Bank of America - Earnings Call - Q2 2011

Transcript

Speaker 3

Today, and welcome to today's program. At this time, all participants are in a listen-only mode, and later you'll have the opportunity to ask questions during the question and answer session. Please note this call is being recorded, and I'll be standing by should you need any assistance. It is now my pleasure to turn the conference over to Mr. Kevin Stitt. Please go ahead, sir.

Speaker 4

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.

Speaker 3

Thank you, Kevin. Before I turn it over to Bruce, I just wanted to make a few comments about the quarter. As we discussed on the call on June 29th, we announced a settlement on private label securities litigation. We've been working hard to put large pieces of uncertain risk behind us as a company, and where we can do that on a basis reasonable to you as shareholders. This quarter, following the actions we took in last year's fourth quarter on the GSEs and the first quarter on the monoline insurers, we've put another significant part of the revenue warranty exposure behind us in other mortgage-related matters. In all, as you can see from those materials, we took almost $20 billion in charges related to the mortgage business. That has translated in a $0.09 per share loss in a range we gave you a few weeks ago.

Adjusting for the mortgage charges, our earnings were $0.33 a share at the high end of the range we gave you in June. Bruce is going to give you more detail on those adjustments later on. Switching to the important question of capital, the work we have done to improve our balance sheet over the last several quarters came through this quarter, as even with a loss, we reported capital ratios which are stronger than this quarter in 2010. Our Tier 1 common ratio, which we set at the end of June with coming around 8%, actually came in at 8.23%, higher than we expected, a drop of 20 bps since the first quarter of 2011, but improving since last year. Our tangible common equity ratio, which we estimated at the end of June to be about 5.7%, came in at 5.87%, again an improvement of what we said.

We achieved the ratios through the continued balance sheet optimization and repair that we've been going through in the company over the last several quarters. In all, during the second quarter of 2011, our RWA came down over $30 billion. Bruce is going to take you through the actions we completed during the second quarter of 2011, and more importantly, the actions that are still ahead of us in the quarters ahead, all of which give us comfort and demonstrate that we don't need to raise capital as we continue on our plans to comply with Basel III. As we look at the business lines and can see how they perform, this quarter shows the power of the rest of our franchise, which has been covered up by losses from mortgage. As you can see on slide five, you can see the results.

Each business line other than mortgage had solid earnings and returns, earning in all over $5.7 billion after tax. The franchise and customer model continues to shine through. In our deposits business, we grew deposits. We also grew accounts at two times the rate we grew them last quarter on net new checking accounts. We paid less for our deposits this quarter in our deposits franchise, and we lowered our costs to operate the franchise in this quarter. The transformation of this business unit continues to go well, and we are growing our fees again, offsetting the overdraft regulations that came through last year. In our card business, we had strong performance aided by the credit provision release, but we also increased our units in the United States this quarter to over 730,000 new cards.

The Durbin Amendment will affect this business in subsequent quarters, and Bruce will lay that out later. In our global wealth and investment management business, we had another solid quarter. We grew long-term assets, grew our advisory team, and continue to see strong performance across the franchise. As we move to the corporate and commercial side of our house, we had strong earnings in our global commercial bank, as you can see. That's our middle market business led by David Darnell, and we had a good quarter in our global corporate and investment banking business, which is part of the GBAM unit led by Tom Montag. That serves our larger corporate customers around the world. The deposits and treasury management revenues in these businesses were solid. The loan growth outside the U.S.

was strong, and our investment banking fees of $1.6 billion plus were one of the best quarters we had in this business since we came together several quarters ago. Our efforts here also show that our international business investments are starting to bear fruit as the revenues outside the United States grew faster than revenues inside the United States. As we switch to our sales and trading portion of the GBAM Global Banking and Markets business, we had a solid quarter, down from the first quarter of 2011, but up from the second quarter of last year. We made money on 97% of the trading days, even in a choppy market. Let me switch to two other areas of focus, our credit and expenses. On credit, we continue to see improvements in all portfolios, and we still have upside as charge-offs will continue to fall.

Delinquencies in all portfolios continue to come down despite the recent backup in some economic and unemployment statistics. On expenses, we continue to manage to a flat core expense level that Bruce will show you in a few minutes if you eliminate the large mortgage one-time charges in the expense space. We've seen our headcount go down slightly this quarter. We continue to invest where we need and have to in this franchise. Examples are the LAS build-out, the Legacy Asset Services build-out where we've had to invest to collect the delinquent mortgage loans. More importantly, on our revenue side, investing in more wealth managers in our Global Wealth Investment Management business, more FSAs or brokers in a branch, and small business lenders in our deposits business, our international franchise, and importantly, a technology investment throughout the franchise.

At the same time, we continue to take out expenses in other areas to help fund these investments. For example, this quarter, our branch count is down 63 from last quarter. Our New BAC project, which is a company-wide initiative on expenses, will be done this quarter in the third quarter of 2011 for about one half of the company. We'll give you the results of that in October and show you what we plan to do with the second half of the company during the latter part of this year. Suffice to say that the work so far has gone well and shows a great opportunity to make our company better and more efficient in the future. With that, I want to turn it over to Bruce to take you through the quarter.

Speaker 1

Okay. Thanks, Brian, and good morning. If I could ask you to start with slide six, as Brian referenced, during the quarter, on a reported basis, we had a net loss of $8.8 billion or $0.90 a share. If we adjust that for mortgage-related and other items, we reported net income of $3.7 billion or $0.33 a share. We've scheduled down at the bottom of the page the one-time items coming through the P&L. The $15.5 billion of mortgage-related revenue charges is comprised of $14 billion of reps and warrants and $1.5 billion of a negative valuation effect on our MSR. On the mortgage-related expense items of $2.6 billion, $1.9 billion of that is litigation expense, and $700 million is assessments and waivers. We've scheduled out back on slide 30 the asset sale gains and other amounts that are comprised of a variety of items.

Before I leave this page, I'd like to touch briefly on taxes. The effective tax rate for the quarter was 39.4%, excluding our goodwill impairment. As you look out and think of the balance of the year, think about the effective tax rate in the 30% area, excluding any unusual adjustments. The other thing I'd call your attention to here is during the third quarter, we will have an $800 million hit to our UK deferred tax assets, given the reduction in UK taxes that we would expect to be approved during the third quarter. Turning to page seven and looking at the balance sheets, assets during the quarter were down slightly while we continued to see growth in the deposits. I'd ask you to spend a minute and focus on risk-weighted assets.

