美國銀行 (BAC) 2012 Q1 法說會逐字稿

Good day, everyone, and welcome to today's program. At this time, all participants are in a listen-only mode. Later you will have the opportunity to ask questions during our Q&A session. (Operator Instructions). Please note day's call is being recorded.

It is now my pleasure to turn the program over to Kevin Stitt. Please go ahead.

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 Bruce discusses the results in detail I just want to take a minute to provide some additional thoughts on the quarter.

On our last call, I listed the following areas of focus for our Company during 2012. We wanted to focus on our capital levels. We wanted to focus on our risk. We wanted to focus on the cost base in the Company and we also needed to drive the core business improvement.

In the first quarter of 2012, we have made progress in each of these areas. As you can see, our capital and liquidity are at record levels in our Company. Our credit costs continue to decline and our cost structure is coming down and many of the business customer and profit metrics have improved.

So first from a capital perspective, we entered 2012 with increasing strength in our balance sheet position. We managed for the CCAR test and made significant progress related to our capital ratios again in this quarter. Our Tier 1 common ratio reached 10.78% at March 31, 2012. We continue to make progress on capital at a faster pace than we expected.

When we turn to risk, our credit costs fell to the lowest level in nearly five years. Reserve levels cover 3.6% of our loans and leases and 2 times our current level of annualized credit losses.

The improvement in delinquent and nonperforming assets bodes well for further improvement in net losses as we go forward. As you know, we continue to take opportunities to reduce the remaining legacy assets in the capital markets business and we believe we have a strong litigation in rep and warranty reserves in the mortgage area.

On a day-to-day basis, the average value at risk or VAR is lower than our trading business has been in some time yet we managed to make similar levels of sales and trading revenue excluding DVA as we did last year.

The continued cost reduction remains at the forefront of our thinking at Bank of America. We continue to streamline our Company. Our priority is to make our Company work better for our customers, our teammates, and our clients, and in the process, reduce cost.

As Bruce will show you later, we are achieving those results. We are achieving good results in bringing down expense across our various business lines, showing good progress on trends over the past year. One area we continue to work is our Legacy Assets and Servicing area. Personnel costs there are beginning to peak after adding significant resources over the past several months to implement the single point of contact in other mortgage programs.

We expect these Legacy Assets and Servicing costs to come down in the second half of 2012. Just for your reference, in the first quarter 2012, the expense in Legacy Asset and Servicing was $3.3 billion.

As those costs increase, we passed a milestone. We have now modified more than one million mortgages. In addition to the modifications, the paces of short sales, [fees] (inaudible) and other alternative resolutions continues to make progress and continues to quick helping us reduce our delinquent loans over all.

For the rest of our Company, we saw continued improvement in our costs. We expect to continue to achieve significant cost savings over the next 18 months, consistent with our new VAC goals. We are finalizing new VAC Phase II as we have told you and we will discuss those expected outcome soon.

As you are well aware, headcount drives our operating costs in the end and we expect to see continued progress in this area going forward. This quarter we added more than 2500 associates in LAS, as I spoke about earlier. But overall, as we work throughout the Company and cost manage it in every other area we reduced our overall headcount including those additions in LAS by over 3000 FTEs. That's on top of a reduction of 7000 FTEs plus last quarter.

At the same time as we are reducing our costs, we continue to invest in our franchise and support the economy. During the quarter to help move the economy along, we extended more than $100 billion in loans to individuals and companies of all sizes showing the fifth consecutive quarter of average commercial loan growth to corporate and commercial clients.

We have added client-facing teammates in selected growth areas in our Company. We've hired 100 small-business bankers in this quarter to further support our small business customers bringing the total of small-business bankers since the program began to over 700.

In small business lending, we continue to exceed all the goals we set for small business lending including the goals we announced last fall in cooperation with the administration and small business administration. In fact, we're up 17% this quarter versus last quarter, first quarter of last year.

We've added 200 financial advisors to our team in the first quarter. As the quarter progressed, we added mortgage loan officers to focus on our direct to consumer mortgage business.

As we think about the consumer business as an area we continue to work and we've spoken about, we continue to respond to changing preferences to optimize our distribution network while investing where appropriate. This quarter we added 0.5 million mobile banking customers during the quarter. That's about 40,000 week, a pace that continues. We now have more than 9.7 mobile banking-enabled customers.

In our industry-leading online banking area, we added another 0.5 million active accounts this quarter, bringing us to over 30 million active accounts.

In addition through our ATM capabilities, we passed a milestone with half the deposits of Bank of America going through our ATMs that used to go through our branch platform.

So overall, our customers continue to do more with us through all the channels including traditional branches, mobile, online, and ATM but they're using the branches less and that's why we are fine-tuning our delivery network.

We continue to align our banking center network to our customer needs. This includes reduction of consolidations, which there's a net reduction of 51 this quarter. That is part of the reduction we've spoken to you about of 750 branches over the next couple of years.

In select instances, we will consider branch sales in markets where growth potential and size don't meet our goals and at the same time, we continue to expand in markets with high density where new locations can generate good results and we continue to renovate centers in all the places we do business.

We have continued to use our leadership positions to deepen our relationship with our customers and clients across all our franchise. In the consumer business, we opened 800,000 new credit card accounts this quarter, half of which even with our focus on credit quality were opened in our branches.

Our innovative Bank of America card Cash 1-2-3 card introduced only eight months ago now has more than one million cards outstanding and has achieved great customer acceptance.

In our brokerage and wealth management area, we continue to make good progress. Brokers accounts and assets are growing nicely. In our [managed] self-serve area, they've grown nicely year-over-year. But most importantly, at our industry-leading capabilities in Merrill Lynch Wealth Management and US Trust, we have seen solid long-term assets under management flows this quarter, some of the best we've seen in a while.

These -- our affluent and wealthy consumers at Bank of America are served by the best team in the business. For the fourth consecutive year we have more financial advisors on Barron's top 1000 list than any other firm.

When we turn to our commercial clients, we saw higher utilization of lines of credit as our commercial customers continue to take advantage of opportunities as the economy continues to grow slowly. Our business of serving clients in our global banking segment and our ability to offer integrated solutions from lending, investment banking, treasury service, in all the areas these clients need services is continuing to produce strong and steady profits and we remain -- maintain our number two investment banking position on fees.

For institutional investor clients, we are encouraged to see a rebound in capital markets activity. We had more than $5 billion in sales and trading revenue this quarter excluding DVA and that's a strong quarter. Recorded positive trading related revenue every single day in the quarter and this quarter represents the highest ever fixed income results in our Company's history. This team did a good job of continuing to build our customer debt, even in the uncertainty of the world's economic events over the past couple of quarters.

So let me close with this before I turn it over to Bruce. The momentum around our strategy continues to accelerate. We still have lots of work to do, but the team is focused and encouraged by these results. We are going to stay focused as we said in the first quarter call; we are going to stay focused on the fundamentals this year and continue to drive forward the results for our clients, customers, and you, our shareholders.

With that, let me turn it over to Bruce.

Great. Thanks, Brian. Good morning, everyone. I would just echo Brian's comments about the progress that we feel that we made throughout the quarter and would look to kick off the presentation starting on slide 4 for the investor presentation.

As we look at that and think about the quarter, I would note several key takeaways, some of which Brian referenced. We obviously reported $0.03 a share in earnings but when you look at and consider that number, realize that includes negative valuation adjustments of $4.8 billion pretax or $0.28 a share after tax, which is the result of our credit spreads tightening significantly throughout the quarter.

In addition to those results, we created significant levels of both capital and liquidity throughout the quarter and each of those metrics are at record levels as we ended the first quarter of 2012.

