美國銀行 (BAC) 2012 Q2 法說會逐字稿

Welcome to today's program.

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

(Operator Instructions) Please note today's call is being recorded.

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

Please begin, 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.

Please review slides 2 and 3 with information around forward-looking statements.

For additional factors, please see our press release and SEC documents.

And with that, let me turn it over to Bruce.

Great.

Thanks, Kevin, and good morning, everyone.

I'm going to start on slide 4. As you all saw this morning, we reported net income of $2.5 billion for the second quarter, or $0.19 a share on a diluted basis.

You will notice at the bottom of the page we do not have any selected items that we have brought forward during this quarter.

And given that the list is relatively short, we will just hit those as we go throughout the presentation within the lines of business.

If we go ahead and move forward to slide 5, we clearly believe that the results in the second quarter demonstrated our ongoing momentum on several fronts.

Capital continued to strengthen and is at record levels by most metrics.

Tier 1 common capital increased $2.5 billion to $134 billion and ended the quarter at 11.24% under Basel I.

We estimate that Basel III Tier 1 common equity was 8.1% at the end of June on a fully phased-in basis, based on our current understanding of both US market risk rules and international Basel III guidelines.

If you recall, we had estimated we would be in excess of 7.5% under Basel III at the end of the year; so based on where we came at out at the end of the quarter we are quite pleased with the progress we have made so far.

While we increased capital, we also continued to bring down long-term debt, reducing it by $53 billion in the second quarter through both maturities as well as liability management actions that we'll get into throughout the presentation.

Likewise, we made progress on expenses, which declined $2.1 billion from the first quarter, of which approximately $900 million was due to the absence of annual retirement eligible stock-based compensation awards that impacted the first quarter.

As we said last quarter, while revenue growth correlates in large part with the health of the overall economy, the two areas that we clearly have the ability to control are our expenses as well as our debt cost, and we aggressively addressed those during the second quarter.

Asset quality also continued to improve in almost all categories.

This improvement, combined with decreased levels of distressed loans, drove provision expense to be its lowest level going all the way back to the first quarter of 2007.

Interest rates did continue to be a headwind.

And as you can see, the decrease in long-end rates during the quarter did negatively affect net interest income.

The European crisis and seasonality are impacting the markets-related businesses, driving those revenues lower compared to the first quarter of 2012.

However, non-interest income did reflect improved results in some of our consumer businesses, which we will get into as we go through the presentation.

If you turn to slide 6, as we look at regulatory capital under Basel I, you can see that $2.5 billion of earnings along with a $27 billion decline in risk-weighted assets, or about 2.3% of risk-weighted assets, drove the capital improvement from 10.78% at the end of the first quarter to 11.24% at the end of the second quarter.

If you look at the left-hand chart, since June of 2011, one year ago, our Basel one Tier 1 common ratio has increased by approximately 300 basis points.

Turning to slide 7 and providing a Basel III update, as we near the 2013 implementation period for Basel III, we have estimated our Tier 1 common equity ratio and its components to provide a better understanding of where we are relative to the Basel III guidelines that will be fully implemented at the end -- or excuse me, at the beginning of 2019.

The estimate we provide here is per BIS Basel III guidelines and the final US Market Risk rules.

If we reported Basel III as of June 30 on a fully phased-in basis, we estimate the Tier 1 common equity ratio would be 8.1%.

We estimate that our Tier 1 common equity would be approximately $127 billion, while our risk-weighted assets would be $1.566 trillion.

As we think about the important differences between Basel I and Basel III capital are the numerator; the differences include capital deductions related to the MSR, our deferred tax assets, and the inclusion of unrealized gains and losses on debt and equity securities recognized and other comprehensive income.

As you're well aware, these items will be impacted by future changes in both interest rates as well as overall earnings performance.

We turn to slide 8 on funding and liquidity, you can see that long-term debt during the quarter was down $53 billion while our overall Global Excess Liquidity Sources only declined by $28 billion to $378 billion at the end of the quarter.

At the Parent Company, long-term debt during the quarter came down by approximately $40 billion.

That $40 billion reduction was approximately $34 billion of Parent Company maturities, of which we'd call out $24 billion of that related to TLGP debt.

At the end of June, all of our TLGP-related debt has been repaid.

In addition to the maturities, we brought in about $5.5 billion through liability management actions on our TRUPs and subordinated debt that are outstanding.

The benefit in the quarter from that was a little over $500 million.

As we look forward, those liability management actions will reduce net income -- or excuse me, will result in net interest income savings of approximately $100 million in 2012 and $180 million in 2013.

As we look at Parent Company liquidity, it remained very strong at $111 billion at the end of the quarter.

And as we look at Time to Required Funding, we finished the quarter at 37 months, the highest in the company's history.

During the quarter, we didn't issue any long-term unsecured Parent Company debt, and I doubt that we will do so during the balance of 2012.

What we will continue to do is to bring down long-term debt both by paying off debt at maturity as well as active liability management, consistent with our overall goals of continuing to optimize net interest income.

In fact, we have already announced calls of another $5.2 billion in both TRUPs and subdebt, which we expect to complete during the third quarter of this year.

In addition to these calls, maturities of $23 billion of which approximately $15 billion at the Parent will come due during the second half of the year, which will also help reduce both long-term debt balances as well as associated interest expense.

Spend a minute on page 9 on a couple balance sheet highlights.

You can see total assets were down about 1% to $2.16 trillion, while total risk-weighted assets were down over 2% to about $1.19 trillion.

Our tangible common equity ratio improved 25 basis points in the quarter from 6.58% to 6.83%; and tangible book value improved by $0.35 during the quarter to $13.22 from $12.87.

We turn to slide 10 and look at net interest income on an FTE basis, it was $9.8 billion during the quarter, down $1.3 billion from the first quarter.

The decrease in the quarter was primarily due to higher premium amortization expense associated with FAS 91 as well as market-related hedge ineffectiveness.

If you recall, rates rose in the first quarter this year, and that led to lower premium amortization and favorable hedge ineffectiveness that benefited NII by about $400 million in the first quarter of this year.

However, lower rates in the second quarter had a negative impact of approximately $500 million, which resulted in a combined negative impact of approximately $900 million to NII from the first quarter to the second quarter.

If we back out those market-related swings, net interest income decreased by approximately $400 million during the quarter due to lower loan balances and yields and lower trading net interest income, which was partially offset by the benefit of the lower long-term debt that I just mentioned.

In the near term, given long-end rates levels at the end of June, we estimate that quarterly net interest income will start at a base of approximately $10.25 billion before the impact from liability management actions.

Second-quarter Parent debt maturities and liability actions plus third-quarter announced redemptions and calls will benefit quarterly interest income by approximately $300 million, of which $60 million was captured in the second quarter of this year.

To state the obvious, if rates increase from the end of June it will have a positive impact; and obviously lower rates would have a negative impact.

We turn to page 11 and look at overall loan activity.

Total loans for the quarter declined by approximately $10 billion from the first quarter, or about 1%.

If you look at the composition of the loan balances you can see ending commercial loans actually grew by about $4.1 billion or 1.3% from the first quarter of 2012.

That growth was attributed to increases in our commercial and industrial loans and was partially offset by about a $1.4 billion reduction in commercial real estate.

It if you go to the bottom of slide 11, you can see ending consumer loans declined approximately $14 billion from the first quarter of 2012.

I would like to spend a minute on that.

If you go and look at the bar chart, we have talked throughout the last couple quarters about runoff portfolios that we are looking to run off that do not produce any meaningful level of pretax income.

You can see we had about $4.4 billion of that during the quarter.

In addition, residential mortgages were down about $4.4 billion.

Keep in mind as we look at those mortgage portfolios, we can either invest in mortgages or securities; and during the quarter we came up in securities, a little bit down in loans.

Over and above that, about $3.4 billion of loan sales that had been targeted that wrapped up at the beginning of the second quarter.

If you back those three items out and look at consumer loans on a net basis, that leaves us with about a $2 billion reduction during the quarter, or well below 1%.

On slide 12, we highlight the results of the Consumer and Business Banking segment.

