And welcome to today's program. At this time, all participants are in listen only mode. You may register to ask a question by pressing the Call. Please note today's call is being recorded. It's now my pleasure to turn the program 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. And please review Slides 23 with information around forward looking statements. And 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. And as you all saw this morning, we reported net income of $2,500,000,000 for the Q2 or $0.19 a share on a diluted basis. You'll notice at the bottom of the page, we do not have any selected items that we've brought forward during this quarter.
And given that the list is relatively short, we'll 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 $2,500,000,000 to $134,000,000,000 and ended the quarter at 11.24 percent under Basel I. We estimate the 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 U.
S. 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 out at the end of the quarter, we're quite pleased with the progress we've made so far. While we increased capital, we also continue to bring down long term debt, reducing it by $53,000,000,000 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 $2,100,000,000 from the Q1, of which approximately $900,000,000 was due to the absence of annual retirement eligible stock based compensation awards that impacted the Q1. 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 address those during the Q2. 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 Q1 of 2,007. 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 Q1 of 2012. However, non interest income did reflect improved results in some of our consumer businesses, which we'll get into as we go through the presentation. If you turn to Slide 6, as look at regulatory capital under Basel I, you can see that $2,500,000,000 of earnings along with a $27,000,000,000 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, 1 year ago, our Basel 1 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've 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 in the final U. S. Market risk rules. If we reported Basel III as of June 30, on a fully phased in basis, we estimate that Tier 1 common equity ratio would be 8.1%.
We estimate that our Tier 1 common equity would be approximately $127,000,000,000 while our risk weighted assets would be $1,560,000,000,000 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 in 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 $53,000,000,000 while our overall global excess liquidity sources only declined by $28,000,000,000 to $378,000,000,000
at the
end of the quarter. At the parent company, long term debt during the quarter came down by approximately $40,000,000,000 That $40,000,000,000 reduction was approximately $34,000,000,000 of parent company maturities, of which we call out $24,000,000,000 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 $5,500,000,000 through liability management actions on our TRUPS and subordinated debts that are outstanding. The benefit in the quarter from that was a little over $500,000,000 As we look forward, those liability management actions will reduce net income or excuse me, will result in net interest income savings of approximately 100,000,000 2012 $180,000,000 in 2013.
As we look at parent company liquidity, it remained very strong at $111,000,000,000 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 maturity as well as active liability management consistent with our overall goals of continuing to optimize net interest income. In fact, we've already announced calls of another $5,200,000,000 in both TRUPS and sub debt, which we expect to complete during the Q3 of this year.
In addition to these calls, maturities of $23,000,000,000 of which approximately $15,000,000,000 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 $2,160,000,000,000 while total risk weighted assets were down over 2% to about 1 point $19,000,000,000,000 Our tangible common equity ratio improved 25 basis points in the quarter from 6.58 percent to 6.83 percent. Intangible 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 $9,800,000,000 during the quarter, down $1,300,000,000 from the Q1.
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 Q1 of this year and that led to lower premium amortization and favorable hedge ineffectiveness that benefited NII by about $400,000,000 in the Q1 of this year. However, lower rates in the second quarter had a negative impact of approximately $500,000,000 which resulted in a combined negative impact of approximately $900,000,000 to NII from the Q1 to the Q2. If we back out those market related swings, net interest income decreased by approximately $400,000,000 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 rate levels at the end of June, we estimate that quarterly net interest income will start at a base of approximately $10,250,000,000 before the impact from liability management actions.
2nd quarter parent debt maturities and liability actions plus 3rd quarter announced redemptions and calls will benefit quarterly interest income by approximately $300,000,000 of which $60,000,000 was captured in the Q2 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 $10,000,000,000 from the 1st quarter or about 1%. If you look at the composition of the loan the loan balances, you can see ending commercial loans actually grew by about $4,100,000,000 or 1.3% from the Q1 of 20 12.
That growth was attributed to increases in our commercial and industrial loans and was partially offset by about a $1,400,000,000 reduction in commercial real estate. If you go to the bottom of Slide 11, you can see ending consumer loans declined approximately $14,000,000,000 from the Q1 of 2012. I'd like to spend a minute on that. If you go and look at the bar chart, we've talked throughout the last couple of quarters about runoff portfolios that we're looking to run off that do not produce any meaningful level of pre tax income. You can see we had about $4,400,000,000 of that during the quarter.
In addition, residential mortgages were down about $4,400,000,000 Keep in mind as we look at those mortgage portfolios, we can either invest in mortgages or securities. And during the quarter, came up in securities a little bit down in loans. Over and above that, about $3,400,000,000 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 $2,000,000,000 reduction during the quarter or well below 1%. On Slide 12, we highlight the results of the Consumer and Business Banking segment.
