Bank of America Corporation (BAC) Q1 2012 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to today's program. [Operator Instructions] Please note, today's call is being recorded. It is now my pleasure to turn the program over to Kevin Stitt. Please go ahead.

Good morning. Before Brian Moynihan and Bruce Thompson begin their comments, let me remind you that this presentation does contain some forward-looking statements regarding both our financial condition and financial results, and that these statements involve certain risks that may cause actual results in the future to be different from our current expectations. These factors include, among other things, changes in economic conditions, changes in interest rates, competitive pressures within the financial services industry and legislative or regulatory requirements that may affect our businesses. And for additional factors, please see our press release and SEC documents. And with that, let me turn it over to Brian.

Thank you, Kevin. Before Bruce discusses the results in detail, I just want to take a minute and provide some additional thoughts on the quarter. On our last call, I listed the following areas of focus for our company during 2012: We want to focus on our capital levels, we want to focus on our risk, we want to focus on the cost base in the company, and we also need to drive the core business improvement. In the first quarter of 2012, we have made progress in each of these areas. As you can see, our capital and liquidity are at record levels in our company. Our credit costs continue to decline, and our cost structure is coming down, and many of the business, customer and profit metrics have improved. So first from a capital perspective. We entered 2012 with increasing strength in our balance sheet position. We managed through the CCAR test and made significant progress on our regulatory capital ratios again in this quarter. Our Tier 1 common ratio reached 10.78% at the end of -- at March 31, 2012. We continue to make progress on capital at a faster pace than we expected. When we turn to risk, our credit costs fell to the lowest level in nearly 5 years. Reserve levels cover 3.6% of our loans and leases and 2x our current level of annualized credit losses. The improvement in delinquent and nonperforming assets bodes well for further improvement in net losses as we go forward. As you know, we continue to take opportunities to reduce the remaining legacy assets in the capital markets business, and we believe we have the strong litigation and rep and warranty reserves in the mortgage area. On a day-to-day basis, the average value at risk or VaR is lower…

Great. Thanks, Brian, and good morning, everyone. I would just echo Brian's comments about the progress that we feel that we made throughout the quarter, and would look to kickoff the presentation starting on Slide 4 of the investor presentation. As we look at that and think about the quarter, we'd note several key takeaways, some of which Brian referenced. We obviously reported $0.03 a share in earnings, but when you look at and consider that number, realize that includes negative valuation adjustments of $4.8 billion pretax or $0.28 a share after-tax, which is the result of our credit spreads tightening significantly throughout the quarter. In addition to those results, we accreted significant levels of both capital and liquidity throughout the quarter, and each of those metrics are at record levels as we ended the first quarter of 2012. As we look at the operating results, Brian referenced capital market activities, and the capital markets generally improved throughout the quarter, driving sales and trading results that were significantly above the fourth quarter of 2011 and in line with what we saw during the first quarter of 2011, once again, excluding DVA. Outside of the sales and trading business, all of our business segments reflected improved profitability during the first quarter of this year relative to the fourth quarter of last year. Credit quality continued to improve significantly, provision expense at $2.4 billion for the quarter was the lowest that we've seen since the third quarter of 2007. We've talked a lot about expenses. Expenses did decline from the fourth quarter of 2011, despite the fact that we had higher revenue-related incentives, as well as the annual retirement eligible compensation cost that occur during the first quarter of every year. Excuse me, and lastly, I'd highlight, we capitalized during the quarter…

[Operator Instructions] Our first question comes to us today from Glenn Schorr with Nomura.

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

Sure. If you look at and think about the numbers that we gave you. Within FICC, I mentioned on both a -- or on an absolute dollar basis, clearly the most significant area that we saw was rates and currencies. Client flows were very strong, and we saw them in 2 areas. We saw them within Europe, with some of the volatility in the markets in Europe, activities were very high. And the second thing I would say is that within the FICC business, as you think about the high levels of activity that we saw in the investment-grade bond area, that translated into opportunities to do more business with our corporate customers, and that contributed to the results in FICC as well. Outside of FICC, the other areas that were -- that had nice increases during the quarter included our commodities area, which we've been focused on and starting to get some traction in the growth there, as well as in the mortgage area. Those were the 3 most significant areas, Glenn. I'd say the other area that was down a touch during the quarter would have been the overall loan trading area as some of the revenue opportunities given that the new issue business in loans was a little bit slower this quarter than a year-ago quarter. We didn't see quite the opportunity there, but at the same time, that, that area performed very well.