As we look at the operating results, Brian referenced capital market activities and the capital markets generally improved throughout the quarter, driving sales and trading results that were significantly above the fourth quarter of 2011 and in line with what we saw during the first quarter of 2011 once again excluding DVA. Outside of the sales and trading business, all of our business segments reflected improved profitability during the first quarter of this year relative to the fourth quarter of last year.

Credit quality continued to improve significantly. Provision expense at $2.4 billion for the quarter was the lowest that we've seen since the third quarter of 2007.

We have talked a lot about expenses. Expenses did decline from the fourth quarter of 2011 despite the fact that we had higher revenue-related incentives as well as the annual retirement eligible compensation of costs that occur during the first quarter of every year.

Lastly, I would highlight we capitalized during the quarter on the ability to capture significant gains on some of our subordinated debt and preferred securities; $1.2 billion pretax during the quarter.

If we turn to slide 5 where we give a little bit more income statement information, you can see the buildout of the net income of $700 million or $0.03 a share. The one thing I would highlight when you look at the income statement that the pretax pre-provision number of $3.3 billion does not add back the $4.8 billion of FVO or DVA that we had during the quarter or for that matter any of the other selected items which I will go through now.

As we look at things during the quarter that benefited net income, I referenced the debt and trust preferred repurchases. In addition to that $1.2 billion during the quarter, we had $800 million of gains both within our private equity portfolio as well as on the gain on sale of fixed income debt securities.

On the negative side, I referenced the $4.8 billion of FVO and DVA. In addition to that, we had $900 million of annual retirement eligible compensation costs that once again as you recall we incur each year during the first quarter of the year and roughly $800 million of litigation expense, the majority of which was not mortgage-related.

We turn to slide 6 and look at capital, we obviously built significant levels of capital from the third quarter to the fourth quarter of last year when we took our Basel I Tier 1 ratio from 8.65% to 9.86%. We had another very strong quarter from a capital accretion perspective, growing capital from 9.86 to 10.78%.

If you look at the components of that increase, four buckets that we have laid out here, the first roughly 7 basis points in capital by virtue of the fact that employees were paid a portion of their 2011 compensation in stock. The gains on repurchases of subdebt and trust preferred exchanges and repurchase, as I referenced, were 13 basis points of capital. And most significantly during the quarter, risk weighted assets declined by $64 billion during the quarter, which contributed 52 basis points to our benefit in our common ratio.

As you think about that 52 basis points of improvement, think about that in the context two-thirds of that represented pure exposure reduction and roughly one-third of that represented declines as we continued to analyze, refine, and optimize our capital calculations. Then lastly, about 20 basis points of capital from earnings.

As you look at that earnings, realize that the FVO piece of the charge that I referenced does not negatively impact or positively if it goes the other way, regulatory capital. As a result of this capital accretion that we have seen during the quarter, we have previously given you guidance that we would expect to be at 7.25 to 7.5 of Tier 1 common under Basel III on a fully phased in basis at the end of 2012. Based on the improvement we saw this quarter, we are very comfortable increasing that guidance to above 7.5% at the end of 2012.

If we move from capital to liquidity on slide 7, you can see that during the quarter our excess liquidity sources across the Company grew by $28 billion to an all-time record of $406 billion at the end of the first quarter. As we look at parent company liquidity, it increased to $129 billion during the quarter, which is up $4 billion while at the same time on a net basis our parent company debt was reduced by $5 billion.

Importantly as we talk about liquidity, we quote a time to funding metric. That time to funding metric increased to 31 months during the first quarter and with $129 billion of parent company liquidity, we are in great shape to address the $34 billion of parent company maturities we have during the second quarter, which includes the remaining $24 billion of debt associated with the Temporary Liquidity Guarantee Program or TLGP.

As you recall, we have worked hard. We no longer -- or have very little parent company or broker-dealer short-term unsecured funding and as we look out at the balance of the year, we issued just over $5 billion of debt during the first quarter. Based on what we are seeing now we clearly expect that to be less during the entirety of the remainder of the year.

Moving to slide 8 to look at certain balance sheet items, I referenced the reductions in risk-weighted assets. You can see that we had about an $8 billion increase in deposits during the quarter. Our tangible common equity ratio remained very strong. It's 6.58%. Tier 1 common grew by just under $5 billion to $131.6 billion which contributes to the 10.78 Tier 1 common ratio I just referenced.

Tangible book remained relatively flat at $12.87 and you can see below, our allowance continues to cover our annualized charge-offs by about 2 times and our liability for reps and warrants remained relatively flat at $15.7 billion.

If we move away from capital liquidity, net interest income on slide 9, net interest income increased sequentially from the fourth quarter to the first quarter by about $100 million. As you look at and think about that change, we benefited from about $500 million of less premium amortization and hedge in effectiveness. In addition, $100 million improvement by virtue of lowering our rates paid on deposits as well as the contraction of our debt footprint. And offsetting those benefits were reductions from declines in consumer balances and yields of about $400 million.

We turn to slide 10. We have laid out here the changes that we have made from a business segment reporting changes. I'm not going to go through this. We have laid it out here. We filed an 8-K last week that gave you a lot of information as to what those numbers look like with those changes and while we apologize for the additional work that it creates, I would note that it very much aligns our business segments with the way that we manage both our customer relationships as well as the way that we manage the overall Company.

On slide 11, we highlight the results of our Consumer and Business Banking segment. Earnings for the quarter were $1.5 billion, which is an increase of 17% from the fourth quarter and was driven by both lower expenses as well as lower provision.

From a deposit perspective, average deposits were up 1.4% or more than $6 billion during the quarter. The rates that we paid on those deposits declined during the quarter to 20 basis points.

As we look at credit and debit card purchase volume, volume had a seasonal decline of 6% from the fourth quarter but increased 4% from a year ago.

In US credit card, new accounts grew by 19% from the first quarter a year ago. I would note that as we look at the US credit cards, there's been a significant change in the way that we open new accounts. We are very focused on leveraging our franchise and online networks while scaling back what we do from a direct-mail perspective.

Average loans during the quarter declined $5.6 billion from the fourth quarter due to seasonality, divestitures that occurred at the end of the fourth quarter, as well as the continued runoff of our non-core portfolio.

Lastly within the card space, credit quality continued to improve. US credit card losses improved for the 10th consecutive quarter and the 30-plus day delinquency rate declined for the 12th consecutive quarter.

Turning to slide 12 and looking at our consumer real estate services area, it reported a loss of $1.1 billion during the quarter. That loss was driven by the cost of managing delinquent and defaulted loans in the servicing portfolio combined with costs associated with managing other legacy mortgage exposures.

The home loans business which is reported within the Consumer Real Estate Services segment did record a profit of $115 million for the quarter. First mortgage originations of $15 billion were down from the fourth quarter due to our exit from the correspondent mortgaging business. Importantly though, while our production volume was the lowest that we've seen in five quarters, production income before the negative impact of reps and warrants was the highest that we have seen in five quarters.

Our results for the quarter include $282 million in costs for reps and warrants primarily related to the GSEs; $313 million of litigation expenses; $410 million for expected assessments and waivers costs associated with our servicing operations; as well as overall increased cost related to our servicing operations.

As you look at the MSR, our MSR asset increased by $211 million during the quarter driven by higher rates and partially offset by borrower payments and model changes and ended the quarter at $7.6 billion. MSR results net of hedge were positive by approximately $200 million in the first quarter and as you look at our capitalized MSR rate at the end of the quarter, it was at 58 basis points versus 54 basis points in the fourth quarter and 95 basis points a year ago.

