Good day, everyone, and welcome to the Bank of America Quarterly Earnings Announcement. At this time, all participants are in listen only mode. Following our presentation, there will be a question and answer session. Please note this call is being recorded. I would now like to turn the conference over to Mr.
Kevin Stitt.
Good morning. Before Brian Moynihan and Chuck Noske 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. Also joining us this morning will be Neil Coddy, our Chief Accounting Officer, who served as our Interim CFO prior to Chuck arriving here.
And Neil did much of the presentation last quarter. So with that, let me turn it over to Brian.
Good morning, and thank all of you for joining us as we discuss our Q2 earnings. I welcome Chuck to his first call as CFO. As Kevin said, Neil is with us. Just to start us off here on slide 4, but in general, I'm just going to give a couple points of my perspective on the quarter. We did make a $3,100,000,000 in net income for the quarter.
But importantly, even with the earnings and that we are continuing to move our core franchise forward. Our credit quality continues to improve, in some cases, faster than we anticipated as we came into this year. As the management team and I have put together the principles we're going to operate under to make sure that we can position this company now and in the future in a way it needs to be positioned, one of the principles we've been focused on is to continue to strengthen our balance sheet. We strengthened our capital this quarter and our reserve coverage ratios even with the release, so we have a stronger balance sheet. We also the team has continued to work through reductions in legacy positions, whether that's in commercial real estate, capital markets, the former Countrywide franchise or some of the loan products and card services.
Another principle that we've been focused on is narrowing the focus of our franchise, ensuring that every activity we have America is core to our core 3 customer bases, consumers, companies and institutional investors. Along that lines, this quarter we sold our interest in Itau in Santander, Mexico. We sold the Mastercard shares we have. And today, we announced that we're selling Balboa Insurance consistent with this strategy. Additional principle that we've been managing to is to get ahead of the impact of new capital requirements and we've been doing that this quarter by continuing to reduce positions as some of the positions I just spoke about and bringing up capital whenever we can to build our capital ratios in anticipation of the new Basel rules.
In addition, this quarter we also sold some private equity positions to help us in this regard. Another principle is that we think that we as we look back at the cycle and what went right and what went wrong is we have to be much stronger risk managers. And I think this quarter shows that even though we've had revenue in our capital markets business go down, it was a nimble way in which Tom Montag and Bruce Thompson and the team adjusted our trading positions, reducing the bar and basically getting out of the way of the euro crisis and sovereign debt crisis this quarter. So we made progress on principles. But as we look ahead, we're well aware that the headwinds we're going to continue to face and we need to deal with it to produce the revenue and profits this company needs to produce.
1st, we continue to see an economy, which our experts don't believe will be a double dip. They think that's a low probability. But we see an economy that's going to grow in the 2.5% range in the second half, which continues to be below trend. Unemployment will remain at high levels. And as we look at the consumer, we're seeing even though the consumer spending has been up consistently quarter on quarter, we're worried about slowing momentum as the year year comparisons get harder as the second half of the year was strong to the consumer.
And again, we continue to watch the housing market carefully and it stays in our focus. As we look at on the loan demand side, it continues to remain weak as the consumers continue to delever. On the commercial side, the commercial customers remain conservative by holding large amounts of cash while waiting signs of sustained demand for their products before they need capital to grow. Another area that is hitting our revenue and earnings is the impact of sustained low rate environment on this core franchise and it continues to impact the net interest margin. A major area and I'm sure you'll have lots of questions about this later and Chuck will talk about the areas is the impact of new regulation.
And as I look at the new regulation, a lot of people focus on the Dodd Frank bill, but you got to put in the context of all the different things going on, whether it's the Reg E, the Card Act and then the errors that will be affected by Dodd Frank. This will cause the most recent is the Durbin Amendment in the interchange area. This is going to cause a significant reduction in revenue in the future and a carrying value change in our asset in the credit card business and Chuck will address that later. So as you think about the quarter, it's more noise than we would have liked, but some of that is inevitable as we continue to reposition this company and as we continue to hit some turbulent markets that we did during this quarter. That said, we continue to make progress in positioning our company now for the future.
On Page 5, you can see the progress we've made in the various customer groups in our customer driven model. We've told you and we'll continue to tell you in the waiver management franchise is take advantage of these very strong businesses that have superior positions in every part and every capability they bring to
the customer. I'm not going to go
through all the points in this page, but I want to touch on a couple of areas just to give you my perspective. Obviously, Joe Price's consumer team has a core challenge to adopt the retail banking model reality to mitigate the lost revenue and adjust the operating costs to meet the return levels we have in that business. In our home loans and insurance business, it lost money this quarter less than
it lost last quarter, but sort of a
tale of 2 cities. On the one hand, our production were number 1 or 2 in a given month or quarter with about 20% market share on the production side. At the same time, we're devoting a ton of effort and expense to working through defaults, short sales and modifications and we're attempting to help every customer we can. In spite of all that hard work, we'll continue to see elevated foreclosure, short sales and other liquidations for the next several quarters as we clean up the legacy Countrywide portfolio. Moving to the commercial side of the business, domestic commercial loan demand remains muted as companies continue to generate solid earnings and cash flow, but tell us that they are reluctant to expand due to the uncertainty they see in the future.
Importantly, as the company has a global commercial franchise, that does that companies in Asia and Latin America and companies in the U. S. That do business in those markets are demanding capital and our business plans especially in corporate investment banking area show that. And that's why we continue even during these times to invest in our international growth in the global capital markets business and the global corporate investment banking business. The 3rd area I want to touch on is the sales and trading area.
Tom Montag's team experienced a drop from a very, very strong Q1. And however, we still earned over $1,000,000,000 in global banking markets and the global market segment produced about a third of those earnings. We continue to be impressed with the growth in the investor client activity that Tom and his team have seen in both in the U. S. And outside the U.
S. Around the world. But in this quarter, we couldn't fight the macro slowdown, the euro debt issues, the sovereign debt issues, so we got out of the way. Our investment banking team's performance continues to be very strong. It continues to improve on its 2 ranking and is coming close to closing the gap to 1.
So all in all, as you can see on slide 5, we continue to make progress in our core customer segments. But the goal is not only to perform well in each of these segments, but to get the most from the entire group together. So slide 6 is the slide I've shown you before, shows some of the successes we've had this quarter leveraging this franchise, especially between Sally Krawcheck's Wealth Management business, Joe Price's consumer business and David Darnell's commercial and Tom Montec's commercial businesses. I'm not going to read all the numbers, but I will confirm to you and commit to you that we focus on these metrics every day and like the direction as they continue to head. The principle that we are focused on is not only do we need to get everything out of each of our businesses in their component parts, but we in order to provide the right service to the clients and the right returns for you to shareholders, we got to do more over the whole thing.
And with that, let me hand it over to Chuck to go through the quarter's numbers.
Thanks, Brian, and good morning, everyone. As you can see on Slide 7, we reported net income of $3,100,000,000 or $0.27 per share versus $0.28 per share in the Q1 and earnings of $0.33 per share in the Q2 a year ago. Credit quality continued to improve with credit costs dropping $1,700,000,000 from the 1st quarter to $8,100,000,000 This quarter had several large items having both positive and negative impacts on earnings. But we think results are representative of the challenging economy and difficult rate environment as we continue to bring down risk and position the balance sheet for the future as Brian outlined. And we think that the Reg E and the Card Act.