Risk-weighted assets were down $40.7 billion for the quarter, or 2.8%, which is consistent with our strategy of driving down risk-weighted assets as we look out to the new Basel capital rules. To give you a sense of the magnitude of this reduction, it led to a 23 basis point benefit to Tier 1 common during the quarter. As Brian alluded to, Tier 1 common at the end of the quarter was solid at 8.23%, and tangible book value ended the quarter at $12.65. From an asset quality and a reserve perspective, ending loan loss reserves after the release were $37.3 billion or 4% of loans and leases and over 1.6 times our annualized charge-offs that we saw for the quarter. On slide eight, we walk through our net interest income for the quarter. On an FTE basis, net interest income was down roughly $900 million for the quarter.

Net interest margin was at 2.5%, which is consistent with our previous guidance where we expected net interest income margin to trot in the 2.5% area. As you think about the decline in net interest income, it was due to several factors. The first, on the consumer side, lower balances and lower yields. The second, the drop in long-term interest rates had a negative impact on our hedge results. Third, we had lower trading-related revenues. As you think about our strategy with net interest income and managing OCI risk, we continue to be very focused on keeping the duration in our discretionary portfolio short, as our asset liability management strategy is focused on managing interest rate risk across the company and minimizing OCI exposure to the extent we were to have a higher interest rate environment as we move towards Basel III.

If we flip to slide nine and look at the deposits business, net income in the deposits business was $430 million during the quarter, up $75 million, or roughly 21% from the first quarter of 2011. Average deposits were up 2% for the quarter, and net new accounts were positive for the second consecutive quarter. Brian referenced the rates paid on deposits and the cost per dollar of deposit. Rates paid on deposits came down three basis points from 32 basis points to 29, and cost per deposit, which we define as non-interest expense over average deposits, came down from 2.6% in the first quarter to 2.44% during the current quarter. On slide 10, we walk through our global card business where net income was $2 billion, a $300 million improvement or 17% over the first quarter.

Its credit improvements more than offset lower net interest income from lower average loans and yields. We think about volumes. Total purchase volume for debit and credit transactions was up seasonally 9% from the first quarter and 6% when we compare it back to the second quarter of 2010. Credit continued to improve significantly as delinquencies improved and U.S. charge-offs declined for the seventh consecutive quarter. From an average loan and lease perspective, the $5.6 billion decline in average loans from the first quarter was due to higher payments, charge-offs, and continued runoff in our non-core credit portfolio. In addition to that reduction, we exited approximately $2 billion in receivables at the end of the quarter with virtually no income statement effect. There's been a lot of questions about Durbin out there.

If we look at our second quarter results and we look out to the fourth quarter, which will be the quarter in which Durbin is implemented, we would expect a negative $475 million revenue impact from Durbin out in the fourth quarter relative to where we were in this quarter. On slide 11, we walk through the Global Wealth and Investment Management business. Net income was $506 million, down $27 million or 5% from the quarter based on higher expenses from increases in the investment in our financial advisors, as well as higher credit costs. Revenue for the quarter was nearly flat to record first quarter levels that we saw during the first quarter of 2011, as record asset management fees driven by market and long-term AUM flows were offset by lower brokerage revenues reflecting lower market activity.

During the quarter, more than 500 financial advisors joined the leading advisory force, pushing the total number of FAs to over 16,000 for the first time since the Merrill Lynch merger. Ending loans within the business grew for the fifth consecutive quarter and reached $1.6 billion. Turning to slide 12 and looking at the Commercial Banking line of business, net income of $1.4 billion was up $458 million from the first quarter and was at its highest level since the second quarter of 2009. Average deposits grew $6.3 billion or 4% during the quarter, as customers in this line of business continue to remain highly liquid. As we look at average loans, average loans declined $3.1 billion.

On the negative, we saw commercial real estate decline by roughly $2.2 billion, which masked the improvement in the increase in average loans that we saw in commercial and industrial loans in our middle market business. Once again, very strong improvement in asset quality within the commercial bank. Charge-offs declined $193 million or 38% from the first quarter. Non-performers declined 11%, and we continue to see very solid performance in credit. If we move to page 13 and look at the Global Banking and Markets business, net income for this business was $1.6 billion for the quarter and fell seasonally by $576 million from the first quarter on lower sales and trading results that were partially offset during the quarter by higher investment banking fees.

If we start to look at sales and trading, the revenues for the quarter were $3.8 billion, a $1.1 billion decline from the first quarter, but up approximately $666 million from the second quarter. We've laid out the DVA gains that we saw during the three periods on this slide. I think as you think about this business and think about the second quarter, as far as how we ran the business, as market certainty increased towards the end of the quarter based on what's going on in Europe, global economic concerns, and quite frankly, the lack of opportunity to make money, we reduced risk at the end of the quarter.

From a risk-weighted asset perspective within sales and trading, they declined $37 billion as we reduced legacy assets, exited our proprietary trading business in its entirety, and continued to optimize the balance sheet as we look forward to Basel III. If we move to investment banking, investment banking revenues of $1.6 billion, excluding any self-led transactions, were a record since the closing of the Merrill Lynch merger, and we saw strong activity across all the investment banking products. If we move to corporate banking, average loans and leases increased $5.8 billion, or approximately 6% from the first quarter, as we saw strong growth in our international commercial loans and trade finance, which is consistent with what we've spoken about before as we made investments internationally in 2010, and they've started to bear fruit in 2011. The next three slides we're going to touch on are consumer real estate services.

On a consolidated basis, you can see the segment reported a $14.5 billion loss. If we adjust out all of the one-time items that I talked about at the beginning of the call, net loss for the quarter was $954 million versus the $399 million that we saw during the first quarter of 2011. The adjusted loss of $555 million delta occurred as the revenue was impacted by the sale of Balboa, which closed on June 1, as well as higher operating costs within the legacy asset services area. I would also highlight during the quarter, the MSR decreased by $2.9 billion from $15.3 billion to $12.4 billion. As we look at the cap rate on that MSR, it was at 78 basis points at the end of the second quarter versus 95 basis points at the end of the first quarter.

On slide 15, we look at the home loans business, which is the ongoing mortgage operation within our bank. You can see that net income for the quarter was $531 million. If we back out the gain on Balboa, it was $86 million, up slightly from the $77 million in the first quarter. Revenue in the quarter was helped by higher lock revenue that resulted from deliberate pricing actions that we took, as well as favorable channel mix, and was offset by lower production volumes. On page 16, we look at the legacy asset servicing business, which you'll recall is the business where we moved a bucket of loans that are either significantly delinquent loans or products that we no longer are interested in participating in.

You can see once we adjust out the one-timers here, the net loss for the quarter was $1.4 billion compared to roughly $800 million during the first quarter. The two principal reasons for the increased loss were the result of increased costs from staffing levels within the business, as well as an increase in provision. As you monitor the progress in this business, this is obviously a discrete portfolio where we're both trying to work down the number of loans in the portfolio, as well as reduce the number of delinquent loans in the portfolio. If you look in the bottom left-hand corner, you can see we made very good progress during the quarter. The number of loans serviced was down about 3.3%, and the number of loans 60 days delinquent in the portfolio was down roughly 5%.

