Good day, everyone. And welcome to today's Bank of America Earnings Announcement. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. Please note today's call is being recorded. It is my pleasure now to turn the conference over to Lee McEntire. Please go ahead.

Good morning. Thanks for joining the call to review our second quarter results. I trust everybody has had a chance to review our earnings release documents. They're available on the Investor Relations section of the bankofamerica.com website.

Thank you, Lee, and thank all of you for joining us for our results. As I step back and thought about talking to you this quarter, I thought back to our discussion of last quarter's results. In mid-April, as we were talking, we sat in the depths of the COVID-19 crisis. We saw -- we're seeing a rise in virus cases. We completed a massive move in our company and companies around the world to work from home. We're closing branches for safety and other facilities. We had 1 million customers that had already approached us by mid-April asking for assistance in terms of paying their loans. We've seen a massive amount of commercial line draws in mid-March to mid-April and loan requests out of panic and the need to create instant liquidity. And as the -- we saw a flood of deposits looking for a safe haven at the same time. Yet at that time, the core economic projections were still catching up to the worsening predictions of the future and the reality of the health officials' projections of the virus path and the reality of shut down and state-at-home orders. And now we're a quarter later. In some areas, the cases are still rising and some areas are rising less. Economic predictions have been revised and the forward path has deteriorated from last quarter. Baseline projections now extend the length of the recessionary environment into 2022 deep into 2022. We provide substantial additional reserves for expected future credit losses this quarter to reflect that and that has impacted our earnings. On the other hand, there has been some encouraging signs. Consumer spending activity has vastly improved since April. Spending by Bank of America consumers during 2019 was a total of $3 trillion, so it's a sizable sample of U.S. activity. For the month of April that spending was down 26% compared to April of 2019. However, for the month of June that spending was relatively flat to 2019. And so far through the first couple of weeks of July, we're seeing that total spending actually be above what it was last year.

Thank you, Brian. I'm going to start on slide 11 with the balance sheet. Our balance sheet ended the quarter at $2.7 trillion in total assets increasing $122 billion since the end of Q1, driven by a surge in deposits. During Q2, deposits grew by $135 billion, while loans declined by $52 billion as commercial borrowers repaid much of their lines. Excess liquidity continued to be invested predominantly in cash and cash equivalents. Shareholders' equity increased modestly as earnings exceeded distributions to shareholders. With respect to regulatory ratios for the past two years our CET1 ratio under the standardized approach has been binding, but this quarter the ratio under the advanced approach is lower and therefore binding. Our CET1 ratio under the standardized approach improved 80 basis points linked quarter to 11.6%, primarily driven by an $86 billion decline in RWA. This RWA decline was mainly driven by commercial loan paydowns, as well as lower credit card balances. In addition, we earlier adopted the Standardized Approach for Counterparty Credit Risk aka SA-CCR for derivatives. Our CET1 ratio under the advanced approach improved to 11.4% as RWA under advanced declined modestly. Also this quarter, we received our preliminary Stress Capital Buffer or SCB from the Federal Reserve pursuant to our CCAR results. Our stress depletion was approximately 150 basis points and including the dividend add-on, our SCB was a little under 2%. However, as you know SCBs are floored at 2.5%. So our minimum standardized and advanced CET1 requirement is 9.5% and remained unchanged. The capital cushion above our 9.5% CET1 minimum was $28 billion at quarter end. The CET1 ratio under the advanced approach became our binding ratio primarily due to the impact on RWA of the migration of corporate credit risk ratings under the advanced approach. Our TLAC ratios…

We'll go first to Glenn Schorr with Evercore. Please go ahead. Your line is open.

Hi, thanks very much. Two quick clarifications. On your net interest income comments of down a couple of hundred million, I'm assuming that is off the current base? And then do we stabilize from there? I heard your comments about -- depending on how we assess the duration of and stickiness of the deposits. So maybe you could talk about how do you assess the duration. It sounds good but I don't know how you -- if clients can help you assess that but how you -- how do you assess the duration and stickiness of the deposits? And what would you redeploy into, if you thought that they were somewhat sticky?

Yes. So just to be clear, we're talking about a couple of hundred million off of -- from Q2 to Q3. I won't repeat all the kind of drivers of that. Beyond Q3, NII is really kind of -- the growth of NII is going to be dependent upon sort of asset growth and redeployment of deposits into higher-yielding acuities. We've added $284 billion in deposits since year-end. All of that has gone into cash earning 10 basis points. So as we assess the future of this pandemic, as we kind of assess how much of that is going to stick around and we get a little bit more confident on the -- on those two elements that can be deployed into securities or a portion of it, let's say, can be deployed into securities. And that's -- there's a big difference even in these rates between what you can earn on a mortgage-backed security or a treasury bond and 10 basis points. So there's some opportunity there but it has to -- I think we're going to be thoughtful about it and it's one of those things I think you know when you see it.

