implemented and optimized.

Okay.

So it's back-end loaded, not front-end loaded?

No, it's more front-end loaded (multiple speakers); it will come a little quicker in the latter part of this year and early part of next year as the models get implemented.

Then it will slow down just to the grind of what we are doing on the asset side.

And then in the first half of 2011 obviously you had some asset sales and then you have got your 6.75% to 7% goal by the end of 2012, but I don't see any asset sales in this bucket that you have identified.

So then you have got future mitigation goals where you have got continued asset sales.

So are you just suggesting that if you did asset sales between now and 2012, recognized some gains that would be incremental to the 6.75% to 7%?

That is correct.

Okay.

Because you obviously have the opportunity to make some asset sales in the next quarter.

People have been -- I know you are not going to comment on what you are planning on doing, but if you were to sell anything you would -- obviously that would be incremental.

Okay.

If we sell assets it would be incremental.

Okay.

And then can you just give us a -- I know you can't talk specifically about the mortgage foreclosure settlement, but maybe you can give us a sense as to where you think it is relative to a final conclusion.

Are we likely to get a settlement here in the next quarter or so, or is it still touch-and-go and who knows?

What I would say there, Betsy, is I think, as you all read about, this is something that is very fluid and continues to move around.

What I would say is that I think everyone realizes it would be a good thing to get this wrapped up so that people can move forward.

There are obviously a lot of people that are involved with this that need to get to the same place.

What I would say from a financial impact perspective, as we look out at and as we understand what is out there, we'd kind of ask you to think about one or two things.

The first is that during the second quarter, as we mentioned at the end of June, we did provide some litigation reserves during the second quarter to be able to help address any cash type penalties that would come out of that.

Beyond that we believe that we have got reserves that we can direct towards some of the settlements.

We just won't really know the exact amount of that until this is finalized and we see if everyone can get to a common place.

Is there an opportunity for potentially you to settle outside of the whole industry?

I am sorry?

Is there an opportunity for you to settle outside of the whole industry?

I wouldn't comment on litigation strategy at this point, Betsy, but I think that Bruce gave you a sense of what we are trying to accomplish.

Okay.

And then lastly, on the settlement that you did announce with the consortium, clearly the market is seeing some dissents coming in.

Did you expect them, how do you plan to deal with that?

And then lastly, did you get an IRS opinion on the settlement before you announced it, i.e., is it going to be -- do you expect it will be deemed to be handled within the REMIC structure of the trust?

If you look at the agreement, we did not get an IRS opinion before the deal was announced.

The deal is obviously subject to that.

We have no reason to believe that we wouldn't get that opinion.

As it relates to the reaction from holders, I think when we were on the call on the 29th -- this is obviously a unique structure.

The types of challenges and the like that we have seen that are out there where clearly expected by both the Gibbs & Bruns group, as well as ourselves.

The other thing that you have probably seen out there is the work that was done and released from the trustee and all of the experts that opined and spoke to the work that they have done.

So I think the only thing that we would say is that we obviously did a lot of work and had a lot of smart people around it.

The investor group did the same, as did the trustee.

There is a court date that has been set out there for November and we will continue to see how it progresses forward.

Paul Miller, FBR.

Thank you very much.

Brian, going back to the first question on the revenue impact of shrinking the risk-weighted assets, on the February investor day you talked about a normalized number but you couldn't give us -- you couldn't tell us when we are going to get there.

And that normalized number is roughly in that $200 billion to $250 billion range.

Do you have any on any update to that normalized number guidance, or you just don't really feel that this lower risk-weighted assets will have a meaningful impact on those numbers neither?

When we gave you those numbers we had in it the mitigation that Bruce described earlier on the risk-weighted assets.

As far as an update, if you think about -- let's just use the PPNR guidance that we gave you.

If you look at what we did this quarter, at the time we told you out in a more normalized environment we would be $45 billion to $50 billion, $30 billion from the core businesses and $15 billion from card.

This quarter we did about $14 billion-plus from card which leaves a need to do obviously around $30 billion, $31 billion from the rest.

We did about $20-odd-billion from the rest of the businesses; leaves us about $8 billion short.

If you think about how to make that up, there is really two major components.

One is as we said at that day and, Paul, you are well familiar with, as rates rise the benefits to the deposit franchise become a lot more lucrative and the net interest margin will expand back out.