On page 17, we look at all other, which is a net loss of $216 million. That's the result of elevated credit costs related to valuation refreshes on our consumer loans, as well as lower revenues. As you look at the revenue line item for the quarter, the three types of items that affected revenue for the quarter, we had roughly a $200 million FBO adjustment on our structured notes, $831 million of gains on debt securities, and about $1.1 billion of equity investment income that was comprised of the dividends from our CCB investment, the gain on the disposition of the balance of our BlackRock interest, partially offset by a $500 million impairment on a strategic equity investment. During his opening remarks, Brian Moynihan touched on expenses. We've laid those out here. I'd like to say a couple of things.

If we exclude the selected items, which we detail elsewhere in this presentation, the reported $22.9 billion of expenses was $17.7 billion with the first quarter and relatively flat with the fourth quarter. Expenses related to increased servicing costs in our mortgage business, as well as the additional client-facing professionals that we've talked about in this presentation, were offset by reduced personnel in various other areas of the company. We referenced New BAC. In May, we initiated New BAC, which is an intensive effort on our part to create greater efficiency throughout the organization. We're currently identifying ideas and action plans, and we intend to begin implementing those as we get closer to the end of the year.

While I know you want us to identify some potential benefits to the bottom line, all I can say at this time is we're very focused on expenses, and we'll update you on the progress as we meet certain milestones. The next couple of slides, I'm going to talk briefly about credit trends, which continue to be quite strong. On slide 19, we look at consumer credit trends. You can see net charge-offs, delinquencies, and non-performers continue to improve. The total provision expense for the quarter for our consumer loan portfolios was $3.8 billion, which is comprised of $5.2 billion of charge-offs and a reserve reduction of $1.4 billion. On slide 20, we look at mortgage and home equity delinquencies.

What I would highlight here is you can see delinquencies peaked in the second quarter of 2009, and we've seen five quarters of continued reductions in those delinquencies through the second quarter of 2011. On slide 21, we look at non-performing assets within our residential mortgage and home equity books. You can see that during the second quarter of 2011, both less than 180-day as well as greater than 180-day delinquencies improved in both residential mortgage and home equity. With that being said, I'd make two additional points. The first, charge-offs do remain elevated due to refreshed valuation losses, even though the frequency of loss continues to improve. The second thing I would note is that we've started to see the greater than 180-day backlog decline as foreclosure activity has started, particularly in most nonjudicial states. On slide 22, we talk about home price impacts.

On the call on June 29th, we said we'd give you some greater color on that. What we've laid out here are those portfolios that are most subject to immediate changes in home prices. As you think about home prices in our assumptions, once again, we look at macro markets currently. Our assumptions are very much in line with those. We expect a little bit north of a 3% decline in home prices in 2011 and a 1% increase in 2012, largely during the second half. As you think about the individual portfolios that are affected by home prices, we have roughly $40 billion of portfolios that are directly affected, $13 billion of non-performing loans that are more than 180 days past due that have been written down to net realizable value.

Given their net realizable value, every 1% decline in home prices will have a correspondingly immediate effect on this portfolio. Within purchase credit impaired, which is carried at $0.66, we have $27 billion of carrying value. That portfolio, on average, is about 40% delinquent. As you think about a 1% decline in home prices, it will be immediately affected, but not to the entire magnitude of the decline in home prices. Outside of that, which is on our balance sheet, we're affected by home prices in the GSEs. If you think about how we're affected by the GSEs, to the extent home prices go down, it affects the collateral losses which they bear. We obviously share in those collateral losses to the extent that we have defects. We currently estimate that about every 1% change in home prices is $125 million relative to the GSEs.

We've not touched on or talked to how changes in home prices can affect our core portfolio. That obviously is something that happens over a period of time, and we provide reserves over and above what our modeled reserves are to try to reflect those types of risks that are out there. On 23, we look at commercial credit trends. Charge-offs declined $180 million in the second quarter of 2011 relative to the first quarter. Total provision was a benefit of $523 million and reflected a reserve reduction of $1 billion in the quarter. I would also note you can see that both non-performers and reservable criticized declined 11% during the quarter as corporate credit continued to improve. Let's now shift from credit to capital. On 24, we've laid out our Basel I Tier 1 Common, which Brian alluded to at 8.23%.

As I mentioned earlier, 23 basis points of benefit based on the improvement in risk-weighted assets under Basel I. On page 25, we show tangible common, which remains very strong at just under 6% and tangible book values at $12.65 at the end of the quarter. As we look out at Basel III, we've laid out on slide 26 the phase-in schedule. What I would say here is we continue to very actively mitigate both the numerator and the denominator effects. As we approach Basel III, we will be well above all of the minimums that are required under Basel. As we told you at the end of June, we have a goal of 6.75% to 7% of Tier 1 Common as we enter into 2013.

On slide 27, as we think about Basel mitigation, we show you the different things that we've completed since we became very focused on this at the beginning of 2010. If you look at the bottom left, we talk about the things that we've accomplished during the first half of 2011. Risk-weighted assets under Basel I are down by over $60 billion, due in part to reducing our legacy capital market risk exposures. Our MSR, as I referenced, is down $2.5 billion, and we completed asset sale gains generating $1.3 billion of Tier 1 Common gains and reducing risk-weighted assets by $5 billion during the first half of the year.

As we look out at the activities that we're focused on to meet the guidance that we've given at year-end 2012, on the numerator side, under Basel III, we see additional mitigation of $200 billion to $250 billion that will enable us to get to our targeted Basel III risk-weighted assets of $1.8 trillion. The way that we'll get there is to continue to reduce our capital-intensive assets, rebalance our portfolios, and optimize our models to be able to get to where we need to for Basel III. We'll also continue to very aggressively, as I talked about, in interest rate to manage the OCI risk associated with our interest portfolio or net interest income. The last point here, future mitigation efforts. We've obviously heard the question that's out there. You're 6.75% to 7% at the end of 2012.

Where do you go beyond that as you look to get to the fully phased-in number of 9.5% by the end of 2019? Even with all of the actions that we've talked about, we have significant additional actions we can take in 2013 and beyond. We've laid out three portfolios of assets here that we would expect to reduce aggressively. We have a loan runoff portfolio of $70 billion that we would expect at the end of 2012 that runs off by roughly 20% a year. We have a structured credit trading book that's roughly $30 billion at the end of 2012 that will run off over a five-year period as well. We have a private equity portfolio that's roughly $50 billion under Basel III that will be out there at the end of 2012 that we'd expect to run off over the several years beyond 2012.

