Good day, everyone, and welcome to today's program. At this time, all participants are in a listen only mode. Later, you have the opportunity to ask questions during the question and answer session. Please note this call is being recorded and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Mr.
Lee McIntyre. Please go ahead sir.
Good morning. Thanks everybody on the phone as well as the webcast for joining us this morning for our Q3 results. Hopefully you've had a chance to review the earnings release documents available on our website. Before I turn the call over to Brian and Bruce, let me just remind you we may make some forward looking statements today. For further information on those, please refer to either our earnings release documents, our website or our other SEC filings.
So with that, let me turn it over to Brian Moynihan, our CEO for some opening comments before Bruce goes through the details.
Thanks Lee and good morning everyone. Thank you for joining us to review our Q3 results. As you know, our bottom line results were heavily impacted by a previously announced settlement with the Department of Justice. But given that I'm still encouraged by what we accomplished this quarter. Our businesses generated enough earnings to absorb the $5,300,000,000 charge and still reported positive net income before preferred dividends.
Now the themes we see are consistent with the past several quarters. You can see in our numbers, prudent balance sheet management. You can see in the numbers good at core expense control. You can see in the numbers continued credit improvement and you can see in the numbers solid business activity. Before Bruce takes you through the details of the quarter, I thought I'd focus quickly on the profitability of our business segments and some of the key statistics that give rise there too.
If you look, we've included in the appendix to the materials on Pages 1820 some information about net income, PPNR and business statistics. So when you step back and look at that, you can see from our release, the company reported $2,900,000,000 in year to date pre tax net income. That includes and overcomes $15,600,000,000 in pre tax litigation costs to resolve primarily legacy mortgage issues. Now we're not suggesting it won't incur litigation costs going forward, but what this demonstrates is how much progress we've made behind the noise of significant legal settlements. So as you step back and think about the businesses, you can see on appendix Slide 18, a graphic showing year to date net income comparative performance by the businesses.
Let's first focus on our Consumer and Business Banking segment. Year to date net income was $5,300,000,000 in 2014. That compares to $4,600,000,000 after tax in 2013. The return on average allocated capital in consumer and business banking was 24%. It is our largest business and has had a good year.
Our Global Wealth Investment Management business had net income of year to date of $2,300,000,000 in 2014. That's up 3% from 2013. Now this business, our G WIM business has a pre tax margin of 26% and its returns on allocated capital are 25%. As we move to our Global Banking business, that's a business provides lending, treasury services, investment banking activities to middle market and large corporate clients around the world. That business earned 4,000,000,000 after tax so far this year, up 8% from 2013 and generated returns on allocated capital of 17%.
Those three businesses together have great annuity streams and owe us in good stead as we look forward. Our global markets business which obviously is more affected by what's going on in the market on a given quarter has earned $2,900,000,000 after tax this year and for the 1st 9 months versus $2,700,000,000 in 2013 you exclude the UK tax changes. So in total these four businesses generated $14,500,000,000 net income after tax for the 1st 9 months of 2014. That $14,500,000,000 is up 10% from last year. You can look on Slide 19 and you can see on a pretax pre provision basis, which some of you also focus on, we're up 4% year over year.
And you can see on Pages 20 21, the business statistics on over the last couple of years of which give rise to these results. We made real progress in the core businesses and we continue to work on the consumer real estate segment and the losses therein. But that real progress shows in the operating leverage profitability of these businesses and we expect that momentum to continue as we move the other side of the mortgage issues.
With that, I'll turn it over to Bruce.
Thanks, Brian, and good morning, everyone. This quarter does reflect what we believe is very solid execution and a lot of what we've been consistently talking with all of you about. We maintained a strong balance sheet as a foundation to operate from. We continue to rationalize our balance sheet for liquidity, profitability as well as evolving regulatory changes. Our revenue has shown relative stability and our non litigation expenses continue to be reduced.
Charge offs have continued to come down and we resolved significant legacy mortgage exposures during the quarter. Let's start on Slide 2 and go through the details. We recorded $168,000,000 of earnings in the 3rd quarter and after preferred dividends that resulted in a loss of $0.01 per share. Earnings included the $5,300,000,000 pre tax income or pre tax impact, excuse me, of the settlement with the Department of Justice and state attorneys general that we announced in August. On an EPS basis, the impact was $0.43 a share as a portion of this charge was not tax deductible.