It -- I don't want to put words in your mouth, but it sounds like it was a pretty cash-driven flow as well as opposed to the derivative side?

That's fair.

Glenn, I think, if you think over last 24 months, Tom and the team have been continuing to build out the breadth of our platform across the world, and we're reaping the benefits of that. So if you think about this quarter this year versus last year, all the prop trading was closed out by mid last year, et cetera, and then -- so that it's really client flows driving. None of this is driven by really, as you said, less derivatives but more client flows, more of the new issue activity, more of the cash business. It's a very core aspect to what we do. So next quarter, because this is a strong quarter in total revenues, it may not be as strong, but the way we're getting there is very consistent quarter after quarter after quarter.

Okay. Appreciate that. Bruce, I wonder if you could just explain [indiscernible] or give a little color on, the 1/3 of the RWA reduction that was the optimization of off-balance-sheet OTC assets?

Sure. If you go through that area, I'd say we continue to work very hard in scrubbing the data. There were certain lending activities that we do that are secured lending activities. That as we work through, we have the ability to optimize from an RWA perspective, so we had some of that. I would say as we look to, and we refine what we do in the markets business, we improve the ability to net as we consolidated certain trading type activities. And we also work through and got third-party ratings on certain of the things which improved that as well. So we continue to be very focused and think we've gotten through the majority of the optimization associated with Basel I as I referenced in the increase in our guidance, we're very focused now on optimizing the balance sheet and looking to drive those Basel III ratios higher as we go throughout the year.

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

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

And we'll take our next question from Matt O'Connor with Deutsche Bank.

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

What I would say, as you think about that, and as you think -- let's spend a moment just on what we saw during the fourth quarter, and I think there are 2 items to note in the fourth quarter when you think of expenses. The $900 million that I referenced is related -- as it relates to compensation-related expense, that obviously, as I said, only occurs in the first quarter of each year. So as you look out at -- over the next group of quarters, that will obviously no longer be there. The second thing, when you think about expenses for the quarter over and above that FAS 123 amount, the expense number for the quarter was up given that the accruals that we had based on the strong performance within the overall markets area. So I think I would level set with those 2 areas, as well as think about some of the mortgage-related charges that I'd referenced. That the goal is, as we work through the year, that those would come down. Once you move away from those expenses, you move to the New BAC expenses. If you think about New BAC 1, we had originally given guidance that it was $5 billion, 20% of which we would recognize during 2012. We obviously took that guidance up and said it would be greater than 20%. So as you look at those consumer businesses on the line of business slide that we gave you, you would expect to continue to see those expenses going down. Obviously, we're in the midst of New BAC 2, which we've looked to wrap up in the May timeframe. And I would just reiterate what we've said there which is that, we don't think the expenses will be as great as what we saw in New BAC 1, although once again, given that they're not as interdependent on technology, we'd look to see those expenses -- those expense savings to start as early as the end of this year. So I would say that it's -- we continue to press through these. I think we wanted to show you the line of business breakdown because I think it gives you a good sense within each of the lines of business outside of what we're seeing in LAS, which Brian talked to about the second half of this year seeing savings, as well as All Other, which can be lumpy to the extent that there are nonrecurring type items showing up that you get a sense for where we're trying to go. But clearly, we would expect sequentially each quarter during 2012 for expenses to go down each of the next 3 quarters.

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

Yes. I think one of the things to keep in mind is that as we've gone through and as we're going through New BAC, we've been absorbing through the P&L the severance cost that goes along with the actions that we've taken. So if you go back to the fourth quarter, we talked about there being a couple of $100 million of severance and related items that we took during the fourth quarter. We had roughly $100 million of those type items that we saw during the first quarter for severance. As it relates to the other items, the only thing I can clearly say about the lumpy items is that each quarter, we accrue them and true them up for what we think our best views are, and we'll continue to do that so it's hard to give any specific guidance about what we may or may not see in any one quarter recognizing that the accruals that we have on the balance sheet at this point are significant.