Earnings were $1.2 billion, a decrease from the first quarter, driven by lower net interest income, lower reserve releases, and higher litigation expense partially offset by higher non-interest income.

Non-interest income did increase from the first quarter due to a couple of factors.

Consumer spending, including higher interchange; the gain on certain card portfolios; and the impact of our consumer protection products.

On slide 13, we list some key indicators for our Consumer and Business Banking for the quarter.

Average deposit balance growth was strong, increasing by over 2% or $10 billion compared to the first quarter of 2012.

As we continue to focus on cost and look to optimize our delivery network, our branch count came down by 57 branches during the quarter.

As far as card purchase activity, combined credit and debit card purchase volumes increased 6% from the first quarter of 2012.

In addition, credit quality continued to improve as the US credit card loss rate is the lowest since the fourth quarter of 2007, while the 30-plus-day delinquency rate is at historic lows.

As we look at activity levels within this segment, we have also continued to increase our mobile banking customer base to more than 10 million customers, which is a 6% increase from the prior quarter and up 34% from the year-ago period.

We turn to slide 14, Consumer Real Estate Services reported a loss of $768 million, which was an improvement of $377 million versus the first quarter of this year.

Lower revenue was more than offset by lower expenses and a lower provision for credit losses.

The home loans business within our Consumer Real Estate Services segment recorded a profit of $241 million for the quarter.

First mortgage retail originations of $18 billion were up 18% over the first quarter due to lower rates and HARP refis, and in line with our retail originations a year ago.

However, as you all know, we exited the correspondent business late last year, so current correspondent originations during the quarter are virtually nonexistent versus volumes of approximately $22 billion a year ago.

Even with the exit from this correspondent channel, core production income is higher than a year ago.

Results for the quarter include $395 million in costs for representations and warranties provision and $109 million of litigation expenses and expected assessments, waivers, and other costs related to foreclosure delays.

During the quarter, our MSR asset decreased by approximately $1.9 billion due to lower mortgage rates and ended the quarter at $5.7 billion.

MSR hedge results for the quarter largely offset market valuation declines, and the capitalized MSR rate at the end of the quarter was 47 basis points versus 58 basis points in the first quarter and 78 basis points a year ago.

If we move forward to slide 15, as we have done before, we show some comparisons of certain metrics in our Legacy Assets and Servicing basis on a linked-quarter basis and compared to second quarter a year ago, as we continue to focus and work very hard on reducing delinquent loans and looking to find homeowner solutions.

As you recall, Legacy Assets and Servicing reflects all of our servicing operations and the results of our MSR activities.

We added almost 1,700 people in the quarter, including contractors, versus 3,000 people in this area in the first quarter alone.

The number of first liens serviced did decline by 5% in the quarter while the number of 60-day-plus delinquent loans dropped 2%.

As we think about that drop in 60-day-plus delinquent loans of $27,000 -- or excuse me, 27,000 loans from the first quarter, it was lower than we would have expected for two reasons.

The first is a result of the DOJ AG settlement.

We had holds on loans that we're attempting to modify.

And in addition to that we had approximately 15,000 loans where servicing is being sold but we won't complete until this month.

Even with these delays we continue to believe we can reduce our 60-day-plus delinquencies by a net of approximately 300,000 over the next 12 months.

As we have talked about before, we remain very focused on decreasing these loans, because on a lag basis it gives us the ability to further reduce costs within this segment.

On slide 16, you can see that outstanding claims have increased from the end of March from a rep and warranty perspective.

Claims from the GSEs increased as a result of ongoing disagreements with Fannie Mae about what constitutes a valid repurchase request.

Through June, there has been minimal monoline activity, consistent with the past six quarters.

However, as I am sure many of you saw last night, we did sign a settlement with Syncora that would have reduced our outstanding monoline claims at the end of June by approximately 20%.

On the private label side, we did have an increase in outstanding claims from $4.9 billion to $8.6 billion during the quarter.

The increase in claims is primarily due to claims received from trustees that we fully anticipated at the time of the Bank of New York settlement a year ago and were largely reflected in the increase in our reserves at that time.

As we look forward, we expect these outstanding claims to continue to grow as the process for ultimate resolution continues to evolve and does remain unclear.

As you look at this table, I think it's important to keep in mind that the table reflects unpaid principal amounts, as opposed to actual losses that are projected on the loan.

Our reserves for rep and warrants ended the quarter at $15.9 billion, up slightly from the prior quarter.

As you look out, our non-GSE range of possible loss over and above existing levels is up to $5 billion.

In Global Wealth and Investment Management, on slide 17, earnings for the quarter of $543 billion(sic-see press release "$543 million") or a pretax margin of 20% were in line with the results we saw in the first quarter of this year.

Solid long-term AUM flows as well as loan growth of $2.5 billion in the quarter helped offset a 2% decline in client balances driven by lower market balances.

Loans within the segment are at record levels.

And our advisor levels remained essentially flat, up just slightly from the first quarter of this year.

If we move to Global Banking on slide 18, net income decreased to $1.4 billion from the first quarter due to lower net interest income as well as lower reserve reductions during the quarter.

Average loans for the quarter were down 3% as a result of the decreases in commercial real estate that I have spoken about before, as well as certain targeted loan sales.

Average deposits increased to $239 billion during the quarter as our corporate customers continue to remain very liquid.

Asset quality for the quarter continued to improve substantially, as we had the largest quarterly percentage reduction since the peak in 2009 in both nonperforming assets as well as criticized balances.

As you can see on slide 19, Investment Banking fees for the quarter firmwide, excluding self-led deals, were $1.1 billion, down slightly from the first quarter as a pickup in M&A activity was more than offset by a decline in both debt and equity underwriting fees.

We were ranked number 2 globally as well as in the US in net Investment Banking fees during the first half of 2012.

As you look at the mix in the geography of the revenues, you can see during the quarter more than 80% of the fees were driven by activity in the US and Canada.

If we switch to Global Markets on slide 20, net income of $462 million decreased $336 million from the first quarter, reflecting lower sales and trading activity, which was partially offset by lower expenses.

Total revenue, ex-DVA, was down $2.1 billion from the first quarter and down $769 million from the second quarter a year ago due primarily to the European crisis, as our clients became more risk-averse.

Expenses were down both from the first quarter, driven by lower personnel-related expense, as well as from a year ago.

Average VaR was $63 million in the quarter, down from $84 million in the first quarter due to lower levels of client activity.

Continuing with the Global Markets segment on slide 21, we recorded DVA losses of $156 million in the quarter versus losses of $1.4 billion in the first quarter of this year and gains of $123 million in the year-ago period.

Sales and trading revenue, excluding DVA losses, decreased $1.9 billion from the first quarter due to the deteriorating market sentiment that I just mentioned as well as a slowing US economy.

FICC revenue, ex-DVA, was $2.6 billion during the quarter, down $1.6 billion from the first quarter as we experienced decreases in almost all product categories.

But would also point out that if we compare Q2 of this year to Q2 of last year, FICC revenues were basically flat in the year-ago period.

In equities, ex-DVA results decreased 26% from the first quarter as volumes remained at low levels, significantly impacting both trading as well as commission revenue.

On slide 22, we show you the results of All Other.

Recall, in All Other we include Global Principal Investments, the non-US consumer card business, our discretionary portfolio associated with interest rate risk management, insurance, and the discontinued real estate portfolio.

The revenue increase we saw from the first quarter was due to a lower negative valuation adjustment on structured liabilities under fair value option, and was offset in part by lower equity investment income, lower gains on sales of debt securities, and lower gains on debt and trust-preferred repurchases during the quarter.

The decline in non-interest expense was mainly due to the absence of retirement eligible stock-based compensation awards that we have in the first quarter of each year.

If we turn to slide 23 and look at expenses, you can see in the upper left-hand corner in the red bars that we have had significant declines in non-interest expense from the second quarter of 2011 as well as on a linked-quarter basis from the first quarter of 2012.

What we have done in the gray bars is backed out goodwill impairment as well as the annual retirement eligible comp costs that we have during the first quarter; and if you back those out, you can see once again expenses declining from $20.3 billion in the second quarter last year to $18.2 billion at the end -- or during the first quarter of this year, down to $17 billion during the current quarter.