Earnings were $1,200,000,000 a decrease from the Q1 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 Q1 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 $10,000,000,000 compared to the Q1 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 percent from the Q1 of 2012. In addition, credit quality continued to improve as the U. S. Credit card loss rate is the lowest since the Q4 of 2007, while the 30 plus day delinquency rate is at historic lows. As we look at activity levels within this segment, we've also to increase our mobile banking customer base to more than 10,000,000 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 $768,000,000 which was an improvement of $377,000,000 versus the Q1 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 $241,000,000 for the quarter. 1st mortgage retail originations of $18,000,000,000 were up 18% over the Q1 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 non existent versus volumes of approximately $22,000,000,000 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 $395,000,000 in costs for representations and warranties provision and $109,000,000 of litigation expenses and expected assessments waivers and other costs related delays. During the quarter, our MSR asset decreased by approximately $1,900,000,000 due to lower mortgage rates and ended the quarter at $5,700,000,000 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 Q1 and 78 basis points a year ago. We move forward to Slide 15.
As we've done before, we show some comparisons of certain metrics in our legacy assets and servicing basis on a linked quarter basis and compared to Q2 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 1700 people in the quarter including contractors versus 3,000 people in this area in the Q1 alone. The number of 1st 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 Q1, 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. And as we've 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 6 quarters. However, as I'm 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 $4,900,000,000 to $8,600,000,000 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 amount as opposed to actual losses that are projected on the loan. Our reserves for rep and warrants ended the quarter at $15,900,000,000 up slightly from the prior quarter. And as you look out, our non GSE range of possible loss over and above existing levels is up to $5,000,000,000 In Global Wealth and Management, Investment Management on Slide 17, earnings for the quarter of $543,000,000,000 or pre tax margin of 20% were in line with the results we saw in the Q1 of this year.
Solid long term AUM flows as well as loan growth of $2,500,000,000 in the quarter helped offset a 2% decline in client balances driven by lower market balances. Loans within this segment are at record levels and our advisor levels remained essentially flat, up just slightly from the Q1 of this year. If we move to Global Banking on Slide 18, net income decreased to $1,400,000,000 from the Q1 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've spoken about before as well as certain targeted loan sales. Average deposits increased to $239,000,000,000 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 As you can see on slide 19, investment banking fees for the quarter firm wide excluding self led deals were $1,100,000,000 down slightly from the 1st quarter as a pickup in M and 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 U. S. In net investment banking fees during the first half of twenty And as you look at the mix in the geography of the revenues, you can see that during the quarter, more than 80% of the fees were driven by activity in the U. S.
And Canada. If we switch to Global Markets on Slide 20, net income of $462,000,000 decreased $336,000,000 from the Q1, reflecting lower sales and trading activity, which was partially offset by lower expenses. Total revenue ex DVA was down $2,100,000,000 from the Q1 and down $769,000,000 from the Q2 a year ago, due primarily to the European crisis as our clients became more risk averse. Expenses were down both from the Q1 driven by lower personnel related expense as well as from a year ago. Average VAR was $63,000,000 in the quarter, down from $84,000,000 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 $156,000,000 in the quarter versus losses of $1,400,000,000 in the Q1 of this year and gains of $123,000,000 in the year ago period. Sales and trading revenue excluding DVA losses decreased $1,900,000,000 from the first quarter due to the deteriorating market sentiment that I just mentioned as well as a slowing U. S. Economy. FIC revenue ex DVA was down $2,600,000,000 during the quarter, down $1,600,000,000 from the Q1 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, FIC revenues were basically flat in the year ago period.
In equities, ex DVA results decreased 26% from the Q1 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 U. S. 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 Q1 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 absence of retirement eligible stock based compensation awards that we have in the Q1 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've had significant declines in non interest expense from the Q2 of 2011, well as on a linked quarter basis from the Q1 of 2012. What we've done in the gray bars is back out goodwill impairment as well as the annual retirement eligible comp costs that we have during the Q1. And if you back those out, you can see once again expenses declining from $20,300,000,000 in the second quarter last year to $18,200,000,000 at the end or during the first quarter of this year, down to $17,000,000,000 during the current quarter.
I would note during the current quarter, litigation expense embedded in that $17,000,000,000 is approximately $1,000,000,000 As we look at the reasons for the decline on a linked quarter basis in non interest expense, 3 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 pre tax 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 U. K. Tax rate reduction of 2%, which should result in a tax charge in the 3rd quarter of approximately $800,000,000 And recall, due to our current DTA disallowance, that charge will not impact our Basel I or phased in Basel III Tier 1 ratios. If we turn to Slide 24, as we've 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 $3,000,000,000 on an annualized basis, which would be fully phased in by mid-twenty 15. We did start to see some of these Phase 2 savings in the 2nd quarter as these initiatives aren't as interdependent as the consumer businesses in Phase 1 are. With respect to Phase 1, we're still on track to exceed the 20% of the $5,000,000,000 in annual cost savings by the end of 2012. In total, in both Phase 1 and Phase 2, we're targeting to produce annualized cost savings of approximately $8,000,000,000 by mid-twenty 15. 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 $645,000,000 to $1,800,000,000 Net charge offs decreased $430,000,000 or 11 percent to 3 point quarter driven by lower consumer charge offs while commercial charge offs were relatively flat. The reserve production was $1,850,000,000 versus $1,600,000,000 in the Q1 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 Q2 of this year, but below that which we saw during the Q1. 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'll 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 business 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 and 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've been on for the last couple of years, rebuilding the balance sheet, making the strategic decisions, putting our operating principles in place and living up to them and driving our customer focused strategy. Everything that we've 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 a sound financial foundation we have built, the strong balance sheet that we built and we'll 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 4 things we are focused upon. We told you we'd focus on improving our capital levels. We told you we'd focus on managing our risk. We told you we'd focus on reducing our cost base and we told you we'd 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 the years' time, we've gone from being behind our peers to being ahead of our peers. If you think about the risk side, asset quality trends continue to positive across the board. Charge offs continue to fall and have room to go.