Okay. And then just separately on the capital side. Obviously, the build the last 2 quarters has been very impressive much more than many of us, including myself, had thought. As we start kind of hearing you guys talk about additional changes from here, whether it's like some branch sales or there is something in the media the other day about you guys potentially looking at selling the non-U.S. wealth management. As we see those things potentially coming up, is that still about a goal of building capital or is it much more about just kind of rationalizing the franchise as Brian mentioned earlier. Just how do we think about, like what's driving the motivation for some of these actions that you might be doing or might be being speculated out there?

Without addressing speculation, if you look across the last 2 years, Matt, our goal is to get the franchise against the 3 customer groups and get out of the businesses which don't do that. And everything we've doing is consistent with that. Does it contribute to capital? Yes. I'd say, you shouldn't expect the things in the future to have as much impact as the things we did in the last couple of years, incrementing capital and a lot of the capital generation really comes from the earnings. In the case of Basel III, remember that we -- our biggest difference between our peers is the deductions for disallowed DTA, et cetera, which accrete off over time, and then the third thing was continuing to optimize the balance sheet. So when we're making decisions about various aspects, whether it was Canadian card or something like that, it is in line with the strategy which is, everything we'll have will be direct to customers, focused on those consumers and where we have competitive strength. And then the branches I talked about earlier, it's really fine-tuning the franchise that we have top positions in the top 30 markets. A lot higher than other people by numbers of branches, things like that and continuing to enhance that position, continuing to build out markets behind that, but also focus a little bit more on the markets that there's growth potential and size and scale that we can take advantage of.

And we'll take our next question from Betsy Graseck with Morgan Stanley.

A couple of follow-ups. One is on the New BAC. Number two, I'm sure you're going into this with a number in your head and given the first quarter strength, would you be inclined to be kind of taking that down relative to what you had been expecting? I would think you can make some arguments for less pull back than maybe you thought before?

I think, one of the things, Betsy, that we're very focused on is given that the environment relative to when we had started New BAC 1 has started to improve a little bit. We're very focused on not taking a step back, but continuing to drive what we saw in both New BAC 1, as well as New BAC 2. Keep in mind, a lot of what New BAC is, relates to simplification, it relates to getting rid of work that doesn't need to be done, and it relates to becoming more efficient. So while I think I'm clearly on the margin this quarter, you feel better about the overall sales and trading opportunity. It's not going to change the rigor and discipline with which we go through New BAC 2. And once again, we think given that we don't have as much technology, we'll be able to get after those costs quicker than what we saw in New BAC 1. The other thing that I think is important and even though it's not part of New BAC, if you look at both the Global Banking, as well as the global bank or as well as the Global Markets expense levels, you read some of the reductions that we made during the third and fourth quarters of last year outside of the New BAC process, and you start to see some of the benefits of those flowing through, and you'll see more of those next quarter as the people actually come off the payroll.

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

I mean, largely, a lot of those tend to be more pay fixed. So I think if you look at the variability, they will bounce around a little bit depending on where the rate curve is. But I think if you look out over the last couple of quarters, they tend to be within a range of several $100 million, and they've been relatively fixed within that range. And that's why we wanted to give you the guidance so you could get a sense as to what the core NII was backing out any changes that happened due to those.

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

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

We'll take our next question from Paul Miller with FBR. Paul J. Miller - FBR Capital Markets & Co., Research Division: On your home equity portfolio, I know it's been -- a lot of stuff has been -- new guidance out on -- pushed on recognizing NPAs, some of those loans that were the first to have defaulted. What do you do when you've modified the first? Can you talk a little bit about, do you -- how do you treat the seconds? Do you modify the seconds also with the first? And how do you classify those seconds?