I would note, during the current quarter litigation expense embedded in that $17 billion is approximately $1 billion.

As we look at the reasons for the decline on a linked-quarter basis in non-interest expense, three major drivers -- lower incentive compensation expense; the benefits of our New BAC programs; as well as lower mortgage-related costs.

If you move to the right and look at our full-time equivalents within the employee base, you can see year-over-year, ex-Legacy Assets and Servicing, our number of employees has come down from 253,000 to 233,000 or an 8% decline.

While we're on the topic of expenses, let me spend just a moment on taxes.

The tax rate for the quarter was approximately 22%, which resulted from the impact of our recurring tax preference items on the level of pretax earnings.

We estimate 22% to be the rate for the rest of the year, except for any unusual items that may arise.

As we mentioned last quarter, one unusual item that we do expect to be enacted later this month is the UK tax rate reduction of 2%, which should result in a tax charge in the third quarter of approximately $800 million.

And recall, due to our current DTA disallowance, that charge will not impact our Basel I or phased-in Basel III Tier 1 ratios.

We turn to slide 24.

As we have talked about previously, our Phase 2 evaluations began late last year, and we completed those in the second quarter.

As you know, Phase 2 focused on our corporate, commercial, and markets-based businesses.

We expect that these Phase 2 cost savings will total approximately $3 billion on an annualized basis, which would be fully phased-in by mid 2015.

We did start to see some of these Phase 2 savings in the second quarter, as these initiatives aren't as interdependent as the consumer businesses in Phase 1 are.

With respect to Phase 1 we are still on track to exceed the 20% of the $5 billion in annual cost savings by the end of 2012.

In total, in both Phase 1 and Phase 2 we are targeting to produce annualized cost savings of approximately $8 billion by mid 2015.

So, if you consider the lower expected FTEs and other expense reductions associated with New BAC, both Phase 1 as well as Phase 2, along with an improving delinquent mortgage loan servicing pool, we believe we can continue to realize cost savings for the remainder of the year.

We switch to asset quality on slide 25.

Overall trends continue to remain very positive.

Provision expense declined $645 million to $1.8 billion.

Net charge-offs decreased $430 million or 11% to $3.6 billion versus the first quarter, driven by lower consumer chargeoffs while commercial chargeoffs were relatively flat.

The reserve reduction was $1.85 billion versus $1.6 billion in the first quarter of the year.

As we go forward and as credit continues to stabilize, we would expect that our overall reserve reductions will continue, albeit at significantly reduced levels.

Consequently, we believe that provision expense for the next two quarters of the year will be higher than what we experienced during the second quarter of this year, but below that which we saw during the first quarter.

So with that, let me turn it over to Brian to go through how we continue to focus moving forward.

Thank you, Bruce.

Let me add a few thoughts before we take questions.

The results you see in our numbers today show that we continue to be well positioned to keep building on the customer and client relationships that we have in our Company.

As we think about our individuals and businesses we serve as clients, many of them have addressed all the financial circumstances that they faced over the last few years and actually are in better shape than the broader economy and the statistics may reflect on a given day or week.

However, there remains some uncertainty in the markets and in the minds of our customers and clients.

This largely revolves around the situations in Europe, the United States, around the longer-term fiscal issues that must be dealt with.

And we continue to run our Company consistent with that uncertainty in everything we do.

If you think about the path we have been on for the last couple years -- rebuilding the balance sheet, making strategic the decisions, putting our operating principles in place and living up to them, and driving our customer-focused strategy -- everything that we have done in our Company has been achieved to make our Company less complex and more streamlined and also to position our Company better to grow over time.

What this quarter continues to demonstrate is the sound financial foundation we have built, the strong balance sheet that we have built and will continue to maintain.

And because of all the work, the opportunities which we are focused on is now to drive the core earnings of the Company.

As we discussed at the beginning of the year we laid out four things that we are focused upon.

We told you we would focus on improving our capital levels.

We told you we would focus on managing our risk.

We told you we would focus on reducing our cost base.

And we told you we would focus on driving core business improvement.

This quarter we saw improvement in each of these areas.

On capital, we continue to make strong progress and feel good about where we stand, especially in light of our Basel III guidance.

In a year's time we have gone from being behind our peers to being ahead of our peers.

If you think about the risk side, asset quality trends continue to be positive across the board.

Chargeoffs continue to fall and have room to go.

Provision expense is at the lowest level we've had in this Company in five years.

Delinquency trends continue to improve in all our products, and criticized commercial exposures continue to fall.

As we think about the cost side we are starting to see the benefits of the New BAC program, and the results of the Phase 2 work will begin to roll through as well.

This is evident in the reduction in headcount and expenses that you have seen in the numbers.

So let's remember this.

As we reduce our costs we continue to invest in the opportunities in our franchise.

We invest in technology, over $2 billion for $3 billion a year this year.

An example of that investment is in May we completed a major technology milestone for our Company, converting our California franchise.

So for the first time in our Company's history, we now have one deposit platform serving customers coast-to-coast.

In addition, we continue to invest in our technology platforms across the world, including our cash management platform that service corporate clients; and you can see the effect of that in our numbers.

But also we invest in our client-facing teams.

We continue to grow our small-business bankers, our wealth management teammates both in our Wealth Management business, in our FSAs, and our consumer business.

And we continue to add more mortgage loan officers, as you can see in our increased production.

So we've had strong steady progress on capital risk and costs, providing a solid foundation as we focus our energy on our core business growth and the earnings power of the Company.

This is the area that we continue to have work to do, as you can see in the numbers.

But we put ourselves in a position to be successful.

For example, we have transformed and repositioned our core consumer business.

While taking the core expenses down, we continue to drive growth.

An example of that Bruce referenced earlier is our mobile banking platform.

We had 10.3 million customers this quarter in that mobile banking platform, up 600,000 from last quarter.

With the usage of that platform and the payments initiated growing very, very quickly, this is a superior service model that is second to none in the industry.

In our consumer business, our deposit balances were up; new credit card accounts are up.

For example we have issued 1.4 million BankAmericard Cash Rewards cards since we introduced them less than a year ago; that is 26,000 new cards a week.

Our mortgage production has increased almost 20% quarter over quarter.

In a broader context, we've extended $107 billion in credit to our customers to help them participate in the economy this quarter.

In the important small business area, year to date we have initiated $4 billion in new credit to small businesses.

So we continue to drive business across the board, whether it's in our Wealth Management business, As you can see in the good long-term assets under management flows, or in the banking products side we can see loans have achieved record levels.

We have market coverage and penetration that is second to none in the commercial areas, whether it is large corporations or medium and small businesses.

We have brought the Wall Street capabilities to those clients across our franchise.

For the institutional investor client base, you have seen in our trading business the core customer focus and how that continues to produce recurring revenue streams.

And also you can see our research capabilities that our clients tell us are second to none.

So now we have tremendous opportunities to franchise, and we all know that as we continue to focus on execution.

So that is what you can expect out of us over the next few quarters -- continue to build the momentum around business performance; continued focus on the fundamentals; stronger capital; capital management of risk; and reducing costs.

And you will see us drive forward and deliver the results that you, our clients, customers, and shareholders, expect.

Thank you; and now we're happy to take questions.

(Operator Instructions) John McDonald, Sanford Bernstein.

Yes, hi.

Good morning.

Bruce, on the net interest income, just want to clarify your statement there.

You said that the starting point should be the $10.2 billion.

Is that the adjusted NII from this quarter?

Is that why you are referencing the $10.2 billion?

That's correct, John.

Then from there are you saying we should add the incremental $240 million benefit from debt reductions?

That's correct.

Then what about the core leakage?

Like this quarter you had that $400 million of core leakage from loan runoff.

You didn't mention that; but do you still expect to still have that battling against the debt benefit?

I mean I think as we think about the $10.25 billion, that is the jumping off point.

We clearly -- and I think you have seen it in the commercial area -- are clearly looking within the context of a reasonable risk appetite to start driving loan growth going forward.