If you turn to slide 13, some data that we want to talk about within our Legacy Assets and Servicing area that's within the CRES segment. You can see on a linked-quarter basis as well as compared to the first quarter of a year ago, we continue to work hard to reduce the number of delinquent loans and find homeowner solutions. Keep in mind Legacy Assets and Servicing now reflects all of our servicing operations and the results of our MSR activities.

During the quarter, we added more than 6000 people, both employees as well as third-party staffing in this area in the quarter alone. As we look at the results and as we look to drive down both the number of loans serviced as well as the number of delinquent loans, the number of first lien loans service dropped 3% in the quarter and more importantly, the number of 60-day plus delinquent loans dropped 6%.

Once again, we are very focused on driving the number of 60-plus day delinquent loans down because as we drive those down, it will give us the ability to start reducing costs within the segment.

In Global Wealth and Investment Management on slide 14, earnings of $547 million more than doubled the results in the fourth quarter of 2011 as higher transactional activity and market levels prove higher revenue while both expenses and credit costs were down for the quarter.

Pretax margin for the quarter was strong at 19.8%. Client balances up 4.8% from the fourth quarter due to higher market levels while our long-term AUM net flows were $7.8 billion, the second highest that we've seen since the Merrill merger.

Expenses declined versus the previous quarter due to the absence of certain fourth-quarter items including litigation expense and other operating losses, FDIC, and severance expense.

Net income in Global Banking, slide 15, was up 19% to $1.6 billion versus the fourth quarter and essentially flat with the first quarter of last year. Revenue increased 11% from the fourth quarter from higher investment banking fees, equity investment gains, and income from leasing transactions.

From a lending perspective, average loans were up slightly as 3% growth in our C&I lending to both large corporate and commercial clients was offset by planned decreases in commercial real estate in the DFS portfolio as well as Trade Finance.

Average deposit balances at $238 billion declined 1% due to seasonal outflows as well as certain liquidity management actions that we took. Despite that, our treasury services revenue remained strong at $1.6 billion, up 3% from the fourth quarter and 8% from the year ago quarter.

Asset quality continued to improve from the fourth quarter. Net charge-offs declined $133 million or 44%. Reservable utilized criticized exposure declined 10% $218 billion and our NPAs dropped 11% to $4.1 billion.

As you can see on slide 16, investment banking fees firm wide excluding self-led were $1.2 billion, up 20% from the fourth quarter as an increase in debt and equity underwriting fees were partially offset by a slowdown in overall M&A activity.

We were ranked number 2 globally in net investment banking fees for the quarter and about three-quarters of our fees in the quarter were driven by activity in the US and Canada.

Switching to Global Markets on slide 17, net income of $798 million increased from a loss in the fourth quarter reflecting increased sales and trading activity during the quarter. Total revenue ex DVA was up $3.3 billion from the fourth quarter and in line with what we saw in the first quarter a year ago.

Expenses were up from the fourth quarter driven by higher revenue but down slightly from a year ago. Excluding DVA, net income in the first quarter would have been in line with what we saw in the first quarter of last year. I think it's important though that when you look at that consistency in revenue and net income, it was done with risk weighted assets that at period end were $192 billion, down $87 billion from a year ago and average VAR in the quarter was $84 million, down from $184 million a year ago.

Continuing with Global Markets on slide 18, sales and trading revenues ex DVA losses increased $3.2 billion from the fourth quarter driven by our fixed income area due to improved market sentiment regarding the European financial crisis and an improved domestic outlook.

FICC revenue ex DVA was 3 times the level in the fourth quarter as we experienced increases in almost all product areas. Versus a year ago, FICC revenue was up 12% ex DVA, once again due mainly to improvements in rates and currencies.

In equities excluding DVA, results increased 62% from the fourth quarter, driven by increased derivative revenues. However, if we look back compared to a year ago, equity results were down about 18% due to lower overall market volumes. Once again, we recorded DVA losses of $1.434 billion in the fourth quarter as our credit spreads tightened during the quarter and that compares to losses of $474 million in the fourth quarter of '11 and $357 million in the year-ago quarter.

On slide 19, we show you the results of all other, which once again includes our global principal investments business, the non-US consumer card business, our discretionary portfolio that is associated with interest rate risk management, insurance, and the discontinued real estate portfolio. The $4 billion decline in net income versus the prior quarter was driven by the selected items that are listed on this slide along with litigation expense of $480 million.

One other item in all other that on the income statement flows through insurance revenue is an additional reserve of $200 million that relates to the payment protection insurance claims that we accrued for in the UK.

As you can see on slide 20, total expenses were down from the first quarter a year ago and except for all other, expenses are down year to year in part demonstrating our focus on efficiency across the entire Company as well as the initial impact that we've begun to see from the first phase of our new BAC efforts.

If we exclude LAS, FTE headcount for March was down approximately 5600 people from December and down approximately 20,000 from a year ago. Compared to the fourth quarter, expense increases were for the most part isolated to increases in performance related incentive expense, LAS costs, as well as business performance.

While I am talking about expenses, let me spend just a moment on taxes. We would expect the effective tax rate for 2012 to approach 30% excluding any unusual items. Embedded in that 30% or approaching 30% estimate is that we do anticipate another UK tax reduction of 2% to be enacted in the third quarter of 2012, which should result in a tax charge at that time of about $800 million. And remember though due to our DTA disallowance, that $800 million charge will not impact our regulatory capital ratios.

If we switch to credit quality on slide 21, overall consumer credit trends remained positive. Net charge-offs in the consumer portfolio increased during the quarter, but it was due to the absence of approximately $289 million in recoveries in the fourth quarter related to the sale of previously charged off UK credit card loans. Excluding those recoveries in the fourth quarter, net charge-offs would have been down by about 6%.

30% or 30-plus day performing delinquencies continue to drop and provision expense in consumer for the quarter was $2.6 billion and included a $1.1 billion reserve reduction.

On slide 22, we show the nonperforming asset trends for both residential mortgage as well as home equity. Residential mortgage NPAs were down 6% from the end of the year as paydowns, charge-offs, as well as returns to performing status continued to outpace new nonaccrual loans.

Home equity nonperformers did increase from year-end due to the impact of inter-agency guidance to reclassify to nonperforming status junior lien loans that have a first lien loan 90 days or more past due. This regulatory agency guidance resulted in an additional $1.9 billion of home equity loans being moved to NPAs. We have not restated prior periods.

As you think about that change, it's important to note that it did not have any impact on our allowance, our provision expense as we track the underlying first lien delinquency status of our junior lien home equity loans and have previously considered the additional risk that these loans present within our reserving process. If we back out this change, home equity NPAs were relatively flat for the quarter.

On slide 23, you can see that residential mortgage and home equity 30-day to 89-day performing delinquent loans excluding fully insured loans were both down. Of the $364 million decline in home equity, $264 million of that was due to the reclassification to nonperforming due to the impact of the inter-agency guidance that I just mentioned. While we typically see strong collections in the first quarter and while we believe that pace may slow, we would still expect improvement going forward.

If we turn to slide 24, commercial credit trends, we saw improving trends as I mentioned when discussing the results within our Global Banking area. Including the provision for unfunded commitments, we recorded a benefit to provision expense of $226 million that did include a reserve reduction of $595 million.

During the quarter, both nonperforming assets and reservable criticized levels showed declines of 10% on a linked-quarter basis.

As I wrap up my part of the presentation before moving to questions, I would just close with four comments. We feel very good about the progress that we made in the operating performances of the different lines of business. We've closed the first quarter with record levels of both capital and liquidity and we achieved this while lowering the overall risk profile of the Company. And as we go forward given the operating environment that we are in, we are very focused on continuing to drive expense levels down during the remainder of the year.