Yes. I think there's a couple of different ways to look at that problem. Let me spend just a moment. I'm glad you asked about the seconds behind delinquent first. If you go back and look at the disclosure that we've put out at year-end with respect to our seconds behind delinquent first, you'll see that at year-end, as we took a look and did the work, we had roughly $2.5 billion of current seconds that were behind delinquent first. Throughout the quarter, as we continue to work with -- and keep in mind, the majority of our home equity portfolio where you have the first behind delinquent first, we do not have the first, so we need to work through the credit bureaus to understand exactly what the status of that first is. And as we've worked through and done more and worked with the credit bureaus to understand those seconds behind delinquent first, that the guidance and when we adjusted up our nonperformers to the $1.9 billion, that's an improvement from what we saw at year end of the $2.5 billion that's out there. I would say secondly, as you think about and what we do through the reserving process with respect to both first and seconds. Even though we may have and we obviously changed the way that the nonperformers are reported this quarter, but we are very cognizant when we look at and have both our formulaic models, as well as the imprecision reserves that we overlay on our portfolio that to the extent that you have seconds that have a delinquent first, we are going to adjust our assumptions to be conservative as it relates to where we feel like were reserved. And I think this new guidance as we came out and as we work through it at the end of the quarter and update it, we feel very good about where we were at the end of the first quarter relative to year end. The other thing that I would say, when you ask about the different home equity portfolios is if you go back to Slides 34 and Slides 35 that we have in the investor deck, I think there are a couple of important things to point out. The first is, if you just go Q4 '11 to Q1 '12, you can see that we continue to see fairly significant pay downs within our home equity portfolio. And I think importantly, if you look at the overall FICO scores, as we've updated and work through the FICO models that the refreshed FICO on our home equity portfolio is now at 742. So I think across-the-board with what we've seen in the quarter, well I think we're very sensitive to that there's not the growth that we'd all like yet in the economy. We've been very focused on the home equity portfolio and so far, during the first quarter, it's performed better than we would have expected.

I think the other thing to add to that is 2 things. One is, think of everything has been originated now for 4 or 5 years, has been originated under fairly conservative -- very conservative standards and traditional going through early 2000. So everything that's been added to the portfolio is very carefully underwritten. And then the second is, at the end of the day, ultimately the cash is the cash. So ultimately, the person who either doesn't pay or pays on their first, ultimately that first goes through liquidation and ultimately the second is dealt within that liquidation, and the proceeds come in. So moving around the timing and reporting is one thing, but ultimately over a period of the courses of months and quarters, it's the cash becomes the cash. And so, what's reflected if you look at some of these long term on Page 23 and these charts, as you can see activity has been going on for many years now and that the simple matter is each quarter it gets incrementally better, and this is the part of our portfolio we're still doing the most work because it's the slowest to fully recover. If you compare it against the Card business or other businesses that have fully recovered and continue to have more upside, this will take us longer just because of the nature of the process. A lot of talk about this, but ultimately it comes through in terms of the cash is the cash. Paul J. Miller - FBR Capital Markets & Co., Research Division: Guys, that was a really great update and I appreciate it. But going back to the question, part of the question was, how do you treat modified loans? Like when you modify the first, how do you -- what type of activity you take on the second? And then how do classify that second lien?

Well, if there's -- up until the change in the guidance, if you have a second lien that's current, and you have a first lien that's delinquent or have been modified, you're not going to adjust the second. What the new guidance now provides is that if you have a first lien that's more than 90 days, so as you look at the March balance sheet, if we have a first lien loan that's more than 90 days past due, we are now characterizing the second lien as a nonperformer. Paul J. Miller - FBR Capital Markets & Co., Research Division: And if you modify, like under these various modification programs, and if you modify the first, would you modify the second also? And then would you classify that as a current or a TDR or a nonperforming loan?

It's very difficult. You have to realize, Paul, that there are 2 different situations that we have. We have situations where we have both the first and the second. And then we have situations where we have the second and somebody else may have the first. And I think the important thing to keep in mind is that as we went through and came up with this nonperforming data, we only take somebody off or only look at a loan where there is a nonperforming aspect to it. It only gets cleaned up by virtue of the credit bureau after they've been current for a year.

We'll take our next question from Nancy Bush with NAB Research LLC.

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

I think if you think about the businesses across the 5 segments. In the consumer area, I'd say that we're very encouraged by the initial results and things like I said, about the mobile banking enrollments and things like that, which help us reduce the cost structure in the general retail business as we call it. And so we need to improve that business. All the regulatory changes that are well known to you, Nancy, over the last couple of years took away a lot of profit and an interest rate environment, which we're familiar with. But the reality is, if you look at the underlying customer dynamics, we're seeing improvements in online, mobile, the ability to fine-tune the branches, the cost of the branches per dollar of deposit, which is a metric I look at, has improved and dropped again this quarter. The rates paid in deposit continue to work their way down. So it's improving, but it's still at the $300 million to $400 million of profit. You can see in the core consumer deposits business, we need to make some upside from there. Now let me flip to the place we're having good success there. On the preferred side of that business, which is the 8 million customers that have a higher annual income, spent a little bit more with us. We're seeing great uptake in the service model we created, which is differentiated service model, and the FSAs we've put in the branches, which are Financial Advisors in the branches which do 2 things. One is, they serve clients, who are sort of below the threshold for the affluent group, and they also refer clients into the affluent group. The mortgage officers working with those groups in the branches that have been sort of designated as…