In addition to that, you can expect to see us continue to reduce assets in the way that we've done over the course of the last six quarters. If we move now from the denominator to the numerator, two things that I want to touch on here. The first is the MSR. We referenced that the MSR is $12.5 billion at the end of the second quarter. You can expect to see us taking two types of actions with respect to the MSR going forward that will benefit the numbers beyond the 6.75% to 7% range I quoted. The first is we're taking a very close look at the types of activities we're originating in servicing. On the front end, you'll see actions where we look to scale back that which we put on our books to service.

Secondly, we're very focused on looking out and moving MSR assets through sale in those instances where it makes sense. We had roughly $70 million of gains on MSR sales during the second quarter of this year. The last thing I want to highlight on the numerator is the deferred tax asset and the multiplier effect with respect to that. As I think everyone knows, the deferred tax asset flows through the Basel calculations in several different ways, depending on whether or not it's an NOL DTA or a timing DTA. As you think about the leverage, though, and the benefits that we will have from the reductions in DTA through 2012 and significantly, but beyond, at the end of June, we'll have roughly $30 billion of a net deferred tax asset. Roughly two-thirds of that is associated with NOLs and one-third is associated with timing.

The net effect of that is that we would expect our Tier 1 Common to grow at a rate that's above that, which is improved just by the generation of net income. As we look to wrap up and close, we continue to work very diligently in getting the legacy issues as well as the legacy assets behind us while we reposition our business for future growth. If you think about the earnings this quarter, they demonstrated that our businesses outside of mortgage are producing attractive returns, even with the headwinds of low interest rates. Deposits continue to grow as we make progress on our customer-focused relationship strategy. Credit quality continues to improve. We have solid capital ratios. Our liquidity position is very strong, and we expect to grow capital going forward. We look at the opportunity each day to make progress, and that's what we are all about.

With that, let me open it up to questions.

Speaker 3

Certainly. At this time, if you wish to ask a question, it is star and one on your touch-tone phone. That's star and one to ask a question. We'll go first to Glenn Schorr with Nomura. Your line is open. Please go ahead.

Speaker 1

Hi. Thanks very much. Quickie, I think it's good to see the $200 to $250 billion risk-weighted asset reduction expectations. Just curious what you think the revenue or earnings associated with that are. I think if you look at and you saw the individual books, one of the most significant contributors to that reduction of $200 to $250 billion is actually something over the last several quarters that we've taken losses on. I think if you think about the structured credit trading book, that's not something where you see significant amounts of income on as well. I think the net of it is, while there is some income, there are also certain elements of that that have been expensive. We really don't see any material level of impact to the income statement from reducing that $200 to $250 billion.

Speaker 3

Nathan?

Speaker 4

I noticed on one of your first slides that long-term debt was down a bunch. That's in line with, I think, your previous thoughts. Just curious on what your refinancing schedule thought process is for the next, say, 6, 12 months. What do you need to fund, what don't you?

Speaker 1

Sure. I think as you look out, we obviously put out a 22 months to funding. I think it's important, even though the mortgage settlement is uncertain, that 22 months to funding reflects the payment of the $8.5 billion associated with the mortgage settlement. We don't know exactly when that happens, but we've assumed it will be within the funding window. What you haven't seen here is, in addition to taking down debt, we continue to aggressively reduce our short-term debt with the goal of driving our commercial paper balances to zero. The last comment I would make there is that the reason the balances continue to remain as high as they are is we're preserving liquidity to be able to pay off the balance of our TLGP debt at the end of June.

As you think about issuances, I would say that we'll continue to be opportunistic as it relates to getting the debt markets. At the same time, we're being very aggressive in looking to generate liquidity through selling parent company assets.

Speaker 3

We will take our next question from John McDonald with Sanford Bernstein. Your line is open. Please go ahead.

Speaker 5

Yes. Hi, Bruce. How much did the long rate hit the hedge component in Q1 in the second quarter? How much did the hedging component hurt NII and NIM? You mentioned that was a factor.

Speaker 1

It was about $300 million, John.

Speaker 5

Okay. You did use the term trough for the NIM and I guess NII too. Could you give us your outlook in the near term about where you see the NIM and NII heading?

Speaker 1

Sure. I think we would clearly expect, and let me start with the net interest income. We would clearly expect net interest income, if not at the trough, to clearly be pretty close to that. On the NIM, there are two comments that I'd make. The first is the rates that we're seeing with respect to the corporate loans that we've made have not shown any material deterioration. The yields that we're seeing on the asset side continue to hold up. What I do want to caution you to a little bit is to the extent that we continue to generate the types of liquidity on the deposit side that we are, NIM will be affected to the extent that that happens because we're not going to chase long-duration assets that have OCI risk, and we're not going to chase assets that we don't feel comfortable with the credit.

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

Speaker 5

John, we've been consistent for several quarters, and we actually, for the last couple of quarters, did better than we thought on a reported basis and the net interest income line. We still stay consistent where we've been at that it drops in the second, third quarter of this year, and then ought to come out from there.

Speaker 1

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

Speaker 5

The dollars that Bruce Thompson talked about.

Speaker 1

NIM, Bruce, your answer there to summarize on the NIM % could bounce around either way, give or take, depending on what happens on liquidity. I think that's fair. Once again, it's going to be a function of liquidity versus the assets that are available, but we're going to be very sensitive to both OCI risk and credit risk with respect to that.

Speaker 5

Okay. On Basel III, and Brian, a question about capital raise. You've consistently stated you don't need to raise capital. Could you again just kind of walk through your reasoning on that? Is that because you've gotten a sense from regulators that a Basel III fast forward is not going to happen and that you'll be allowed to meet the requirements as they're actually phased in?

Speaker 1

Right. I think that the sense we get from the world regulatory community is that it's phased in once it's phased in and put in purposefully when it will be put in this fall. Importantly, I think what I think, John, we got a lot of people focused on was from here to 2012. What I think Bruce was trying to lay out earlier is beyond 2012, there's significant mitigation both on the numerator and denominator side. A lot of the discussion about how you get from the 7% level to the 9.5% over the course of the five, six years, the pace at which you move in the first couple of years of that is high because of the amount of numerator improvement you get through the DTAs and other things. What we try to do today is to show you that.

I think we believe that we can get to the 7%, 6.5% to 6.75% or 7% we said by year-end 2012, continue to improve well beyond that. That takes into account us continuing to make the great improvements in the optimization on both the RWA side and numerator. Everything we hear, that's consistent with where we need to go. The sheer amount of capital we have, if you just step back and think about it compared to where we were 12 months ago or 24 months ago, is quite high, including both on the ratio side and raw dollars. We continue to make improvements that make us feel comfortable. We got to continue to show you that bridge each quarter as we execute.

Speaker 5

There's no pressure to raise capital from the regulatory side of things?

Speaker 1

No.