With that, we will go ahead and take questions.

(Operator Instructions). Glenn Schorr, Nomura.

Thanks very much. Maybe we could get a little more granularity on FICC. The trading numbers were great and pretty much across the board, a big turnaround from last quarter. I want to talk about which piece of the franchise you thought were strongest and maybe any help you can give us on the positioning coming into the quarter so we think about the rest of the year the right way.

Sure, if you look at and think about the numbers that we gave you, within FICC, I mentioned on both a -- on an absolute dollar basis, clearly the most significant area that we saw was rates and currencies.

Client flows were very strong and we saw them in two areas. We saw them within Europe with some of the volatility in the markets in Europe activities were very high. And the second thing I would say is that within the FICC business as you think about the high levels of activity that we saw in the investment grade bond area, that translated into opportunities to do more business with our corporate customers and that contributed to the results in FICC as well.

Outside of FICC, the other areas that had nice increases during the quarter included our commodities area, which we have been focused on starting -- and starting to get some traction in the growth there as well as in the mortgage area. Those were the three most significant areas.

I would say the other area that was down a touch during the quarter would have been the overall loan trading area as some of the revenue opportunities given that the new issue business in loans was a little bit slower this quarter than a year ago quarter. We didn't see quite the opportunities there but at the same time, that area performed very well.

It sounds -- I don't want to put words in your mouth but it sounds like it was a pretty cash-driven business -- flow as well. I suppose that there is (inaudible)

That's fair.

Glenn, I think if you think over the last 24 months, Tom and the team have been continuing to build out the breadth of our platform across the world and we are reaping the benefits of that. So if you think about this quarter this year versus last year, all the prop trading was closed out by mid last year, etc. and then so it's really client flows driving -- now this is driven by really, as you said, less derivative but more client flows, more the new issue activity, more the cash business. It's a very core aspect of what we do.

So next quarter if it is a strong quarter in total revenues, it may not be as strong but the way we are getting there is very consistent quarter after quarter after quarter.

Okay, I appreciate that. Bruce, I wonder if you could just explain a drop more -- give a little more color on the one-third of the RWA reduction that was the optimization of off-balance-sheet OTC assets?

Sure, if you go through that area I would say we continue to work very hard in scrubbing the data. There were certain lending activities that we do that are secured lending activities that as we work through we have the ability to optimize from an RWA perspective. So we had some of that. I would say as we look to and we refine what we do in the markets business, we improved the ability to net as we consolidated certain trading type activities and we also worked through and got third-party ratings on certain of the things which improved that as well.

So we continue to be very focused and think we've gotten through the majority of the optimization associated with Basel I, as I referenced, and the increase in our guidance, we're very focused now on optimizing the balance sheet and looking to drive those Basel III ratios higher as we go throughout the year.

Okay, last one for me. Reps and warranty claims continue to rise. Just curious if you can give us an overall comment on A, what's driving it? And B, when we might see a leveling off?

I think what I would say on that, Glenn, I would say it's really consistent with what we talked about when we discussed year-end numbers and with the disclosures that are in the slides. The majority of the increase in the backlog of reps and warrants is in the GSE category. It largely relates to Fannie Mae and if you saw and compared the balance at the end of the third quarter of 2011 with the balance at the end of the first quarter, you would see that the majority, a substantial amount of the amounts that are coming in are for borrowers that have paid well north of 24 months. And we obviously continue to have a disagreement with them about whose responsibility those are.

Understood, I appreciate that. Cool. Thank you.

Matt O'Connor, Deutsche Bank.

Good morning. Maybe we could drill down a little bit more on the expense side. You mentioned the legacy mortgage costs start to come down in the back half this year. Obviously the new BAC cost saves will probably start to accelerate. When you put that all together, how do you envision the expenses trending both in second quarter and then maybe as we exit this year?

What I would say as you think about that, let's spend a moment just on what we saw during the fourth quarter and I think there are two items to note in the fourth quarter when you think of expenses. The $900 million that I referenced is -- as it relates to compensation related expense, that obviously as I said, only occurs in the first quarter of each year, so as you look out at over the next group of quarters, that will obviously no longer be there.

The second thing when you think about expenses for the quarter over and above that FAS-123 amount, the expense number for the quarter was up given that the accruals that we had based on the strong performance within the overall markets area.

So I think I would level set with those two areas as well as think about some of the mortgage-related charges that I'd referenced that the goal is as we work through the year that those would come down.

Once you move away from those expenses, you move to the new BAC expenses. If you think about new BAC 1, we had originally given guidance that it was $5 billion, 20% of which we would recognize during 2012. We obviously took that guidance up and said it would be greater than 20%. So as you look at those consumer businesses on the line of business slide that we gave you, you would expect to continue to see those expenses going down.

Obviously we are in the midst of new BAC 2, which we look to wrap up in the May timeframe and I would just reiterate what we have said there, which is that we don't think the expenses will be as great as what we saw in new BAC 1 although once again given that they are not as interdependent on technology, we have looked to see those expenses -- those expense savings to start as early as the end of this year.

So I would say that we continue to press through these. I think we wanted to show you the line of business breakdown because I think it gives you a good sense within each of the lines of business outside of what we are seeing in LAS which Brian talked to about the second half of this year, seeing savings as well as all other, which can be lumpy to the extent that there are nonrecurring type items showing up that you get a sense for where we are trying to go.

But clearly we would expect sequentially each quarter during 2012 for expenses to go down each of the next three quarters.

Okay, as we think about some of the lumpy items like the litigation, the mortgage-related assessments and maybe any restructuring or severance costs for new BAC parts 1 and 2, any thoughts on the magnitude and timing of those?

Yes, I think one of the things to keep in mind is that as we have gone through and as we're going through new BAC, we have been absorbing through the P&L the severance costs that goes along with the actions that we have taken. So if you go back to the fourth quarter we talked about there being a couple hundred million dollars of severance and related items that we took during the fourth quarter. We had roughly $100 million of those type items that we saw during the first quarter for severance.

As it relates to the other items, the only thing I can really say about the lumpy items is that each quarter we accrue them and true them up for what we think our best views are and we will continue to do that. So it's hard to give any specific guidance about what we may or may not see in any one quarter, recognizing that the accruals that we have on the balance sheet at this point are significant.

Okay, and then just separately on the capital side, obviously the build the last two quarters has been very impressive, much more than many of us including myself had thought. As we start hearing you guys talk about additional changes from here, whether it's like some branch sales or there was something in the media the other day about you guys potentially looking at selling the non-US wealth management. As we see those things potentially coming up, is that still about a goal of building capital or is it much more about kind of rationalizing the franchise, as Brian mentioned earlier?

How do we think about like what's driving the motivation for some of these actions that you might be doing or might be being speculated out there?

Without addressing speculation, if you look across the last two years, Matt, our goal is to get the franchise against the three customer groups and get out of the businesses which don't do that and everything we've been doing is consistent with that. Does it contribute to capital? Yes.

I would say you shouldn't expect the things in the future to have as much impact as the things we did in the last couple of years to [incremental] capital and a lot of the capital generation really comes from the earnings.

In the case of Basel III, remember that our biggest difference between our peers is the deductions for disallowed DTA etc., which accrete off over time. And then the third thing is continue to optimize the balance sheet.

So when we are making decisions about various aspects, whether it was Canadian card or something like that, it is in line with the strategy which is that everything we have will be direct to customers, focused on those customers and where we have competitive strength. And in the branches I talked about earlier, it's really fine-tuning the franchise that we have top positions in the top 30 markets a lot higher than other people by numbers of branches, things like that, continuing to enhance that position, continuing to build out markets behind that, but also focus a little bit more on the markets that there's growth potential in size and scale that we can take advantage of.