That ought to be worth $3 billion annually.

Then on the cost side in the PPNR number that is $8.5 billion to $8.7 billion this quarter is still the operating costs from all the mortgage legacy assets which -- and also the elevated costs we're working on our new BAC project.

The operating costs, as you saw in one of the slides Bruce had, is about $1.7 billion, $1.8 billion for Legacy Asset Servicing just this quarter.

That will drop $1 billion-plus a quarter easily and then the rest of the costs work will come through.

So I think we still see that when you put that together sort of $14 billion-ish, $14.5 billion, on card plus the need to get to $30 billion on the rest of it to get to the level we talked about.

But if you look at the shortfall there is really two major components -- getting the work on the cost side and the net interest margin expansion when rates rise.

And you put it all against that that we are obviously projecting more normalized time and a little bit better economy than the growth rates we are seeing now in the GDP.

So we still feel comfortable with that guidance and we still are working towards that and making all the preparations.

The RWA optimization was factored into our thinking there.

The reality of that RWA optimization is that along with a bunch of assets that are not core to what we do as a company.

Something like the structured credit trading book is not a business that we continue to do in the way that it was done in the 2007/2008 timeframe, but it takes till 2013, 2014, 2015 for it to run off.

So as you think about that I think we are comfortable with the projections that we gave then and I just tried to give you a little insight on the PPNR, for example, of the $45 billion to $50 billion, how do we get back in that range.

Thank you very much, gentlemen.

Matthew O'Connor, Deutsche Bank.

A question on expenses.

You just gave us a little commentary in terms of what might be coming down in the magnitude, but obviously the cost savings opportunity seems quite large.

There has been some talk about reducing the branches by about 10%.

At the end of this year, when you are done with your internal work, are you going to present to the Street kind of a total cost savings program in terms of dollars and more backup detail?

Yes, in the third-quarter call, because we will finish the work during the third quarter, we will have the work that is really on -- think of all the consumer businesses and all the centralized groups that will be done.

Then in the third quarter we start with the GWIM, Global Commercial Banking business, and GBAM business and we split it in half just because of the size of our company and the amount of work.

So we will give you that in the third quarter.

We are deep into it now; we have been seeing all the ideas.

We have had the steering committee meetings and going through it, and we are very confident, as I said earlier, that it will provide great benefit to the Company.

Then as you go through initiatives such as this, the size of the opportunity, what type of macro backdrop do you try and keep in mind?

Obviously there is a lot of moving pieces on the capital markets, on the rate environment.

Do you have kind of a base case that you try and manage for and then provide some flexibility up and down?

Yes, we obviously do.

If you think about how we've managed the money, the Company across the last several quarters, the environment we have managed into is to try to figure out how to keep the -- leave aside the quarterly expense that might come from the assessments or things which are more volatile that are harder to predict.

But the core operating expenses, the core headcount we have been managing it to try to make sure as we deployed assets in places we wanted them we were taking them out of other areas to fund it.

And so we have been running at about that level.

I would say that longer term I hope your expectation and our expectation is the economy will grow faster, but the backdrop of this is an economy moving towards trend over the next couple of years, not at trend tomorrow.

So it's a modest growth environment that the economy keeps grinding along and grinding along but doesn't improve dramatically in the short term, but improves over time.

Okay.

And then separately, I think you have addressed most of the capital questions out there, but just to clarify the targeted capital ratio at the end of next year that would not include any potential gains from the CCB.

But what about additional private-label losses of up to $5 billion you have talked about, the state attorney general's settlement?

Have you factored in any of the mortgage hits as well?

The question and what Betsy had is what do you have in asset sales and things like that, so I think embedded in there are estimates for ongoing costs of litigation and things, normal run rate costs of what our earnings would be over the next quarter.

So it's all in there and when we factor that all in we get to the 6.75% to 7%.

And I would be careful about trying to pluck any piece out and say this piece is in, this piece is in.

But we factor it all in in terms of our expectations of when litigation costs will come or when asset sales, as Betsy talked about, will take place, if any, and how they will affect it.

So it's in our estimates and we will tell you that -- we will give you a quarterly report of how we are improving them and the progress we are making.

Okay.

But just to be clear, that is an all-in number including both potential ongoing mortgage costs as well as opportunities to take gains?