Got it. Maybe a similar question on expenses. The $400 million in COVID-related expense, I'm assuming that's a combination of PPP and work-from-home related things. Do -- does that roll-off starting now that stick around? I want to get to the core number that we're adding the $200 million of merchant servicing expenses on top of. Thanks.

Yes, sure. So, as we said, we're sort of estimating that if you take all the increases from COVID-related spending and all the decreases, you had a net $400 million. If you think about all those increases, it's not just PPP. There's supplemental pay. There's child care. There's masks. There's food. There's more financial guards in at our financial centers. You've got all the PPP-related expenses. You've got all the tech expenses moving people -- virtually all our employees move from home -- moving to work-from-home. You got some offsets in sort of some travel and other employee expenses in terms of meetings that all kind of nets down this quarter to $400 million. We're going to work on that. I don't think you can say it's all going to go away in Q3 but we're going to work on those expenses as we move forward. But of course, we're going to make sure anything we do, we're not jeopardizing the safety of our customers and employees. So we think there's some opportunity there.

Okay. Last one. The Wealth Management reserve build, I wonder if you could talk about the profile of those loans. How much of that is to things like a building for a wealthy Management would require that build?

I think most of it is mortgages.

And there's some commercial lending in there, but it's all very high-quality and personal wealthy people's loans and some -- there was 30% of our mortgage originations this quarter aided at 25th. And so it's a significant mortgage book and that picks up some and just the estimates whether it happens or not is a separate question. But we feel good about that portfolio, but it's just the same factors applied to the rest of the portfolios applied in that business.

Okay. Appreciate it.

We look at things like real estate exposure we consider real estate exposure in that business that people have buildings and things we're talking about. There's -- going back Glenn to the many years, there's no hidden sort of real-estate exposure on our Wealth Management business. It's handled as real estate.

Understood. Thanks, Brian.

Next question is from Mike Mayo with Wells Fargo. Please go ahead.

Hey, Brian.

Hi, Mike.

You mentioned July activity is above last year. Is that right? So, just a little bit more color on the green shoots. It seems like the trends are all in your favor. But I'm just wondering, if that's backward looking. In many of your markets like Florida, or Texas, or California I mean, that's where you're big you're seeing an increase in COVID cases. And I guess that leads to death and that leads to shutdown. So from an on-the-ground perspective, do you expect these green shoots to continue? What advice do you give the governors in those states? How does it all shake out?

The first advice we give to everybody is try to be safe. The faster you can get the environment to tip over as you've seen in some of the hotspots we talked about last April, you can see the activity pick up. But just to be very precise the data through the 14th of July, so that's about as recent as you might be able to get is up over last year. If you look in the first two weeks of July, it fell a little bit in Texas and places like that, but it's still 25% higher as an aggregate than where they were in the shutdown phase. So it will plateau a little bit Mike I think, and you'll see that ebb and flow. But there are other activities that just overwhelm that what you see in terms of the bars closing stuff, just the general activities the improvement in people's homes spending on their homes. And you saw some of the data today that supports that in the retail sales numbers. So, yes, it's flattened a little bit, because it flattened in credit card. You'll see that more dramatically, because the credit card spending that goes on in restaurants and travel and stuff. But it -- just in the last couple of weeks, it fell mid-single digit percentages, I think in some of those in Texas and Florida, but it's still 25% compared to that week-to-week -- the weeks before the reopening. That's 25% up. So, we'll see it play out. It's hard to be any more down to date than July 14.

And then a separate question. I guess, you've added more to your reserve what $8 billion added to your reserves the last two quarters another $4 billion this quarter pretty remarkable. And your net charge-off ratio was flat quarter-to-quarter. Talk about a disconnect, however, maybe it's not a disconnect. So I guess, it's a tough question. But what would your charge-offs fee? What would your NPAs be if you didn't have the forbearance in place? Like, if it ended tomorrow and you had to recognize the full extent of the problems just in a sense of order of magnitude would it be 5% higher? Or 10% higher? 50% higher? What?