Turning to Slide 8, let me briefly summarize some of the material items this quarter that impacted earnings. We had several announced asset sales during the quarter, some of which were related to our agreement to pay back TARP. Our ownership in Entau was sold for a pre tax gain of $1,200,000,000 Our Columbia long term business was sold for pre tax gain of $60,000,000 but resulted in a reduction of goodwill and intangibles of approximately 800 $1,000,000 Our Mastercard position was sold resulting in a pre tax gain of $440,000,000 We entered into an agreement to sell our ownership interest in Santander, Mexico which generated a pre tax loss of approximately $428,000,000 before associated tax benefits. All of the asset sales this quarter impacted Tier 1 common equity by $2,300,000,000 and added 18 basis points to the Tier 1 common ratio. Turning to Slide 8.
Let me briefly summarize some of the material items this quarter that Let me talk about asset sales. Let me also add that we're exploring a potential sale before the end of the year of Balboa Insurance, one of the largest creditor placed insurers in the U. S. As most of you remember, we agreed to generate $3,000,000,000 of capital through asset sales or other actions in 2010 and have until December 31st to complete. Other items in the quarter included the credit mark on the Maryland structured notes under the fair value option that resulted in a gain of 1 $200,000,000 and as reported in other income, but as you'll recall there is no additional regulatory capital benefit related to this gain.
We received a dividend of $535,000,000 from our ownership stake in CCB that is reflected in equity investment income. A hike in the UK payroll tax resulted in increased personnel expense of $425,000,000 And finally, we increased our reps and warranties expense by $722,000,000 to $1,200,000,000 as a result of our continued evaluation of exposure to repurchases, including our exposure to repurchase demands from certain monoline insurers. Although this expense and related reserve are based on a life of loan calculation, the environment around repurchases continues to evolve and we will assess this reserve based on the facts available to us each quarter. We expect the level of putbacks each quarter to remain quite variable. Let me turn to Slide 9 and discuss some general highlights for the quarter.
Revenue of $29,500,000,000 was down 9% from the 1st quarter and 18 percent from a year ago on a managed basis. We had a drop in net interest income of $873,000,000 from the 1st quarter due to lower loan levels and the continued low interest rate environment. Sales and trading revenue declined 55 percent to $3,200,000,000 and I'll go into further detail on that in just a minute. Expense levels were down 3%, but did include the $425,000,000 in higher personnel expense due to the UK payroll tax. Last quarter included annual retirement eligible expenses of $758,000,000 and higher litigation expense, while most other expense areas were relatively flat.
Our provision was down 17% with net charge offs down 11% and reserves reduced by $1,500,000,000 Commercial non performing loans, leases and foreclosed properties decreased 5% from the Q1, while commercial reservable criticized levels were down 9%, reflecting 3 quarters in a row of decreases. Net charge offs were impacted this quarter by an acceleration of losses in our foreign credit card portfolio of $378,000,000 conform with how we account for renegotiated loans domestically. Our allowance for loan and lease losses now stands in excess of $45,000,000,000 or 4.75 percent of total loans and leases versus a charge off rate this quarter of 3.98% and net charge offs are expected to continue to decline. The total reserve, including the reserve for unfunded lending commitments, is nearly levels as Tier 1 increased 44 basis points to 10.7% versus the 1st quarter. Tier 1 common was up 40 basis points to 8% and tangible common was up 13 basis points to 5.4%.
Global excess liquidity increased roughly $20,000,000,000 almost $290,000,000,000 while tighter required funding stood at 22 months. On Slide 10, you can see trends for the past 5 quarters. Pre tax pre provision earnings dropped to approximately $12,000,000,000 reflecting the changes you can see on the forward, we believe revenue will benefit from sales and trading performance. However, this benefit will be offset by the impact of Reg E, the Card Act, lower loan levels, low rates and potentially other regulatory impacts not yet assessed or identified. Benefit to earnings will be expected decreased credit costs due to lower charge offs and reserve reductions.
Switching to the business segment slide on Slide 11. I just want to point out that like last quarter, all business segments made money with the exception of home loans and insurance. HLI a smaller net loss than the prior quarter, dollars 1,500,000,000 versus a net loss of $2,100,000,000 despite higher reps and warranties expenses, dollars 1,200,000,000 versus $526,000,000 last quarter. Now let's turn to net interest income on Slide 13. Net interest income on an FTE basis was $13,200,000,000 down $873,000,000 from the Q1.
This was due to lower loan levels, lower yields on credit cards and the impact of rates in both our core assets and trading book. During the quarter, the net interest yield of 2.7 7% decreased 16 basis points due mainly to a shift in the mix of earning assets as higher lower yielding assets driven by the lower rate environment. Our average balance sheet for the quarter was down $20,000,000,000 versus the Q1, reflecting decreases in average loans of approximately $25,000,000,000 Loans were down due to charge offs, pay downs and de risking the portfolio as well as weak demand. Implementation of the Card Act had a negative impact on net interest income this quarter due to reduced can see on slide 14, average loans excluding residential mortgages were down $29,000,000,000 or 3.8 percent from the 1st quarter, while while dollars average retail deposits showed organic growth of $8,000,000,000 or 1.3 percent even as we maintained our pricing discipline. Also shown is the increase in our discretionary portfolio on an average basis versus Q1.
Going forward, we expect net interest income to trend down in the second half of the year due to continued loan runoff, the impact of the card act and the low rate environment. Our overall interest rate positioning additional impact of the as higher interchange offset the additional impact of the Card Act. Total interchange is up 10% from the 1st quarter and 19% on a managed basis from a year ago due to higher consumer spending. We expect the Dermot amendment as currently drafted and subject to final rulemaking to have an adverse impact on debit card interchange starting in the second half of next year, which I will discuss later. On Slide 16, we show service charges were relatively flat at $2,600,000,000 And as we mentioned in prior quarters, we made changes to our overdraft policy last year, which are costing us on average about $160,000,000 per quarter.
Reg E will have an additional impact to service charges when it becomes effective in the Q3 of this year. We believe that the total impact of these changes will be reflected in the 4th quarter numbers. We're estimating overall service charges in the Q4 to be around $2,000,000,000 which will fully reflect Reg E versus the $2,600,000,000 this quarter. Obviously, we will look to mitigate some of this impact going forward. Mortgage banking income on Slide 17 dropped from the Q1 as a result of higher reps and warranties expense.
Production levels in 1st mortgage increased to approximately $72,000,000,000 from approximately $70,000,000,000 in the Q1. And in core production revenue, we experienced higher margins and lock volumes. Total Russian warranties expense in the quarter was 1 point $1,000,000,000 to $3,900,000,000 Core servicing income increased from the prior quarter and was offset by less favorable MSR results, net of hedges compared to the Q1 while the market driven decline in the MSR value of $4,000,000,000 was effectively hedged. The capitalization rate for the consumer mortgage MSR asset ended the quarter at a low 86 basis due to the drop in rates at the end of the quarter versus 110 basis points in the Q1. Reflecting the impact of increased home purchase transactions driven by the federal tax credit and seasonality, we saw an increase in the level of purchase mix in our fundings to 53%.
Given the drop in rates over the past few weeks, we would expect production volumes to remain in line with the 2nd quarter as refinance volumes offset the expected drop in purchase volumes due to the a pretax gain and reduced goodwill and intangibles. Investment in brokerage fees were down 1% from the Q1 as an increase in brokerage fees was offset the decrease in asset management fees related to the sale of the Columbia business. Asset management fees of $1,400,000,000 were down 6% from the of 6% driven by higher market valuations in the Q1 as well as seasonal tax fees. Clearly, given the market valuations at the end of the second quarter, this trend will reverse itself in our 3rd quarter results. Assets under management ended the quarter at just over $600,000,000,000 down due to the sale of Columbia's equity and fixed income, lower market valuations and outflows from the former Columbia Cash Complex.