As you can see on the right hand side of Slide 2, the $5,300,000,000 impact was split between $4,900,000,000 in litigation expense and $400,000,000 in provision expense that relate to additional reserves that are associated with the consumer relief portion of the settlement. Revenue during the quarter on an FTE basis was $21,400,000,000 versus $21,700,000,000 in the year ago quarter. If we exclude the DVA impact from both periods as the $1,200,000,000 of equity investment income that we recorded during the Q3 of 'thirteen that was driven by gains from our CCB investment, adjusted revenue of $21,200,000,000 was up slightly from the Q3 of 2013. On a segment view, revenue was stable to modestly up in 4 of our 5 businesses from last year with Crest being the exception. Relative to the Q2 of 2014, revenue was 3% lower driven by the lack of equity investment gains, seasonally lower investment banking fees and lower mortgage banking revenue.
Total non interest expense was $26,700,000,000 which included $5,600,000,000 in total litigation expense. We back out litigation expense compared to the second quarter of 2014 expenses declined roughly $400,000,000 from both our new PAC and our LAS cost initiatives as well as lower revenue related incentives. On the same basis, looking back to the Q3 of 2013 expenses improved by 1 point 1 LIS costs and to a lesser degree our new VAC cost savings. Provision for credit losses during the quarter was 6 $36,000,000 and included $400,000,000 as I mentioned for the DOJ settlement, while our net charge offs were $1,000,000,000 Our results during the quarter did benefit from roughly $200,000,000 in DVA or about a penny per share as our debt spreads widened during the end of the quarter. There was also approximately $0.04 of benefit to earnings that relate to certain discrete tax items.
Lastly, the quarter also benefited by about a balance sheet highlights that we do each quarter, but we did want to focus you specifically on our efforts to rationalize the balance sheet as our actions led to a $47,000,000,000 decrease from the Q2 of 2014. We took prudent actions to increase liquidity as well as to reduce both credit and market risk. We shifted the mix of some of our discretionary assets out of less liquid loans into more liquid debt securities. For example, we converted $6,500,000,000 of residential mortgage loans that benefited from standby insurance agreements into agency securities. We also sold $2,500,000,000 of non performing and delinquent loans during the quarter and had $4,000,000,000 of net pay downs in our legacy consumer real estate loans.
We reduced our global markets balance sheet and associated funding by $11,700,000,000 from the Q2 of 'fourteen and that included low margin prime brokerage loans of approximately $3,300,000,000 Our decline in quarter end deposits was primarily driven by optimization efforts that included the reduction of approximately $15,000,000,000 of deposits that had little to no benefit to our LCR ratio. From a capital perspective, I'll remind you that we did issue $3,100,000,000 of preferred stock during the quarter that improved our Basel III Tier 1 regulatory capital ratio. And lastly, as a reminder, we increased our quarterly common dividend to $0.05 a share during the quarter. We move to Slide 4, where we show our capital ratios under Basel III. Under the transition rules, our CET1 ratio was stable at 12%.
We look at our Basel III regulatory capital ratios on a fully phased in basis, you can see CET1 capital declined 1 point $6,000,000,000 that was driven by a $1,000,000,000 decline in OCI. Our operational risk weighted assets did increase that negatively impacted our advanced levels but not the standard levels. Other RWA balance sheet improvement benefited both approaches and that partially offset the increase in RWA under the advanced approach. If we look at the ratios under the standardized approach, CET1 improved slightly to 9.6% during the Q3 of 'fourteen. And under the advanced approach, the CET1 ratio was also at 9.6 percent both well above our 8.5% 2019 proposed minimum requirements.
If you look at our operational risk, risk weighted assets under the advanced approach, they now represent approximately 30 percent of our overall risk weighted assets. We move to supplementary leverage. This is the 1st quarter that we've actually disclosed the actual ratios from a supplementary leverage perspective. The bank holding company during the Q3 was at 5.5 percent. And if we look at our primary banking subsidiary BANA, its ratio was 6.8%, which is pro form a for September 30 as we merged FIA, our card services unit into Bana on October 1st.