Just to give you a simple answer. If you -- and a little bit of this Mike will always depend on timing, because if you think about credit cards then there's a roll rate to them as you well know. But just for the second quarter, I think the number would have been another $40 million higher, if you took all the stuff and assume the payment behavior took place but there was no deferral. And so that's $40 million on what? $600 million to $700 million, so it's something small. Interesting enough for the non-deferred customers, the delinquency quarter-to-quarter actually went down 15 or 20 basis points. For the non-deferred customer, excuse me, the non-deferred customers. So 90% of people in cards that didn't defer their delinquency went down quarter-to-quarter. And so, as you think about that, it's a mixed bag. The other thing that's inherent in your question is, all of us getting used to CECL versus the old methods of providing which is, you provide for a lifetime and then the losses are going to come that later down the road by definition, or else you have it as CECL provision. So, you'll see the actual losses that's come in later than later quarters. But you're right. Right now, we are seeing nothing that is consistent with an 11% employment rate in the actual consumer payment behavior. And that has to do with the stimulus and things that's helping the margins quite substantially. So it's hard to predict, because there's a lot of factors in it, but that's kind of the data points I'd give you to give you a sense of it.

And just last follow-up. I mean, clearly, the stock market based on your stock price doesn't believe you. They think your customers are a lot weaker. So are we just not seeing it yet? I mean two or three quarters now where you say, oh, it was a lot worse than we expected. Or do you think this is going to play out in that, like actually the borrowers are in better shape than people realize?

I think, part of this will play out in terms of how the path forward on Phase 4 Stimulus and everything occurs. But even on the commercial side, if you look our -- the NPLs went up $350 million or something on the commercial NPLs for the quarter and 40 basis points. So even on the commercial side and we went through -- we asked our team to go through every commercial borrower in our business banking and our middle market segment, which is tens of thousands of borrowers, and assess everyone and rerate to make sure they're all up to date. Make sure, yes, just really go work on it, when they were at home and not able to do as much. And they've gone through that book. And what you see criticized moved up and that's expected. The actual non-performers aren't. And so, those commercial customers are adapting and you're seeing it. So I think the -- we basically have looked at the assessment, the provision setting methodology is, as we said, 10% unemployment year-end, 9% first half of next year, it gets down to 7.5%. So it's not a rosy picture in a lot of ways. And the proof is we give all those data to the Fed, as Paul said, and they do a stress test. And under those scenarios, our losses run, I don't know, 4%, 4.7%. And we're sitting with 2% reserves today and we're not in that scenario in terms of actual payment behavior by customers or delinquencies and cash, and that has to do with the stimulus is different in this crisis than it's ever been. It was given directly to consumers to sustain their ability to carry their day-to-day expenses.

All right. Thank you.

Hey, Mike. It's obviously --

Yes.

Hey, Mike. It's obviously hard to see data yet, right? But there are some clues out there and you can start looking at those clues across the industry. And I would -- you mentioned one of them, let's just look at losses. You can look at NPL growth. You can look at reserve quick growth. And then as Brian just said, I mean, it's not like this is one-time where our loss ratios in the Fed stress tests have been the lowest among peers. They've done eight exams. Every one of those exams is kind of different. They did this thing and that one, stress this thing more on that other one and change something else on the next one. Seven out of eight of them, no matter what they changed, no matter what they did, we had the lowest loss rate. So there is some evidence out there if you look carefully at it.

All right. Thanks again.

Next question is from Jim Mitchell with Seaport Global.

Hey. Good morning. Hey, Brian, just a follow-up on your corporate credit comment. If you look at your NPLs, you absolutely had the least amount of increase quarter-over-quarter versus your peers. And I appreciate your comments that you did really a real micro as opposed to macro look at every individual loan. So when we think about that, do you think it's -- your performance is more to do with the fact that you took a micro look rather than some peers maybe doing a macro look? Or is it really just your higher exposure to investment grade, your industry mix? And how do you think about the massive amount of capital raising in the second quarter and the liquidity that provides to corporate borrowers and how you factor that in? Just -- that's it. Thanks.

I'm not sure where it is in that sequence, but it's the latter part of it, which is that, basically it's the quality of the portfolio. So our commercial real estate exposure, as Paul said earlier, is much -- it's not going into last crisis we had $14 billion or something of construction-related for housing. We have like $400 million or something like that. It's very little. So the kinds of exposure to get pulled on pretty quickly. And remember, we took a lot of charge-offs in the first quarter for what? For gas company exposure I think a couple of hundred million Paul. And those -- yes so, we've been taking care of the portfolio. So, it's not macro-micro. It's actually just the quality of what we have done in client selection across the last decade gets us there. And so -- and that's why you see differences in the rates in the stress tests and other things. But that's responsible growth and we built this company so that'd be adamantine in all times and fortress and that's how we build it. And we'll see where this all goes. But remember that our SCB is under the floor yet the losses -- and there's a lot of objective third-party evidence that shows and that has a lot to do with our mix of businesses and how we build them.

Yes. Absolutely. And then maybe on deposit growth, it continues to be I think surprisingly strong. Appreciate the comment of not sure how it holds up and you're holding it in cash for now. But when you think about -- is there any kind of trends throughout the quarter as the stimulus money got paid? Do you see deposit growth slowing? Or are you seeing it turn negative lately? How do we think about the ability for those at least near term what are you seeing in terms of deposits over the last month?