We also continue to experience stability and retention in the level of our wealth advisors. Sales and trading revenue on Slide 19 of $3,200,000,000 which includes both net interest income and non interest income, dropped approximately 50 5% from a great Q1 due to general market deterioration as a result of concerns around the global economy and a lack of liquidity as sovereign debt fears and regulatory uncertainty fueled investor concerns. Compared to the prior quarter, FICC revenue dropped 58% to $2,300,000,000 driven mainly by
lower
the Q1, although down 20% from a very strong quarter a year ago. Results were driven by an increase in M and A and leverage finance and our monthly results in the quarter followed a U shaped pattern as markets declined in May and global fee pools reached their lowest monthly total since 2,003. Then revenues rebounded in June to the levels we saw in April. Our overall global fee ranking remained stable at number 2 when compared to the Q1, but we believe we substantially narrowed the gap between number 1 and number 2 this quarter. Our revenue remains concentrated in the Americas versus a more diversified global mix as some of our peers and consequently we continue to focus on that opportunity with key hires and relationship building in important markets outside the U.
S. Let's turn to the remaining S. Let's turn to the remaining revenue categories on Slide 21. Equity investment income reflects the activity for the quarter I described earlier. Net gains from the sale of debt securities were $37,000,000 and included losses of $711,000,000 on sales of non agency RMBS sold as a result of a change in certain portfolio objectives to focus on capital management and credit risk reduction.
Other income also reflected insurance revenue of 678,000,000 dollars down a bit from the Q1, but slightly up from a year ago, and also included the credit mark on a Maryland structured notes. Let me say a couple of things about expense levels on Slide 22. Total expenses decreased $522,000,000 from the first quarter due to the absence of $758,000,000 in expense associated with retirement eligible stock grants we normally incur in the Q1 as well as lower litigation expense, offset by an increase due to the Q2 UK payroll tax. Personnel expense compared to a year ago was up $1,000,000,000 reflecting the UK payroll tax as well as higher expenses for the build out of our global markets and GCIB businesses as well as the higher level of headcount and expense at home loans to address loan modifications and workouts. In addition, compared to last year, we're seeing the impact of deferred compensation in our markets businesses that was granted last year and is hitting expense this year.
We're watching expense levels closely and we'll take appropriate actions if and when our outlook changes. Excluding personnel expense, expenses were down 2% from the 1st quarter and 8% from a year ago. Before moving to credit quality, let me add a few comments around income taxes. Due to capital gains from special items during this quarter, the effective tax rate of 17.7 percent included a $250,000,000 tax benefit from the partial release of a valuation allowance from the Merrill Lynch capital losses carried forward. Separately, you may have read that the UK has announced that it intends to lower its corporate tax rate in the Q3 by 1% effective in 2011.
Although this is good news from a cash tax $400,000,000 The UK Treasury has announced plans for further reductions in the UK tax rate in future years. Similar charges to income tax expense would result upon enactment for each additional future 1% reduction in the UK tax rate. Moving to asset quality on slide 24. We continue to see an improving trend as net charge offs decreased $1,200,000,000 from the Q1 to $9,600,000,000 Consumer improvement in the unsecured lending portfolios reflected lower losses while consumer real estate stabilized. Commercial asset quality also improved as net charge offs and reservable criticized declined for the 3rd straight quarter.
Turning 25. As I mentioned during the quarter, in the foreign credit card portfolio, we had an acceleration of $378,000,000 in charge offs to conform to our domestic charge off policies. Excluding this impact, foreign credit card charge offs would have been 564 dollars versus $631,000,000 in the Q1. In addition, if you remember last quarter, we had approximately $800,000,000 of consumer real estate charge offs on collateral dependent modified loans upon the implementation of new regulatory guidance. The collateral dependent The collateral dependent impact for the current quarter was $142,000,000 And also as we've done in past quarters, we repurchased government insured delinquent loans because it is more economical than to continue to advance principal and interest at the security rate.
These loans are insured by the government, but do in fact show up in our 30 plus performing delinquency measures. Turning to credit quality trends on Slide 26. Total net charge offs of $9,600,000,000 decreased $1,200,000,000 compared to net charge offs in the Q1. Excluding the impact of collateral dependent modified loans in the Q1 and foreign credit card adjustment this quarter, consumer losses versus the Q1 were down $813,000,000 and commercial losses were down $134,000,000 The allowance for loan losses decreased $1,500,000,000 through the provision. This was driven by improving delinquencies, collections of bankruptcies in our domestic consumer credit card and unsecured consumer lending portfolios and the consumer real estate portfolios, including $328,000,000 for the Countrywide purchase credit impaired portfolio and 600,000,000 dollars for other consumer real estate loans.
On the commercial side, reserves on our core commercial portfolio decreased $350,000,000 as we've seen broad based improvement in customer credit profiles, resulting in lower reservable credit size levels. On slide 20 7, we show you the trend in non performers. In the consumer area, we saw an increase of $483,000,000 The pace of increase slowed from the 1st quarter as delinquency inflows have slowed in residential mortgage and home equity. Commercial non performers decreased just over $700,000,000 from the end of the first quarter driven by pay downs, charge offs and asset sales. Almost all the decrease in NPAs was real estate related, although most categories were down.
Approximately 95 of commercial NPAs are collateralized and approximately 40% are contractually current. Total commercial NPAs are carried at about 71% of original value before considering loan loss reserves. On Slides 2829, you can see that excluding the impact of delinquent government insured loans, consumer delinquency trends continue to improve. 30 plus delinquencies 30 insured loans added $2,000,000,000 to the 30 plus delinquency levels, although they are still insured. These government insured loans are primarily related economic reasons.
We can finance these loans at a cheaper rate on our balance sheet and our risk exposure is the same whether we are the servicer or the holder of these assets since they are insured. Commercial reservable criticized levels declined by 4,900,000,000 dollars or 9% versus a drop of $3,400,000,000 in the 1st quarter representing 3 straight quarters of decreases. These decreases were broad based across all clients and industries. Slide 30 shows you the trends of consumer charge offs. As you can see, all categories continue to improve or stabilize even with the acceleration of losses this quarter in foreign credit card.
Going forward, we expect to see continued improvement. On Slide 31, you see that commercial charge offs peaked in the Q3 of last year, although we did see a small losses are still elevated, the vast majority of this book are not piggyback loans for home purchase or refinance, but rather loans that consumers used in most cases for non real estate purposes. Collateral and reserves exist to partially offset future losses 94% of loans with combined loan to values greater than 100% are current. Turning to capital and liquidity highlights on Slide 34, our liquidity position strengthened during the quarter as customers continued to delever and through a shift into more liquid assets in our discretionary portfolio. Cash and cash equivalents were up $6,000,000,000 and our global excess liquidity sources ended the the such as U.
S. Treasuries and agency mortgage backed securities held at the parent, our banks and our broker dealers, which are readily and we continue to be very measured in our approach to reinvestment. As noted on our last call, we'll continue to be selective in going to the debt markets markets and diversifying our funding footprint, but we expect our benchmark issuance to be substantially less than our maturities. In the Q3, our GAAP capital levels will benefit from the initial mark to market of our ownership position in CCB currently carried at cost. This is because the shares become unrestricted in the Q3 of 2011 resulting in a mark in OCI beginning 1 year prior.
The mark impacts GAAP capital, not regulatory capital, and the related unrealized gain at June 30 was roughly $12,000,000,000 pretax. Moving to Slide 35, I've already pointed out our increased regulatory capital levels. We view these levels as strong and believe we can increase these levels over the next couple of quarters. 36, we've listed several pieces included in regulatory reform. We've already discussed the impact of the Card Act and Reg E and we're still gauging the impact of derivative and proprietary trading reform.