Provision expense is at
the lowest level we've had
in this company in 5 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're starting to see the benefits of new VAC program and results of that Phase 2 work will begin to roll through as well. This is evident in the reduction in headcount and expenses that you've seen in the numbers. But let's remember this, as we reduce our costs, we continue to invest in the opportunities in our franchise.
We invest in technology over $2,000,000,000 or $3,000,000,000 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. Additionally, we continue to invest in our technology platforms across the world, including our cash management platform that serves 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 and our FSAs and our consumer business. And we continue to add mortgage loan officers as you can see in our increased production. So we've had strong steady progress in capital risk and costs, providing solid foundation as we focus our energy on our core business growth in 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 were transformed and repositioned our core consumer business. While taking the core expenses down, we continue to drive growth. The example that Bruce referenced earlier is our mobile banking platform. We hit 10,300,000 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 are up, new credit card counts are up. For example, we've issued $1,400,000 BankAmericard cash rewards cards since we introduced them less than a year ago. That's 26,000 new cards a week. Our mortgage productions increased almost 20% quarter over quarter. In a broader context, we've extended $107,000,000,000 in credit to help them participate in the economy this quarter.
In the important small business area, year to date, we've initiated $4,000,000,000 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 a good long term asset under management flows or in the banking product side, we can see loans achieve record levels. We have market coverage and penetration second to none in the commercial areas, whether it's large corporations or medium and small businesses. We brought the Wall Street capabilities to those clients across our franchise. In the institutional investor client base, you've 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 in franchise and we all know that we continue to focus on execution. So that's 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, careful management of risk and reducing costs. And you'll 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.
Thank
And with that, we can take our first question from the site of John McDonald with Sanford Bernstein. Your line is open.
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. Percent.
Is that the adjusted NII from this quarter? Is that why you're referencing the 10.2
percent? That's correct, John.
And then from there, are you saying we should add the incremental $240,000,000 benefit from debt reductions?
That's correct.
And then what about kind of the core leakage like this quarter you had that $400,000,000 of core leakage from loan runoff. You didn't mention that, but do you expect to still have that battling against the debt benefit?
I mean, I think as we think about the 10.25 percent, that's the jumping off point. We clearly and I think you've 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've talked about before that the runoff portfolio is not one that's particularly profitable. So as we look forward and as we thought about that jumping off point, that's how we think about the $10,250,000,000
Okay. Just trying to think of when we once we jump off, is there something about the $400,000,000 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 mean, I think the other thing is that and as I mentioned in my comments, when we talked about rates going up or down, we while we're not predictors of interest rates per se, we clearly would not expect to see the decline in interest rates from the that we saw from the end of the Q1 to the end of the second quarter going forward.
Okay. And then just finally, how would the hedge and the premium amortization work work given where the tenure is today versus where it ended the Q2? 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 tenure was at the end of the quarter, I believe it was at about 164. So we're clearly a little bit lower today than we were at the end of the quarter. I would expect though that if rates were to continue to go down, I'm not sure that you would necessarily see that the same impact on the downside for premium amortization because at some point it is going to stop.
Okay. So it would be down, but not by the same magnitude for on the hedge effectiveness and the premium amortization?
That would be the expectation.
Okay. And then on the expenses, it sounds like you think the $17,000,000,000 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. And then on the Phase 2 done by 2015, am I correct that the Phase 2 stage were 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 1st 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-twenty 15, obviously the Phase 1 takes longer than mid-twenty 15 to finish up?
No, because keep in mind, the Phase 1, we've talked about a 3 year period and having all of the Phase 1s done by the end of 2014, because Phase 1 was started much earlier.
Okay. Got it. Okay. So it's not from today, it's from when it started. Okay.
That's correct.
And then last thing, just the operating expenses in LAS were up to 2.7 from 2.4. Do you believe that those have peaked now? And do you see those starting to decline in the second half of this year or more in 2013?
John, I think they're up a little bit because remember we're now in full multiple things going on Department of Justice, the look back in full swing and everything. So the team thinks we're have largely peaked, but I wouldn't I'd 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're still finishing up for the 3rd Q4. But once we get through the Department of Justice, look back, once we get settlement work, once we get through the look back, there are a lot of expenses will come out relatively quickly and then the core underlying loan numbers go down. But I think we peaked, but I don't I think it'll take us as we enter early next year when you start to see meaningful quarter by quarter improvement.