Speaker 5

Okay. Bruce, on the January 1, 2013, 7% goal, that's assuming you're hitting yourself on the numerator deductions there, right? If you didn't have the numerator deductions because those don't start until 2014, do you have a sense of what your Basel III actual number would be as reported and required on January 1, 2013?

Speaker 1

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

Speaker 5

Right. That's what you'd actually be reporting when it starts, right?

Speaker 1

That's correct.

Speaker 5

Okay.

Speaker 1

There'd be no numerator deductions. The way to think about it is if each year's numerator deductions are coming in over the pace beginning in 2014 and beyond, we'll have made numerator improvement before that. That's a fully front-loaded as if it were 1,119 number, the 6 and three quarters or 7%.

Speaker 5

Why are you showing us this lower one of 6.75 to 7? Just because the market's asking for it? The regulators haven't asked you to fast forward that. You're just doing it to show a more conservative number?

Speaker 1

I think we all basically said if we show you that number, that shows you you don't have to wait for it to come in. I think that's the goal there. Our peers have all been showing it to you. We've been showing it to you. We'll continue to show that. As we move through each period, the reported number will be much higher than that. That's what you pointed out. It's not a question of capital adequacy under any standard that we measure. Remember, the standard at the end of 2012 was 3.5%. If you think about that in our context, you have $100 billion of capital more than the minimum. It's not a question of capital adequacy. We're doing it to show you what the fully phased-in number is so you can compare us against other people.

Speaker 3

We will take our next question from Betsy Graseck with Morgan Stanley. Your line is open. Please go ahead.

Speaker 2

Hi. Thanks. Follow-up question on capital. Risk-weighted assets came down under Basel I by about $40 billion in the quarter. What was the effective Basel III RWA decline?

Speaker 1

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

Speaker 2

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

Speaker 1

Yeah. There are some fundamental steps to that, Betsy, in terms of that. Think of going from 1 to 2.5 to 3 in the optimization around model developments and ways it works in the trading book. It will not be as ratable as you may be by dividing it out, but the math works. It'll come in bigger chunks, I think, frankly, over the next couple of three quarters as we get some of these models fully implemented and optimized.

Speaker 2

Okay. It's back-end loaded, not front-end loaded?

Speaker 1

It's more front-end loaded. It'll come a little quicker in the latter part of this year and early part of next year as the models get implemented. Then it'll slow down just to the grind of what we're doing on the asset side.

Speaker 2

In the first half of 2011, obviously, you had some asset sales. You have your 6.75% to 7% goal by the end of 2012. I do not see any asset sales in this bucket that you have identified. You have future mitigation goals where you have continued asset sales. You are just suggesting that if you did asset sales between now and 2012, recognize some gains, that would be incremental to the 6.75% to 7%?

Speaker 1

That's correct.

Speaker 2

Okay. Because you obviously have the opportunity to make some asset sales in the next quarter. I mean, people have been, I know you're not going to comment on what you're planning on doing, but if you were to sell anything, you would obviously, that would be incremental. Okay.

Speaker 1

If we sell assets, it'd be incremental.

Speaker 2

Okay. Can you just give us a, I know you can't talk specifically about the mortgage foreclosure settlement, but maybe you can give us a sense as to where you think it is relative to a final conclusion. Are we likely to get a settlement here in the next quarter or so, or is it still touch and go, and who knows?

Speaker 1

What I would say there, Betsy, is I think as you all read about, this is something that's very fluid and continues to move around. What I would say is that I think everyone realizes it would be a good thing to get this wrapped up so that people can move forward. There are obviously a lot of people that are involved with this that need to get to the same place. What I would say from a financial impact perspective is we look out at and as we understand what's out there, we kind of ask you to think about one or two things. The first is that during the second quarter, as we mentioned at the end of June, we did provide some litigation reserves during the second quarter to be able to help address any cash-type penalties that would come out of that.

Beyond that, we believe that we've got reserves that we can direct towards some of the settlements, and we just won't really know the exact amount of that until this is finalized and we see if everyone can get to a common place.

Speaker 2

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

Speaker 1

I'm sorry?

Speaker 2

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

Speaker 1

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

Speaker 2

Okay. Lastly, on the settlement that you did announce with the consortium, clearly the market's seeing some dissent coming in. Did you expect them? How do you plan to deal with that? Lastly, did you get an IRS opinion on the settlement before you announced it? I.e., do you expect it will be deemed to be handled within the remix structure of the trust?

Speaker 1

Okay. If you look at the agreement, we did not get an IRS opinion before the deal was announced. The deal is obviously subject to that, and we have no reason to believe that we wouldn't get that opinion. As it relates to the reaction from holders, I think when we were on the call on the 29th, this is obviously a unique structure. The types of challenges and the like that we've seen that are out there were clearly expected by both the Gibson Bruns Group as well as ourselves. The other thing that you've probably seen out there is the work that was done and released from the trustee and all of the experts that opined and spoke to the work that they've done.

I think the only thing that we'd say is that we obviously did a lot of work and had a lot of smart people around it. The investor group did the same, as did the trustee. There's a court date that's been set out there for November, and we'll continue to see how it progresses forward.

Speaker 3

We will go next to the line of Paul Miller with FBR. Your line is open. Please go ahead.

Speaker 4

Yeah. Thank you very much. Hey, Brian. Going back to the first question on the revenue impact of shrinking the risk-weighted assets, on the February Investor Day, you talked about a normalized number, but you couldn't give us—you couldn't tell us when we're going to get there. That normalized number is roughly in that $200 to $250 range. Do you have any update to that normalized number guidance, or do you just not really feel that it's a meeting that this lower risk-weighted assets will have a meaningful impact on those numbers either?

Speaker 1

When we gave you those numbers, we had in it the mitigation that Bruce described earlier on the risk-weighted assets. As far as an update, if you think about let's just use the PP&R guidance that we gave you. If you look at what we did this quarter, at the time we told you out in a more normalized environment, we'd be $45 to $50 billion, $30 billion from the core businesses and $15 billion from card. This quarter, we did about $14 billion plus from card, which leaves the need to do obviously around $30, $31 billion from the rest. We did about $20 billion odd from the rest of the businesses, leaves us about $8 billion short. If you think about how we make that up, there's really two major components.

One is, as we said that day and Paul, you're well familiar with, as rates rise, the benefits of the positive franchise become a lot more lucrative, and the net interest margin will expand back out. That ought to be worth $3 billion sort of annually. On the cost side, in the PP&R number that's $8.7 billion this quarter is still the operating costs for all the mortgage legacy assets, which, and also the elevated costs we're working on our New BAC project. The operating costs, as you saw in one of the slides Bruce had, is about $1.7 to $1.8 billion for legacy asset servicing just this quarter. That will drop $1 billion plus a quarter easily, and the rest of the cost work will come through.