We're obviously very pleased with the capital and supplementary leverage ratios in the context of the resolution of the DOJ matter during the quarter. If we turn to Slide 5, feel very good about the work that the funding team did during the quarter. In addition to the $3,100,000,000 preferred stock issuance, we issued $3,000,000,000 of Tier 2 subordinated debt, which also adds to our total capital metrics. Lastly, we issued $4,500,000,000 of straight debt at the parent. Our goal was not only to build the Basel III non CET1 component of the capital stack that we thought were levels that were appropriate to build liquidity in advance of the payments that we'll make during the month of October for the DOJ and state AG settlement.
Total long term debt for the quarter ended at $250,000,000,000 which was down $7,000,000,000 from the end of the Q2 of 2014. If we look at the cost of our debt, our long term debt yields improved 10 basis points from the Q2 of 'fourteen due primarily to maturities of higher yielding debt as well as issuances at more favorable levels. Global excess liquidity sources remain very strong at $429,000,000,000 and our time to required funding was stable at 38 months. We turn to Slide 6. Net interest income on a reported FTE basis was 10,400,000,000 dollars up from the Q2 of 2014 as we had a less negative impact from market related adjustments and that was coupled with modest improvements in our adjusted net interest income.
Adjustments during the quarter were a negative $55,000,000 in the Q3 of 'fourteen that compares to a negative 100 $75,000,000 in the Q2 of 'fourteen. Net interest income of $10,500,000,000 excluding the market related adjustment improved modestly as lower long term debt balances and yields as well as an extra day of interest accruals were partially offset by lower loan balances as well as lower loan yields. The net interest yield improved 4 basis points on an adjusted basis and 7 basis points on an actual basis. We continue to remain positioned to benefit as interest rates move higher particularly from the short end of the curve. Since we're largely done at this point with our debt footprint reductions, the direction as well as the trajectory of our net interest income and net interest yield will be more dependent on rates as well as balance sheet movements going forward.
And given the volatility of the rates, should the opportunity present itself, we could decide to take actions to reduce OCI risk in preparation for what we will be in an eventual rising rate environment. Those actions could have a relatively small near term impact interest income but reduce our duration risk as well as to provide additional liquidity to reinvest in a higher rate environment. Non interest expense on Slide 7 was $19,700,000,000 in the Q3 of 2014 and included $5,600,000,000 of litigation expense. As I previously mentioned, dollars 4,900,000 of the expense related to the DOJ settlement while the remainder was associated with a number of smaller pre existing cases, one of which caused us to bulk approximately $200,000,000 in our global markets business. We exclude litigation, total expenses were $14,200,000,000 this quarter, which declined $400,000,000 from the Q2 of 2014 on both our new BAC as well as our LAS initiatives as well as lower revenue related incentive costs.
Compared to the Q3 of 2013, expenses are $1,100,000,000 lower driven by LAS cost savings. Our legacy assets and servicing costs once again ex litigation reduced by approximately $100,000,000 in the quarter and remain on track to hit $1,100,000,000 in the Q1 of 2015. In the Q3, we've now reached our new BAC savings initiatives with the targeted goal of 2 $1,000,000,000 on an annualized basis. So as we move forward, we believe that expenses apart from litigation as well as the continued reductions in legacy assets and servicing expenses should move more directionally with the revenue streams that we see in the businesses. Asset quality on Slide 8, you can see credit quality continued to improve.
Net charge offs declined slightly from the 2nd quarter of $14,000,000,000 6 in both the Q2 of 'fourteen as well as the Q3 of 'fourteen. And if we normalize for those benefits, net charge offs would have been $1,300,000,000 in the Q2 of 'fourteen and $1,200,000,000 in the Q3 of 'fourteen with the Q3 being about 8% lower. Delinquencies, a leading indicator of net charge offs remain very low. Our 3rd quarter provision expense was $636,000,000 and we released $407,000,000 of reserves given the continued pace of asset quality improvement. We exclude the reserve that was associated with the DOJ settlement, we released 8 $7,000,000 from our reserves.
Let's now focus on the businesses starting on Slide 9 with Consumer and Business Banking. Results again this quarter showed year over year improvement as our net income grew 4% to 1 $900,000,000 and increased 3% from the Q2 of 2014. This business generated a 25% return on allocated capital during the Q3. Revenue was relatively stable at $7,500,000,000 compared to the Q3 of 2013 and up from the Q2 of 2014 led by higher card income and service charges for both comparative periods. As you can see on the slide, Q3 provision expense was lower than the Q3 of 'thirteen as net charge offs improved and we also released less reserves.