Well and I'll let Paul talk about this on the commercial side especially because he used to run that business for us a long time ago before we got him to be a CFO. But the reality is this the place we're uncertain is in the large cash inflows from corporate customers that you're not sure when they're going to start using the money and redeploy the money and want them to frankly. We should want them to redeploy that money into the economy as opposed to having drawn or raise money in the markets and have it sitting on the balance sheet. So that's the real volatility question is when do they -- when do those companies move some money out for higher yield because some of the money marketing prints are settling in with a little more yield to them and things like that and the stability allows them to take -- think about putting it off a bank's balance sheet. So that's the volatility question in terms of deposits. It's around that. But when you look at consumer just to give you a sense, the linked-quarter growth in consumer checking was $50 billion. We had 180,000 net new checking accounts, year-over-year up almost 900,000. Those are numbers that are normal quarters' sort of net production. I think we might have been 250,000 or something like that in a quarter like this. And so what's happened is we still are building up that core consumer base and the average amount in accounts are up 12%, 20%. Some of that's been spent down. We think all the EIP-type stimulus as well is largely out of people's accounts. It's been gone through the system. Obviously the unemployment supplements for the limited number of customers we have. That's a small --…

Yes. I'm not sure to add anything Brian. Maybe just a macro point of obviously if the money supply grows, more our deposit balances are going to go up. And you -- when you look at -- in addition when you look at the treasuries bank account at the Fed it's got an enormous balance way higher than usual. And my guess is some of that's going to end up in the private sector as well. So there were some -- perhaps some macro forces that would suggest that deposit balances are going to grow at banks and we're going to get our fair share. There are a couple of little just tiny things about the third quarter that's worth reminding people. Tax payments were delayed and they're going to get paid in the third quarter. Plus we're all hoping as Brian says that spending continues to increase and so some of that excess money that's sitting on people's accounts may get spent both in the corporate and consumer side. And then in GWIM, you've just got a lot of deposits came out of the market and went into deposit accounts and if markets continue to feel good to people, you expect to see some of that come out of deposits and go back into the market.

That's all really helpful. Thanks.

Our next question is from Betsy Graseck with Morgan Stanley. Please go ahead.

Hi, good morning. A couple of follow-ups there. One on the points that you were making about the deposits. It's interesting that you had all those drawdowns and paybacks, but the deposits didn't leave yet. That's basically what you're referring to, right?

Yes, Betsy, that's the interesting point. You'd expect if they pay them back you just seen it, but other cash came into those companies and it came on the books and I think we grabbed more than our fair share. Nothing to do with the consumer side, but on the institutional side. It's been interesting because our predictions would have been that we'd have seen the deposits decline already and they haven't.

So, my two questions. One is on just the forbearance and the waivers. Can you give us an update as to how you're dealing with those? Do they roll off automatically? Are you going person-by-person? How should I be modeling this fee waiver fading? Is it going to come back? Do you kick it back in? And I mean do you stop the fee waivers in 3Q or is it going to be more of a phase-in through 2021? Just help us understand how you're dealing with that.

I think maybe the size of the mortgage has different aspects because of statutes and stuff. The rest of the lending side stuff begins especially like the small business as I said earlier it really runs off as we speak. And then some of the other products run through. We're always going to help consumers in distress. So, if somebody calls up and says I'm unemployed and I can't work and stuff we're going to work with them and we're going to work on both on the fee side and on the collection side for the lack of a better term. But our view from the start was we want to have that dialogue with the consumer to help figure out where they stand and so that activity starts to pick up. The waivers by definition were 90 days and things they roll off. But in -- what you'll get away from is people who did it out of panic which when you see somebody's paid every month, obviously, they didn't need the waiver. Those people roll off and disappear and you'll get down to the people that you need to actually help. They're unemployed and struggling and we'll help them. We'll work with them like we always do in our collection efforts. So, that's the sort of credit side of the thing. And the big numbers will move. The numbers of requests I said have dropped 98%, so it's really nothing if you look at our percentages relative to industry and mortgage were lower across the board 200 basis point, 150 basis points in terms of requests and stuff. So, we feel good about that. When you get to the fees, this is really going to come down to this. We all -- we went into this thinking about it as a bit of a natural-disaster type approach process. So, that's going to come down to where the consumer lives the market the condition what's going on in that market and whether they're able to work and things like that. So, we'll see that play out. If there's another round of stimulus payments, we waive the fees so people wouldn't have the fees. We've held off on the fees that they had that could have been negative in their account to make sure they got the whole $1200 in the case of last payment. We will do that again because that's the right thing to do to make sure they get the benefits of that -- those payments. But those things will sort of ease through the third quarter depending on really a specific question and then as you get towards next year, they'll normalize.