And earnings of the franchise and things like that.

Okay.

All right, thank you.

And what we are trying to be clear with you is from 2012 out, I think because we had such focus on now through 2012 because at the time that we -- spent a lot of time on this earlier this year; was before the SIFI buffer, etc.

As the SIFI buffer came inwhat we wanted to make sure that you are seeing is the opportunities from 2013, 2014, and out through numerator optimization and denominator work that will help drive us to the next level.

So from now to 2012 it factors in all the things we just talked about.

Mike Mayo, CLSA.

Just staying on the capital issue, I guess the other potential events that could cause a capital raise would really relate to funding or rating agencies or CDS spreads.

What are you seeing from those areas?

I guess CDS spreads are a fraction of where they were at the crisis peak, but they are up from the low.

If rating agencies threaten a downgrade might you have to raise capital?

What I am really getting to and you've talked a lot about it already, Brian, is just what is your level of conviction that you don't need to raise capital?

The level of conviction is given the economics scenarios which are moving along but at a very slow, steady pace is that we don't see it.

From a funding perspective, I think if you look, Bruce mentioned it earlier and I will let him touch on it, that we have driven down short-term funds to a very small amount.

Our plan is to take it literally down next to zero.

We have built up tremendous liquidity.

The ratings of the banks and the broker-dealer are separate.

We continue to operate the business as if -- between all the things going on around the world that you can see disruptions in the markets and we continue to watch that carefully.

So, Bruce, do you want to --?

Yes and I would just add, Mike, a couple of things.

We obviously continue to work with the rating agencies very closely.

I think if you look out at S&P you can see that we had them take a look at the broker-dealer, both Pierce, Fenner & Smith as well as MLI, and they actually notched the broker-dealer up.

So we felt good about that rating.

The other thing I would say as it relates to access to capital, we obviously put the news of the settlement and released the guidance at the end of June.

We went out and raised $2.5 billion in the fixed income markets at the beginning of July at attractive rates.

So we are very sensitive to the rating agencies, we continue to work with them closely and we continue to be opportunistic as it relates to accessing the markets.

What about your exposure to the countries in Europe, the PIIGS countries?

What is your net exposure?

What is your gross exposure?

Yes, if you look out at -- in the supplement, we have put some information out there.

You can see that the number that we have out there is $16.7 billion.

As you think about that $16.7 billion, realize it has been reduced by roughly $1.1 billion due to hedges.

Outside of that $16.7 billion that was reduced by $1.1 billion of hedges, we have additional protection that is not factored into that number.

Roughly $1.7 billion of CVA hedges and an additional $3 billion of single-name hedges that we have not reduced those numbers by.

So we were active and early in getting after this exposure starting in the first quarter of 2010.

We have laid out the exposure with the caveats that I have just mentioned.

And while we are very focused and vigilant in watching it and trying to think through what the spillover effects could be, as we sit here today we feel very good about where the exposure is.

How much could you lose if things go worse in Europe, which could in turn potentially lead to a capital raise?

I am asking you.

I think what you have to think through as you think through the exposure, there is three different kinds of buckets of exposure that we have within the region.

The first is the corporate loan book.

What I would say is that if you look at the corporate loan book, it is largely to large multinational, global leading companies.

And to the extent that the amounts are above house guidelines, in many cases, like I said, we buy protection.

So the corporate loan book we feel very good about.

If you look at the liquid traded book, we only have one country where we have any meaningful level of sovereign exposure and we have protection that largely offsets that.

Then we have a securities book that is marked to market that we mark every day.

So as we look at any meaningful level of losses from where we sit today we just don't see it, and clearly we don't see it whatever lead to there being any kind of a capital event.

And then last follow-up for Brian again.

Brian, think I heard you just say we don't see it in this economic scenario.

If you can provide any more confidence, because at the start of the year where you were considering the possibility of a dividend increase by the end of the year and now several investors ask about the idea of a potential capital raise.

We have kind of gone full circle here.

So just your level of conviction.

Can you provide any more comfort?

You have more confidential information than any of us have on the call.

We have given you the improvements we have made in the capital.

Even with a sizable $20 billion charge this quarter, it's a net impact of 20 basis points so our economic scenario is posted, is out there.

The scenario that we use to plan against is the one you see out in the domain, which is modest growth, and we don't see anything in that that challenges.