And as we have talked about before, that the runoff portfolio is not one that is particularly profitable.

So as we look forward and as we have thought about that jumping off point, that is how we think about the $10.25 billion.

Okay, just trying to think of when we -- once we jump off, is there something about the $400 million that was elevated this quarter in terms of core leakage and why that might slow.

Is it just -- is loan shrinkage slowing?

Is that the idea?

That's the idea.

I think the other thing is that -- and as I mentioned in my comments, when we talked about rates going up or down, while we are not predictors of interest rates per se, we clearly would not expect to see the decline in interest rates that we saw from the end of the first quarter to the end of the second quarter going forward.

Okay.

Then just finally, how would the hedge and the premium amortization work, given where the 10-year is today versus where it ended the second quarter?

Would that be an incremental hurt?

And would it be similar magnitude, or less?

It obviously goes both ways, both up and down.

I think if you look at where the 10-year was at the end of the quarter, I believe it was at about 1.64%.

So we are clearly a little bit lower today than we were at the end of the quarter.

I would expect, though, that if rates were continue to go down, I am not sure that you would necessarily see the same impact on the down side for premium amortization, because at some point it is going to stop.

Okay.

So it would be down, but not by the same magnitude on the hedge effectiveness and the premium amortization?

That would be the expectation.

Okay.

Then on the expenses, sounds like you think the $17 billion is a good jumping off point for expenses all-in, and you expect to decline for the rest of the year from there.

Is that what you said?

Yes.

okay.

Then on the Phase 2 done by 2015, am I correct that the Phase 2 stage was supposed to come faster than Phase 1?

Is that still the expectation?

Yes.

When we put out the Phase 1 expectations, we obviously said it was roughly 20% by the end of the first year.

And given, as I said, a lot of the work is not as interdependent, you would expect that those Phase 2 savings to come more on a ratable-type basis as opposed to having them a little bit more back-end loaded.

Okay.

But given that those are coming by mid 2015, obviously the Phase 1 takes longer than mid 2015 to finish up.

No, because keep in mind the Phase 1 -- we had talked about a three-year period in having all of the Phase 1s done by the end of 2014.

Remember, because Phase 1 was started much earlier.

Okay.

Got it.

Got it.

Okay.

So it is not from today, it is from when it started.

Okay.

That's correct.

Then last thing, just the operating expenses in LAS were up to $2.7 billion from $2.4 billion.

Do you believe that those have peaked now?

Do you see those starting to decline in the second half of this year or more in 2013?

John, I think they are up a little bit, because remember we are now in full -- multiple things going on, Department of Justice, the lookback is in full swing and everything.

The team thinks we have largely peaked, but I would expect to be slowly start to move in the right direction.

But I think the next quarter I wouldn't expect them to come down a lot just because we are still finishing up for the third and fourth quarter.

But once we get through the Department of Justice lookback, once we get settlement work, once we get through the lookback there are -- a lot of expenses will come out relatively quickly, and then the core underlying loan numbers go down.

But I think we have peaked; but I don't -- I think it will take us -- as we end -- or early next year when you start to see meaningful quarter-by-quarter improvement.

Okay.

So the decline from $17 billion in the back half of this year is more from the New BAC stuff, would you say?

Yes, I think if you look at that chart on headcount, John, that Bruce showed you in the upper right-hand, corner, watch the quarter-by-quarter trend.

And you can see that from a broad franchise, absent LAS, we are down 20,000 people year-over-year and 3,000 this quarter, including overcoming an increase in LAS.

So you are just seeing it through come through quarter by quarter by quarter.

So we are still driven largely this year by the non-LAS; and then the LAS will help probably more in '14 -- or more in '13, excuse me.

Got it.

Okay.

Thanks.

Paul Miller, FBR.

Yes, thank you very much.

Hey, Brian, can you help us on slide 16?

A follow-up question on the -- you said the $8.6 billion private label, that settlement last night settled 20% of that or roughly $1.7 billion?

Yes, we said -- so, if you look at the -- that's correct.

That on the monolines as you look at the dollar claims it was roughly 20%.

I think, Paul, though, that the other thing to keep in mind is that when you look at the monolines, some of the exposure is included within the claims; and with respect to certain other monolines it is within the litigation number.

But you are correct that with respect to the Syncora settlement it was 20% of the outstanding claims.

Of the monolines?

Of the monolines?

Yes, just to make sure.

You said private and Bruce said monolines.

But the monolines (technical difficulty).

Yes, I had it wrong.

Then the other question is, is like the private -- I mean the GSE reps and warrant putbacks continues to grow.

And I agree with you that after 25 payments you shouldn't have to pay any reps and warrants.

But how is this going to be settled?

Will the GSEs go to court?

Have they gone to court?

I don't think you're in dialog with them.

I know you probably don't want to make a comment about that.

But how can we look at this as analysts?

How will this be eventually settled?

Will it have to go to court?

Paul, I would just reiterate your point.

I think if you look back on slide 33 and look at the new claim trends that are coming in from the GSEs, it is very clear that the new trends that are building up in that bucket were back in the 2006/2007 vintages.

So I think we clearly have a disagreement; and the way that it gets resolved is obviously through one of two ways.

Either they would look to bring an action, or alternatively there would be a settlement.

But those would be the two ways that it would get resolved.

Okay.

Thank you very much.

Go ahead.

Paul, just look -- if you look on those pages, you can see that there are approved repurchases going through in quarters.

So there is a pattern in which things -- we are still paying Fannie today on ones that we believe we owe on.

But you are paying on those that are less than two years of payments, right?

The disagreement is coming about on those loans that has made over 25 payments; right?

Yes, we are paying on the ones that are consistent with our past belief that we owe them the money.

Leave aside the payment exactly; but it's really -- do we owe them the money or not?

Okay.

Thank you very much, gentlemen.

Glenn Schorr, Nomura.

Thank you.

Quick one, the Basel III 8.1% that you showed.

Correct me if I'm wrong.

It includes $2.5 billion, but not the NPR?

I am just curious on why you took that route and what your estimate might be using the standardized approach?

Sure.

That's correct, Glenn.

I think as we look at the NPR, obviously there is a comment period; there is a lot of clarification and qualification that needs to get baked in.

We have done the work and, based on our understanding, realizing it is a draft and there is going to be a lot of comments, we think the negative effect would be around 15 basis points.

But I think we're just hesitant to include it in the number until there is exact clarity and the different clarifications get made and the rules become a little bit more clear.

Okay, that's all we really needed, just to get that range.

That's helpful.

Then on the -- just curious; I don't know if I missed it in the prepared remarks.

But I think the private label claims spiked by like 77%.

I am not sure if that is a single private label holder, or what caused that spike.

Yes, I think it's a series of holders.

I think the one thing that I think is important to take a step back in, and when you think about these private label claims, is that when we set up the reserves and entered into the settlement at the end of the second quarter of last year, we obviously established both reserves in range of possible loss with the anticipation that we would see increased claim activity.

I think as you look at these private label claims I think it's important to think of a couple things.

The first is they're notional amounts.

The second thing is, if you look at the losses that tend to be associated with those notional amounts, they are roughly $0.60 on the dollar of what the notional amounts are.

So if you take that $8 billion number that has come in and think about it in the context of $0.60, it gets you down to a number of roughly $5 billion.

And then you can take the settlement data that we've had out there, if you wanted it to look at a Gibbs & Bruns type settlement number off of collateral losses, and if you applied that to that number you get something that is well below $1 billion.

Obviously as we go through the process and set up both reserves and range of possible loss, we factor in the data that you see there.

Very helpful.

I appreciate that.

Last one is a quickie.

There was nothing in the Q, the past Q, on LIBOR.

I know it's a sticky situation; but is there any -- I think you only set LIBOR in US dollars, if that is correct.

And just curious if you can update us on anything related to that issue now.

Yes, I mean I think -- obviously all of you have seen the different press reports and that you are aware we're a panel bank.

Not unlike others, we have received and are cooperating with the inquiries that we get from both the US and the foreign regulators.

We're also one of a number of defendants in some of the other LIBOR-related litigation.

And just given the fact that these are active matters there is really not a lot more that we can say than that.