And then as we go through this pandemic, obviously, we've got flash points building again in certain locations like you were asked earlier on the call, you've got a big footprint of branches in these locations. So, I would think that your programs are open obviously for folks who are coming back into that second wave. Just want to confirm that. And then how are you thinking about the branch footprint just generally? I mean you mentioned earlier about opportunities to improve efficiencies to call back the $400 million net COVID cost increase that you experienced this quarter. But a little bit longer term given the increase in digital the fast ramp that we've seen in the most recent couple of months does that make you think, hey, we can pull back on our branches even more than we had been thinking before? Give us an update there. Thanks.

Yes, I think the time to figure that out will be a little bit later Betsy not because we don't work it all the time. So, even year-over-year I think we're down 30 or 40 branches or something like that in terms of branch count. This -- last year's second quarter -- or this year's second quarter we're always working as dynamic. They might be bigger and replace two or three small ones. They might be places that we just had too many whatever but we'll always be working that. So, 6,100 to 4,300 branches continue to work and we're doing that by following customer behavior. So if this -- some of this behavior changes stick to the ribs, you'll see us keep fine tuning our system. By the way the cost of deposits, now with all the operating costs in consumer over deposits actually went down year-over-year again to -- by about 7 basis points or something like that. So we continue to manage that overall operating cost down, and it's not just the branches it's all of the call centers and all the things around it. So let us play that out. I don't think -- and then by the way remember, we're deploying and we opened branches in the middle of this thing in places in Ohio and stuff we didn't have. And so that replaces on the account at a much different execution than something that may have been left over from years ago. So it will play out. I don't think they'll get -- they'll go one way or the other way dramatically, but what will happen is some of the count we believe will be consolidated markets as we've always been doing and deploy to markets where we don't have reach. I think on a given day, we're still getting 0.5 million business to the branches. So it is an important part of what we do and the teammates in those branches have done incredible work being open every day during this crisis despite what was going on in the environment around them. So I -- it will always be an important -- an incredibly important part, which makes us different. We are a big digital company and we're a big physical company and that combination proves superior customer reach and results.

Thanks.

We'll go next to Matt O'Connor with Deutsche Bank. Please go ahead. Matt O’Connor: Good morning. Can you just talk about the small business PPP in terms of the timing of when you think it will be repaid or forgiven and remind us of the accounting there? And is that included in your net interest income outlook? Thanks.

Why don't I start with the accounting? So the -- if you look at this quarter, there's about a little under $100 million. It will be a little more than that next quarter in NII for PPP. That's a function of 1% interest rate plus under FAS 91, you're going to amortize the fees into NII over the life of the loans. In terms of the overall program, we're -- we did about 335,000 loans in a few weeks. That was quite expensive in terms of all that we had to do to do that well, and so I would not expect much if any profitability out of PPP. Matt O’Connor: Okay. And does that include the fees that you get if it's accelerated from a forbearance? I think there were some articles out there that you're going to donate any profit. But obviously, there's just the focus on the revenue, and to your point, there is the cost as well so.

Yes. If -- once there's forbearance to the extent that we were amortizing those fees into NII, once a loan is forgiven then you have to accelerate the remaining fees that haven't been amortized. So it could be a spike in a quarter or two if we start seeing a lot of forbearance. But again, as you know, we've -- we said, we're going to donate profits, but I wouldn't expect a lot of profits out of this program. 335,000 loans in a quarter is probably I don't know I think somebody in consumer told me was like 10 years of loans in small business. This was a massive effort that involved people outside the company, in the company to get -- to do it well. Matt O’Connor: Okay. And then just separately on the criticized commercial loans, it's helpful that you do disclose this. I'm not sure everybody does. So I appreciate that. But how would you think about the loss content on that? Obviously, it's a much bigger bucket than say non-performers and -- are loans that you're watching. But how should we kind of think about the risk of loans that are kind of criticized versus say non-performing? Or how much might flow into non-performing?

Yes. Well, I'd say that that's -- that depends on the loan. They're largely secured. They're collateralized what sort of recovery, but remember the criticized is -- the ratings driven is a loss -- a probability to follow the loss given default and then the collateral structure. So that's all built into the reserving methodology that results in the reserve build. So, it's not something that you have to think of separately than NPLs. It's just -- there are different stages in the process of getting through the system, but so it's really -- you have to say if it's -- we -- for example, we have a lot of retailers who have gone through bankruptcy over the last several years. We haven't lost anything because of the method of securing yourself and things like that. And that's -- but that's a business we've had for decades that has done a great job there. Whereas if it's an unsecured line and somebody you have a follow-on -- somebody follows quickly that can be more problematic. But it's -- just rest assured it's all built into the methodology which produces the loss content which produces the reserves which -- in the scenarios we use.