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

So I think I'd make a couple of observations. I think when you look at and what we had talked about before was that as we think about 2012 and as we talked about year-end, as you think about 2012, the amount of NII we're reporting I think is a pretty good range if you back out either plus or minus what we saw from hedge in prepay. I think if you look out at core margin and you think about where we are, there's nothing over time once the rate environment changes with the exception of having less credit card in the portfolio that would change what we've been able to achieve historically in margins with one exception. And the one exception that we're very focused on and one of the biggest opportunities we have with core margin is to continue to shrink the debt footprint that we have of the company. And when you think about the $35 billion in maturities that we have in the first quarter, or excuse me, in the second quarter of this year, as well as the amount of liquidity we have that outside the core businesses that we have where you can kind of project what the yields are, the biggest opportunity we have to drive that down is using the liquidity to shrink the debt footprint, which on average, as we repay that tends to be 300 and 400 basis points on a floating basis relative to the underlying LIBOR.

I think, Nancy, if you look at the long-term average, I think it's been closer to 3% across time. Assume that the mix of the assets may shift and so it's safe somewhere below that, but from the 2.50-ish, we kind of run at now to -- we've told you before, 2.75% should be easily within range with a short-term rate that moves up 100 basis points or so and we still feel comfortable that's the mix of business we have and in fact, we may have tightened that a little bit as we've tightened down the balance sheet.

And we'll take our next question from John McDonald with Sanford Bernstein. John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division: Bruce, just following up on that last point. Just sounds like for this year, net interest income was $11 billion this quarter. It sounds like you're kind of running in place perhaps the next couple of quarters unless something changes on the rate front or loan growth?

I think that's fair, John. I think just realize though that when you look at that, if you look at the quarter, but think a little bit about the benefit that we had during the quarter from the prepay and the hedges. I would not assume that, that's in the run rate during the next couple of quarters. John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division: Was that a benefit or just a lack of a negative compared to last quarter? Was it a positive benefit this quarter?

It was both. It was a negative that swung to a positive during the quarter and like I said, on a linked quarter basis, it was about $500 million. John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division: What about just how much it was as a net positive this quarter?

I believe it was in the mid-300s, John. John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division: Okay. And then on credit. What kind of outlook do you have on the ability to keep up the current pace of reserve release? Do you expect the size of the reserve release to come down going forward?

I think as we look out at -- and we look at the models, John, I think the right way to think about it is that we would expect that charge-offs would continue to decline as we go throughout 2012 quarter-over-quarter. And I think what you're likely to see is that the benefit from reduced charge-offs is probably going to be more or less offset by lower reserve releases. So as you look at the overall provision number going forward over the next 3 quarters, while there may be a little bit of variability, I think that'll be a pretty good proxy for you. John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division: Okay, and then one little nit pick question. In the first quarter, the diluted share count declined by about 300 million shares even though the stock price went up, you issued shares to employees. Is that impacted by the Buffett warrants or why would it have gone down this quarter?

Yes, you've got 2 different things going on. And the simplest way that I can say it, John, is that in a quarter, we're on a reported basis that we're north of $0.11 or $0.12 on a reported basis. You're going to see the Buffett shares in, and on a reported basis, when we're below, they're out. So as you think about this quarter, given that the impact of DVA and FVO and what it did to EPS, they were out and then obviously part of the reason why they were up a little bit in the quarter was because of some of the exchanges that we did throughout the fourth quarter of last year, as well as the employee shares that were issued during the first quarter. Those are the things that comprise the difference. John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division: Okay, so those things were overwhelmed by the Buffett coming out this quarter because of the reported earnings?