Okay. So the decline from 2017 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, just watch the quarter by quarter toward trend and you can see that from a broad franchise apps and LAS were down 20,000 people year over year and 3,000 this quarter, including overcoming an increase in LAS. And so you just see it 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 2014 more in 2013, excuse
it. Our next question is from the site of Paul Miller with FBR. Your line is open.
Hey, thank you very much. Hey, Brian, can you help us on Slide 16 a follow-up question on the you said the 8.6 private label that that's correct that the on the monoline,
as you look at the that's correct that the on the monoline as you look at the dollar of claims, it was roughly 20%. I think, Paul, though that the other thing to keep in mind is that when you look at the monoline, some of the exposure is included within the claims and with respect to certain other monoline, it's within the litigation number. But you are correct that with respect to the Syncora settlement, it was 20% of the outstanding claims.
Of the monoline. Of the monoline.
Yes. Just to make sure, you said private and Bruce said monoline, but the monoline is not.
Yes. I had it wrong. And then the other question is like the private I mean the GSE put reps and warrant put backs 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 dialogue 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?
I think Paul, I would just reiterate your point and I think if you look back on Slide 33 and look at the new claim trends that are coming in from the GSEs, 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 1 of 2 ways, either they would look to bring an action or alternatively there would be a settlement, but those would be the 2 ways that it
would get resolved. Okay. Thank you very much. Go ahead.
Well, just look if you look
on those pages, you can see that there are approved repurchases going through in quarters. So there's a pattern which things we are still paying Fannie today on ones we believe we owe
But you're paying on those that are less than 2 years of payments, right? The disagreements coming about on those loans that has made over 25 payments, right?
Yes, we're paying on the ones that are consistent with our past belief that in how we've that we own the money. We decide the payment exactly, but it's really that we own the money or not.
Okay. Thank you very much, gentlemen.
Thank you.
Let me take our next question from the site of Glenn Schorr with Nomura. Your line is open.
Thank you. Quick one, the Basel III 8.1 percent that you showed correct me if I'm wrong it includes 2.5%, but not the NPR. I'm just curious on why you took that route and what your estimate might be using the standardized approach?
Sure. That's correct, Glenn. And I think as we look at the NPR, obviously, there's a comment period. There's a lot of clarification and qualification that needs to get baked in. We've done the work and based on our understanding, realizing it's a draft and there's 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's 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. And 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'm not sure if that's a single private label holder or what caused that spike?
Yes, I think it's a series of holders. And 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 Q2 of last year, we obviously established both reserves in range of possible loss with the anticipation we would see increased claim activity. And I think as you look at these private label claims, I think it's important to think of a couple of 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're roughly $0.60 on the dollar of what the notional amounts are.
So if you take that $8,000,000,000 number that's come in and think about it in the context of $0.60 it gets you down to a number of roughly $5,000,000,000 And then you can take the settlement data that we've had out there, if you wanted to look at a Gibson Bruns type settlement number off of collateral losses. And if you apply that to that number, you get something that's well below $1,000,000,000 And 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 quick e. There was nothing in the queue, the past queue on LIBOR. I know it's a sticky situation, but is there any I think you only set LIBOR in U.
S. Dollars, if that's 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're aware that we're a panel bank. Not unlike others we've received that are cooperating with the inquiries in some of the other LIBOR related litigation. And just given the fact that these are active matters, there's really not a lot more than we can say than that.
Okay. Thanks for answering the questions.
We'll go next to the site of Matt We go next to the site
of Matt O'Connor with Deutsche Bank. Your line
is open. Good morning. If I could just follow-up a little bit on the net interest income commentary. I guess first, when you talk about the jump in off point, the 10.25, I guess, I'm trying to think why it's not the 10,500,000,000 roughly, including some of the liability management. And then from there, we got to make adjustments up or down for loans, securities and interest rate environment?
I think you're saying the same thing slightly differently that we did, which is that the 10.25 is generally where we were at in the Q2 adjusted for that activity. And you're right, going forward, there should be an incremental $240,000,000 a quarter that would get added to that and then plus or minus whatever you see in balance levels in rate movement. So we said it slightly differently, but you're right, you can look at it the way that you just articulated it as well.
Okay. And then taking out the accounting nuances of premium amortization hits, the market related hedge and effectiveness, 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 mean, I would assume there's just kind of 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're benefiting from credit improvement within the card business. And 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 there downward pressure going forward, I think it's going to be more a function of both loan balances as well as where rates go from here more than anything else.
Okay. And 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. And 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're adding is 1.5% to 1.7% right now. So I mean hypothetically, if rates stay here, it's just kind of a constant bleed down to that, right?