Okay, thank you very much.

Betsy Graseck, Morgan Stanley

Thanks, good morning. A couple of follow-ups. One is on the new BAC 2. I am sure you are going into this with a number in your head and given the first-quarter strength, would you be inclined to be kind of taking it down relative to what you had been expecting? I would think you could make some arguments for less pull back than maybe you thought before?

I think one of the things, Betsy, that we are very focused on is given that the environment relative to -- when we started new BAC 1 has started to improve a little bit, we are very focused on not taking a step back but continuing to drive what we saw in both new BAC 1 as well as new BAC 2.

Keep in mind a lot of what new BAC is relates to simplification. It relates to getting rid of work that doesn't need to be done and it relates to becoming more efficient.

So while I think on clearly on the margin this quarter you feel better about the overall sales and trading opportunity, it's not going to change the rigor and discipline with which we go through new BAC 2. And once again, we think given that we don't have as much technology, we will be able to get after those costs quicker than what we saw in new BAC 1.

The other thing that I think is important and even though it's not part of new BAC, if you look at both the global banking as well as the global markets expense levels, you read some about the reductions that we made during the third and fourth quarters of last year outside of the new BAC process. And you start to see some of the benefits of those flowing through, and you will see more of those next quarter as the people actually come off the payroll.

Okay, then separately on page 9 you go through the NII. Could you just give a little bit more color around the hedge that you've got? I know you've got one on the AFS portfolio, and give us a sense as to how you are managing that right now.

Largely, a lot of those tend to be more pay fixed. So I think if you look at the variability, they will bounce around a little bit depending on where the rate curve is. But I think if you look out over the last couple quarters, they tend to be within a range of several hundred million dollars and they have been relatively fixed within that range. That's why we wanted to give you the guidance so you could get a sense as to what the core NII was, backing out any changes that happened due to those.

Okay, so you haven't changed the size of that that much?

Not at all. And indeed, I would say the other thing that we are very focused on is managing the interest rate risk as we look out to Basel III, given that OCI will flow through capital. We have been, I think, very conservative in making sure that we manage this in a way so that at some point in time when rates start to move up that we don't have an OCI hit through that investment portfolio.

Right, thanks.

Paul Miller, FBR.

Yes, think you very much. On your home equity portfolio, I know a lot of stuff is the new guidance out on recognizing NNPAs, some of those loans that were the first as defaulted. What do you do when you've modified the first? Can you talk a little bit about do you -- how do you treat the seconds? Do you modify the seconds also with the first? How do you classify those seconds?

Yes. I think there's a couple different ways to look at that, Paul, but let me spend just a moment. I'm glad you asked about the seconds behind delinquent first. If you go back and look at the disclosure that we put out at year-end with respect to our seconds behind delinquent first, you will see that at year-end as we took a look and did the work, we had roughly $2.5 billion of current seconds that were behind delinquent first.

Throughout the quarter as we continue to work with, and keep in mind the majority of our home equity portfolio where you have the first behind delinquent first, we do not have the first. So we need to work through the credit bureaus to understand exactly what the status of that first is. As we have worked through and done more and worked with the credit bureaus to understand those seconds behind delinquent first, that the guidance and when we adjusted up our nonperformers to the $1.9 billion, that is an improvement from what we saw at year-end of the $2.5 billion that's out there.

I would say secondly as you think about, and what we do through the reserving process with respect to both first and seconds, even though we may have -- and we obviously changed the way that the nonperformers are reported this quarter -- but we are very cognizant when we look at and have both our formulaic models as well as the imprecision reserves that we overlay on our portfolio; that to the extent that you have seconds that have a delinquent first, we are going to adjust our assumptions to be conservative as it relates to where we feel like we are reserved.

And I think this new guidance as we came out and as we worked through it at the end of the quarter and updated, we feel very good about where we were at the end of the first quarter relative to year-end.

The other thing that I would say when you ask about the different home equity portfolios is if you go back to slides 34 and slides 35 that we have in the investor deck, I think there are a couple important things to point out. The first is if you just go Q4 '11 to Q1 '12, you can see that we continue to see fairly significant paydowns within our home equity portfolio. And I think importantly if you look at the overall FICO scores as we have updated and worked through the FICO models, that the refreshed FICO on our home equity portfolio is now at 742.

So I think across the board with what we have seen in the quarter, well, I think we are very sensitive too that there's not the growth we would all like yet in the economy. We've been very focused on the home equity portfolio, and so far during the first quarter it has performed better than we would have expected.

I think the other thing to add to that is two things. One is think of everything that has been originated now for four or five years has been originated under fairly conservative -- very conservative standards and traditional -- and going through the early 2000s. So everything that's get added to the portfolio is very carefully underwritten.

Second is at the end of the day, ultimately the cash is the cash. So ultimately the person either doesn't pay or pays on the first. Ultimately that first goes through liquidation. Ultimately the second is dealt with in that liquidation and the proceeds come in.

So moving around the timing and reporting is one thing but ultimately over a period of courses of months and quarters, it's the cash becomes the cash. And so what is reflected if you look at some of these long-term -- on page 23 in these charts is you can see activity has been going on for many years now and the simple matter is that each quarter it gets incrementally better. And this is the part of our portfolio where we are still doing the most work because it's the slowest to fully recover.

If you compare it against the card business or other businesses that have fully recovered and continue to have more upside, this will take us longer just because of the nature of the process. But it's a lot of talk about this but ultimately it comes through in terms of cash or the cash.

Guys, that is really a great update and I appreciate it but going back to the question, part of the question was how do you treat modified loans? When you modify the first, how -- what type of activity you take on the second and then how do you classify that second lien?

Well, if there is -- up until the change in the guidance, if you have a second lien that is current and you have a first lien that is delinquent or has been modified, you're not going to adjust the second. What the new guidance now provides is that if you have a first lien that's more than 90 days, so as you look at the March balance sheet, if we have a first lien loan that is more than 90 days past due, we are now characterizing the second lien as a non-performer.

If you modify like under these various modification programs and if you modify the first, would you modify the second also? And then would you classify that as a current or a TDR or a nonperforming loan?

It's very difficult. You have to realize, Paul, that there are two different situations that we have. We have situations where we have both the first and the second and then we have -- then we have situations where we have the second and somebody else may have the first.

I think the important thing to keep in mind is that as we went through and came up with this nonperforming data, we only take somebody off or only look at a loan where there is a nonperforming aspect to it. It only gets cleaned up by virtue of the credit bureau after they've been current for a year.

Okay. Thank you very much, guys.

Nancy Bush, NAB Research LLC.

Good morning. Brian, one of the things that you emphasized was improvements in the core businesses. Could you just give us some color on the businesses that are meeting or exceeding expectations versus those that are lagging? And what you are doing or maybe doing in the lagging businesses?

I think if you think about the business across the five segments, in the consumer area I would say that we are very encouraged by the initial results and things like I said about the mobile banking enrollments and things like that which help us reduce the cost structure in the general retail business as we call it. And so we need to improve that business, all the regulatory changes that are well known to you, Nancy, over the last couple years took away a lot of profit and then the interest-rate environment which we are all familiar with. But the reality is if you look at the underlying customer dynamics, we're seeing improvements in online, mobile, the ability to fine tune the branches, the cost of the branches per dollar deposit, which is a metric I look at as improved and dropped again this quarter. The rates paid on deposit continue to work their way down. So it is improving but it is still at the $300 million to $400 million of profit. You can see in the core consumer deposits business, we need to make some upside from there.