That's correct. John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division: Okay. And one last follow-up on expenses. The LAS this quarter was $3.3 billion. First, did you say that you think those have peaked? And then second, given that it's kind of a restated number now, with the restatement. What's a good eventual number for LAS do you think longer term? I think previously you had said of maybe a few $100 million per quarter kind of a normal servicing over time?

Yes, I think we said, sort of a $500 million a quarter. That's more of a normal servicing based on our estimates of what our portfolio will be at that level. John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division: That's still the case the way you've stated that?

Yes. I think, John, we're seeing the -- if you look at the slide, it'd show you sort of the work is about the delinquent loans, and you're seeing those drop, and we'll see those come down. As we've said, it'll take us the rest of this year and into next year, probably through next year to get it more normalized. But we're very encouraged by the amount of work that's getting done and the staffing levels we have. Just so people are clear, we talk about the 40,000 employees we have here. We also have around 10,000 to 15,000 contractors that work in this business. So if you think about our total headcount, think of how much of our -- of 278,000, 40,000 is deployed against this. So when this comes down it will have a significant impact on the company's activities on a day-to-day basis. John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division: Just to clarify that, Brian, you're not expecting to get from $3 billion to a couple of $100 million in a year, right? That's a couple.

No, it'll take us this year and next year and then it will really show up in '14. It will keep coming down during this timeframe, but I'd expect normal to really get it behind us is probably in the '14 just because we'll get the activities down. It'll take us a little while to shape it. John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division: Okay. And then the last thing for me was, Bruce, on the assessment of waivers back up to $410 million. Just why is that up so much? Is this the reserve and is this related to your kind of dispute with Fannie Mae?

There are a couple of things. There was a chunk that we had that when we looked at that we set aside for reserves on servicing advances and there were other assessment type things like you'd expect with Fannie Mae. So think about it in those 2 different context. John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division: Okay. And is that something that you have an outlook on that could continue at that level or is it they're just impossible to predict?

We would not expect it to continue at that level. John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division: Okay. So somewhere between $0 and $400 million?

Definitionally, that's correct.

We'll take our next question from Mike Mayo with CLSA. Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division: My question was on loan growth. And I see, Global Banking loans are flat. GWIM loans are flat. Consumer is down. And it's looks like some sort of deceleration. So are you seeing a swap from at least the large loans to the capital markets? Or how do you describe what's taking place? Is there a slowdown in the U.S. economy? Are you deliberately backing away from some credits? Any color you can give would be great.

Sure. I think what I'd say is a couple of things on that, Mike. The first is that, we have a very strong both commercial and corporate franchise. And obviously, we're very focused and especially given where we've built capital levels now, as we go forward to look to build off and to grow traditional C&I loans, both within the commercial, as well as the overall corporate bank. I think when you look at in 2 of the things or 3 of the things as I referenced that were slight offsets that we made a decision on during the quarter is that we've continued to work through, and we've got our commercial real estate lending down to an area that we feel good about. So going forward, you wouldn't expect to see the reductions in commercial real estate that you've seen over the last couple of quarters. The second thing I would say is that we did during the quarter, given what the market opportunity was and where pricing and securitization pricing was, to securitize some of our DFS assets out in the market, which led to some of the reductions. That's something that was opportunistic and quite frankly gives us a base to be able to go out and grow and do more with our customers on. And then the third thing that was a little bit lighter relative to year end was on the trade finance side. That, that it will ebb and flow, but as we've talked about before, we're very focused on growing the international footprint as well. So I think, while on the overall -- from an average balance sheet perspective, it looked kind of flattish. We did see some growth within the areas that we're focused, and those areas that there were reductions, we…

So Mike, if you look at -- let's take mortgage first. If you look in the fourth quarter, we did about $15 billion of direct to consumer originations, and in the first quarter, we did about the same. So the real steep drop in "our market share" out there has been on the correspondent side just going to 0. So if you look year-over-year, it dropped $20-odd billion in production. That is an absolute deliberate move. We will move -- we will be in a direct to retail channel for both our general customers and then also our affluent and wealthy customers. It's a business we think we have an advantage in, and we'll continue to drive that. That being said, as we retool that business, we underperformed on a direct to retail. And we expect that and as we moved through each quarter, each month of the quarter, we saw improved results in just straight volumes, and we've added more loan officers. We've focused the people to getting several thousand in the quarter of referrals from the branches and working with their teammates there. We've staffed up on the fulfillment side to increase our throughput. You'd remember there's some noise about a reservation system earlier on. So we underperformed, but we're doing exactly what we wanted, which is to focus on direct to retail. The team's working hard. David Darnell and the team and you'll see us improve there. But the correspondent is behind us, and as I said, if you want that business back and go out and buy in the market is not actually a customer-driven business in the way we look at businesses here in the company. When you go into the Card business, I think we have been continuing to fine-tune and have sold off…

Our next question comes from Brennan Hawken with UBS.