Okay.

Thanks for answering the questions.

Matt O'Connor, Deutsche Bank.

Morning.

If I could just follow up a little bit on the net interest income commentary.

I guess first, when you talk about the jumping off point, the $10.25 billion, I guess I am trying to think why it is not the $10.5 billion roughly, including some of the liability management; and then from there we have got to make adjustments up or down for loans, securities, and interest rate environment.

I think you are saying the same thing slightly differently than we did.

Which is, that the $10.25 billion is generally where we were at in the second quarter adjusted for that activity.

And you're right; going forward there should be an incremental $240 million a quarter that would get added to that; and then plus or minus whatever you see in balance levels and rate movement.

So we said it slightly differently; but you're right.

You can look at the way that you just articulated it as well.

Okay.

Then taking out the accounting nuances of premium amortization hits, the market-related hedge ineffectiveness, like as we just think about the core portfolio and some of the repricing that you might see in the securities book if rates stay here, I would assume there is just some natural drag to the core NIM, if rates were to stay here that we would expect.

I think you almost need to look at it portfolio by portfolio.

Obviously, the securities portfolios are subject to rates either going up or down from here.

I think if you go back and look at the different card portfolios, that the actual rates on the card portfolios have been pretty sticky where they are.

And obviously beyond just NIM, as you go down to the pretax line, we are benefiting from credit improvement within the Card business.

Then I would say if you look at and go through some of the commercial and corporate loan pricing, that I would characterize that environment as generally pretty stable at this point.

So to your point as far as where do you see -- and is their downward pressure going forward, I think it is going to be more a function of both loan balances as well as where rates go from here, more than anything else.

Okay.

Then I guess, you're not the only bank, but a number of banks have kind of brushed off the low rate impact on the securities book.

I know it takes time for the securities portfolio to reprice.

But if we adjust your yield for some of the one-timers, it seems like it's around 2.8%; and my guess is the stuff that you are adding is 1.5% to 1.7% right now.

So hypothetically, if rates stay here, it is just a constant bleed-down to that.

Right?

I think what I would say is that as we look out at -- and I think if you go back to last year, we could see -- and I think as we looked out, we are pretty close, ex the FAS 91 and the premium amort, of being pretty close to where we thought NII would land.

What I would say at this point is that I think, all other things being equal, in this environment obviously there is a little pressure downward on that.

I think the other thing, though, and clearly what we are looking to do and working real hard to mitigate and hopefully improve where we are from a net interest perspective, is the debt footprint.

I think as you look out, at the Parent we've got roughly $15 billion of maturities during the balance of the year.

And we will look to clearly offset to the extent that that pressure exists; work real hard to continue to shrink the debt footprint.

Because we are paying roughly $2.5 billion a quarter on that long-term debt footprint, and obviously one of the things that is in our control is to continue to shrink that.

Okay.

Then just a separate topic briefly here.

Obviously there is a lot of cost savings coming from New BAC, probably another $7 billion or so versus what is in the run rate now.

The legacy mortgage costs could come down.

Either you said it or we have estimated maybe $8 billion annually.

So these are really big numbers off of your expense base.

Are there any modest offsets like ramp-ups in investment spends, or some of the growth initiatives you've talked about in the commercial?

Anything in those areas that we should be factoring in?

You know, I think -- so think about the Markets business; so the revenues and the compensation will follow that.

So be careful to always adjust that to what you think it is.

But outside of that, we're -- example, we invested about $3 billion in technology development this year.

About $1 billion of that or about $750 million of that will go to New BAC implementation, which is going through the run rate.

And as that comes off, we will turn that $750 million level back to the core businesses.

So embedded in that is what -- shifting money around even on something like that to help drive the business growth.

So of course, if you look in core consumer, you'd see expenses are flattish when you adjust for litigation quarter-to-quarter.

That is because that business is putting on loan officers and putting on FSAs and putting on preferred bankers in the preferred growth areas of the business, while in the mass-market, the retail business, we are bringing it down.

So I think you are seeing those investments go on in the business.

So we are taking advantage of those opportunities.

Our marketing dollars we have always -- we're careful with them, but we continue to watch them and trim them.

But we are getting rid of a lot of expense that is just coming from the overall repositioning of the Company, including real estate expenses and things like that.

So there is enough room to invest.

And embedded in the way we did New BAC is two -- at least a couple years of growth capacity that we left in there to -- assuming the economy, which is bumping around at 2%, 2.5% type of growth.

So I think we are comfortable that you won't see a big offset to it in that context.

When you go to the Markets business, we've built the international platform out.

We will always take opportunities to add people where opportunity is.

But even on the international, we have brought that back a little bit because the fees available and the trading profits available are down.

So I am not overly concerned about the reinvestment rate within the businesses.

There is money there.

So you should think a lot of that is only coming through today net of the implementation costs which that -- we can reposition.

Okay.

Thank you very much.

Betsy Graseck, Morgan Stanley.

Good morning; thanks.

One follow-up question on the capital.

You indicated that Basel III proposals if you put them all in would be about a 15 basis point hit.

Lots of caveats around the fact that we need more clarification.

I guess I am wondering, is that on an advanced basis or standardized basis?

That would be on a -- assuming all model approvals.

So it's going to be on an advanced basis, which I think from everything that we have seen, Betsy, I think we clearly believe that that will be our governor.

Okay.

So -- then the standardized rate with the Collins Amendment, will you have to disclose whichever is lower?

Would the standardized have an impact there, or no?

I think from everything we are seeing at this point, clearly the advanced approach is going to be our governor.

So as you look at the different rules, assume we are advanced.

Okay.

Betsy, also remember -- when we are saying fully phased in, we are still deducting the entire DTA in terms of the calculations as of today.

And by the time those rules will be phased in we will earn that back over time.

So there are other adjustments which, while you're making these adjustments on this side we agree with you, but the fully phased-in acts as if the rules were there fully implemented, and it is still five to six years out.

So as you watch this really play out you will see some differences in that, the reported numbers, during time; and we will earn back the DTA, and that creates capital at a faster rate than [otherwise].

Sure.

Okay.

That's helpful.

On page 16, just want to make sure that I understand what you're saying about the DOJ AG is holding on to the loans; and then you've got this 15,000 loans servicings sold that are going to be completed this month.

So I just wanted to make sure I understand how that is going to flow through into not only expected declines in delinquencies.

That is over and above the 300,000 that you're talking about over the next 12 months?

Or that is embedded within?

No, the servicing sales are embedded within that net 300,000 units.

Okay.

But then the comments that you are making about the DOJ --

Yes, the DOJ, just as we attempt to modify some of those loans, it slowed down what would have gone through the normal process as we satisfy those obligations.

So we look at that as more of a one- to two-quarter delay, not something that is permanent.

I think the thing that we just wanted to make sure of is -- we have spoken publicly before, that as we look out at over the course of the second quarter, third quarter, fourth quarter, first quarter, that we were thinking it would be a net 300,000 reduction.

And we just want to make it clear that over that time frame we are not coming off that guidance.

Okay.

Then as we think about the LAS expenses, as you have indicated a decline in the delinquencies obviously should be driving down your LAS expenses.

When I look at the servicing pools of foreclosure to liquidation or past-due to liquidation, I am not seeing that much of a ramp-up yet.

Can you just give us some thoughts on what you are doing to try to ramp that up, and when you think that turn is going to happen?

Yes, a couple things.

I think the first thing is that when you look at the expense side, just to keep in mind -- embedded in these numbers are a couple things that we have absorbed in the second quarter as we go forward.

First is obviously as part of the different settlements we have had to staff up, and obviously going to single point of contact adds a level of expense.

The second thing is there are a variety of obligations under the DOJ AG settlement including getting through the modifications that adds expense.

And obviously there are some of the lookback and other activities that adds expense.

So as you look at those different things from an expense perspective, those are all embedded in the second quarter.

It is why we believe that they will trend down based on the guidance that Brian had given before.

I think as it relates to some of the activity as far as the different buckets of getting the number of 60-plus-day delinquencies out, I don't think that there is any question that the second quarter was a little bit slower in those different buckets than what we would have expected.