I think we still see that when you put that together, sort of $14 billion-ish, $14.5 billion on card plus the need to get to $30 billion on the rest of it to get to the level we talked about. If you look at the shortfall, there's really two major components: getting to work on the cost side and the net interest margin expansion when rates rise. You put all against that that we're obviously projecting a more normalized time, a little better economy than the growth rates we're seeing now in the GDP. We still feel comfortable with that guidance, and we still are working towards that and making all the preparations. The RWA optimization was factored into our thinking there. The reality of that RWA optimization is it's along a bunch of assets that are not core to what we do as a company.

It's something like the structured credit trading book is not a business that we continue to do in a way that was done in the 2007, 2008 timeframe, but it takes till 2013, 2014, 2015 for it to run off. As you think about that, I think we're comfortable with it. We are comfortable with the projections that we gave then. I just try to give you a little insight on the PP&R, for example, the 45% to 50%, how do we get back in that range?

Speaker 4

Thank you very much, gentlemen.

Speaker 3

We'll go next to Matthew O'Connor with Deutsche Bank. Your line is open. Please go ahead.

Speaker 1

Hi, guys.

Speaker 5

Hey, Matt.

Speaker 1

A question on expenses. You just gave us a little commentary in terms of what might be coming down in the magnitude, but obviously, the cost savings opportunity seems quite large. There's been some talk about reducing the branches by about 10%. At the end of this year, when you're done with your internal work, are you going to present to the street kind of a total cost savings program in terms of dollars and more backup detail?

Speaker 5

In the third quarter call, because we'll finish the work during third quarter, we will have the work that's really on, think of all the consumer businesses and all the centralized groups, will be done. In the third quarter, we start with the Global Wealth Management, Global Commercial Banking Business, and GBAM Business. We split it in half just because of the size of our company and the amount of work. We will give you that in the third quarter. We're deep into it now. We've been seeing all the ideas. We've had the steering committee meetings and going through it, and we're very confident, as I said earlier, that it will provide great benefits to the company.

Speaker 1

As you go through initiatives such as this to size the opportunity, what type of macro backdrop do you try and keep in mind? There are a lot of moving pieces on the capital markets, on the rate environment. Do you have kind of a base case that you try and manage for and then provide some flexibility up and down?

Speaker 5

Yeah. We obviously do. You know, if you think about how we managed money, the company across the last several quarters, the environment we've managed into is to try to figure out how to keep the, leave aside the quarterly expenses that might come from the assessments or things which are more volatile, that are harder to predict. The core operating expenses, the core headcount we've been managing is to try to make sure as we deployed assets in places we wanted and we were taking them out of other areas to fund it. We've been running about that level. I'd say that, you know, longer term, I hope your expectation, our expectation is the economy will grow faster, but the backdrop of this is an economy growing, moving towards trend over the next couple of years, not at trend tomorrow.

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

Speaker 1

Okay. I think you've addressed most of the capital questions out there. Just to clarify, the targeted capital ratio at the end of next year would not include any potential gains from the CCB. What about additional private label losses of up to $5 billion you've talked about, the state attorney general settlement? Have you factored in any of the mortgage hits as well?

Speaker 5

The question I'm going to bet you at is what you have in asset sales and things like that. I think embedded in there are estimates for ongoing costs of litigation and things of normal run rate costs of what our earnings would be over the next quarter. It's all in there. When we factor that all in, we get the 6 and three quarters or 7%. I'd be careful about trying to pluck any piece out and say this piece is in, this piece is in. We factor it all in in terms of our expectations of when litigation costs will come or when asset sales, as Betsy talked about, will take place, if any, and how they'll affect it. It's in our estimates. We'll tell you that we'll give you a quarterly report of how we're improving them and the progress we're making on it.

Speaker 1

Okay. Just to be clear, that's an all-in number, including both potential ongoing mortgage costs as well as opportunities to take gains?

Speaker 5

Earnings of the franchise and things like that.

Speaker 1

Okay.

Speaker 5

What we're trying to be clear with you is from 2012 out, I think because we had such focus on now through 2012, because of the time we spent a lot of time on this earlier this year was before the SIFI buffer, etc. As the SIFI buffer came in, what we want to make sure that you're seeing is the opportunities from 2013, 2014 and out through numerator optimization and denominator work that will help drive us to the next level. From now to 2012, it factors in all the things we just talked about.

Speaker 3

We'll take our next question from Mike Mayo with CLSA. Your line is open. Please go ahead.

Speaker 4

Just staying on the capital issue, I guess the other potential events that could cause a capital raise would relate to funding, rating agencies, or CDS spreads. What are you seeing from those areas? I mean, I guess CDS spreads are a fraction of where they were at the crisis peak, but they're up from below. If rating agencies threaten a downgrade, might you have to raise capital? I'm really getting to, and you've talked a lot about it already, Brian, just what's your level of conviction that you don't need to raise capital?

Speaker 1

The level of conviction is given the economic scenarios which are moving along, but you know at a very slow pace is that we don't see it from a funding perspective. I think if you look, Bruce mentioned earlier, and I'll let him touch on it, that we've driven down short-term funds to a very small amount. Our plan is to take it really down X to zero. We've built up tremendous liquidity. The ratings of the banks and the broker-dealer are separate. We continue to operate the business as if between all the things going on around the world, if you could see disruptions in the markets, and we continue to watch that carefully. Bruce, you want to? Yeah. I would just add, Mike, I mean, a couple of things. We obviously continue to work with the rating agencies very closely.

I think if you look out at S&P, you can see that we had them take a look at the broker-dealer, both Pierce Fenner and Smith, as well as MLI, and they actually notched the broker-dealer up. We felt good about that rating. The other thing I'd say as it relates to access to capital, we obviously put the news of the settlement and released the guidance at the end of June, and we went out and raised $2.5 billion in the fixed income markets at the beginning of July at attractive rates. We're very sensitive to the rating agencies. We continue to work with them closely, and we continue to be opportunistic as it relates to accessing the markets.

Speaker 4

What about your exposure to the countries in Europe, the PIIGS countries? What's your net exposure? What's your gross exposure?

Speaker 1

Yeah. If you look out at in the supplement, we put some information out there, and you can see that the number that we have out there is $16.7 billion. As you think about that $16.7 billion, realize it's been reduced by roughly $1.1 billion due to hedges. Outside of that $16.7 that was reduced by $1.1 billion of hedges, we have additional protection that's not factored into that number, roughly $1.3 billion, or excuse me, $1.7 billion of CDA hedges, and an additional $3 billion of single-name hedges that we've not reduced those numbers by. We were active and early in getting after this exposure starting in the first quarter of 2010. We've laid out the exposure with the caveats that I've just mentioned.

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

Speaker 4

I mean, how much could you lose if things go worse in Europe, which could in turn potentially lead to a capital raise? I'm asking you.