Although we're still waiting for more clarity, we believe the impact will be manageable given that we do distinguish between fiduciary and trading businesses. In addition, a large part of our revenue and earnings is generated by client focused businesses versus proprietary activity.
As for
the Durbin amendment, let's turn to Slide 37. All of our consumer and small business card products, including our debit card business, are part of an integrated platform within the Global Card Services segment. When the financial reform bill is signed into law, the Durbin Amendment will impact the future revenues generated by our debit card business. We estimate that our debit card revenue for $2,900,000,000 Although subject to final room making over the next year, we estimate that the decrease in annualized revenue before mitigation could be as much as $1,800,000,000 to $2,300,000,000 starting in the Q3 of 2011. The estimated shortfall in revenue would impact the carrying value of the $22,000,000,000 of goodwill currently included in the Global Card Services segment.
Using these revenue estimates, we estimate that the impairment of goodwill to be reported in the Q3 of 2010 could potentially be in the range of $7,000,000,000 to $10,000,000,000 We will continue to explore mitigation initiatives, not all of which will be reflected in the Global Card Services segment. The amount of impairment recorded in the Q3 will be after consideration of the value of mitigation initiatives applicable to Global Card Services that exist at that time. Before we open it up for questions, let me reiterate that 20.10 is an environment where earnings and capital formation are the goals. The economy and the consumer at the present time are still delevering, so core revenue growth is difficult. The improvement in credit quality is better than our expectations in March and our outlook
for the rest of the
year has also improved. However, we do have revenue headwinds that we highlighted in the second half of the year as customers continue to delever and we realize the full adoption of legislation. As we mentioned in the Q1 from an earnings perspective, it will be the dynamic of how fast credit improves and expenses are
are that
And we'll take our first question from Matt O'Connor at Deutsche Bank.
Good morning.
Good morning.
Can you
give a little more clarity on the outlook for net interest income? It was down about $900,000,000 this quarter. Some of it's obviously from trading. That piece is always hard to project. But your comments that it's going to trend down going forward.
Do you think we'd have similar declines to what we had this quarter or more modest?
Well, they'll certainly be similar. We don't
is as you watch the reduction in loans in quarter to quarter, some of these core loans that the economy just continues to retract, but some of it also that we're trying to run off. In those portfolios are typically fairly high yields, but they also have a fairly high credit cost. So that dynamic has been going on for several quarters. It starts to mitigate as you get over the next few quarters because those portfolios are being run down.
Okay. And then
decline. Well, keep in mind the numbers that we gave reflect no mitigation actions. And obviously over the forthcoming months and as we watch the rulemaking by the Fed, we'll be adjusting our business model to attempt to mitigate as much of that as we can.
Okay. And it seems like one potential offset for the industry would be bringing down the rewards. Can you just remind us, do you have rewards attached to your debit cards? And is that a pretty big cost?
That's not a significant part of our debit card. On a credit card, it would be, but not on a debit card as much.
Okay. And then just lastly if I may, the non performing assets were relatively flat quarter to quarter
and it's still early in
the earnings season, but we're seeing declines in some other banks. And I'm just wondering if you have any thoughts on why the pace of improvement there is maybe taking a little bit longer than at some other places?
I think it's largely the impact of some of these legacy portfolios that Brian was referring to.
Okay. All right. Thank you.
Thanks.
Our next question comes from Betsy Graseck at Morgan Stanley.
Hi, good morning.
Good morning, Betsy. How are you?
Good. So a couple of questions. One is just on the FICC line. I mean, was there any one timers in there this quarter? You had peers so far down about a 3rd Q on Q and you were down a lot more than that.
I was just wondering what was in there?
I mean, you have impacts of CBA and other things that Betsy, it's hard to say the one time or not one time. We just had a very strong quarter in the Q1. So I think I'd look at it as more there are pluses and minuses in the Q1, plus and minus in the Q2. I think it's you You can get into 42 line items about ins and outs and I think it's better said that probably we just had a very strong quarter Q1 compared to what we had had in prior quarters.
Okay. Just when I look at your FICC line in trading relative to the underwriting, it looked like the way we think about multiples there, the multiple came down a bit. So and then you indicated that the trading team was nimble ahead of the European market correction. So just wondering if there was anything that they did that might have been a near term?
To give you a sense, we were running about $300,000,000 round numbers of average $280,000,000 $300,000,000 of average bar in the Q1. We were down to about $180,000,000 in the Q2. So they took the risk down because they weren't sure of the direction. And that gives up opportunities if they'd have gotten it right. So I think it was more making sure that we manage the risk down than it was we just thought it was so volatile.
I think Tom and his team thought it was so volatile, they just got out of the way.
Sure. Okay. And then just separately, I know you spoke about the commentary around Durbin already, but maybe I could just ask it from a slightly different angle, which is what are the key drivers to the assumptions that come up with the $1,800,000,000 to $2,300,000,000 reduction, the 60% to 80% reduction in that line item?
Well, it's largely our interpretation of the law of Etsy is to look at the rule making flexibility of the Fed, it's actually pretty narrow. They have some definitional opportunities there. But as we've assessed it, they don't have a lot of wiggle room in terms of being able to modify what's written in the amendment. Again, I want to emphasize that that estimate assumes no mitigating actions. And as you might imagine, Joe Price and his team are working diligently to determine the appropriate ways to mitigate the impact of Durbin.
Some of those mitigating actions may occur in other business segments of Bank of America and wouldn't necessarily be reflected in the card segment.
Right. Because basically the Fed is required to look at what the cost to provide the services. And so is it fair to assume therefore that revenue decline is brings down your debit fees to the cost to provide that service?
Yes. We've made some assumptions. We believe we're probably the most efficient provider of that service. But we do have some expectations that the Fed is not going to require merchants to offer different rates, if you will, for every single credit card that a consumer might bring to its store. So, I mean, it's
a that's a margin in isolation is a very profitable activity. And when you go from full recovery of revenue to only cost recovery, the impact is substantial. The issue is it's not a severable activity in a sense from all the things that customer does from us. So there's other ways to make money and other ways to mitigate it. But when you look at that narrow revenue stream, it's a fairly profitable because it's very leveraged because you're not taking account any of the cost of originating the customer, servicing the parts accounts, running the 18,000 ATMs that they have access to the 6,000 branches.
And that's part of the conundrum in the statute quite frankly.
Yes. The Durbin Amendment Betsy remember is allows us to recover incremental cost. And as Brian said, the cost of bringing that the aggregate cost of bringing that service to the customer, the fixed we have and the overhead are substantial.
Right. Okay. And so reward program you mentioned is not as big as in credit card, but there is some reward program associated with debit?
I think it's very minor. I mean, I mean, we'll get to that Betsy, but don't think of that as a relevant question.
Okay. And then the goodwill charge would come when?
When the President signs in the quarter in which the President signs the bill.
Right. So it would be in the Q3 of 10? Yes. Even though the rulemaking could change and you're just taking that your scenario is the base case scenario?
Well, our judgment Betsy as we look again at the degree of flexibility that the Fed has to write the rules, it's fairly narrow. In terms of flexibility, we've made a judgment that under any reasonable range of outcomes, we think we'll have an impairment in goodwill. And under the accounting rules, when you've got that when you've reached that judgment, then you got to measure it as best you can and take the charge. I'm sorry?
In a matter of transparency, it's a law of the land when he signs it. The question exactly impact could be subject to some interpretation, but we got to take it when it becomes a law of the land.
Yes. And during the quarter, as we evaluate mitigating actions, we will come back with our best estimate at the end of Q3. That will be the charge we take. We will continue to work to improve the performance of that business through other mitigating actions. But to the extent that those mitigating actions occur in a different business segment, we really can't take credit for it in making this goodwill impairment measurement.