At the same time as we look out at -- as I said -- over the next couple quarters, as we see the different pipelines, the different servicing sales and everything else, we are still quite comfortable with what we have communicated before.

Okay.

Then last on the DOJ piece, a lot of that review has to be done by the end of this year.

Can you tell us how much you think the expenses could come down as you move into 1Q, 2Q from those reviews being completed?

I think we said it will take us the rest of the year; so you will see more benefits next year in that, in terms of them coming down, plus the day-to-day work.

You've got multiple things going on.

You've got the DOJ; you've got the foreclosure lookback, which is running through here; and then just getting the inventory down overall.

Remember also, Betsy, there is a flow in each quarter that we are -- that you address each -- and it's 75,000, 80,000 new units come in, in the second quarter, just from the general delinquency flows of the portfolio.

So all that put together, what we are saying is for the rest of this year, we are busy getting the DOJ behind us; getting the work done on the lookback and get that behind us, which is very expensive -- largely not through the personnel line, but largely through the out-of-pocket expenses to third parties, the independent foreclosure review.

And then you will see it start coming down next year more measurably because those two activities will be completed, as you said.

And then the rest of the balances come down.

So year-over-year, we are down 200,000 60-plus units.

But remember, in that year we probably had 250,000 -- think about maybe 300,000 new units flow in from the delinquency close of the portfolio.

So you have made a net gain over top of that.

And that front-end flow is slowing down as the portfolio shrinks and the asset quality gets better.

Sure.

Got that.

I just wondered if it was possible to put a number on third-party payments that you've got associated with this review that is going to end at year end.

There is nobody working harder to get this number down than we are.

Okay, thanks.

Andrew Marquardt, Evercore Partners.

Morning, guys.

Just back on capital, so just want to -- with the capital ratios coming in above where you had targeted for the full year as well, how do we think about -- do you have a new target for the end of this year?

We have not put out a new target for this year.

I think the things that I would say, as you look at capital -- but think about it both numerator and denominator.

On the numerator side as you look at us generating net income and given where we are from a DTA perspective, I think generally you can think about that capital number growing in the ZIP code of 1.5 times our net income.

So you've got that benefit, and that relates to the tax position that Brian referenced.

Unlike some of our other peers, it is largely in the US where we generate income.

Secondly, and I think one of the benefits that we had this quarter that -- just be aware of -- is that obviously as we continue to drive down and to sell servicing that benefits the MSR, which is a capital benefit.

That MSR obviously also bounces around with rates as does OCI.

So I think as you think about the numerator, I would think about those different things.

And as we look at the denominator in moving forward, I think we still believe that we've got a decent bit of runway on the denominator as we go forward, both from actual risk-reduction things that we continue to do and as we continue to reduce legacy assets, that we believe that there is upside there.

And then secondly there is still a lot of model work that we are working through that we believe will provide further benefit as we go throughout the end of this year and into next year.

Should we assume that the runoff portfolios more than offset incremental growth?

Or are they offsetting that?

How do we think about the overall balance sheet size?

Yes, I think that clearly some of the stuff that runs off, given its nature, tends to be higher on the risk-weighting spectrum.

So as you think about that amount that runs off of $5 billion, some of that has decent risk-weightings associated with it.

Until we see the actual mix of what we are able to get and what comes on, it's not probably not appropriate to comment.

But we are obviously mindful, as we look to grow and put assets on, of what the different Basel III risk-weightings are.

Got it.

Thank you.

Then lastly just back on expenses, can you help us understand in terms of Phase 1 and Phase 2, $8 billion by mid '15?

Just want to understand.

Is Phase 1 now -- the $5 billion; you've realized $1 billion.

Is the timing of realization on the same glide path as it had before?

I recall it was going to be coming in sooner, by the end of '13.

But maybe I am not recollecting correctly.

Yes, I think a couple things on that, Andrew.

What we had said when we came out with New BAC 1 is that it was $5 billion on an annual basis.

It would be fully phased in by the end of 2014.

We said that we'd realize 20% of that by the end of 2012.

You are exactly correct that we have subsequently said that we are ahead of schedule with respect to that 20% by the end of 2012.

As I mentioned earlier, as you think about the New BAC 2 and you think about that $3 billion over the course of the next three years, unlike New BAC 1 I would generally think about that in the buckets of kind of a third, a third, a third in each of the three years.

Got it.

So just to be clear on the New BAC 1, if 20% is realized in this year, how much should we think about next year?

Is the bulk of that coming in next year?

Is that fair?

We have not provided that guidance or split between the second and the third year.

But just to be clear, we haven't changed what we said before.

We just added a -- the 2015 comes attached to Phase 2, not Phase 1.

Okay.

Thank you.

Jefferson Harralson, KBW.

I was going to follow up on some -- on the rep and warranty question.

Given that we are not in dialog with Fannie and that the private labels seem to be trying to get their suits in before statute of limitations hit, should we expect the same types of outstanding claims increase next quarter?

Yes, I think at this point we are not going to predict what these claims are or are not.

Because I think you have to keep in mind that, first, they tend to be lumpy; and the second thing is that I don't think we want to confuse claims that come in versus those that are valid that have the ability to come in.

But I think as you think about it and you think about when the underwriting and the originations with respect to these slowed down as we got into 2008, we are clearly almost four years into that.

So I think generally speaking your point has some merit; but we are not going to predict exactly what we would expect these to be.

Besides that we expected those to increase; we continued to see some of those increases in the second quarter; and we will see some more going forward.

All right.

Just on a follow-up, is it possible -- I am trying to frame this $6 billion of increase in the outstanding claims.

You give us the net claims every quarter.

Is it possible to look at the total claims that you've gotten over this cycle and compare that $6 billion of new claims to the total claims?

Is it -- if you've gotten, I don't know, $60 billion of claims, it's a different -- or $600 billion of claims, it is a different growth rate.

I think if you look at 32 and 33 you can see that we paid out $13.6 billion, on page 32 of the slides, through this quarter.

That has actually been paid on resolution of these types of things.

Then we have our reserves established for $15.9 billion.

Then if you look -- I don't have it right here in front of us; but if you look at this chart from page 33, we have been producing this now for better than a year and a half.

So you can go back and see the claims flows literally quarter by quarter going back pretty far.

All right.

Thanks, guys.

Moshe Orenbuch, Credit Suisse.

Great, thanks.

A couple of things.

Just on the rep and warrant, Bruce, I understand the idea that you set up the reserve contemplating a lot of this.

What should we look at from our stand -- vantage point out here to get the sense that you would need to add to the reserve?

In other words, what would have to happen in order for that to -- for you to add to them?

I think you almost need to go through the three different buckets.

We obviously, as we have said before, believe that the work and the way that we have reserved for the GSEs is based on our obligations; and we continue to believe that we are satisfying those obligations with respect to the GSE bucket.

I think second if you go to the monolines, the deal that we referenced, Syncora, that we signed up that got done today was in the context of our reserves.

So I think in the context of getting that one behind us it was where the reserves were.

So I guess given that a fair bit of the monoline stuff that is out there relates to litigation, obviously if something from a litigation perspective was different than what we had assumed, that would affect it.

Then I think, third, if you go down to the private label stuff, you've got two different buckets of liability.

You've got one from the rep and warrant perspective; and obviously if there was different behavior from a claims perspective than what we have assumed and an outcome that we didn't anticipate, we'd have to adjust at that point if the experience was different than what we had assumed.

Then obviously, the fourth piece of it is that there is securities litigation that is out there that we touch on as far as looking at range of possible loss within our litigation bucket.

So I think at this point we've got experience.

We've got the different buckets, and we've laid out what those are.

And obviously changes from what our assumptions and what are experience is, is what would change that.

Great.

On the comment that you made about the retail banking platform, now that you're actually on one platform is it more likely that you will have a new retail banking offering and adjust pricing and try to recapture some of the revenue that has been lost over the last several years?

Any thoughts that you can give on that some of that, Brian?

It's a combination of everything.

But if you look, we have passed through all the different regulatory impacts now and you can see that -- if you look at the consumer segment you can see the revenues have stabilized in terms of the fee revenues and started to grow really with activity at this point.