We have reserved -- the difference between now and a couple of years ago when people were worried about the deterioration in the economy, when unemployment obviously rose, is think about the reserve levels we have, think about the improvements in the portfolios that we have made across that.

So when there is a lot of discussion about future home risk.

The risk, the charge-offs in our mortgage portfolios combined between home equity and first residential -- $2.5 billion a quarter, still an unacceptable level -- but they are down from the peak.

Even while housing prices actually had deteriorated from the time they peaked, because the quality of the portfolios and the quality of the borrowers in the portfolio is different than it was.

So that gives us a good step between the reserves, the capital we have built, and the quality of portfolios to hold us against economic times which are going to bounce around.

And that is what we have done.

So you see this quarter with a charge of $20 billion we took a 20 basis point hit to ratios and plowed through it.

Moshe Orenbuch, Credit Suisse.

Great, thanks.

Maybe, I don't know if you could flesh out the answer a little more as to how you are confident that this quarter or the third quarter are the trough in net interest income and what things would kind of lead you to think that that number turns around and starts to grow?

A couple of things that I would say.

If you think about the quarter in what we absorbed, it was obviously a fairly significant negative effect on hedge income and we clearly would not expect that to happen again given how flat the yield curve is as we look out there.

The second thing that I would say is that we had some run-offs in the corporate book during the second quarter that we wouldn't expect to see again.

So I think as we look at the number, absent some meaningful change in the rate environment, when we look at both the assets that we have as well as the rates that are applied against them, I think that we feel pretty good that we are pretty close to the trough as it relates to net interest income.

Bruce, in that $300 million that you identified on the hedging, does that come back or is that just the absence of a negative in the future?

I don't want to speculate if it comes back or it doesn't, but I think you know during the first quarter we had some benefits from hedging.

So the number bounces around.

But I just want to reiterate that the reason it's there is because we are very sensitive to OCI risk and making sure that as we go out towards Basel III that we don't have any negative effects from OCI.

I think if you think about it more broadly, what has been going on in the last many quarters that we have been trying to make sure people saw is that as you ran off on some higher yielding assets which don't have a net profit contribution because the charge-offs exceed the yield and that keeps coming down that was hurting us.

And then what we -- and the offsets that will grind down your debt cost and your deposit cost.

The issue now is that if the core loan growth is still -- is modest, and even backing out the run-off portfolios just because the economic activity is not that strong.

So that helps in that we are seeing that activity be a little stronger than it was several quarters ago but it's bumping along.

The deposits, we continue to drive down deposit costs and all-in cost of debt by paying off the term debt, as someone mentioned earlier.

So we will be grinding at this.

So the assumption is as we trough out here it will continue for a while, it's not going to leap right back up so we want to make sure that you guys see it.

But it's in line with what we have been predicting for six quarters, that this would be the place where we would sort of see it bottom out.

But long term we will have to grind from here on both the liability pricing side, the debt cost side, and also you will grind out loan growth slowly but surely.

Okay.

And as a separate but somewhat related issue is you mentioned $475 million a quarter of impact from Durbin.

Obviously that is less than you had thought before potentially, but can you talk a little bit about your strategies to mitigate that, both from a product and pricing standpoint?

Sure.

I think usually Durbin gets caught with all the other changes that have gone on as opposed to any one of them going back what seems like a long time ago -- the CARD Act and then Reg E and Durbin and all the pieces around the consumer business.

So how are we mitigating the activity?

If you look what we have been doing is the new account structure has now been rolled out in three states for new accounts and then now for all accounts and they are converting the accounts.

That is all going very well so we would expect that conversion to take place during 2012.

What that does is institutes some monthly fees and other ways customers can pay us, away from overdrafts or, frankly, the value of the interchange on Durbin.

And so the pricing structure in that is set, will be set -- is set and will be set to generate the activity.

The good news is that -- reasonable good news is that where we ended up in Durbin is a place where we can continue to drive debit usage.

You can see from the statistics on the card page you can see the payments made through plastic in our franchise continue to grow 5%, 6% a year.

You take out the gas prices it's 4% to 5% a year.

Gas prices contributed 1.5% to 2% of that.

So we will continue to drive the usage of that which will continue to drive the revenue up from a level after the Durbin takes it away.