Speaker 1

Yeah. I think what you have to think through is you think through the exposure. There are three different kinds of buckets of exposure that we have within the region. The first is the corporate loan book. What I would say is that if you look at the corporate loan book, it is largely to large multinational global leading companies, and to the extent that the amounts are above house guidelines, in many cases, like I said, we buy protection. The corporate loan book, we feel very good about. If you look at the liquid traded book, we only have one country where we have any meaningful level of sovereign exposure, and we have protection that largely offsets that. We have a securities book that's marked to market that we mark every day.

As we look at any meaningful level of losses from where we sit today, we just don't see it. Clearly, we don't see it whatever leads to there being any kind of capital event.

Speaker 4

Last follow-up for Brian again. Brian, I think I heard you just say we don't see it in this economic scenario. If you can provide any more confidence, because at the start of the year, you were considering the possibility of a dividend increase by the end of the year, and now several investors ask about the idea of a potential capital raise. We've kind of gone full circle here. Just your level of conviction, can you provide any more comfort? You have more confidential information than any of us have on the call.

Speaker 1

We have given you the improvements we have made in the capital, and even with a sizable $20 billion in charges this quarter, it had impacted 20 basis points. Our economic scenario is posted out there. The scenario that we use to plan against is the one you see out in the domain, which is modest growth. We do not see anything in that that challenges. We have reserves. The difference between now and a couple of years ago when people worried about deterioration in the economy, when unemployment obviously rose, is think about the reserve levels we have. Think about the improvements in the portfolios that we have made across that.

When there is a lot of discussion about future home risk, the charge-off in our mortgage portfolios combined between home equity and first residential, $2.5 billion a quarter, still an unacceptable level, but they are down from the peak, even while housing prices actually have deteriorated from the time they peaked, because the quality portfolios and the qualities of borrowers in the portfolios are different than it was. That gives us good step between reserves, the capital we built, and the quality portfolios to hold us against economic times, which are going to bounce around, and that is what we have done. You see this quarter with a charge of $20 billion. We took a 20 basis point hit to the ratios and plowed through it.

Speaker 3

We will go next to the line of Moshe Orenbuch with Credit Suisse. Your line is open. Please go ahead.

Speaker 1

Great. Thanks. Maybe I don't know if you could flesh out the answer a little more as to how you are confident that this quarter or the third quarter is the trough in net interest income and what things would kind of lead you to think that that number turns around and starts to grow? A couple of things that I'd say. If you think about the quarter and what we absorbed, it was obviously a fairly significant negative effect on hedge income, and we clearly would not expect that to happen again, given how flat the yield curve is as we look out there. The second thing that I would say is that we had some runoffs in the corporate book during the second quarter that we wouldn't expect to see again.

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

Speaker 5

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

Speaker 1

Yeah. I don't want to speculate if it comes back or it doesn't, but I think you know during the first quarter, we had some benefits from hedging. The number bounces around, but I just want to reiterate that the reason it's there is because we're very sensitive to OCI risk and making sure that as we go out towards Basel III, we don't have any negative effects from OCI.

Speaker 5

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

Speaker 3

Your debt cost and your deposit cost. The issue now is that the core loan growth is still modest and even backing out thrown off portfolios just because the economic activity is not that strong. That helps in that we're seeing that activity be a little stronger than it was several quarters ago, but it's bumping along. The deposits, we continue to drive down deposit costs and all the cost of debt by paying off the term debt, as someone mentioned earlier. We'll be grinding at this. The assumption is as we drop out here, it'll continue for a while. It's not going to leap right back up. We want to make sure that you guys see it, but it's in line with what we've been predicting for six quarters that this would be the place where we sort of see a bottom out.

Long term, we'll have to grind from here on both the liability pricing side, the debt cost side, and also grind out loan growth slowly but surely.

Speaker 4

A separate but somewhat related issue is you mentioned $475 million a quarter of impact from the Durbin Amendment. Obviously, that's less than you had thought before potentially, but can you talk a little bit about your strategies to mitigate that from both a product and pricing standpoint?

Speaker 3

Sure. I think usually Durbin gets caught with all the other changes that have gone on as opposed to any one of them going back, you know, what seems like a long time ago to CARD Act and then Reg E and Durbin and all the pieces around the consumer business. How are we mitigating the activity? If you look at what we've been doing as a new account structure has now been rolled out in three states for new accounts and then now for all accounts and they're converting the accounts. That is all going very well. We'd expect that conversion to take place during 2012. What that does is institute some monthly fees and other ways customers can pay us away from overdrafts or, frankly, the value of the interchange on Durbin.

The pricing structure now is set, will be set, is set, and will be set to generate the activity. The good news is that, reasonably good news is that where we ended up in Durbin is a place where we can continue to drive debit usage. You can see from the statistics on the card page, you can see the payments made through plastic in our franchise continue to grow 5%, 6% a year. You take out the gas prices, it's 4% to 5% a year. Gas prices contribute 1.5% to 2% of that. We will continue to drive the usage of that, which will continue to drive the revenue up from a level after the Durbin takes it away.

It's the account structure, it's the pricing within that monthly accounts, it's the charges that you've seen some of us put in across the last several months to make up for some of the fee loss. The real benefits of that come really as we convert the entire account base to the new structure in 2012 and into 2013. The benefits come in 2013 after you're done with the conversions. Think about this, this is all 30 million checking holders going through a conversion in our franchise. It's a large conversion and will take place after we finish migrating the deposit platforms together. It's going well. It's having an intended outcome both from a dollars and cents basis, but also from a customer behavior basis. We'll continue to drive that.

That all being said, the other way that we'll get paid is to have to maintain disciplined deposit pricing as short-term rates rise as the economy improves. That will be critical for us to do. You've seen our ability to continue to take down deposit pricings and grow deposits. The competitor for customers' deposit money won't be competitive until short-term rates rise quite a bit. If we maintain that deposit price, it's another way to make up for that cost.

Speaker 1

We'll go next to Erika Najarian with ISI Group. The line is open. Please go ahead.

Speaker 4

Yes, good morning. Most of my questions were answered, but I have one specific question for Bruce. It's a bit detailed. If you look on page 10 of the supplement, which is the liability side of the average balance sheet, I'm focused in on your cost of federal funds purchased, securities loaned or sold under agreements of repurchase. That cost this quarter was 159 basis points, up from 129 basis points last quarter and 79 basis points a year ago. I'm comparing that to other banks. I just compared that to JPMorgan, for example. A year ago, you actually borrowed on that line for 5 basis points less than JPMorgan did at 79 basis points versus their 84 basis points. A quarter ago, you borrowed for 20 basis points more at 129 versus their 109. Now you're borrowing for 49 basis points more.

Is there something going on in terms of your ability to borrow in the wholesale markets and that cost rising more rapidly than peers? Why, in your opinion, has this line item, which is pretty substantial at $338 billion, grown from a borrowing cost perspective so much more rapidly than peers? Yeah.