I think what I'd 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're pretty close ex the FAS 91 and the premium amort being pretty close to where we thought NII would land. And what I would say at this point is that, I think all other things being equal in this environment, obviously, there's a little bit of pressure downward on that. I think the other thing though and clearly what we're looking to do and work real hard to mitigate and hopefully improve where we are from a net interest perspective is the debt footprint. And I think as you look out at the parent, we've got roughly $15,000,000,000 of maturities during the balance of the year. And we'll look to clearly offset to the extent that that pressure exists, work real hard to continue to shrink the debt footprint because we're paying roughly $2,500,000,000 a quarter on that long term debt footprint.
And obviously, one of the things that's in our control is to continue to shrink that.
Okay. And then just separate topic briefly here. Obviously there's a lot of cost savings coming from new BAC, probably another $7,000,000,000 or so versus what's in the run rate now. The legacy mortgage costs could come You said in a revestimated maybe $8,000,000,000 annually. So I mean 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 talked about in the commercial? Anything in those areas that we should be factoring in?
I think so think about the markets business. So the revenues in compensation will follow that. So be careful to always adjust that to what you think it is. But outside of that, we are for example, we invest about 3,000,000,000 dollars in technology development this year, about $750,000,000 of that will go to NubiaC implementation, which is going through the run rate. And as that comes off, we'll turn that $750,000,000 level back to the core businesses.
So embedded in that is 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 he does for litigation quarter to quarter. That's because that business is putting on loan officers and putting on FSAs and putting on preferred bankers in a preferred growth area of the business while in the mass market, the retail business we're bringing it down. So I think you're seeing those investments go on in the business. And so we're taking advantage of those opportunities.
Our marketing dollars, we've always we're careful with them, but we continue to watch them and trim them. But we're getting rid of a lot of expense that is just coming from the overall reposition the company including real estate expenses and things like that. So there's enough room to invest and embedded in the way we did new BAC is to at least a couple of years of growth capacity that we've left in there to assuming an economy which is bumping around at 2%, 2.5% type of growth. So I think we're 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'll always take opportunities to add people where opportunity is. But even on the international, we brought that back a little bit because the fees available and the trading profits available are down. So I'm not overly concerned about the reinvestment rate within the businesses. There's 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.
And we can go next to the site of Betsy Graseck with Morgan Stanley. Your line is open.
Hi. 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'm wondering, is that on an advanced basis or standardized basis?
That would be on a assuming all model approval. So it's going to be on an advanced basis, which I think from everything that we've seen Betsy, I think we clearly believe that that will be our governor.
Okay. And so and then the standardized rate with the Collins amendment, we have to disclose whichever is lower with the standardized have an impact there or no?
I think from everything we're seeing at this point, clearly the advanced approach is going to be our governor. So as you look at the different rules, assume we're advanced.
Okay. Betsy also remember when we're staying fully phased in, we are still deducting the entire DTA in terms of the calculations as of today. And by time those rules really phase in, we'll 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's still 5 to 6 years out. And so as you watch this really play out, you'll 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 loans and then you've got this 15,000 loans servicing sold that are going to be completed this month. So I just want to make sure I understand how that's going
to flow
through into not only expected declines in delinquencies, that's over and above the 300,000 that you're talking about over the next 12 months or that's embedded within?
No, the servicing sales are embedded within that net 300,000 units.
Okay. But then the comments that you're 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 1 to 2 quarter delay, not something that's permanent. And I think the thing that we just wanted to make sure of is we've spoken publicly before that as we look out at over the course of the Q2, Q3, Q4, Q1, that we were thinking it would be a net 300,000 dollars reduction and we just want to make it clear that over that timeframe we're not coming off that guidance.
Okay. And then as we think about the LAS expenses, as you've indicated a decline in the delinquencies obviously should be driving down your LAS expenses. When I look at kind of the servicing pools of foreclosure to liquidation or past due to liquidation. I'm not seeing that much of a ramp up yet. Can you just give us some thoughts on what you're doing to try to ramp that up and when you think that turn is going to happen?
Yes. A couple of 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 of things that we've absorbed in the Q2 as we go forward. 1st is obviously as part of the different settlements we've 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 look back and other activities that adds expense. So as you look at those different things from an expense perspective, those are all embedded in the Q2 and it's 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's any question that the Q2 was a little bit slower in those different buckets than what we would have expected. At the same time, as we look out at, and as I said over the next couple of quarters, as we see the different pipelines, the different servicing sales and everything else, we're still quite comfortable with what we've communicated before.
Okay. And 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?
Well, I think we said it will take us the rest of the year, so you see more benefits next year 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 look back, which is running through here and then just getting the inventory down overall. And remember also Betsy, there's a flow in each quarter that we're that you just each and it's 75,000, 80000 new units come in, in the second quarter.
So just from the general delinquency flows of portfolio. So all that put together, what we're saying is for the rest of this year, we're busy getting the DOJ behind us getting the work done on the look back 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 to the independent foreclosure review. And then you'll 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're down 200,000 plus 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 flows of the portfolio.
So you 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 the 3rd party payments that you've got associated with this review that's going to end at year end?
There's nobody working harder to get this number down than we are.
Okay. Thanks.