Just wanted real quick hit on the tax rate. I got to 9% for the quarter. Is that right? And what's driving that? And were there any unusual items in there that when you hit on your 30% tax rate for the year, we should sort of consider when we think about the full year tax rate?

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

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

Yes, I mean, at this point, it's a couple of things. The first is that -- and as we talked about both at year end and this quarter, we continue to adjust and provide reserves for the MI rescission and continue to work through that process with not only Fannie but other places where MI is topical, and our reserves reflect that. I think with respect to your original question, as it relates to reps and warrants, we obviously look at and provide the rep and warrant each quarter based on what we're seeing and based on our interpretation of the documents, which I can assure you we've had numerous people look at and feel very strongly with where we are. I don't think it's probably appropriate for me to reflect or to comment on what Fannie's view on that may be.

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

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

Okay. And they would reflect, if there is any deterioration in counterparty, those reserves would reflect that as well?

Absolutely.

Okay. okay, great. And then last for me on capital markets. You made some comments about VaR, but just if you could talk about maybe what happened with risk in the quarter? Did you guys take on risk, particularly in FICC? Which given what happened, if you took it on at the beginning of the quarter, certainly it would have worked out well. And then maybe give us an idea of how much of a tailwind for FICC you guys benefited as far as the tightening credit spread environment?

A couple of things. The first thing that I would say is that the -- as I referenced, the largest driver in the FICC business this quarter was our rates and currencies area. And that strength that we saw in the quarter was due solely or due largely, I guess, I would say to client flows where we were doing more with our clients during the quarter. So that is good core flow business for us that we saw during the quarter. And I think that if you look at both the risk-weighted assets and the VaR, they support that in that what we're saying is that, we're able to take less risk and make -- and if you look at both RWA, as well as VaR, they were roughly half of what they were a year ago, and we were still able to generate the same level of revenue. And I think when you think about that revenue number and you think about the level of risk, what it's reflective of is the fact that our client-facing businesses during the first quarter were very strong. And I think -- the only thing I'd say is that as we've continued to build the balance sheet, build capital and as we've seen our credit spreads tighten, the one thing I would say is that we are seeing more and more people that are doing more and more business with us. And we feel very good about that.

Just to be clear, we have not changed the limits this business operates on in 7 or 8 quarters. So the ability to do what they need to do to participate in the market is there, and they're making the choices based on opportunities and capabilities that they have to do it. And are well within the risk measures and producing as much revenue. So I think the team's doing a great job of really driving the business along the way that you would want them to.

We'll take our next question from Moshe Orenbuch with Crédit Suisse. Moshe Orenbuch - Crédit Suisse AG, Research Division: Just a follow-up on the GSE activity. 2 separate points. First of all, with all the -- despite all the rhetoric about the GSEs kind of expanding what they're looking at, it looks like this quarter actually had a smaller kind of new claims from the GSEs than the last -- at least the previous 4. But at the same time, you're kind of activity either approving repurchases or rescinding them were both kind of much, much lower. Could you talk about what's actually going on there and what it's going to take to get some more of this resolved as we go forward?

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

Moshe, you're assuming that a loan in every quarter for the last 10 quarters is exactly what they send in is the same, what's happened is it's different. And so the result of the activity is different because what is sent after being sent is different. It's not that the volume is different. Moshe Orenbuch - Crédit Suisse AG, Research Division: Got it. A couple of other quick things. First actually, you mentioned before the correspondent business and the Mortgage business kind of being focused on the core Bank of America customer. Is there any thought about thinking about that in the credit card business as well and kind of doing something with some of the affinity business, the national credit card business that doesn't kind of overlap with your customer base?