Speaker 5

I think we can get back to you with the exact numbers. I believe that there's a couple of things going on within the numbers. The first is that some of the hedges are directed towards that. As we talked about some of the hedge income and the ineffectiveness, you'll see some of that there. The second thing is we looked out at and we've talked about we're extending and within some of our repo books, extending the maturities on those repo books as we go forward. The third thing is, and we can get you the exact number, that during the second quarter within the markets business, as we borrow in Europe for dividend stocks, given that the dividends in Europe are paid in the second quarter, the borrowing cost typically lifts up a little bit in the second quarter for that.

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

Speaker 4

As I just sort of look at and do net interest margin math, this increase looks like something that had a, you know, it was part of the negative impact. Is this a number you expect to stabilize or come down in future quarters, or will this trend of rising continue to happen?

Speaker 5

I think if you think about the three things that I've given you, we are going to continue to extend repo. You know that piece of it you'd expect. Clearly, with respect to the European stocks, that's a seasonal thing in the second quarter, as well as the hedge effectiveness. We would hope that those wouldn't continue. I think if you can answer your question, one probably does, two don't.

Speaker 4

Okay. Thank you very much.

Speaker 1

We will go next to Nancy Bush with NAB Research. Your line is open. Please go ahead.

Speaker 2

Good morning, guys. Two questions for you. First, on the commercial bank, I think you said that CRE declined by about $2.2 billion, and then you had some loan growth in middle market C&I. Has the middle market C&I loan growth continued as we've gone into the third quarter here? Was the CRE runoff planned or unplanned?

Speaker 5

Start with the commercial real estate. I think given both the capital markets as well as the refinancing markets, I would say part of the real estate was planned. Part of it, quite frankly, were assets that were either criticized or non-performers coming off the books. As we look at that commercial real estate number, we obviously don't like to see loans going down at the same time that there was some stuff that you would have wanted to come off. We feel very good about where the commercial real estate portfolio is now, and quite frankly, are trying to figure out places to do more commercial real estate where it makes sense. With respect to the CNI portfolio within the middle market, that's about $37 billion of the overall commercial banking portfolio.

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

Speaker 2

I guess the root of my question is the companies that we've seen report thus far are reporting the glimmers of beginning commercial loan growth. I just wanted to see if that was your experience as well, or if you can give us an overall view of whether we're at a growth inflection point yet.

Speaker 3

I'd say, Nancy, as you came through from the end of last year and the first part of this year, you were seeing, you know, David Darnell would say the core middle market books, the customers were optimistic and they were starting to grow a little bit. I think that sort of flattened out a little bit. There is still some growth, as we pointed out here. If you look at the utilization rates and stuff, they've now stabilized. They were at a low, probably 31% to 32%. They're sort of in a 34.5% to 35% range. They would be in a 43% range in normal lifetimes. Now, people have access to cash. I'd say that as we've gone through the year this year, I think that the people are less aggressive. Our clients are less aggressive in the core broad middle market spectrum than they were earlier this year.

The loan balances are holding in and growing slightly.

Speaker 2

Yeah. Brian, I just have one final question for you. We've been getting several articles lately about what seems to be a permanent change in the attitude toward homeownership in the U.S. What do you get your opinion on that? Also, just when all is said and done here in whatever year that may happen, how do you see the mortgage business as a contributor to the bottom line at Bank of America?

Speaker 3

Let me go to the second one. Nancy, I think it kind of answers the first one in some respects. Leave aside the exact dollars and cents, but the way we see the mortgage business in our company going forward is we have 50 million consumer households, 30 million have their core banking checking accounts with us, etc. Our job is to provide mortgage products to not only our general customers and our retail and preferred segments, but also our global wealth management customers in a very strong, very focused, and in a very fair way. That's what we're going to drive to, and that's what you expect to see in our mortgage business going forward. I think the idea of being in a standalone context where we had the wholesale business, for example, the broker-driven business, we've gotten out of the reverse mortgage we've gotten out of.

We continue to shape our view of what the correspondent business looks like. The business that we'll be in, it will be a strong direct retail, direct to the consumer mortgage business. That's where we're moving, Barbara and the team are moving the business to. That actually fits into the capital demands on MSR and other things that you could well figure out. That's how we're going to run the business for the benefit of our customers in the same way we're running all our businesses, making sure every ounce of our capital is used to support that core customer base. Frankly, to do the mortgage product very well for that customer base. When you back into the broader context, I think the homeownership discussion is a policy discussion.

I lead the policymakers, but as you look at our customers and listen to them and watch what they've gone through, I think that the people in the world of my children's age are going to think differently about homeownership in terms of the value of it and how it factors into their thinking because of what they've seen going on around them. I think that that's just the reality where we're in. It doesn't mean it's good or bad. It's just the reality. I think with the population growth dynamics and things like that in the United States, I think that that's going to be the reality of a more sober society on this. I think our job is to provide products in that and help people become homeowners because it's ultimately something they may aspire to, but do it the right way.

Speaker 1

Due to the time, we will take our final question from Chris Kotowicki with Oppenheimer. Your line is open. Please go ahead.

Speaker 0

Yeah. When you look at the trading results on page 26 of the supplement, it looks like your total trading profits this quarter were almost exactly in line with the trailing four-quarter average. I'm curious, what's your sense? Is this the new normal or do you still view this as a depressed trading environment? What's the outlook for this business? If the revenues remain at this level that they've been in, is the expense side of that business properly structured then?

Speaker 3

I'd say that I'd still say we're probably below normal right now in the minds of Tom and the team running it. I think that you won't see what you saw, say, in the first quarter of last year and things like that. That was way above normal. We've talked about sort of $4.5 billion range in total revenue, which includes this plus the margin and other things. I think we're still below the normal. The question is, unless you see the improvement back to normal, we will have to continue to work on the expense. In fact, that's what Tom's been doing. If you look at our business, the headcount that he's had has been relatively flat.

What we've done is deployed in the international space, for example, obviously Asia being a key component where, you know, from a research side, we've got strong Asia-wide research ratings, Japan number one rating, things like that. We deployed resources there to help our teams, salespeople to cover the clients. At the same time, the total deployed resources headcount has been flattish and we've been taking it out of places where the opportunities aren't as big. You ought to expect it to continue to manage your business that way. In the aggregate, this is a little below normal. If it doesn't get above normal, then the cost structure will come down. The comp structure is one of the quick ways to adjust it. Ultimately, we've got to keep factoring that in.

Speaker 1

All right. Thank you. At this time, I'd like to turn it back over to Mr. Brian Moynihan for closing comments.

Speaker 3

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

Speaker 1

This concludes today's conference call. You may disconnect at this time. Thank you and have a wonderful day.