Sure. And do you know when the timing of those mitigating action announcements would end up being?
Have any? It's going to
I mean, this is going to be, in my mind, a 1, 2, 3 year type of work. It's going to be a changing, as I said in my comments, Betsy, Joe and the team have been hard at and will start to roll out changes in the core way the customer accounts operate of which this is a part. And so it's not an overnight thing. It's going to be over a series of the next 6 to 12 quarters before we can identify and get it through the back end P and L.
Okay, great. Thank you.
Richard Richard, your line is open. We'll move on. We'll go to Ed Najarian at ISI Group.
Good morning.
Good morning.
I guess two questions. First I think is a fairly easy one. When you talk about the $1,000,000,000 after tax for the card act, could you indicate to us how much of that might already be embedded in the 2Q run rate?
About a quarter of it.
Okay. Thank you. And then secondarily, given the different types of rereg related headwinds that we've discussed and you've discussed on the call, are you giving any thought to reconsidering your stance on Reg E and sort of going back and reconsidering whether you might work to change that policy and get customers to opt in to try to recover some of those overdraft charges?
I think we're the largest consumer franchise, and especially in the sort of core consumer markets. As we looked at the change we made in Reg A, we were very comfortable we made the right changes for the good of the customer. And I think even if a customer opts in, quite frankly, the next time they overdraft and hit 4 or 5 draft fees for a cup of coffee and a few things, they're going to realize that that was not the choice they want to make. It's clear from what the customer research we do. And so don't think that's the way to go.
I think the way to go is to move away from the penalty that the intersection of the overdraft charges, the toughness in the economy, people stretching their paychecks as far as they can. And then the way the charges worked and think of that through and go to less penalizing a certain group of customers and spread it across the broader group of customer base so we can achieve a return in the business. Because the outcome of the specific customer interactions we had a small percentage of customers are paying a line, a good chunk of the fees. And it just when you looked at in hindsight, it's not the right way to treat them. I don't think them opting in is going to change that dynamic.
And I think they'll be upset once they opt in down the road. And so rather than go through opting them in and then have a fight about it again, I think the better course is to get it over with and start to charge a better way. And we've seen our customers respond from our attrition rates are way down. And if you actually look at the overdraft fees, they have come down some over the last couple of quarters, but they're stabilizing and stuff and customers are understanding it. We expect them to continue to drop as reggae comes in, but on the other hand, it's the best thing for the customer.
And so I think other people taking different positions and we'll see, but we've taken a consistent position. We won't have such a penalty orient pricing in this franchise or else we won't those will be destroying the value of the long term.
And then lastly, thanks Brian. And then lastly, if you could just maybe give a little bit of a big picture answer to sort of the question of, we're obviously seeing throughout the banking industry a lot of revenue headwinds related to lack of loan growth, net interest income is coming down. We've got all these re reg related headwinds that we're discussing. What would be the big picture opportunity for Bank of America to kind of go back through and really take a hard look at its operating expense base and bring down operating costs related to some of these revenue headwinds?
If you look at so you have to sort the businesses, I think, into different parts of that. So if you look at the consumer business and you just look at the numbers of branches we had 4 quarters ago versus now, you'll see they're down a couple few 100. If you look at the even trim some of the ATMs, change in the functionality of ATMs, there's no question that Joe Price and his team are hard at work on cost structure, how to mitigate this by revenue and by cost. And he has to do that. He knows it and he's working on it.
If you back up in the broader picture to all consumer segments, we're still suffering in the picture to all consumer segments, we're still suffering in the card business and the mortgage business, the impacts of the delinquency servicing costs, for lack of better term. And to give you a sense, it's probably a good loan is $30 ish a service or something like that and a tough loan is $700,000,000 to $800 a service. So that's has barber costs way up and then likewise in the credit card. So in those businesses, the cost structures have been are being worked on as we speak and will have to continue to be worked on with the caveat that until we sort of break the back on the hard work around foreclosures and defaults and the delinquencies, the last thing you'd want us to do is to pull back on the resource dedicated to that. Let me completely flip that to the other side and took something like Tom's business.
Tom's business is a revenue business and you can see it in the quarter to quarter in terms of the $3,000,000,000 plus in profit in the first quarter $900,000,000 in this quarter. The challenge here is all about people. And so what you don't want to do is to go pick up the cost as we're building out and driving the business and driving the profitability on the basis of 1 downdraft in the quarter. So as I look at it, each business is different. We will have to drive the cost down.
But it's differentiated. We'll have to drive the cost down overall than we have. The non personnel expenses, I think, are down 8% in a linked quarter basis and stuff, and we'll continue to do that. But I think we have to be careful about which business and how. And then in the broadest context, one of the reasons why we're getting rid of some of these non core activities is a restructuring that not only has the value of capital, but also has the value on a more straightforward company.
And so to the extent that we can get that out, we can take some down some of the costs attributable to that from unique operations, which are not sort of scalable into the broader base. So you're absolutely right. Over the next several years, costs are going to be an issue for our industry, especially on the consumer side.
Okay. Thank you.
We'll take our next question from Mike Mayo at CLSA.
Good What was the loan utilization in the second quarter?
I don't think it changed significantly on the revolving credit lines to be you get to report different numbers, but sort of core middle market credits used to run 40s, now they run 30s. And so the actual utilization rate is a little different when we made some of the smaller business credits. But if you think about a core middle market company, it's not moved up.
So it's still 37% in the Q1, is it still 37%?
Yes, in the aggregate. But I think, Mike, as I look at focus on sort of the lower size companies that are larger. I look at the core middle market companies, it's even lower than that and it's been steady. So there's no loan demand because there's no demand for the products.
But that it didn't get worse, it just stayed flat?
No. As we look out, I think that we've seen some stability in the applications in our small business credit. We've seen some stability in those numbers. But Doctor. Ward, stability, not optimism yet.
But if you went back to quarters, you had to know that you're still coming down.
And you're shedding a lot of assets. What about CCB and BlackRock?
CCB is a strategic asset for us and we'll let you know when we make the decisions about various things. But I think that the CCB asset, we have a strategic relationship that's broadening as we speak and we benefit by BlackRock, as I've said many times, is a great company and we're very happy with
it. And then back to the NPA question, it seems like the prime mortgage NPAs went up by a few percent this quarter. Why is that staying up? And do you think we're going to have a double dip? And when does come down?
I mean by double dip in housing.
Our experts don't our internal economists would think that probability of a double dip as well as I said. And I think and that applies both to housing and the general economy. But to question the NPAs, I'd make sure we understand exactly the question because I missed you right at the beginning.
Yes, sorry. Just the NPAs in residential mortgage were up linked quarter. And I'm just wondering when you think you might see a turn for the better in category?
I think we're still a few quarters away. I mean it's in half from the Q1. So I think over the next couple of quarters I'd say you'd start to see that mitigate. So if you look at it was 1,100,000,000 growth in the first at 677 on Page 27, you can see it Mike. So but I still think we're a few quarters away on that.
It's going to be the slowest. If you think about what's happened, the car business turned around sort of first because it frankly is the easiest to move to reposition. And then the commercial business turned around. The C and I business broke through pretty quickly again because frankly the team did a great job in underwriting I think through the cycle and then was able to get it done. The real estate related stuff is just slower moving and commercial consumer real estate, commercial estate will take us a little longer to complete break the backs of the credit in total, even though they're coming down and getting a little better.
Are there any other factors that are influencing that? Like you mentioned the elevated foreclosures as you clean up countrywide. Anything else related to government intervention that's changing and therefore that's impacting the outlook?