Just to be clear. The correspondent business is out of the Mortgage business. So it's a direct to retail business. In the Card business, we have an affinity group, and we've narrowed that group of affinities over the last 3 years to be consistent with where we think it adds value to the customer and to the company. And so we have major affinity programs which are very valuable to us that we continue to drive growth in. What we've done is pared off several thousand of programs, which the economics just didn't make sense. So we have achieved that. I think those are affinities with big brands that we benefit by as a company as opposed to affinities, frankly where we are providing a credit card for another financial institution that provides a core product to their customers. That's what we really gotten out of and then smaller groups that just didn't have the volumes to make sense. Moshe Orenbuch - Crédit Suisse AG, Research Division: Great. And just one quick last thing and that is, obviously, some terrific progress on the capital front. I didn't catch, if you had said this before, but do you -- have you changed your expectation of kind of year end risk-weighted assets under Basel III or has been the improvement -- has the improvement been kind of more from the numerator or is it denominator-driven also?

If you look at it, it's going to be a little bit of both because as I referenced, as you think about what we got through and once again, under both Basel I, as well as Basel III, we are in a disallowance under Basel I of DTA and in Basel III, we're over the 15% sin bucket. So as we generate net income and as you think about the piece that's FVO not being in it, the numerator is benefiting. And then secondarily, the denominator as we continue to work through and optimize, it will improve. We obviously have taken the guidance on Basel III at year end fully phased-in up above 7.5%. We will look to give you greater detail on both numerator and denominator when we look at Basel III at the end of the second quarter.

We'll take our next question from Jefferson Harralson with KBW. Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division: As a question on LIBOR, there's been some ruckus overseas on how it's set and regulators being concerned about potential, I guess, issues with how it's set. Can you comment on how BAC participates in the setting of LIBOR. And if you have reserves or any concerns over this process as it plays out?

This had been going on a while. We wouldn't comment. I'd leave it to our lawyers to talk to you about it. But that's been going on for a couple of years.

Our next question comes from Andrew Marquardt with Evercore Partners.

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

No, the biggest thing, Andrew, if you think about it was that the -- and keep in mind we're thinking about NII now, not pretax income. The biggest difference in the quarter that was a drag was the fact that we had over $8 billion of card receivables from the Canadian card business, but that sale closed at the beginning of December. So as you think sequentially, and you think about those consumer balances and consumer yields, that was the biggest piece of it and obviously, the number that we've put out there was that it was to the tune of about $400 million.

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

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

Okay. And then in terms of looking at the pre pre, this quarter came in just under on a core basis, maybe $7 billion, materially better than last quarter, which was just under $4 billion. But then this quarter obviously helped by FICC in mortgage banking, that may not repeat. I mean, how should we think about that kind on a core run-rate basis? And will that improve largely now due to expenses continuing to improve based on Phase 1 and then Phase 2 next year?

I think there's a couple of things. Obviously, in any one quarter, if you think about variables, you've got on the revenue side, the one variable piece that we have in revenues is going to be what you see from a sales and trading perspective. That there is a level of variability in that, either up or down. I think from a revenue perspective, given that you've backed out the different security gains and private equity gains, when you quoted that $7 billion, that's going to be the one number from a revenue line that does have the variability to it. And then I think your point is exactly right, that what we can do to look to drive that number up is largely going to be on the expense side.

And do you still have confidence in, maybe it's an outdated range now of 45 to 50 on an annual basis? Is that still valid or have things changed enough that, that needs to be rethought?

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

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

I think we were clear in the CCAR. We said, and we came through that test, and we were clear before that we didn't apply for anything in 2012. I don't think we changed our thinking that as we work to make sure that we drive towards being Basel III compliant over the next couple of quarters. So I think we're -- we have a high confidence in our capital, a high confidence that we have the right capital and high confidence that we're building at a good pace that we knew before, but now you all see. And so I think we'll just keep playing it through the end of this year in this way.

Got it. And too soon to call until maybe towards the end of the year where capital stands ultimately in the outlook macro-wise, is that fair?

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

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

We'll let you know when we -- we've said consistently, we'll apply when we know we'll get approved, and we can work closely with our regulators to get that through, and we'll see how we proceed through this year and the next.

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

Thank you, everybody.

Thank you.

This concludes today's program. You may disconnect at any time. Thank you, and have a great day.