Because you have now had the impact of the overdraft, and the interchange, and everything through the quarterly results.

So the team is working on a combination of all the factors, driving revenue from the standpoint of loan originations and things like that off the core portfolio; bringing down expenses, that is the 57 branches or whatever we reduced this quarter.

And if you look at the people, the headcount in this business is down from a high point at one point of 100,000 down to say 70,000, to give you a sense; and so we continue to reduce that.

So it's a combination of all things.

So we continue to do it.

A new offering, new account structures is something we have been testing.

We have been clear about that.

We haven't made any decisions there, and we continue to look at it.

But interesting enough, this mobile platform growth really has changed some of our thinking there.

Because for example, we send out 20-odd-million texts a month to people telling them their balances are low.

The initiation of payments off the mobile platform is about $1 billion a week now, up dramatically year-over-year and continues to grow.

It is just a much more efficient and frankly strong service model.

So I think it is going to be -- it continues to be a combination of expenses and revenue and activity.

I'd tell you that the core sales checking accounts were strong this quarter.

The account closures by our customers the lowest that they have been since 2007, so the net attrition rates are down.

And we keep driving all those different things.

So I wouldn't lean it's any one thing.

But the platform, really the Northwest and the California, because people forget we did a Northwest, gives us a much more cheaper platform, obviously, but also a much more capable platform that we can change things quick, we can get it into the system.

And we continue to look at account structures and making sure we balance the rates we charge with the value we give.

Okay, thanks.

Just one quick follow-up, Bruce.

I wasn't sure if you said this already; but did the DTA go down in the quarter, or what happened there?

It went down by a small amount.

Small amount?

Thank you.

Brennan Hawken, UBS.

Hi, good morning.

Thanks for taking the question.

My question is on LAS, first off.

The staffing levels there, it seems as though the FTE definition that you guys use in your LAS disclosures bounces around a little bit.

I was hoping you could maybe give some clarity on that, and maybe provide some consistent quarter-over-quarter disclosure over an extended period of time so we could get a better handle on exactly staffing levels there and what is moving.

Because it doesn't seem like it is just the FTEs plus third-party.

Can you help out there a little bit?

We have been consistent in the FTEs, the way we count the FTEs.

So you can see that.

What you -- sometimes you hear numbers that are 42,000 and the 55,000.

The 55,000 is the contractors.

We have about 10,000 to 12,000, 13,000 contractors working at a given time that are not on our payroll, that we obviously pay through the expense line.

We will talk about 50,000-plus people working on it, but the FTE numbers have been calculated consistently.

And we can -- if you look on page 15 you can see it is up 7,000 employees, FTE equivalents, from the second quarter of 2011 to 2012.

But the contractor one moves around a little bit based on the ebbs and flows of what we are doing.

And you should see those come down.

Yes, but last quarter in your deck you had FTEs at 38.1 and now you're at 42.4; but you say you're only up 0.3.

So I guess I don't understand that.

Yes.

In the last quarter it was adjustment to -- there is a group that is in our core consumer business that does the good mortgage servicing before collections.

And we have moved some people around, so there might be a little bit of noise there.

But from a core activity level, you are seeing this thing is really running about 55,000 people equivalents -- 42,000 with us, 13,000 with other people.

Okay.

I guess I am just -- it would be helpful to see it consistently disclosed.

Because I mean, what I am getting at here is starting at about third quarter of last year indications were that LAS staffing was at a near peak, but we have actually seen the staff levels go up every quarter since.

I might be not remembering this correctly, but I seem to recall you saying previously that LAS staffing should start to go down in the back half of 2012 previously.

And now it seems like you are calling for those declines to be held off until 2013.

So what I am getting at is, can you give us a sense of your confidence level of these cost projections and maybe how much we should bake in there?

Okay.

Let me just make sure.

With respect to the staffing levels and what you are looking at, what was adjusted this quarter was the -- within Legacy Assets and Servicing, there is some non-distressed servicing that is in there, that when we reported this segment we adjusted the people that do some of that non-distressed servicing in the numbers.

That is reflected in the numbers, and we have gone back and adjusted those numbers to make sure that it is consistent on a lookback basis, so you've got apples-to-apples within these numbers.

Okay?

The second question, as it relates to the staffing levels, I think what we have said this quarter with respect to the overall expense base in staffing is that we are wrapping up the different parts of the different DOJ AG and other settlements.

And we would start to expect both the people and the expense to go down probably more towards the latter part of the year with significant momentum in 2013.

Okay.

I get it, believe me; the business has been really difficult and I am sure it has been really hard to manage.

So I can certainly appreciate the challenges there.

I guess it is just -- a key part of the story is a lot of this expense improvement.

And some of the commentary around improvements in 2013, it seems as though it has been -- that is going to be sort of slow, whereas you get a more substantial pickup in 2014.

I think, Brian, you have made some of those references in some of the investor presentations where I've heard.

So could you give us maybe a bit more?

Is it possible to get a bit more specific on what you are talking about there?

Are we talking about somewhere in the ballpark of like a 10% to 15% reduction in that $8 billion ex-litigation number?

Or is it more like a third?

Is it -- what are we thinking about for 2013 and then 2014?

Is it possible?

We have given you an overall viewpoint that says that the amount of 60-plus-days delinquent loans will ultimately get in to, say, the 300,000 range.

That will take us the rest of this year and next year to get it down into those ranges and probably into '14.

For that we are saying that takes about $500 million of quarterly costs versus the $2.8 billion you have in here today.

So that is what we have given.

The pace of this even six months ago, for example, in our foreclosure lookback, we just got the final rules recently about how to finish the work, and that was months after we expected.

So a lot of this is based on -- in that case we had to get the final rules and actually go do the work.

And the Department of Justice, the settlement came through in early April, the final settlement.

A lot of people believed it would be done a few months before that, because it was largely worked out.

And we couldn't start the work until the settlement was finalized.

So some of these things move around a month or two.

But in the grand scheme of things, the key is to get this from the $2.8 billion level to the $500 million level.

And they are in there -- all the people costs.

And in there on top of that is some of the -- effectively each quarter the one-time adjustments to the lifetime expectation for foreclosure delays and things like that that we adjust on.

But I think you will see this come down relatively quickly once we break through the two big bodies of work, and then -- being the Department of Justice settlement work and the lookback.

And then after that, it is really scheduled against -- as the work goes down, the people will come down.

And we are working as hard as we can to get it down.

So I think any adjustment in view of timing has largely been just to make sure we do it right.

Because the number one thing is to do this right for the consumers, continue to modify the 1-million-plus loans we have modified, continue to work the short sale process and other alternative resolutions, continue to do all the work under all the various programs that are there now and get added.

But it is always subject to making sure we do it right, and we are not going to bring the headcount down until we know we have got the job done well.

Right.

Yes; no, as I said I get that it has been a challenging environment, so that's probably been real difficult.

Last, not to beat a dead force here, but the putback claims.

Just on the GSE side, because I get it that private label, right; that is going to be solved by the courts and probably pretty difficult.

But at least with GSEs there is a lot more history.

When you look at some of the Fannie and Freddie filings, BofA and Countrywide really stand out on the pending and disputed claims.

You all are about 6.5 times your closest peer, even though the repurchase levels are about in-line and the withdrawal claims are only about 1.8 times your closest peers.

So it seems as though these disputes are a BofA-specific issue.

What gives you confidence that you going to be able to buck the trend of the entire industry?

Can you help us out on that front?

I think all we can really say at this point, quite frankly, is the way that we look at this and the reserving is based on our view of what our understanding agreements are.

We have said that there are disagreements that are out there.

And I am not sure there is a lot more to say than that.

I think the only other thing that I would say, though, is that as you look out at and you look at these agreements, and you go back, we were able on a lookback basis to get a deal done with Freddie Mac on a global basis to resolve all the Countrywide claims prior to the end of 2008.

So I think that the way we are going about it and looking to solve these challenges has not changed a bit.

I think you also have to remember that if you go look at 32 and think through the categories where there is resolution on.