Quarter to quarter the government programs are basically the same, and we've modified our 600 plus 1,000. What we have done is during the Q2, I think exactly which month, but basically we started releasing people who aren't going to qualify for permanent mods into the foreclosure process. And so that if you remember, we used to say we had 700,000 temporary total mods and dropped to 6 and largely that was a release. So the process is moving through the system. It's a difficult process.
So but there's been no substantive change in terms of government support for the modification programs. We're finishing up on the work that we're doing there and continue to originate modifications in accordance with the currently outstanding programs.
And then last question with the new CFO maybe just any philosophical change on how you approach the position or any changes that we might
see? I'll let Chuck answer that. I think that was directed to him or
Yes, Chuck, go ahead.
Well, Brian, I'm sure we talked about this, so none of this will be a surprise to him. Mike, I think if I think about my priorities, open and direct communication with our shareholders and other constituencies, doing the right thing, doing it the right way. A disciplined approach to our finances focusing on returns not absolute size. Committed to a strong balance sheet, strong capital with adequate liquidity through the cycle. We're going to focus on our core businesses.
We're not going to get diverted into other activities and obviously focus on strong controls and expense management. So that's my focus. Those are my priorities.
All right. Thank you. Thanks, Mike.
We'll take our next question from Nancy Bush at NAB Research.
Good morning, guys.
Good morning, Laurie.
A couple of questions here. Brian, you spoke derisked? And if there's any way, and I realize this is very difficult to sort of size the impact that derisking may have had on 2nd quarter results?
Yes. Just in a broad context, I think going through the customer groups and the consumer side, when we talk about taking out the risk, in the unsecured lending products, card products, we had a consumer lending portfolio, which is at a high point well over $20,000,000,000 It is now down to $16,000,000,000 and will continue to effectively run to 0 over the next few years. We had obviously the legacy assets from Countrywide, which we are continuing to run down, some of which are in the consumer segment, some of which are in the central segments, but we're running those down. The home equity book will continue to let drift off some of the tougher areas we probably originated a credit to on 2 of favorable terms of customer. And then in the very small business area, that was an area, if you remember, our charge off rates ran up almost 18% to 19%, and that's come down it's down to $12,000,000,000 in the Q2.
I think at the high point, I'd say it was $15,000,000 or $17,000,000 So in the consumer, it's more running off sort of non core portfolios or portfolios that have risk in we take. And so I could I can't off the top of my head say exactly what that happened, but it is taking up revenue. And frankly, some of those yields in those portfolios actually the better higher yields than the core consumer card would be. When you look at the commercial side of business, our core middle market business is very strong and we're doing everything we can to grow a loan balance, just not a lot of demand. But on the commercial real estate side, for example, we had in loans, we have a couple of these large deals.
1 of them we liquidated in what we used to call large floaters. But when we liquidated this quarter, we expect to liquidate the rest of them. So that's sort of stuck hung large commercial real estate deals. And then, the rest of David's portfolio has actually been very strong. And then, when you go to the large corporate portfolio, it's performed very well.
I mean, lending portfolio in Tom's world and we wouldn't be doing anything there. And Tom's world is really the legacy asset CDO rundown, wrapped asset rundown and we just continue to run that off. So from an asset portfolio side,
it's a
whole bunch of pieces and I can ask Kevin and those guys to try to take a stab at it. But I think let me go back to a broader perspective as you think about over the next several quarters. What I think we owe you over the next few quarters, Nancy, and part of just working through it, make sure we have a good handle is sort of the core non core view as we out as to where the loan portfolios that we expect to carry and want to carry and how they are behaving versus portfolios aren't. And we'll do more for you for the in each quarter in the quarters going forward. It's just been as we've been making the transition here, it's a little hard it's been harder to isolate them and getting Chuck on board and sort of get them put together a lot of other things going on.
But we will do a better job stowing you as how this year and economy stabilizes what the core asset size looks like and try to highlight that for you.
Okay. Also there was a story yesterday in The Wall Street Journal about some of the initiatives that are taking place in the branch network. And I'm wondering when Joe is going to address is going to to speak to us about what's going on there or you're going to do any kind of sort of strategic review of what's going on in retail? And is there any expense associated with that?
I think what we I think we told you, I think, in the last call is our anticipation would to come to you in early next year with sort of a complete layout of the company and an Investor Day that we haven't done in a few years to lay it all out. I'm sure frankly between now and then, Joe will be in situations where we'll talk about it. But the thing is, is things change. I mean, if we were here 90 days ago, the idea of interchange being a relevant question, I don't think was on anybody's mind. So we're trying to make sure that we sort of get the rules of the road set and then we can react to them.
So last call would have been reggae and card act. This call, it's interchange. And the question is we got to sort of make sure that we have the cement forming under the rules and then we can do it. So it's going to take a few quarters. But they are it's not that they're sitting on our hands.
They sell the products. We pilot the products in Georgia and other areas where the all electronic products, we piloted some of the monthly fee products and things like that. So they'll be making some of those changes even as we've waited to the transformational new product set around the transformational new product set around the core consumer checking, which will roll out next year if they're starting to put some of those changes in, all consistent with the core thought process that shifts from more penalty oriented pricing to more broad based pricing. And with the thought process that we have to provide a return for you and our shareholders in consumer banking, the ROEs 11%, that business has to produce a lot more for that for us to be able to do what we need to do on our balance sheet. And so they it's all the levers to pull them all and we'll be as the quarters go on here and we get more used to what the rules really say, then we'll be able to show you more.
And just one good get to Countrywide sort of looking like a normal mortgage company?
Well, I think if you separate in 2 pieces, I think the front end, we're finishing the last part of the integration of the systems and implementing the full image based systems and stuff. And one of the things we don't talk about is we've had some of the largest systems work ever done in our company's history going in on the weekends now with Merrill Lynch Countrywide and completed very well and stuff. So from the front end, they've completed that work. And so from production side, they're still about a month away from having it fully done, I think, a month and a couple of months in terms of the last pieces of it. And we had to slow down a little bit to make sure it was really working right.
From the production side, we're 20% market share sort of quarter in month in quarter in quarter out. So that's sort of behind this one brand in the market core products. What we want to do, adjusted all the buy box, so to speak, adjusted the product parameters, that's done. It's really now the back end. And this is think of it as $1,200,000 or $1,300,000,000 loans that we have just to work through and then the subsequent work through those loans, which may need to be touched again.
And that's so it's sort of bifurcating in 2 pieces right now. And so I'd say it's still probably I think Barbara didn't ask a Barbara about it. I think this year, next year ended the 12% before you see that back end really go over the edge and you see significant reduction in past the point we get to normalize sort of default practice.
We'll go next to Moshe Rambusch at Credit Suisse. Go ahead please.
Great. I've got basically kind of 2 questions. Just expanding on the Durbin, could you maybe flesh out what kind of actions you would take both inside the card business and outside the card business to mitigate that? And a corollary is, as compared to the overdraft where you didn't take goodwill write downs when Reg E cut your overdraft revenues. Why would you take them now before this is kind of fully fleshed out and your mitigating actions are in place?
Could you kind of differentiate between the 2?
Let me take the back half of that question and leave the front half for Brian. What we do each quarter for our key businesses where we have substantial goodwill balances is go through an assessment, 2 step assessments as required by the accounting standards to determine whether or not the carrying value of our goodwill holds And so that's an incremental kind of an effort. And frankly, when the first round of regulatory changes came into effect or were announced, we had plenty of headroom, if you will, in our goodwill impairment calculations. The trigger the signals to us that we had an impairment. Yes.