Expenses of $4,000,000,000 were stable compared to both periods as the benefits from our network delivery optimization were offset by investments that we made in our specialist sales force. With regard to the specialist sales force, over the course of the last year, we've added nearly 500 Financial Solutions Advisors and Small Business Bankers. Growth in mobile as well as other self-service customer touch points has allowed us to continue to reduce our banking centers we went below 5,000 units during the quarter, while at the same time our customer satisfaction scores continue to improve and customer activity continues to build. We look at customer activity during the quarter. We had good deposit growth and our rates paid year over year as we benefited from both improved account flows and market valuation.
Our mobile banking customers reached over $16,000,000 during the quarter and 11% of all of our customer deposit transactions are now done through mobile devices. Card issuance remained strong at 1,200,000 new accounts in the Q3 of 'fourteen with 60 4% of those cards going to existing customers of our company. And lastly, credit quality continued to improve as our U. S. Credit card loss rate fell below 3% and where we continue to see north of a 9% risk adjusted margin.
We move to Consumer Real Estate Services. As I mentioned, the loss in the quarter was driven by the DOJ settlement, which impacted expense, provision as well as income tax. Revenue was down about $300,000,000 from the Q2 of 2014. The servicing income component of revenue was driven by an approximate $100,000,000 charge to adjust our MSR for cost of service assumptions in a smaller amount as our level of servicing assets did decline. Our production revenue decline driven by an approximate $80,000,000 increase in rep and warrant expense.
1st mortgage retail originations of 11,700,000,000 dollars were up 6% from the Q2 of 2014. If we look at the pipeline at the end of the quarter, our 1st lien origination pipeline was down 12% from the Q2 of 2014. On the home equity front, we continue to see very good demand where originations during the quarter were $3,200,000,000 which were up nicely on both the linked quarter and a year over year basis. Expenses once again included 5.3 $1,000,000,000 of litigation costs during the quarter versus $3,800,000,000 in the Q2 of 2014. If we exclude that $1,500,000,000 increase in litigation costs, expenses declined $117,000,000 Our LAS expense for the quarter was just over $1,300,000,000 and once again remains on track to hit $1,100,000,000 in the second or excuse me, in the first quarter of 2015.
Our number of 60 plus day delinquent loans of 221,000 that are serviced by LAS dropped 42,000 or 16 percent from the end of the Q2 of 'fourteen. In addition, we continue to reduce our production staffing levels in line with the market opportunity as we continue to lower our fulfillment costs. On Slide 11, Global Wealth and Investment Management delivered another strong quarter where we saw both record revenues as well as record earnings. Pretax margins remained strong, north of 25% for the 7th consecutive quarter. Record asset management fees drove revenue higher, but were offset by some softness in transactional activity, although
I do want
to mention that we did see transactional activity pick up during the month of September. Net income of $813,000,000 was up 12 percent on a linked quarter basis as the business continues to focus on operating leverage the revenue growth to the bottom line. We increased the number of financial advisors and year to date the retention of our more experienced advisors remains at record levels. Client balances were nearly $2,500,000,000,000 with negative market valuation mostly offset by positive flows that we saw during the quarter. Long term AUM flows were $11,200,000,000 during the quarter, the 21st consecutive quarter of positive flows.
Ending client loan balances also increased to a record level from the Q2 of 'fourteen as we see good activity in both If you turn to Slide 12, Global Banking. If we turn to Slide 12, Global Banking. Earnings were $1,400,000,000 which is up 24% from the Q3 of 'thirteen on both on lower credit cost and to a lesser degree higher revenue. Compared to the Q2 of 'fourteen, earnings were up on lower credit costs, which were slightly offset by seasonally lower investment banking fees. Return on allocated capital during the quarter was strong at 18%.
Within the revenue line item, investment banking fees for the company this quarter were $1,400,000,000 which is up 4% from the year ago quarter, but down seasonally from the Q2 of 2014. Our overall investment banking pipeline does remain very strong, but I do want to note that our Q4 of 2013 was a record quarter from an investment banking fee perspective. Provision during the quarter was a slight benefit, which reflected continued low loss rates in a small reserve release. If we look at the balance sheet, average loans were $267,000,000,000 which is up 3% compared to the year ago period, but which has slowed over the past couple of quarters as we continue to focus on client profitability. We've also seen some significant prepayments from some of our larger corporate banking clients during the last couple of quarters.