Okay. Thank you.

Next question is from Ken Usdin with Jefferies. Please go ahead.

Thanks. Good morning. I had a couple of questions on the JV dissolution. So just wondering, Paul relative to your $100 million fees; first of all, where is it located kind of where are we going to see it? And second of all can you help us give perspective of what it was maybe at its peak? And you've mentioned it could get better as the economy improves. What's the best metric we can watch of your disclosures to track that progress?

A portion of that revenue is going to be in consumer. A portion of it is going to be in Global Banking. I -- we'd have to think about how to help you see it because it's -- it never -- certainly on a net basis it never was a big number in terms of net profits coming out of that JV. We expect it now that we can integrate it, do it our way, really leverage our customer relationships, put our full sales force more directly behind it and innovate. We think this is incredibly important to our customers and we can grow it. But right now it's -- we gave you I think we gave you some perspective. It's about -- I would expect the revenues there to be about $100 million in the near term. But we would expect them to grow as we ramp up and some of our investments start to bear fruit. And again, I don't know how to answer your question on how you can see it. I have to think about that, whether it's something appropriate for the supplement or not.

Okay. And just in terms of fees, other categories, wealth management, the asset management part was down. Was that because of the averaging effect? And should that improve given the period-end market levels that we saw?

Yes. You have to remember that AUM fees are on a one-month lag, so you're picking up there what happened at the end of the first quarter.

Yes. And lastly, just any comments about the Investment Banking pipeline given the relative strength that we saw in the second quarter? Thanks, Paul.

Yes sure. The Investment Banking had a great, great quarter. And we know we picked up significant market share. We've been picking up significant market share for many quarters now. I think all of you have sort of recognized that. It was a record. I think our market share is above 8% at this point. And our market share in middle market investment banking is also rising given our emphasis there on the bankers we add. I think we're up to -- we're over 9% there. A lot of activity as we help clients raise capital to address their needs, you can't really expect -- I don't -- we don't know the answer, but we're already sort of seeing a little bit of a slowdown in activity in the first couple of weeks of this quarter. So I don't think you can expect that the third quarter is going to be as robust as the second quarter has been. But what I will want to emphasize we feel really good about the progress we have made with our clients in terms of market share both for large companies around the world and the middle market companies.

We'll go next to Saul Martinez. Please go ahead. Your line is open.

Hi. Good morning guys. I wanted to start off on NII, what's just a bit of a clarification. You said NII would be down a couple of hundred million quarter-on-quarter on commercial paydowns. You also said that long-end rates would also weigh on NII. Just give me -- give us a sense of what the order of magnitude could be in terms of additional NII pressure to the third quarter from long-end rates? Now I would assume that the redeployment of cash into securities is something that helped, but only over a longer period of time. And I know Paul in the past we've talked about reinvestment risk and kind of sized up the impact of long-end rates on securities cash flow. So if you can help us understand the potential impacts on third quarter and how to think about it beyond that?

Yes, look I will say in terms of our $200 million of current perspective being down quarter-over-quarter 2Q to 3Q, we're kind of putting all that stuff in there, right?

Yeah.

You've got loans being potentially down. You've got average LIBOR coming down. You've got the securities portfolio. It's kind of all in there. Securities portfolio about $20 billion, $25 billion matures every quarter. And reinvestment yields right now are significantly below where that -- where the portfolio is. So that's just going to slowly dilute over time. We can offset some of that, if we decide to take some of these deposits that are now sitting in cash and put them into securities we can get a sort of a natural offset. But we have to sort of just see how that all plays out.

Okay. I don't think -- I may have misunderstood. I thought that you met. So the $200 million a couple of hundred million is all in not simply from the impact of commercial paydowns, but from a number of things I guess. The -- I guess I wanted to go back and follow-up on Matt's question on PPP and get a little bit better sense for what the order of magnitude of the impact could be, because I mean you have $25 billion of PPP loans and I think it's fair to assume that a pretty sizable proportion of those will be forgiven. And given the fee rates on those, I mean we're not talking about small numbers even relative to your -- the size of your NII, I mean you get to easily over $1 billion. So I guess my first question is, why should we see a pretty significant spike in NII in 4Q and 1Q as those loans start to get forgiven and the income is recognized? And I guess relatedly on the expenses, I guess I'm trying to understand what you mean by you're not going to make a lot of money on that. Is it just that it's sort of in the expense base already and you've had to ratchet up expenses? Or is it that as revenues are recognized from an accounting standpoint you'll donate those accounting -- that accounting revenue away as one of your competitors is doing. I guess I'm trying to understand the order of magnitude timing and geography of the impact. So they don't seem to be small to me.