And we can take our next question. This one is from the side of Andrew Markart from Evercore Partners. Your line is open.
Good morning, guys. 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, let's 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. And unlike some of our other peers, it's largely in the U.
S. 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 into self 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 and 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's upside there. And then secondly, that there's still a lot of model work that we're 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? I mean how do we think about kind of 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. And so as you think about that amount that runs off of $5,000,000,000 some of that has decent risk weightings associated with it. Until weightings to grow and put assets on of what the different Basel III risk weightings are.
Got it.
Thank you. And then lastly, just back on expenses. Can you help us understand in terms of Phase 1 and Phase 2, dollars 8,000,000,000 by mid-fifteen. Just want to understand, is Phase 1 now the $5,000,000,000 you've realized 1,000,000,000 dollars Is that is there timing of realization on the same glide path as it had before? I recall it was going to be coming in sooner kind of by the end of 2013, but maybe I'm not recollecting correctly.
Yes. I think a couple of things I'm going to do. What we said when we came out with new BAC I is that it was $5,000,000,000 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. And you're exactly correct that we've subsequently said that we're ahead of schedule with respect to that 20% by the end of 2012.
And as I mentioned earlier, as you think about the new BAC II and you think about that $3,000,000,000 over the course of the next 3 years, unlike new BAC I, I would generally think about that in the how if 20% is realized in this year,
how much
how if 20 percent 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've not provided that guidance or split between the 2nd and the 3rd year. But just to be clear, we haven't changed what we said before. We just added the 2015 comes attached to Phase 2 and not Phase 1.
Okay. Thank you.
We'll go next to the site of Jefferson Harrelson with KBW. Your line is open.
Hi, thanks. I was
going to follow-up on some on the rep and warranty question. Given that we're not in dialogue with Fannie and that private label seem to be trying to get their suits in before statute limitations hit, should we expect the same types of outstanding claims increase next quarter?
Yes. I think at this point, we're not going to predict what these claims are or 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 with as you think about it and you think about when the underwriting and the originations with respect to these slowdown as we got into 2,008, we're clearly almost 4 years into that. So I think generally speaking, your point has some merit, but we're not going to predict exactly what we'd expect these to be. Besides that, we expected those to increase. We continue to see some of those increases in the Q2 and we'll see some more going forward.
All right. And just on a follow-up, is it possible I'm trying to frame the $6,000,000,000 of increase in the outstanding claims and 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 $6,000,000,000 of new claims to the total claims? I mean, is it because if you've gotten, I don't know, dollars 60,000,000,000 of claims, is it a different or $600,000,000,000 of claims is a different growth rate.
I think if you look at $32,000,000 $33,000,000 you can sort of see that we paid out $13,600,000,000 on Page 32 of the slides through this quarter that's actually paid on resolution to these types of things. And then we have our reserves established for $15,900,000,000 And then if you look, we don't I don't have it here in front of us. If you look at this chart from Page 33, we've been producing this now for better than a year and a half. So you can sort of go back and see the claims flows literally quarter by quarter going back pretty far.
All right. Thanks guys.
We go next to the site of Moshe Orenbuch with Credit Suisse. Your line is open. Great. Thanks. 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 vantage point kind of out here to kind of 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 that?
I mean, I think you almost need to go through the 3 different buckets. We obviously, as we've said before, believe that the work and the way that we reserve for the GSEs is based on our obligations and we continue to believe that we're satisfying those obligations with respect to the GSE bucket. I think second, if you go to the monoline, the deal that we referenced in core 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. And so I guess given that a fair bit of the monoline stuff is out there, it relates to litigation.
Obviously, it's something from a litigation perspective was different than what we've assumed. That would affect it. And then I think 3rd, if you go down to the private label stuff, you've got 2 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've assumed in 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.
And then obviously, the 4th piece of it is that there is securities litigation that's out there that we touch on as far as looking at range of possible loss within our litigation bucket. So I think we've 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 our 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'll kind of have a new retail banking offering and kind of adjust pricing and try to recapture some of the revenue that's been lost over the last several years? Any thoughts you can give us on that Brian?
It's a combination of everything. But if you look, we've sort of 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 start to grow really with activity at this point because you've now had the impact of the overdraft and the interchange and everything through the core results. And so the team is working on all the 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's the 57 branches or whatever we reduced this quarter. And if you look at the people, the headcount in this business, it's down from a high point of 1.100,000 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've been testing and we've 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 the for example, we sent out 20 odd 1000000 text a month to people telling their balances are low.
The initiation of payments off the mobile platform is about $1,000,000,000 a week now, up dramatically year over year and continues to grow. And it's just a much more efficient and frankly strong service model. So I think it's 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 are lowest since they've been in 2007, so the net attrition rates are down and we keep driving all those different things.
So I wouldn't lean as any one thing, but the platform really the Northwest and the California because people forget we did the Northwest gives us a much more cheaper platform obviously, but also a much more capable platform that we can change things quickly and 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 get.
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.