So if
you think about the Card Act, that was taken into account
in the valuation as of
the June quarter and we were to the plus. It's next quarter if and we all anticipate the President will sign a law next week that will hit you. And so, and the difference also is the segments. The overdraft fees in the consumer segment whether remember this goodwill comes the purchase of MB and A, we got to start back there. And that was a card company and we put our payments business together under the leadership of Bruce Hammonds and Rick Struthers and now Susan Faulkner back then and put the 2 together, so the segment was reported separately.
In the retail business where the overdrafts go, there's a hugely whole bunch of revenue streams, including a bunch of margin, obviously, on the deposit business that supports a goodwill number, which is actually less than this business. So it's just not been an issue.
And Brian, sorry to harp on this, but you didn't buy a signature debit business with MB and A. So, where is that goodwill? How is that goodwill coming from that acquisition?
It's on the enterprise, which is our payments, our consumer payments business, which is a combination of our debit card business, credit card business. That's been going that was put together 2 or 3 years ago. Yes. Our global credit our global card segment has both debit and credit in it. And it has for a significant period of time.
Right. And so as changes have occurred in recent action is the one that
So it tipped you over the edge with respect to the valuation.
That's right. You got it exactly right. And as
far as the mitigating actions that you inside and outside the segment, could you talk about that a
little bit?
Yes. I mean, I think that for the overdraft and the debit interchange, you basically think about it as you have a checking account and you have how you're going to charge for the checking account. You can pick up revenue obviously by the spread on deposits. You can pick up revenue by the fees. And so the mitigating actions are from the revenue side are along those dimensions, which is different times of fees, different types of fee structures, higher minimum balances, still charging for overdrafts and other things that occur on the check side and things like that.
And then people wanted from an overdraft, but prepaid debit and things like that. So of the benefits that people wanted from an overdraft, but prepaid debit and things like that. So we're working on those. Those it's all around either the fee side, annual monthly fees, etcetera, or the spread side. One of the issues until rates rise, the spread side is relatively in elastic because on the checking you're charging 0.
So the value will come as the core rate structure moves up. And then the issue as we said before, some of that falls in the deposits line of business and some of it falls in, but from a standpoint of how the customers think about they're paying for a checking account, 6,000 branches, 18,000 ATMs, etcetera, etcetera, etcetera.
Okay. Just kind of a follow-up on a different issue and that is you talked about the compensation line, but with a significant reduction kind of linked quarter $4,000,000,000 roughly in trading profits, I guess, shouldn't we have expected to see a little more of a reduction on the personnel expense accruals? I guess, maybe could you flesh out that versus the deferred comp that you alluded to in the press release?
Well, given the variability between the two quarters, I think you really have to look at it on a year to date a year to date basis. And on a year to date basis, we're in the sort of mid to high 30s in terms of our accrual, in terms of a percentage of revenues. And depending upon how the rest of the year goes, that seems like a good year to date kind of number. Got it.
Thank you.
Thank you.
Jefferson Harrelson at KBW. Your line is open.
Thanks. I think I've heard you talk in the past about the pre tax pre provision earnings power of the company eventually being $52,000,000,000 to 60,000,000,000 dollars with this quarter with Durbinville maybe hitting by $2,000,000,000 with maybe the margin the spread was down by $1,000,000,000 that's $4,000,000,000 annualized. The fee income included the DVA of over $1,000,000,000 the rental warranty moved up a little bit higher. Does this quarter or FinReg details make you change how you think about the $52,000,000,000 to $60,000,000,000 or do you think that needs to be lowered a bit?
I think we I'm not sure if I ever talked about that number, but that's in the past because I think we saw $14,000,000,000 round numbers and then $12,000,000 And so we try to make sure people don't annualize the $14,000,000 of the Q1 because we thought trading had to outsize. But I think as you look forward, I think that an idea of hitting that high range would be based on everything we know today, that would probably be more than we'd expect. On the other hand, we've had time to work through some of this mitigation, some of these provisions. So I think our view is that if people are up at the high end of that range, I think they are high compared to the things that hit us since even like interchange that hit us since the time we made that. So I think as we look in the future in near term future quarters, I think we've been clear that the $12,000,000,000 which has some pluses and minuses, but trading back in and take some stuff out, that's more in a range of we're talking about $11,000,000,000 $12,000,000,000 for the near term with some pluses and minuses each quarter going through.
We'll go next to Chris Mutacchio at Stifel Nicolaus. Go ahead please.
Thanks for taking my question. Hey Brian, can you I hope you don't think I'm harping on this or else is. On the Durbin Amendment, I'm just trying to struggle to see what assumptions you're using in which the Durbin Amendment pretty much knocks off 70% of debit interchange fees.
Can you
share the assumptions that you're using?
I mean, so the broad assumption is you went from ability to charge to ability to only get recovery of costs. Your incremental costs of supply and service. And so Chuck, you've been tearing apart the assumptions that get us there, but that and Neil could add to it. But from a broad perspective, you have to read what that law says, which is that you can recover incremental costs. This is why we were so trying to as an industry trying to make sure people understood that, because it's an unusual event for someone to regulate a particular transaction between 2 businesses to only allow you to recover your costs.
That's a very unusual event in American history.
Yes. Chris, If you go and read the rules carefully and there's still some wiggle room with the Fed in terms of their rule making, we're able we're able to recover incremental costs. So the overhead, the infrastructure, a lot of the things that we offer our retail customers in the banking centers is not incremental. And so this was a particularly lucrative business for us. As Brian said, this is not going to benefit the consumers at all.
This is simply a movement between different businesses of profitability.
Amazing. Brian, one follow-up I think Betsy had earlier. In FICC trading, was there any issues with European sovereign debt that might have brought down the trading amount in the quarter. It seems like you're lower than what I've seen from maybe Citi and JPMorgan. I know you kind of qualified that by saying that
you took risk off table during
the quarter, but was there any type of items related to foreign or sovereign debt issues in the quarter that impacted that more significantly?
Not anything significant in terms of the nothing on cyber debt. We didn't have a lot of exposure. We managed it well. If you look at that revenue line on the chart there, you can see that the numbers run on a fixed side 5 last quarter. And if you look back over the other quarters, you can see that that was just an extremely strong quarter for us.
So I think we think of Tom's business being sort of quarter in quarter out on average and it will move by seasonality more like $5,000,000,000 And that's what I in the earlier question, he needs to add about $1,000,000,000 on revenue, dollars 20,000,000,000 in revenue a year, and we think that's a solid performance of that business. As you look back, you could see that you can get to the $5,000,000,000 average, but it bounces around a bit based on some of the seasonality and some of the opportunity. So the $7,000,000,000 in sales and trading revenue last quarter was a significant outsized performance. And most of it, as you can see, the equity business is more of a we decided to get dinged up a little bit some of the derivatives, but generally it's $1,500,000,000 business sort of because of the cash nature of it and the way it works as well as the derivative, but it's sort of more of an annuity stream for lack of better term, and the FICC is where you have the volatility. It's not a sovereign risk issue.
It's more related to the lack of opportunity in terms of upside. And any hits we took were around the classic sort of CDA issues with counterparties and things like that.
Any thoughts on the Lincoln amendment going forward as it relates to that type of $5,000,000,000 average per quarter?
We don't think again, this is there's lots regulations and that's one's harder to understand because it's not so discernible. But we are because we're customer driven and Tom frankly the last 18 the house at all. And see this as being as significant on this side of house at all. And frankly, there's some benefits into it as counterparty risk and things like that that will help. So we have not this has not been our major concern.
Obviously, with numbers we put out in the Aeros stuff, that's what the concern is.
Thank you very much.
And we'll go next to Carol Berger at Solace Securities.
Good morning. A couple of small things. On the reps and warranties, the increase, I'm not too clear whether we're going to a new level of expenses. I mean, you were at the lower level of about $500,000,000 for several quarters. Is this a new level?