Now let me flip to the place we are having good success here. On the preferred side of that business, which is the 8 million customers who have higher annual incomes and a little bit more with us, we are seeing great uptake in the service model we have created, which is differentiated service model, in the [FSAs] we put in the branches, which are financial advisors and branches which do two things. One is they serve clients who are sort of below the threshold for the affluent group and they also refer clients into the affluent group.

The mortgage officers working with those groups and the branches have been sort of designated preferred branches. We are seeing great uptake there and strong growth and strong penetration across you can see in the Merrill Lynch assets growing year over year, you can see in the flows of customer accounts, so that we are very excited about.

So retail mass market is more fine tuning delivery system and continuing to get incremental growth there, but the preferred is going well.

The wealth management business I think is performing very well, $500 of profit, look at the margins are better than anybody in the industry. We continue to see that. In the commercial banking business, the global banking segment was put together to highlight that that business was $1.6 billion in profits is fairly steady, provides good returns on a very capital-intensive business obviously because lending has shaped off its commercial real estate exposure, continues to perform return above the cost of capital.

If we were talking last quarter we'd be talking about the global banking business needing to recover and we saw it this quarter. So as you look across it, a lot of work to do in mortgage. I won't take you through that. Work to do in the core consumer retail franchise optimizing the costs because a lot of that progress is taking place and we've sort of seen the bottom I think sort of last year as the final (inaudible) as Durbin came through, seeing that come up.

And then across sort of the relationship business and wealth management in the preferred segment of consumer wealth management and global banking seeing strong, steady profits and then global banking, global markets we saw a nice recovery, so we are excited about that. That all poured through as we removed the cloud of the mortgage business.

Bruce, a question for you. The core margin ex the market-related assets I think has hit 3% again. Is that maintainable? And if I could just ask you to speculate or forecast, when we get back to a more normal rate environment, what is an achievable sort of normalized margin for the Company?

I think I'd make a couple observations. I think when you look at -- what we have talked about before was that as we think about 2012 and as we talked about year-end, you should think about 2012 the amount of NII we are reporting I think is a pretty good range if you back out either plus or minus what we saw from hedge and prepay.

I think if you look out at core margin and you think about where we are, there's nothing over time once the rate environment changes with the exception of having less credit card in the portfolio that would change what we've been able to achieve historically in margins, with one exception. The one exception that we are very focused on and one of the biggest opportunities we have with core margin is to continue to shrink the debt footprint that we have of the Company. And when you think about the $35 billion in maturities that we have in the first quarter -- or excuse me -- in the second quarter of this year as well as the amount of liquidity we have, that outside the core businesses that we have where you can kind of project what the yields are, the biggest opportunity we have to drive that down is using the liquidity to shrink the debt footprint, which on average as we repay that tends to be 300 and 400 basis points on a floating basis relative to the underlying LIBOR.

I think, Nancy, if you look at the long-term average, I think it's been closer to 3 across time. Assume that the mix of the assets may shift and so say it is somewhere below that but from the 250-ish we kind of run at now to we've told you before 275 should be easily within range with a short-term rate that moves up 100 basis points or so and we still feel comfortable that's the mix of business we have. And in fact, we may have tightened that a little bit as we've tightened down the balance sheet.

Okay, great. Thank you.

John McDonald, Sanford Bernstein.

Bruce, just following up on that last point, it just sounds like for this year net interest income was $11 billion this quarter. It sounds like you are kind of running in place perhaps the next couple quarters unless something changes on the rate front or loan growth.

I think that's fair, John. Just realize, though, that when you look at that, I think you look at the quarter but think a little bit about the benefit that we had during the quarter from the prepay and the hedges. I would not assume that that is in the run rate during the next couple quarters.

Was that a benefit or just a lack of a negative compared to last quarter? Was it a positive benefit this quarter?

It was both. It was a negative that swung to a positive during the quarter and like I said on a linked-quarter basis, it was about $500 million.

What about just how much it was as a net positive this quarter?

I believe it was in the mid-300s, John.

Okay and then on credit, what kind of outlook do you have on the ability to keep up the current pace of reserve release? Do you question were to expect the size of the reserve release to come down going forward?

I think as we look out at and we look at the models, John, I think the right way to think about it is we would expect that charge-offs would continue to decline as we go throughout 2012 quarter-over-quarter and I think what you're likely to see is that the benefit from reduced charge-offs is probably going to be more or less offset by lower reserve releases. So as you look at the overall provision number going forward over the next three quarters, while there may be a little bit of variability, I think that'll be a pretty good proxy for you.

Okay and then one little nitpick question. In the first quarter, the diluted share count declined by about 300 million shares even though the stock price went up, you issued shares to employees. Is that impacted by the Buffett warrants or why would it have gone down this quarter?

You've got two different things going on and the simplest way that I can say it, John, is that in a quarter we are on a reported basis that we are north of $0.11 or $0.12 on a reported basis, you are going to see the Buffett shares end and on a reported basis when we are below, they are out. So as you think about this quarter given that the impact of DVA and FVO and what it did to EPS, they were out.

And then obviously part of the reason why they were up a little bit in the quarter was because of some of the exchanges that we did throughout the fourth quarter of last year as well as the employee shares that were issued during the first quarter. Those are the things that comprised the difference.

Okay, so those things were overwhelmed by the Buffett coming out this quarter because of the reported earnings?

That's correct.

Okay. Then one last follow-up on expenses. The LAS this quarter was 3.3. First, did you say that you think those have peaked? And second, given that it's kind of a restated number now with the restatement, what is a good eventual number for LAS do you think longer-term? I think previously you had said it may be a few hundred million per quarter kind of a of normal servicing over time.

I think we said it was sort of a 500 a quarter is more of a normal servicing based on our estimates of what our portfolio would be at level.

That's still the case the way it is stated now? Okay.

Yes, and I think, John, we are seeing -- if you look at the slide that shows you sort of the work is about the delinquent loans and you're seeing those drop and we will see those come down. As we've said, it will take us the rest of this year and into next year probably through next year to get it more normalized but we are very encouraged by the amount of work that is getting done and the staffing levels we have.

Just to keep it clear, we talked about the 40,000-ish employees we have here. We also have around 10,000 to 15,000 contractors at work in this business. So if you think about our total headcount, think of how much of our [278, 40,000] is deployed against this so when this comes down, it will have a significant impact on the Company's activities on a day-to-day basis.

Just to clarify that, Brian, you are not expecting to get from $3 billion to a couple hundred million in a year, right? (multiple speakers)

No, it will take us this year, next year, and it will really show up in '14. It will keep coming down during those timeframes but I would expect normal to really get behind this -- it's probably into '14 just because we will get the activities down and it will take us a little while to shape it.

Okay. Last thing from me was Bruce, on the assessment of waivers back up to 410, why is that up so much? Is this a reserve and is this related to your kind of dispute with Fannie Mae?

There are a couple of things. There was a chunk that we had that when we looked at that we set aside for reserves on servicing advances, and there were other assessment type things like you would expect with Fannie Mae, so think about it in those two different contexts.

Okay, it is that something that you have an outlook on that could continue at that level or is it very just impossible to predict?

We would not expect it to continue at that level.

Okay, so somewhere between zero and 400.

Definitionally that's correct.

All right. Thanks.

Mike Mayo, CLSA.

Good morning. My question was on loan growth and I see global banking loans are flat and GWIM loans are flat and consumer is down. It looks like some sort of deceleration. So are you seeing a swap from at least the large loans to the capital markets or how do you describe what's taking place? Is there a slowdown in the US economy? Are you deliberately backing away from some credits? Any color you can give would be great.