So it's the account structure, it's the pricing within that monthly accounts, it's the charges that you have seen some of us put in across the last several months to make up for some of the fee loss, but the real benefit of that come really as we convert the entire account base to new structure in 2012 and into 2013.

The benefits come in 2013 after you are done with the conversions.

Think about this, this is all 30 million checking holders going through a conversion in our franchise.

So it's a large conversion and will take place after we finish migrating the deposit platforms together.

It's going well.

It's having the intended outcome, both from a dollars-and-cents basis but also from a customer behaviors basis, and we will continue to drive that.

That all being said, the other way that we will get paid is to have to maintain discipline deposit pricing as short-term rates rise as the economy improves.

And that will be critical for us to do.

You have seen our ability to continue to take down deposit pricings and grow deposits.

The competitor for customers' deposit money won't be competitive until short-term rates rise quite a bit, and so if we maintain that deposit price another way to make up for that cost.

Edward Najarian, ISI Group.

Good morning.

Most of my questions were answered but I have one specific question for Bruce.

It's a bit detailed.

If you look on page 10 of the supplement, which is the liability side of the average balance sheet, I am focused in on your cost of federal funds purchased, securities loaned or sold under agreements of repurchase.

That cost this quarter was 159 basis points, up from 129 basis points last quarter and 79 basis points a year ago.

And I am comparing that to other banks.

I just compare that to JPMorgan, for example.

A year ago you actually borrowed on that line for 5 basis points less than JPMorgan did at 79 basis points versus their 84 basis points.

A quarter ago you borrowed for 20 basis points more at 129 versus their 109.

Now you are borrowing for 49 basis points more.

Is there something going on in terms of your ability to borrow in the wholesale markets and that cost rising more rapidly than peers?

Or why, in your opinion, has this line item, which is pretty substantial at $338 billion, grown from a borrowing cost perspective so much more rapidly than peers?

I think we can get back to you with the exact numbers.

I believe, Ed, that there is a couple of things going on within the numbers.

The first is that some of the hedges are directed towards that, so as we talked about some of the hedge income and the ineffectiveness you will see some of that there.

The second thing is we have looked out at and we have talked about we are extending, and within some of our repo books extending the maturities on those repo books as we go forward.

And the third thing is, and we can get you the exact number, is that during the second quarter within the markets business is we borrow in Europe for dividend stocks.

Given that the dividends in Europe are paid in the second quarter, the borrowing costs typically flips up a little bit in the second quarter for that.

So we can get you the exact numbers, but I think those are the three things that would contribute to that number.

I mean as I just sort of look at and do net interest margin math, this increase looks like something that had a -- it was part of the negative impact.

Is this a number you expect to stabilize or come down in future quarters or would this trend of rising continue to happen?

I think if you think about the three things that I have given, we are going to continue to extend repo so that piece of it you would expect.

Clearly, with respect to the European stocks, that is a seasonal thing in the second quarter as well as the hedging effectiveness.

We would hope that those wouldn't continue.

So I think, to answer your question, one probably does, two don't.

Okay.

Okay, thank you very much.

Nancy Bush, NAB Research.

Good morning, guys.

Two questions for you.

First, on the commercial bank I think you said that CRE declined by about $2.2 billion and then you had some loan growth in middle-market C&I.

Has the middle-market C&I loan growth continued as we have gone into the third quarter here and was the CRE run-off planned or unplanned?

Start with the commercial real estate.

I think given both the capital markets, the refinance -- as well as the refinancing markets, I would say part of the real estate was planned and part of it, quite frankly, were assets that were either criticized or non-performers coming off the books.

So as we look at that commercial real estate number we obviously don't like to see loans going down.

At the same time there was some stuff that you would have wanted to come off.

We feel very good about where the commercial real estate portfolio is now and, quite frankly, or trying to figure out places to do more commercial real estate where it makes sense.

With respect to the C&I portfolio within the middle market, that is about $37 billion of the overall commercial banking portfolio.

And if you go back and look at that since the second quarter of last year that portfolio is up about 10%, and that really is the core guts of the client base that we are very focused on within the commercial bank.

I guess sort of the root of my question is the companies that we have seen report thus far are sort of reporting the glimmers of commercial, beginning commercial loan growth.

I just wanted to see if that was your experience as well or if you can just give us an overall view of where -- whether we are at a growth inflection point yet?