Although our average deposits during the quarter did increase, our end of period balances declined and that's due as I mentioned earlier that we intentionally managed down certain which have little LCR benefit. We move to global markets on Slide 13. We earned $769,000,000 during the Q3 of 2014. To put the Q3 of 'fourteen on a like basis to the Q3 of 'thirteen, you should exclude a $1,100,000,000 impact from the UK tax rate change that we saw in the Q3 of '13 as well as adjust the impact of DVA for both periods. Once again, DVA this quarter was a benefit of 2 $5,000,000 versus a detriment of $444,000,000 last year.
If we make those adjustments, we saw very strong growth in earnings of 21% on a year over year basis. Earnings are down from the Q2 of 'fourteen as a result of the typical seasonal declines in sales and trading as well as higher litigation expense during the Q3 of 'fourteen within the segment. We back out DVA revenues up 7% from the year ago period driven by strong sales and trading results. We're pleased to report both FIC and Equity sales and trading revenues were up versus the year ago period. FIC revenues were up 11%.
The improvement was driven by results in currencies given the increased volatility that we saw during the month of September as well as improved performance in both our mortgages and our commodities areas. Equity sales and trading was up as well up 6% from the Q3 of 2013 driven by higher client financing revenues. On the expense front, they were up 2% year over year driven by higher revenue related incentives. Relative to the Q2 expenses were up $70,000,000 from the 2nd quarter due to higher litigation expense. If we backed out the $200,000,000 litigation expense during the quarter, expenses declined by about 100 and $30,000,000 in line with the lower revenue levels on a linked quarter basis.
Average trading related assets were down about 13 $1,000,000,000 from the Q2 of 'fourteen and our overall bar remains very low. Return on allocated capital during the during the quarter was down on a year over year basis as we had $1,100,000,000 of equity investment gains in the Q3 of 'thirteen and during the Q3 of 'fourteen we had a $300,000,000 charge for U. K. Payment protection insurance. Expenses on a year over year basis are down about $400,000,000 due to lower litigation expense and all other as well as lower personnel costs.
Income tax expense is included within all other as the benefits related to discrete items that I mentioned earlier are largely reflected in this segment. As we look at the Q4 of this year, we'd expect the tax rate to be roughly 31% absent any unusual items during the quarter. So before we open it up for questions, I'd like to summarize the quarter. We feel we made once again very good progress during the quarter. We saw good business activity across the customer footprint.
This led year over year earnings improvements in 4 out of the 5 businesses. And in our mortgage business, we're taking cost out of the legacy assets and servicing side and have taken cost out of the fulfillment side as well. We generated enough earnings during the quarter from the businesses to offset a significant charge to settle our RMBS issues with the DOJ and RMBS working group and at the same time maintain a very strong capital position. Asset quality continued its trend of improvement and we did take some deliberate balance sheet actions to improve liquidity, manage OCI risk and reduce both credit and market risk. And we'll go ahead now and open it up for questions.
We'll go first to Betsy Gossett with Morgan Stanley. Please go ahead.
Hi. Thanks very much. Good morning.
Good morning. Good morning, Betsy.
So just wanted to touch on a couple of things that you mentioned during your prepared remarks here. One is on the NII actions that you were talking about you might take with the securities portfolio as a way to protect AOCI, but might have a hit on the top line when you do that. Could you just talk through what kind of slides you're thinking about what the triggers for that action might be?
Sure. A couple of things Betsy. I think the first thing if you look at the balance sheet from the Q2 to the Q3, when you look at the securities portfolio, you can see that virtually the the dated agency securities. The second thing that I mentioned is just in references what we would look to do with respect to our buy ticket during the Q4. And I think at this point we're being very cautious at looking at that buy ticket given the overall rate environment that we see that's 30 to 35 basis points lower than what we saw during the Q2 of 20 14.
And there's also a little bit of roll to spot risk that you have as we look out. And I'd say if we aggregate those 2 items and put it in the context of NII risk for the quarter, those two items could be roughly $100,000,000 of risk relative to what we saw during the Q2 excuse me, during the Q3.
Okay. And then, obviously, a question that a lot of people have is the current rate environment and what that impact is. So this is in addition to typical negative impacts on NII from the low end of the long end of the curve, I would assume?