And so the claims are really coming through, there is obviously disputes on, in the sense that the private label/CFC issues have been resolved with Bank of New York for over a year now, and we are waiting for the court process to take place as Bruce mentioned on the Countrywide.

So I think the issue is the volumes we would have are not coming through -- big parts of the production at the time, the 2004 to 2008 production, because they are settled.

And monolines the same thing.

So obviously the people that -- specifically Fannie -- that we are going to have the biggest argument with are the people still submitting claims.

Right.

Okay, and then the last one, just on Wealth Management.

Can you get a sense for net new assets and what they were and what they have been over the last years?

Because it seems as though that is not a disclosed number anymore.

It would be really helpful to get that figure.

Which number are you looking for?

The net new assets in the brokerage business, not necessarily asset management, but Wealth Management.

We will get Lee to get back to you on that.

You can see the long-term AUM flows, which has been driving the business to be more of a -- in the financial plans of the -- with the customers and clients, the AUM flows are where we focus as we move from the transaction-based to the more money-managed basis.

You can see those flows have been strong.

We will get to the net new assets side.

Sure.

Thanks.

Chris Kotowski, Oppenheimer & Co.

Yes, good morning.

Syncora's press release cited that they received $375 million in the settlement.

And you said that it was about 20% of the $3.1 billion, which is a bit more than $600 million.

So that implies a settlement rate at about $0.60 on the dollar.

I wonder, is there anything that would make Syncora a better or worse exposure than the rest of the monolines claims?

Then secondly, why would the settlement rate on the private label be radically lower than what it is on the monolines?

Yes, I think you have to be careful, Chris.

I can assure you that the rate at which it was paid was not anywhere near the number that you quoted.

The reason is, keep in mind with the monolines -- as we have talked about, you have got a couple different buckets that go into what you think a monoline exposure is, that drives that number significantly lower than what you just quoted.

The first is there are claims that come in that monolines have submitted.

At points in time monolines have stopped submitting claims because they believed that they are going the route of litigation.

Then third, over and above those two buckets, you have things that may happen in the future that have not been realized or worked through.

So when I quoted the fact that the Syncora settlement was 20% of those claims, you should not in any way extrapolate out that that is the payment percentage.

Not sure I understood that, but I will follow up.

Thank you.

Mike Mayo, CLSA.

Hi.

Just a real big-picture question.

What inning are we in from the negative impact from this very low interest rate environment?

You had one bank say it was pretty much done; they are not going to have a whole lot more negative impact.

You had another large bank saying -- well, it is more than half done, it is mostly done.

And a third bank has said -- well, actually it's going to hurt a lot more if rates stay here.

So where do you stand on that question?

And specifically I note this quarter the deposit rates only declined by 2 basis points, whereas the yield on loans were down 11 and commercial loan yields were down 17.

Yes, I would say a couple things on that, Mike.

The first thing I will address is just your last question, which is that where do you -- we continue to look at and given this rate environment to be very disciplined with respect to what we do on the deposit pricing.

As rates persist we will continue to revisit that, realizing that when you get to the levels that we are at with respect to deposit pricing that there is only so much further that you can go.

I think with respect to the rest of your question, I think you need to split the rate question really into two pieces.

The first piece is that as you look at loans spreads and what we are seeing from a loan spread perspective, that on those things that are floating-rate based, the spreads at this point and some of the new origination spreads that we have seen -- that the spreads on those have stabilized.

So I think as it relates to -- is there more downside, or are you concerned more on rates with respect to that?

At this point I think we feel okay with that.

The last piece is where it is with respect to those fixed-rate instruments.

We have been very careful at this point to manage and to manage the duration such that we don't have OCI issues with respect to Basel III.

If you look at on a swapped basis with respect to duration on the securities portfolio, we are just over a year on a swapped basis, realizing it is a couple more years if you didn't take into account swaps.

So I think as we look at it, the piece that probably has some element of risk over time is if these rates stay at this point, the overall securities portfolio.

But I think a lot of what we do at this point, the low rate environment is baked into it.

I had just one follow-up.

I am looking at page 10 of the supplement, and I am sure you know these numbers.

Total commercial yield from the first quarter to the second quarter went from 3.52% to 3.35%.

That is a 17 basis point decline in the commercial loan yield.

So is there noise there?

What gives you such good confidence that that decline is pretty much done?

Yes, I think if you go into it if you look at where are the majority of the noise came in, and if you look at -- there are two pieces that move.

The first and probably the most significant was -- and we disclosed this back in the first quarter -- we had some gains on the overall leasing portfolio that settled up during the first quarter.

So if you look at that -- if you look at the number you can see the leasing portfolio came in by about 100 basis points.

That is clearly something as we look out at that we don't expect to repeat.

So I think as you look at those two buckets, that is the reason, both.

So if you look at US commercial it was down a little bit.

Commercial real estate was effectively flat.

Commercial lease is where you saw the biggest change.

And on the non-US commercial stuff where you will see that number bounce around a little bit is if we are doing trade finance, it tends to have a little bit lower rate than some of the straight-up corporate stuff.

But I would say as we look out at and look at the new origination spreads that we are seeing on the base business, we really didn't see any erosion of spreads that we booked with respect to newer loans.

So that jumping off point of what -- would you say $10.2 billion of NII, you expect that to be flat or higher then?

What we have said at this point is that we think that is the jumping off point.

We mentioned the benefit that we have from the long-term debt footprint; and then we will obviously need to see activities during the quarter.

All right, thank you.

Mike, to back up to the broader level, think about two or three things.

One is the low rate environment has been impacting us; and that is why one of the issues about you have to go out to the cost side and get the cost structure in line, because the low interest rate environment has affected revenues.

Secondly, remember in these runoff portfolios we are giving up net interest margin gross yield.

But if you look at our net interest margin minus chargeoffs, you will see that it is actually growing year-over-year, second quarter last year to second quarter this year.

So what is running off is costing us money or not contributing a lot to the pretax line, as Bruce said.

And the third is we continue to have benefits that we think are unique to this franchise because of the amount of acquisition debt that was built up and the long-term debt size.

Continue to drive that down.

So as you watch the balance sheet shift across time, the non-interest-bearing sources, deposit-funding sources become more and more -- a higher and higher percentage, of which they are already high, of the total funding.

If you think about it very simply, we pay about $0.5 billion a quarter for all the deposit funding, $1 trillion.

And we pay about $2.5 billion, round numbers, a quarters for the $300-odd-billion of long-term debt.

So the effectiveness of moving that down, because we just don't need the size, we have -- because we are running off assets which aren't yielding as much, is very beneficial going forward.

So we are fighting a trend.

This is a trend that has held on longer than most people expected; but we are fighting with all the arrows in our quiver that we have.

All right, thank you.

Matt Burnell, Wells Fargo.

Good morning.

Just an administrative question.

You noted that your tax guidance for the remainder of the year is around 22% excluding the effects of the UK tax.

Last quarter you noted that you thought the tax rate was going to be about 30%.

I am just curious as to what is driving the decline in the tax rate guidance.

I believe and I could -- I would have to go back and look.

I think if you look at it and what we are saying now is that the 22% includes the different preference items that we have, based on where we are today.

And as we look out at, that 22% is a good number, as it relates to what we would expect before, as we have said, adjusting for what we would see coming out of UK tax.

Right.

Again another, one final administrative question.

You mentioned about $300 million in benefits from your actions reducing higher-cost debt.

$60 million of that was recognized in the second quarter.

Then on page 8 of the slide deck, you say that there is about $100 million of savings from those actions in 2012; another $180 million expected in 2013.

Is that $300 million number you are talking about the equivalent of the $280 million in combined savings in '12 and '13?

No.

We gave you the information on the liability management actions to give you a sense as to the benefit that they would provide.

So the way to think about those savings that we talked about in the liability management is they are embedded and a $300 million quarterly benefit, of which $240 million will be incremental in the third quarter this year relative to the second quarter this year.

Okay.

That's helpful.

Thank you very much.

I'm showing that we have no further questions at this time.

Thank you, everybody.

We will look forward to talking to you next quarter.

This concludes today's program.

Have a great day.

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