We announced in April I think it was that we'd go away the net profits from this activity. There's a lot of costs -- internal costs obviously allocation of 10,000 people we had working on the origination platform of this to the high point. The forgiveness what we've got 3,000 people lined up to work on forgiveness that are already working on it and we open for business in a couple of weeks. And then we had -- in part we also had to hire third parties coming to do some work and supplement us then -- and so there's a lot of elements. So where it shows up in revenue and -- we'll deal with it. But just I -- well the revenue you're saying is not insignificant. The issue is there's a lot of cost against it.

Yeah.

Some are in the P&L and some are going to be next quarter's P&L, because on the forgiveness side, we have these teammates working on it. So we'll reconcile it all for you, but this space to commitment was to give away to net profits. That was something we committed in April. This is not new news.

Okay. But am I thinking about it right in terms of--

You're not going to see--

Yes. Go ahead.

To your point on the revenue, you're not going to see it in the revenue until the loans start to get forgiven.

Yes, which we would assume is what fourth quarter? First quarter? Or?

We do see -- we see -- yes. We don't know when it's going to be.

Yes. And by the way in phase 4 they're talking about extending and doing more loans and there's a bunch of proposals. So a little bit of this was hard to predict, because if they say you can do loan A and then do another loan or extend it that's -- even in the last quarter we're going from eight weeks to -- or 12 weeks to 24 weeks and things like that. So it's -- just look there's no mystery here. We'll just -- we just don't know until we get through it what exactly is going to happen because the rules changed so much.

Yeah. Okay. All right. Thanks guys. I appreciate it.

The next question is from Vivek Juneja with JPMorgan. Please go ahead.

Hey, Brian, hey, Paul a question that I wanted to just clarify. The consumer loans that been -- that had been deferred, I'm presuming in sort of late June or early July you started to see some of those stock to get through the deferral period, just deferrals or 90 days. And so what are you seeing in the ones where deferrals are done? What percentage are re-upping and asking for a deferral to cut anew versus how many are going off? And of those going off what are you seeing?

We're not -- the -- your point Vivek is that we're sort of -- it's now the time for that. It all kind of -- the time period that most of it occurred is now in a time period where it rolls off. And so we'll know better. But you separate the card, we've already seen a couple of hundred thousand roll off and a bunch of them are rolling off as we speak. So that is 85% of our card and so separate that. From the standpoint of all the other aspects what I said earlier about small business, which is the next biggest -- which is the biggest percentage category, yeah, those are docs and dentists in there. They've all told us they're paying us and their payments are now coming up in July and early August. In terms of home loans, we're seeing the numbers on deferral drop every week because there the new requests are less than people who have continued to pay. And so it's going to come down to cards and we're in that period of time. But there are substantial reserves set-up based on the credit characteristics of those individual card holders and what our expected outcome for them are. And as we said earlier, a lot of them -- a substantial number of them paying us every month, some haven't been paying us at all, some have been paying us partly and that will all play out this quarter. When they charge-off with them we'll be down -- as that plays out over the roll-rate type of thing. But it's all in the reserves today. And while we say that there's -- yeah there's a decent chunk of reserves in the card business that is specifically built by these deferred loans. What I said earlier, if you didn't hear it was that for the second quarter for the people who had deferred, the actual increase in charge-offs would have been about, I don't know $30 million, $40 million on a basis $600 and some million whatever it is. So it wasn't a substantial difference yet. And so those are the people that only got enough that they were rolled and charged off during the quarter. So let us see it play out. It's in the reserves. It will be covered by the reserves.

Okay. Thanks.

Our next question is from Brian Kleinhanzl with KBW. Please go ahead.

Yeah. Thanks. Just two quick questions. I mean, first on the expenses. Just how are we should be thinking about the expense trajectory as we look out to the third quarter, fourth quarter? I get the extra $200 million from merchant services, but then how much of these COVID-type expenses are expected to roll off into the third quarter, and then that still if we get the typical seasonality as well in the back half of the year?

Yes. So all of those factors, I think Paul laid out earlier, but what we were reminding people is last year when we unwound the joint venture and told you about it this time last year, we said when we took it from a joint venture interest through the P&L on the balance sheet interest, it was going to increase our expenses. That $200 million it -- this is the quarter where it happens. And so we just want to make sure people are factoring that in. Absent that, you know, that we manage expenses tightly in this company and we'll manage them down. And we'll have some pluses and minuses and we'll work it down, but we didn't want people to forget that we told you that last year. All the rest of it will be the same, sort of, management practice we had. You have some PPP expenses come down a little bit. You have -- as we've -- people have moved around opened up a little bit, you have a little more business activity expenses. We'll see it play out. But then and you have the seasonality as you mentioned. And that will all be standard fare, but the key difference is we want to make sure people didn't forget what we told you last year.