I would say, Nancy, as you came from the end of last year and the first part of this year you were seeing -- David Darnell would say the core middle-market book customers were optimistic and they were starting to grow a little bit.

I think that has sort of flattened out a little bit, so there is still some growth as we have pointed out here, but if you look at the utilization rates and stuff they have now stabilized.

Again they were at a low probably of 31% to 32%.

They are sort of in the 34.5% to [30]% range.

They would be in the 43% range in normalized times.

Now people have excess cash.

But I would say that as you have gone through the year this year I think that people are less aggressive, our clients are less aggressive in the core, broad, middle-market spectrum than they were earlier this year, but the loan balances are holding in and growing slightly.

Brian, I just have one final question for you.

We have been getting several articles lately about what seems to be a permanent change in the attitude towards homeownership in the US.

I wanted to get your opinion on that.

Also just when all is said and done here, and whatever year that may happen, how do you see the mortgage business as a contributor to the bottom line at BAC?

Let me go to the second one, Nancy, because I think it kind of answers the first one in some respects.

Leave aside the exact dollars and sense, but the way we see the mortgage business in our company going forward is we have 50 million consumer households; 30 million have their core banking, checking accounts with us, etc.

Our job is to provide mortgage products to not only our general customers in our retail and preferred segments, but also our global wealth management customers in a very strong, very focused, and very fair way.

And that is what we are going to drive to and that is what you expect to see in our mortgage business going forward.

I think the idea being in a stand-alone context where we had the wholesale business, the broker-driven business.

We have gotten out of the reverse mortgage; we have gotten out of -- we continue to shape our view of what the correspondent business looks like.

But the business that we will be in it will be a strong direct to consumer -- director to retail, direct to the consumer mortgage business, and that is where we are moving -- Barb and her team are moving the business to.

That actually fits in to the capital demands and MSR and other things, as you could well figure out.

So that is how we are going to run the business for the benefit of our customers, as the same way we are running all our businesses.

Making sure every ounce of our capital is used to support that core customer base and, frankly, to do the mortgage product very well for that customer base.

When you back in to the broader context, I think the homeownership discussion is a policy discussion I leave to the policy makers.

But as you look at our customers and listen to them and watch what they have gone through I think that the people in the world my children's' age are going to think differently about home ownership in terms of the value of it and how it factors into their thinking because of what they have seen going on around them.

And I think that is just the reality we are in.

It doesn't mean it's good or bad; it's just the reality.

And I think with the population growth dynamics and things like that in the United States I think that that is going to be the reality of a more sober society on this.

I think our job is to provide products in that and help people become homeowners, because it's ultimately something they may aspire to but do it the right way.

Chris Kotowski, Oppenheimer.

When you look at the trading results on page 26 of the supplement, it looks like total trading profits this quarter were almost exactly in line with the trailing four-quarter average.

And so I am curious is this the new normal, or do you still view this as a depressed trading environment?

What is the outlook for this business?

And if the revenues remain at this level that they have been in, is the expense side of that business properly structured then?

I would say that -- I still say we are probably below normal right now in the minds of Tom and the team running it.

So I think that you won't see what you saw, say, in the first quarter of last year and things like that.

That was way above normal.

We have tried to talk about -- we have talked about $4.5 billion range in total revenue, which includes this plus the margin and other things.

So I think that that is -- I think we are still below the normal.

The question is unless you see the improvement back to normal we will have to continue to work on the expense.

In fact, that is what Tom has been doing.

If you look at our business, the headcount that he has had has been relatively flat, but what we have done is deployed in the international space for example.

Obviously Asia being a key component where, from a research side, we have got strong Asia-wide research ratings; Japan number one ratings, things like that.

So we deployed resources there to help our teams, salespeople to cover the clients.

At the same time the total deployed resources headcount has been flattish and we have been taking it out of places where the opportunities aren't as big.

So ought to expect us to continue to manage the business that way.

In the aggregate this is a little below normal.

If it doesn't get above normal then the cost structure will come down and the comp structure is one of the quick ways to adjust it, but ultimately you got to keep factoring that in.

All right, thank you.

At this time I would like to turn it back over to Mr.

Brian Moynihan for closing comments.

Thank you for your attention and we look forward to talking to you in October.

Thank you.

This concludes today's conference call.

You may disconnect at this time.

Thank you and have a wonderful day.