We can go next to the site of Brennan Hawken with UBS. Your line is open.
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's moving?
Because it doesn't seem like it's just the FTEs plus 3rd party.
Can you help out there a little bit?
We've 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 10000 to 12, 13,000 contractors working at a given time that are not on our payroll that we obviously pay through the expense line. And we'll talk about 50,000 plus people working on it.
But the FTE numbers have been calculated consistently and we could if you look on Page 15, you can see it's up 7,000 employees FT equivalents from 2,000 quarter Q2 of 2011 to 12. But the contractor one moves around a little bit based on the ebbs and flows of what we're doing and you should see those come
down. Yes. But last quarter in your deck you had FTEs at 38.1 percent and now you're at 42.4 percent, but you say you're only up 0 0.3%. So I guess I don't understand that.
Yes. In the last quarter, there's adjustment to there's a group that's in our core consumer business that does the good mortgage servicing before collections and we've moved some people around. So there might be a little bit noise there. But from a core activity level, you're seeing this thing is really run about 55,000 people equivalents, 42 with us, 13 with other people.
Okay. I guess it'd be helpful to see it consistently disclosed because I mean what I'm kind of getting at here is starting at about Q3 of last year, indications were that LAS staffing was at or near peak, but we've actually seen the staff levels go up every quarter since. And I might be not remembering this correctly, but I seem to recall you saying previously that LAS staffing be start to go down in the back half of twenty twelve previously. And now it seems like you're calling for those declines to be held off until 2013. So what I'm 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 on with respect to the staffing levels in what you're looking at, what was adjusted this quarter was the within legacy assets and servicing, there is some non distressed servicing that's in there that when we reported this segment, we adjusted the people that do some of that non distressed servicing in the numbers. That's reflected in the numbers and we've gone back and adjusted those numbers to make sure that it's consistent on a look back basis. So you've got apples to apples within these numbers. Okay.
The second question is it relates to the staffing levels, I think what we've said this quarter with respect to the overall expense base in staffing is that we're 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. And I get it, believe me, the business has been really difficult and I'm sure it's been really hard to manage. So I can certainly appreciate the challenges there. I guess it's 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's been that's going to be sort of slow, whereas you get a more substantial pickup in 2014.
And I think Brian, you've 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're talking about there? I mean, are we talking about somewhere in the ballpark of like a 10% to 15% reduction in that 8,000,000,000 dollars ex litigation number? Is it more like a third? Is it what are we thinking about for 2013 and then 2014?
Is it possible?
We've given you an overall viewpoint that says that the amount of 60 plus day delinquent loans will ultimately get into, 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 $14,000,000 For that, we're saying that takes about $500,000,000 of quarterly cost versus the $2,800,000 we have in here today. And so that's what we get. The pace of this even 6 months ago, for example, if closure look back, 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 to actually go do the work in 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 2. But in the grand scheme of things, the key is to get this from the $2,800,000,000 level to that $500,000,000 level and they're 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 lifetime expectation for foreclosure delays and things like that that we adjust on.
But I think you'll see this come down relatively quickly once we break through 2 big bodies of work and then beating the Department of Justice settlement work and the look back. And then after that, it is really scheduled against as the work goes down, the people will come down. And we're working as hard as we can to get it down. So I think any adjustment to view a timing is 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 1,000,000 plus loans we've modified, continue to work the short set 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's always subject to making sure we do it right and we're not going to bring the headcount down until we know we've got the job done wrong.
Right. Yes. No, as I said, I guess that it's been a challenging environment. So that's probably been real difficult. Last, not to beat a dead horse here, but the put back claims.
Just on the GSE side, because I get it the private label, right, that's going to be solved by the courts and probably pretty difficult. But at least with GSEs, there's a lot more history. And when you look at some of the Fannie and Freddie filings, either A 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 of claims are only about 1.8 times your closest peer. So it seems as though these disputes are a BofA specific issue.
What gives you confidence that you're going to be able to buck the trend of the entire industry? And that can you help us out on that front?
I think all we can really say at this point quite frankly is that the way that we look at this and the reserving is based on our view of what our understanding agreements are. We've said that there are disagreements that are out there. And I'm not sure there's 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 look back basis to get a deal done with Freddie Mac on 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's resolution on. And so the claims are really coming through, there's obviously disputes on. In a sense that the private label CFC issue has been resolved with Bank of New York for over a year now. And we're waiting for the court process to take place, as Bruce mentioned, in the countrywide. So I think the issue is that the volumes we would have are not coming through big parts of the production at the time, the 2,004 to 2,008 production because they are settled and the monoline is the same thing.
So obviously the people that I think specifically Fannie that we're going to have the biggest argument whether the people still submitting claims.
Right. Okay. And then the last one, just on wealth management, can you give a sense for net new assets and what they were and what they have been over the last few years? Because it seems as though that's not a disclosed number anymore. It'd 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'll 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 consumer with the customers and clients, the AUM flows are where we focus as we move from sort of the transaction base to the more money managed basis and you can see those flows have been strong, we'll get to the net new asset side.