Okay. And then a separate one just simple is the tax rate guide that you gave in the second half, does that roll forward into 2021? Thanks.

I don't think we have a good answer for year 2021 yet. At least I don't have an answer, but we can get back to you on that if you need it. But for the rest of the year, it will be around 11%.

Yeah. Okay.

And we'll take our final question today from Charles Peabody with Portales. Please go ahead.

Yeah. I wanted to get some more color on your consumer and community bank and particularly the profitability of the various product lines like cards, mortgages, autos, branching. And I ask that because on a relative basis your consumer and community bank has done much better than the other big three Wells, JPMorgan, and Citi. And I know a big part of it is probably cards where the other businesses are losing money. The other companies are losing money in cards. So, can you talk a little bit about the profitability of your different product lines and the relative value that they produced for you guys versus other major banks?

I'm not sure I frankly agree with your premise that the profitability of our consumer bank is driven by the deposit business. And so given that you're in the middle of a twist right now with rates falling and the floors of zero rates in the consumer business that part it fell this quarter, but that'd be expected as you go through this twist. So it's been running -- the deposit segments have been running $2 billion a quarter type of numbers. And if that's in the consumer lending segment, would have been running even back in 2019 about $1 billion a quarter. So it's a business which is -- and that's all lending not just the card lending. So it's a business which is driven by the deposit business when the rates fell as quickly and we moved rates down in the quarter it's going to take a little while to catch back up. And -- but that's -- but I'm not sure, I agree with the premise and that is driven by the card business. The card business is a portion of that a-third of the general operating profit.

I think you're right, Brian. I think it -- the way to think about it is we started at a position of profitability before rates came down. That was stronger than many of our competitors given the strength of our deposit franchise and given how careful we have been with respect to credit unsecured consumer credit. You're now seeing us getting hurt on the -- because that deposit franchises and those deposits aren't as valuable in a lower-rate environment, but you're not seeing us have the same sort of potential losses in unsecured consumer, because we just don't have as much as others.

Yeah. Be that as it may because that lending portion lost money this quarter. And the deposit business continue to make money this quarter. So I'm not sure, I get that the starting point, but just to give you a sense. And so there wasn't a lot of money overall, but it was made by the deposit business.

I guess, the starting point was that the card businesses tend to be an outsized product for the other big banks and they're -- they clearly are losing money. And so is that the big differentiation? Is your card business losing money this quarter as well and -- but less so than the other big businesses other big companies?

Yes. The lending business lost money. We don't -- I don't have a separate card P&L. But the lending business and consumer lost money. The deposit business made money and brought it to profit and offset $0.75 billion of losses on the lending side, because of the provisions versus $0.75 billion of profit after tax. So -- but remember, what drives the profitability consumer business is the position we have across all of the products. We don't think of a lending business. And as we think of a customer business that is number one position in deposits, 92% core checking account, checking account growth of a million accounts year-over-year. The average balances of accounts growing year-over-year or even taking out the COVID impact, they're still growing at double-digits typically in a year. That -- the operating cost coming down year-over-year in terms of as a percentage of deposits. These are all good measures that give you a great anchor, but when -- it gets tougher when rates are very low. That's -- we played that. I've been CEO for just my 11th year and has been through 9/11. I think the Fed fund rate has basically been zero a quarter and so that that's what we're doing. The card business is a nice business. We keep it to a size that we think is consistent with our adamantine commitment to responsible growth and now therefore that, it's never going to drive the P&L one way or the other way. Then the risk-adjusted margin is 8% in that business today they're in actual charge-offs. Remember what we've -- what's causing the losses is you're putting up reserves for the rest of the life of the portfolio in one quarter given an economic scenario that's deteriorated. So it's a good -- it's a wonderful business for us. It's our biggest business in terms of profit. And it -- but we don't run it as a card business, or as a home loan business. We got out of that many -- a decade ago saying, it is the consumer business and we drive it on a unified basis.

All right. Thank you.

It appears we have no further questions. I'll return the floor to Brian for closing remarks.

Well, thank you, and thank you for spending time with us this morning. It's another quarter where we've driven responsible growth. We continue to manage this company tightly given the environment we're in, and we continue to drive the core activities forward. And this quarter, we're especially pleased with the work our team did in Global Markets and Investment Banking area gaining share and providing the earnings power to have us earn twice our dividend build our capital, build our liquidity, and have a -- in the worst economic quarter since the Great Depression. So thank you. We'll talk to you next time.

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