The $100,000,000 risk that I referenced is relative to the actual net interest income in the 3rd quarter once we back out for market related items.
Got it, got it. Okay. And then the other comment was on expenses where you indicated that you are obviously done with new VAC, which is fantastic and LAS is on track. So outside of the LAS expense reductions more directionally expenses would move in line with revenues. Could you give us a sense as to what you think you could do on expenses in the event that
no longer occurs today is where
it is right now covering it like 2.01? Sure.
I think the biggest endpoint Betsy is if you look at what we've done, if you look at the number of FTEs that we have which tends to drive a lot of the expense, we're down 7% year over year and down 2% on a late quarter basis. And you see the flow through of those benefits through a number of line items. And one of the most important things to look at is if you go to our supplemental materials and flip to page 4, we show you 9 different exclude the other category, which includes litigation expense, all a headcount as a result of the various programs we've talked about as well as just generally you do continue to see a grind down expenses across all categories across the company. And that's just to put
it in a broader perspective. How would you manage the company if a low rate environment continues is a lot like we've been managing now continuing to be careful in every expense item, every headcount, but at the same time investing in the business. And so if you think over last year, we've added small business bankers and financial service advisors, the people work in the branches for Merrill Lynch and the Merrill Lynch teams. We've added sales mortgage loan offices in the retail segment while we reduced the overall numbers. And so we've been able to accomplish a reduction in expenses, but at the same time we're making the investment $3,000,000,000 $3,500,000,000 in technology last year probably $3,300,000,000 or so this year.
So we'll continue to those investments. So that means that the new BAC left to implement helps offset any kinds of sort of inflationary growth you get. And then on the top of that, we continue to work on initiatives, continue to simplify the company and eliminate non core products etcetera to continue to keep the expenses where they are.
Right. So to be just to rephrase, you still have expense reduction coming through from the work that you've done so far. You're just not going to name it something new?
No, we're just going to we're just doing the daily work that we need to do. And remember, we're offsetting all the inflation and healthcare costs and wages and everything that goes on in a normal day. But we've made the raw reduction we talked about now it's just business as usual go to work.
Okay. Super. Thank you.
And we'll go next to Glyn Shore with ISI. Please go ahead.
Hi, thanks very much. On Slide 8, there's this tiny uptick in consumer 30 day past due. It's a small number, but it's the first time I've seen it go up in a long time. Credit outlook is great. Just curious if that denotes like a bottoming and what you're seeing?
And then in conjunction with that, how you feel about your what appears to be very large loan allowance as a percentage of charge offs?
Sure. Now we went back and noticed the same thing Glenn. There were a few items that were 10s, 20s 30s that rounded. But as we go out and look and as we freshened up and look forward, I would say that the forward look on credit as we look forward relative to when we looked at it last quarter, we do continue to see continued improvements albeit at a slower pace from a charge off perspective once you adjust for the non performing loan sales.
That's good. That's comforting. You mentioned the $3,000,000,000 of sub debt that you issued during the quarter. Just curious if there's any thought process of is that getting ahead of OLA? And do you feel that there's going to be a sub debt component?
Or is that just you being cautious and having some diversification in the debt structure?
I think as we looked out and as you look to fill up the various non CET1 buckets, you can see that we obviously had the bucket Series T in May and we've issued about $4,600,000,000 to get where we're largely filled up on the preferred bucket and the sub debt issue of $3,000,000,000 was relative to approximately $5,000,000,000 to fill up that bucket from an overall capital perspective. And at this point, I would say from an OLA perspective, we continue to read what you do. We feel like we've been very prudent in building up the significant debt stack at the parent and we just have to see where the regulation goes from here and we're obviously waiting to see exactly what that is.
Okay. Last one on mortgage. Just curious what percentage of current originations you're keeping on balance sheet? And then related part 2 would be, how much is the unfinished question around repurchase risk constraining any mortgage lending? Or is it really still a function of demand at this point?
I'd say the have gone on the balance sheet during the quarter. In terms
of just origination quality, we continue to focus as we have for quite a long time here on originating high quality prime mortgages, while still fulfilling our duties to get customers credit for home purchases. The originations continue to rise. The purchase component obviously is rising too. So we feel good about where we are and you can see that the repurchase requests and the agencies and stuff come down dramatically. So we're not going to change course because in the end of the day because we feel good about the credit quality we've taken that we're taking on producing for ourselves and for investors.