Sure. Thanks.
Next is the site of Chris Kotowski with Oppenheimer and Company. Your line is open. Yes, good morning. Syncora's press release cited that they received $375,000,000 in the settlement. And you said that it was about 20% of the $3,100,000,000 which is a bit more than $600,000,000 So that implies a settlement rate of at around $0.60 on the dollar.
And I wonder, is there anything that would make Syncora better or worse exposure than the rest of the monoline claims? And then secondly, why would the settlement rate on the private label be radically lower than what it is on the monoline?
Yes. I think you have to be careful, Chris. I can assure you that the rate at which was paid was not anywhere near the number that you quoted. And the reason is, keep in mind with the monoline, as we've talked about, you've got a couple of 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 monoline have submitted.
At points in time, monoline have stopped submitting claims because they believe that there's they're going the route of litigation. And then 3rd, 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's the payment percentage.
I'm sure I understood that, but I'll follow-up. Thank you. And we take our final question from the side of Mike Mayo with CLSA. Your line is open.
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're not going to have a whole lot more negative impact.
You had another large bank saying, well, it's more than half done, it's 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'd say a couple of things on that, Mike. The first thing I'll 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 is what with respect to what we do on the deposit pricing. And as rates persist, we'll continue to revisit that, realizing that when you get to the levels that we're at with respect to deposit pricing, that there's 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 2 pieces.
The first piece is that as you look at loan spreads and what we're seeing from a loan spread perspective that on those things that are floating rate based, the spreads at this point in some of the new origination spread that we've 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've 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.
And if you look at on a swapped basis, with respect to duration on the securities portfolio, we're just over a year on a swapped basis realizing it's a couple more years if you didn't take into account swap. 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.
Just one follow-up. So I'm looking at Page 10 of the supplement and I'm sure you know these numbers. Total commercial yield from the Q1 to the Q2 went from 3.52% to 3.35%. That's 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 that if you look at where the majority of the noise came in and if you look at that there are 2 pieces that moved. The first and probably the most significant was and we disclosed this back in the Q1, we had some gains on the overall leasing portfolio that settled up during the Q1. 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's clearly something as we look out at that we don't expect to repeat. So I think as you look at those 2 buckets, that's the reason both. So if you look at U. S. Commercial, it was down a little bit.
Commercial real estate was effectively flat. Commercial leases where you saw the biggest change. And on the non U. S. Commercial stuff, where you'll see that number bounce around a little bit is if we're 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're 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 $10,200,000,000 of NII, you expect that to maybe be flat or higher than?
What we've said at this point is that we think that's the jumping off point. We mentioned the benefits that we have from the long term debt footprint and then we'll obviously need to see activities during the quarter.
All right. Thank you.
Mike, to back up to the broader level, think about 2 or 3 things. One is the low rate environment has been impacting us and that's why one of the about you have to go after the cost side and get the cost structure in line because the low and straight environment is expected 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 charge offs, you'll see that it's actually growing year over year Q2 last year, 2nd this year. So the what is running off is costing us money or not it's contributing a lot to the pretax line, as Bruce said.
And the third is, we continue to have benefits that we think that are unique to this franchise because of the amount of acquisition debt that was built up in the long term debt size to 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 higher and higher percentage of which they're already high of the total funding. And if you think about it very simply, we pay about $500,000,000 a quarter for all the deposit funding, dollars 1,000,000,000,000 and we pay about $2,500,000,000 round numbers a quarter for the $300 odd 1,000,000,000 of long term debt. So the effectiveness of moving that down because we just don't need the size, we have the because we're running off late assets, which aren't yielding as much is very beneficial going forward. So we're fighting the trend.
This is the trend that's held all along than most people expected, but we're fighting with all the errors in our quiver that we have.
All right. Thank you.
And we did have one more question in queue. We can go to the side of Matt Bernal with Wells Fargo. Your line is open.
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 U. K. Tax.
Last quarter you noted that you thought the tax rate was going to be about 30%. I'm just curious as to what's driving the decline in the tax rate
guidance? I believe and I could I'd have to go back and look at it. I think if you look at it and what we're 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, that 22% is a good number as it relates to what we'd expect before it is we've said adjusting for what we'd see coming out of U. K.
Tax.
Right. And then again another one final administrative question. You mentioned about $300,000,000 in benefits from your actions reducing higher cost debt, dollars 60,000,000 of that was recognized in the Q2. Then on page 8 of the slide deck, you say that there's about $100,000,000 of savings from those actions in 2012, another $180,000,000 expected in 2013. Is that $300,000,000 number you're talking about the equivalent of the $280,000,000 in combined savings in 2012 and 2013?
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're embedded in the $300,000,000 quarterly benefit of which $240,000,000 will be incremental in the Q3 of this year relative to the second quarter of this year.
Okay, that's helpful. Thank you very much.
Thank you.
We have no further questions at this time.
Thank you everybody. We'll look forward to talking to you next quarter.
And this concludes today's program. Have a great day. You may disconnect your lines