Sure, I think what I would say is a couple things on that, Mike. The first is that we have a very strong both commercial and corporate franchise and obviously we are very focused especially given where we have built capital levels now as we go forward to look to build off and to grow traditional C&I loans both within the commercial as well as the overall corporate bank.

I think when you look at -- and two of the things or three of the things as I referenced that were slight offsets that we made a decision on during the quarter is that we have continued to work through and we have got our commercial real estate lending down to an area that we feel good about. So going forward, you would not expect to see the reductions in commercial real estate that you have seen over the last couple of quarters.

The second thing I would say is that we did during the quarter given what the market opportunity was and where pricing and securitization pricing was to securitize some of our DFS assets out in the market, which led to some of the reductions. That's something that was opportunistic and quite frankly gives us a base to be able to go out and grow and do more with our customers on.

And the third thing that was a little bit lighter relative to year-end was on the trade finance side but that will ebb and flow but as we've talked about before, we are very focused on growing the international footprint as well.

So I think while on the overall from an average balance sheet perspective it looked kind of flattish, we did see some growth within the areas that we are focused and those areas that there are reductions, we feel like we're generally down to and have done the things that we want to do to the point where we can start growing off that base.

I think if you move to the consumer space, I would just note a couple of things as people look at loans in the consumer space. Obviously as we look at the home equity business that the balances were down about $3.5 billion in home equity, we clearly are not doing a lot of new home equity lending now and the fact that those balances are going down we view as a very good thing.

The second thing is if you look in our supplement, you will see that the residential mortgage area is coming down. Keep in mind that's not due to residential mortgages that we are originating. As we look to manage the overall risk profile and interest rate profile, there's a constant look at do we want to own whole loans or do we want to own securities? And at the end of the quarter, at the first quarter we were a little bit more into securities than whole loans.

And then the last thing I would say on loan balances is just within the card business that seasonally card balances obviously tend to peak in the fourth quarter, so the declines you saw in the card business in the first quarter were largely seasonal.

Then just one follow-up. Seems as though your market share in cards and mortgages has declined. Do you agree or disagree? If you agree, is this a deliberate move? Are you underperforming what you would like to achieve or is this simply prudent given what you are seeing in the market?

Mike, if you look at -- let's take mortgage first. If you look at the fourth quarter we did about $15 billion of direct to consumer originations and in the first quarter, we did about the same. So the real steep drop in call it our market share out there has been on the correspondent side just going to zero. So if you look year-over-year, it dropped $20 billion odd in production.

That is an absolute deliberate move. We will move -- we will be in the direct to retail channel for both our general customers and then also our affluent and wealthy customers. It's a business we think we have an advantage in and we will continue to drive that.

That being said, as we retooled that business, we underperformed on a direct to retail and we expect that as we move through each quarter, each month of the quarter we saw improved results on just straight volumes and we have added more loan officers.

We focus the people who are getting several thousand in the quarter of referrals from the branches and working with the teammates there. We have staffed up on the fulfillment side to increase our throughput. You remember there is some noise about a reservation system earlier on.

So we underperformed but we are doing exactly what we wanted, which was to focus on direct to retail. The team is working hard, David Darnell and the team, and you will see us improve there.

But the correspondent is behind us and as I said, if you want that business back, I can go out and buy it in the market. It's not actually a customer-driven business in the way we look at businesses here in the Company.

When you go into the card business, I think we have been continuing to fine-tune and have sold off some portfolio as we are providing the card as a backbone to other companies, meaning other financial companies and we sold those portfolios back to them as part of fine-tuning the business.

I would say that we have performed as anticipated in card, really brought the direct mail down. This quarter we did 800,000 new cards as I said, half through the branch system with the credit quality that you can see in our numbers, which is outperforming what we would have expected as we put the cards on over the last couple of years. So we should expect to hold our share there and start to drive it but we still are in a straight raw market competitiveness of 15% versus 16% or something like that in the fourth quarter. It really is based on us continuing to shape the affinity groups and some of the vestiges in the US business of the past.

But you should expect that to stabilize now and start to grow. That has been a strategy we told you we would start in 2009 honestly and it's behaving the way we said.

That being said, there's plenty of opportunity for us to drive the card business in our franchise, so we have the 800,000 originations, the 1 million Bank of America Cash 1-2-3 cards. We will drive that business back up but again, it will be focused on the customers.

Thank you.

Brennan Hawken, UBS.

Good morning, guys. I just wanted a real quick hit on the tax rate. I got to 9% for the quarter. Is that right? What's driving that? Were there any unusual items in there that when you hit on your 30% tax rate for the year we should sort of consider when we think about full-year tax rate?

I think the thing when you look at taxes for the first quarter that you have to keep in mind is that because of the large DVA and FVO charges that went through the P&L, the pretax income after those charges was reduced, so you have a couple preference items in the first quarter that when they are compared on a book basis to a relatively low pretax income number, it tends to distort the effective tax rate. So as we -- and I will just say what I said during the presentation, as you have a more normalized quarter without the DVA and the FVO, we would expect the rate for the year to approach 30%. And the one unusual item that I would note in that rate approaching 30% is that we will have the $800 million adjustment for the UK tax rate given that the tax rate is going down in the jurisdiction where we have a DTA.

Okay, and on rep and warranties, it seems as though there is a new low-level provision that you guys tend to be running at which really reflects B of A's view, yet we've got steadily increasing Fannie claims. And I'm just curious how those resolve themselves and maybe also how much of those claims are tied to MI through rescissions or cancellations of insurance?

At this point, I would say a couple of things. The first is that and as we talked about both at year end in this quarter we continue to adjust and provide reserves for the MI rescission and continue to work through that process with not only Fannie but other places where MI is topical and our reserves reflect that.

I think with respect to your original question as it relates to reps and warrants, we obviously look at and provide the rep and warrant each quarter based on what we are seeing and based on our interpretation of the documents, which I can assure you we have had numerous people look at and feel very strongly with where we are. And I'd don't think it's probably appropriate for me to reflect or to comment on what Fannies' view on that may be.

Sure, that's fair. I guess I'm just trying to understand as far as the MI impact is concerned, is it that B of A is providing the rep and warrant that valid insurance exists and then therefore the GSE has a claim against B of A and then B of A has to go pursue that actual -- has a claim against the MI? Can you help me understand how that works?

You are right and in our disclosure we talk about in certain cases where we do need to go and pursue and work with the different reinsurers to get the payments that were due and what I would say is that each quarter as we go through this, the reserves that we put up as it relates to the risk of mortgage rescission, the reserves apply both to the GSEs or anywhere else, that could be a risk for us.

Okay, and they would reflect if there's any deterioration in counterparty, those reserves would reflect that as well?

Absolutely.

Last for me on capital markets, you made some comments about VAR but just if you could talk about maybe what happened with risk in the quarter, did you guys take on risk particularly in FICC, which given what happened if he took it on at the beginning quarter certainly would've worked out well? And then maybe give us an idea of how much of a tailwind for FICC you guys benefited as far as the tightening credit spread environment?

A couple things. The first thing that I would say is that the -- as I referenced, the largest driver in the FICC business this quarter was our rates and currencies area and that strength that we saw in the quarter was due solely or due largely I guess I would say to client flows where we were doing more with our clients during the quarter. So that is good core flow business for us that we saw during the quarter. And I think that if you look at both the risk weighted assets and the VAR, they support that in that what we are seeing is that we are able to take less risk and make -- if you look at both RWA as well as VAR, they were roughly half of what they were a year ago and we were still able to generate the same level of revenue.