Is this part of this a reserve filled? Could you flush that out a little?
Sure. Carol, as you might imagine, there's variability in the degree of dialogue between us and the various monologues. In some cases, we're in a very constructive discussion where we have an ability to understand our exposure and measure it and accrue for it. In other cases, there's litigation involved and a lack of communication because of the is make our best judgment and our best estimate around that exposure. Last quarter, we told you that as it related to monolines, we didn't have enough information to make an accrual.
We have more information this period this quarter to make an accrual. It will depend upon the dialogue with the monoclines or the lack of dialogue and the kind of work we do to see if we change our estimates. So what I communicated in my prepared remarks was that it's going to be a bit lumpy, it's going to be a bit variable and it will there's not a run rate concept here the behavior of the monologues.
I think Chuck, in the second quarter, the actual cost, the real run the actual cost was really flat for the first quarter. This is the additional reserve and expected future comp.
Yes. This roughly $700,000,000 addition was reflective of that.
Okay. That's helpful. Also, do you have any of the after tax numbers on some of these larger asset sales? Because it seems to me even after I adjust your tax rate for that $250,000,000 tax credit, I still get a pretty low tax rate in the quarter.
My recollection, Carol, and we can get back to you more specifically. My recollection is that the aggregate impact of all of these on the quarter after tax was a net gain of about $1,100,000,000 $1,200,000,000
After tax. After tax.
After tax. Of the 3 of the ITAU, Mastercard in Colombia? Yes. 1.2, 1.3, okay. And lastly Carol,
one other thing too.
We did have some additional tax benefits that associated with the Tundeir
Mexico. In
addition to DTA impact. Okay.
So the one point 2, I mean, yesterday on JPMorgan call, Jamie Dimon also said that in addition to large corporates having a lot of cash on their balance sheets that he thought small and mid sized companies were also sitting on a lot of cash. Is that your experience as well?
I would say midsize, yes. I'd say very small companies, I'd be careful because it depends on what industry, whether they're successful or still struggling. So if they're in pure retail restaurants and stuff, you don't know. But if they're in retail restaurants or construction, things like that, those companies are still struggling. That mid market companies have done a great job through this cycle of getting themselves delevered in very good shape.
And they as you talk to those middle market customers, they're ready to go. They just need to see the opportunity. And those that have business in Asia and stuff are actually seeing revenue growth. And those that have business that in the United States, they're moving along, but if they have but they're worried about Europe, but they have business there. And so it's no different than you sort of into it from the general economic picture.
But they have gotten themselves and they're sitting all the cash there. If the catalyst exists for demand, they'll be able to fill the
demand very quickly. But that doesn't really bode well for your loan growth prospects?
I think that's the point that we're talking about. We've seen stability in the in the draw rates and stuff that I think was Mike asked about earlier. But and what is stability? Stability is better than what we were seeing say in the second half of last year. So but we're not saying that we're seeing the attributes setting up to grow yet because of the issues you're just talking about.
They have the cash and they don't if you look at the NFIB surveys and stuff, the people are not it's not access to credit, it's not cash, it's opportunity and uncertainty that's on their minds. And so it would take little while for loan growth engine to pick back up.
Okay. Thank you.
Thank you.
Our next question comes from Chris Kotowski at Oppenheimer and Company.
Hi. Most of my questions have been asked. But on the rep this quarter's bump up? Or is it an issue that 2,003, 2,004, 2,008 and 2,009 are being infected now as well?
No, it's the vintage as you'd expect.
It is all in the vintage.
Yes, there's no new news there.
And intuition would tell you that some has paid us for 3 or 4 years and starting to age behind us and that you seal the group of activity and a group of loans that we're going to have to work out in the next several years from all aspects not only rental warranty but from just generally working through.
Okay. And then I'm not sure I'll get any further than anybody else has, but on the potential offsets to like the debit card interchange fees, are there levers that one can pull in terms of either demanding increased free balances from customers or fees or anything like that?
Yes. We got fees, we got the spread and then we got the sort of activity per account which would be raising balances and any other cost side. We are working on all those dimensions. And so raising minimum balances and things produces a more efficient in other words, if that customer has give you more to get to keep an account and adds to your efficiency. So all those are on the table.
It's just with the law was passed yesterday, it's not even the law yet. And so but it will take time to retool the whole franchise and have the dialogues of customers do it. But every aspect will be done. And then the one thing I'd say that we that is one of my things that I get asked a lot about is how come this is such a great area for banks, low rate environment, it's not good for deposit franchise. And so we don't pay in checking accounts and the issues when rates are effectively 0, the value to that to this company is less than it is when the short rates are 2.5% to 3%.
So as rates rise, that will also be an offset.
And I think importantly, when you think about the mitigating actions, think about which ones will occur within the card segment and which may occur in other segments of Bank of America. That has a real never mind. Well, if you
take actions, never mind.
Well, if you take actions in the deposit segment to begin to mitigate this, it doesn't help our goodwill write off measurement because that relates to the card segment.
Okay.
All right. So it's if you can recover the point you're implying is if you can recover the revenues from the merchants somehow then that mitigates the goodwill write off?
No. If we did something in our deposit taking business, in our checking accounts and the kinds of actions and mitigations that Brian alluded to that don't result in incremental revenues inside the card segment, it doesn't affect the goodwill write off judgment. But we run the business in order to optimize the enterprise, not the segments.
Yes. I mean, look, what you're concerned about, what we're concerned about, the balance sheet adjustment we made are not at a level. That's done. The real question is, what's the business model going forward on the consumer side and that is all the mitigating factors. No matter where they come in, you'll get the benefits that it has in shareholders.
So, whether it's spread, whether it's fees in any segment, whether it's minimum balance requirements to make us more efficient and then taking the cost out. The team is working on it. We're putting them in place. We've already implemented them in some of the early the card act and other things. But it will take time to do it as we through the deposit franchise over the next several quarters.
All right. Thank you.
And due to time constraints, we will take one last question. Our final question comes from Matt Bernal at Wells Fargo.
Good morning. I'll try to
make these quick. Just a couple of administrative questions, I guess. First of all, in terms of the TDR trends, it looks like TDR balances were increased by a much lower amount this quarter. Can you provide any color on what the trends are there and what you might see in the Q3?
Yes. No, you're absolutely right. They did decline this quarter and we have and it will probably decline going forward. Okay. Focusing on the
Can you give us a sense as to what impact that might have on expenses in the global wealth and I'm sorry in the global markets business? A
lot of it is in the a lot of people are being hired as we speak. And so they'll come in their run rate. But I think from the numbers of people we're adding relative to the whole size of business, it will be an impact, but not a huge impact. And in the way we accrue for is against the profit and revenue, so that it will work out in terms of the operating dynamics. But I wouldn't say it's going to change the dynamic of the cost structure in Tom's business that materially over the next several quarters.
It's replacing people we lost and adding people, but it gets to a total base of 10 15,000 people, it's in the 100 type of thing.
And then last question, in terms of your potential sale of Balboa, my number suggests that there's about a little more than $3,000,000,000 of assets in Balboa, a couple of $1,000,000,000 in capital. Assuming you are able to execute the sale, what effect should we see from that in terms of assets and or capital getting freed up?
We'll fill people in on that. I think Kevin and those guys could fill you in specifically. We just today put it in market. And so I don't have a quick answer for you on the top of my head. But it will be a sale we're going to gain, it will be behind us, it contributes to earnings.
But our view is why are we selling? We're selling because it's not a core activity of making mortgages and we're continuing to fine tune the franchise.
Great. Thank you.
With that, I'd like to thank everyone for joining us this morning and have
a good day.