And I think when you think about that revenue number and you think about the level of risk, what it's reflective of is the fact that our client-facing businesses during the first quarter were very strong and I think the only other thing I would say is that as we have continued to build the balance sheet, build capital, and as we have seen our credit spreads tighten, the one thing I would say is that we are seeing more and more people that are doing more and more business with us and we feel very good about that.

To be clear, we have not changed the limits this business operates under in seven or eight quarters. So the ability to do what they need to do to participate in the markets is there and they are making the choices based on the opportunities and capabilities that they have to do it and they are well within the risk measures and producing as much revenue. So I think the team is doing a great job of really driving the business along the way that you'd want them to.

It sure looks that way. Thanks for the color, guys.

Moshe Orenbuch, Credit Suisse.

Thanks, just a follow-up on the GSE activity and two separate points. First of all, with all -- despite all the rhetoric about the GSEs kind of expanding what they're looking at, it looks like this quarter actually had a smaller kind of new claims from the GSEs than the last at least the previous four. But at the same time your kind of activity either approving repurchases or rescinding them were both kind of much, much lower. Could you talk about what's actually going on there and what it's going to take to get some more of this resolved as we go forward?

What I would say is generally in any one quarter, it can bounce around a little bit but I'd just reiterate -- I would say that the activity that we saw during the first quarter was not significantly inconsistent with what we saw during the fourth quarter. But you are right, the data you just quoted, you would expect to see the number of repurchases as a percentage to decline to the extent that you disagree with what's coming in.

You are assuming that a loan every quarter for the last 10 quarters is exactly what they sent in is the same. What has happened is it's different and so the result of the activity is different because what is being sent is different. It's not that the volume is different.

Got it, a couple of other quick things. First, actually you mentioned before the correspondent business and the mortgage business kind of being focused on the core Bank of America customer. Is there any thought about thinking about that in the credit card business as well and kind of doing something with some of the affinity business, the national credit card business that doesn't kind of overlap with your customer base?

Just to be clear, the correspondent business is out of the mortgage business, so it's a direct-to-retail business. In the card business, we have an affinity group and we've narrowed that group of affinities over the last three years to be consistent with where we think it adds value to the customer and to the Company.

And so we have major affinity programs which are very valuable to us that we continue to drive growth in. What we have done is pared off several thousand of programs which the economics just didn't make sense, so we have achieved that.

I think those are affinities with big brands that we benefit by as a company as opposed to affinities frankly where we are providing a credit card for another financial institution that provides a core product to our customers. That's what we've really gotten out of and then smaller groups that just didn't have the volume, just doesn't make sense.

Great, And just one quick last thing and that is obviously some terrific progress on the capital front. I didn't catch if you had said this before but do you have -- have you changed your expectation of kind of year-end risk-weighted assets under Basel III or has been -- has the improvement been kind of more from the numerator or is it denominator driven also?

If you look at it, it's going to be a little bit of both. Because as I referenced, as you think about what we got through and once again under both Basel I as well as Basel III, we are in a disallowance under Basel I of DTA and in Basel III, we are over the 15% SIM bucket. So as we generate net income and as you think about the piece that's FVO not being in it, the numerator is benefiting and then secondarily, the denominator as we continue to work through and optimize, it will improve.

We obviously have taken the guidance on Basel III at year-end fully phased in up above 7.5%. We will look to give you greater detail on both numerator and denominator when we look at Basel III at the end of the second quarter.

Great, thank you.

Jefferson Harralson, KBW.

Thanks, I will ask a question on LIBOR. There's been some ruckus overseas on how it's set, and regulators being concern about potential I guess issues with how it is set. Can you comment on how BAC participates in the setting of LIBOR and if you have reserves or any concerns over this process as it plays out?

This has been going on awhile. We wouldn't comment. I would leave it to our lawyers to talk to you about it but it's been going on for a couple years.

Thanks a lot, guys.

Andrew Marquardt, Evercore Partners.

Thanks. Good morning, guys. I just want to circle back on the margin NII commentary in terms of I think you're basically saying that we should think about NII basically holding. But I want to go back this quarter, you had the benefit that's not going to repeat. But then what were the drags? Again, you had mentioned earlier maybe I missed it in terms of some consumer yield pressure but then is there also core asset yield pressure because of low rate environment?

The biggest thing, Andrew, if you think about it was that the -- and keep in mind we're thinking of NII now, not pretax income. The biggest difference in the quarter that was a drag was the fact that we had over $8 billion of card receivables from the Canadian card business, that that sale closed at the beginning of December. So as you think sequentially and you think about those consumer balances and consumer yields, that was the biggest piece of it and obviously the number that we put out there was that it was to the tune of about $400 million.

Got it, and then in terms of outside of that commercial pricing competition, asset yield pricing, asset yield pressure, is that manageable it seems like?

I think it's manageable. I think the only other thing that I would say is that as you look out at NII and when you run the size of the investment portfolio that we run from a rate management perspective, as rates bounce around and as some of those mortgage and other types securities yields either go up or down, will fluctuate with that. But there was nothing really notable for the quarter from that perspective.

Okay, thank you. Then in terms of looking at the pre-pre-, this quarter came in just under on a core basis maybe $7 billion materially better than last quarter which was just under $4 billion. But then this quarter obviously helped by FICC and mortgage banking that may not repeat.

How should we think about that kind of on a core run rate basis? Will that improve largely now due to expenses continuing to improve based on Phase I and then Phase II next year?

I think there's a couple things. Obviously in any one quarter if you think about variables, you've got on the revenue side the one variable piece that we have in revenues is going to be what you see from a sales and trading perspective that there is a level of variability in that either up or down.

I think from a revenue perspective given that you've backed out the different security gains and private equity gains when you quoted that seven, that's going to be the one number from a revenue line that does have the variability to it. And then I think your point is exactly right that what we can do to look to drive that number up is largely going to be on the expense side.

You do you still have confidence --? Maybe it's an outdated range now of 45 to 50 on an annual basis, is that still valid or have things changed enough that that needs to be rethought?

I think on the prior calls we brought -- that range has been a lower range just because we sold off a lot of the credit cards and stuff when that number was originally published. But I think as we said last quarter, we are continually confident that we can push the number given the time and the interest rate environment and over $10 billion a quarter but it's going to take a normalized interest rate environment and economy growing at 3% as opposed to economy growing at 1.5% or 2%, which is what we've been consistently saying.

Thank you, and then lastly just on capital, any updated thoughts on potential deployment, maybe still too early but maybe more confidence now that bumping up your goal and target for Tier 1 common Basel III of 7.5% by the end of the year. Any updated thoughts on when or how or maybe some thoughts also kind of lessons learned from what happened with Citigroup?

I think we were clear in the CCAR what we said and we came through that test and we were clear before that we didn't apply for anything in 2012. I don't think we changed our thinking in that as we work to make sure that we drive towards being Basel III compliant over the next couple of quarters.

So I think we are -- we have a high confidence in our capital, high confidence that we have the right capital and high confidence we're building at a good pace that we knew before but now you all see and so I think we will just keep playing it through the end of this year in this way.

Got it and too soon to call until maybe towards the end of the year where capital stands ultimately in the outlook macro wise? Is that fair?

I'm sorry, I didn't hear the very end of that.

Is that fair to assume kind of too soon to call in terms of is 2013 the year in terms of maybe starting to at least think about it or at this point --?

We will let you know. As we have said consistently, we will apply when we know we will get approved and we could work closely with our regulators to get that through and we will see how we proceed through this year and the next.

Very good, thanks.

That was our last question. I would like to thank you for participating.

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