Okay. Thanks both.
Thank you.
And we'll go next to Jim Mitchell with Buckingham Research. Please go ahead.
Hey, good morning. Two questions. First on governance, can you just kind of talk through the reasoning on the Board's perspective to kind of change the Chairmanship and with a Lead Director, how that you think that dynamic may change good or bad? And I guess secondly is this a vote of confidence in you Brian in terms of the leadership and current strategy?
Well, I think we have a strong Board as a team and with various people with various skills and backgrounds and that diversity really helps us. And so I think the Board's decision as we put out a few weeks ago when the announcement was made, it was this is continued great governance, continued commitment to good governance. Jack Bogen, the Lead Director takes over from Chad Holliday who served as Chair for about 4.5 years and did a great job for us. And the Board is very committed to continue to have the strong governance especially in the heightened expectations from the regulators and the enhanced supervisor prudent prudential standards from the Fed. And so we feel good about the governance, but it's a team effort and how the Board works together.
And I think your points Chad made in the announcement are that the Board feels very good about the accomplishments of the management team This is part of the progression in that regard.
And does the Fed take part in reviewing this decision in any way?
It's the Board's decision, but we consult with regulators in all our major decisions in the company. But I think the key is to how we operate as a Board and how we govern the company. And I think it will be for the benefit of the shareholders as it has been.
Okay, great. And then second question on the balance sheet with the $47,000,000,000 reduction, clearly it helps the LCR. But can you give us a sense on how it benefited I'm sorry, the SLR, but can you give
us a sense on how it
might have improved your LCR, number 1? And if there's any additional benefits beyond leverage that helps the stress test?
A couple of questions. The first thing is we focus on the deposits. The I wouldn't say it benefited LCR, but what it enabled us to do was to continue to rationalize the balance sheet without hurting LCR. That relates to the deposit LCR benefit asset and converting them to $6,500,000,000 of LCR benefit. So that would have been the one pickup of the activities that we mentioned as well as just the reinvestment of repayment of legacy loan proceeds into securities once again helps LCR.
So the actions with respect to bullet 1 under the key balance sheet benefited LCR, the $15,000,000,000 of deposits just enable us to rationalize the oversize overall size of the balance sheet. As it relates to CCAR and the actions that are taken, as we look to manage the company, we continue to look to manage out the higher risk categories of loans. And if you look at what we did in the 2nd quarter with just over $2,000,000,000 of non performing loan sales and $2,500,000,000 this quarter. We would clearly expect that as you look at those from a CCAR perspective, they would be higher loss content loans relative to the rest of the portfolio. But the rationale and the goal to move those out was to reduce the risk in a market environment that was very favorable and we feel good about those actions that we took.
So is it fair to assume that you guys are near at the 100% LCR threshold? And I guess secondarily should we expect balance sheet growth to start loan deposit growth balance sheet growth to start to pick up from here? Or you still have more to do?
So from an overall LCR perspective at the parent, we're at approximately 110% at the parent. So we're well in excess of where we need to ultimately be in 2017. Within the bank levels, we're well above the 80% level and would look to drive that to be north of 100% during the first half of twenty fifteen well in advance of the 2017 implementation. And as it goes as we move forward and we look at the compare the loans in the 3 principal businesses where we make loans in the segments that we've laid out here and that would be in our consumer business, in our wealth management business as well as in our global banking business that And we're clearly very focused on looking to drive out and push out and grow loans. We're obviously focused on growing deposits with our core customers, which is which will benefit LCR as well.
And I think as it relates to the overall size of the balance sheet, we want to continue to be more efficient. But I don't think you're going to see the magnitude move in the balance sheet going forward that you saw during this quarter.
Okay, great. That's helpful. Thanks.
And we'll go next to Don McDonald with Sanford Bernstein. Please go ahead.
Hi, Bruce. I wanted to 100,000,000 headwind the core NII, does that reflect the possible strategic actions? Or is that just reflecting the fact that reinvestment rates for the maturing cash flows are lower today than they were in the second
quarter? It would reflect 2 things John. It's both the roll to spot risk as well as the buy ticket during the Q4.
Okay. And this buy ticket or these actions that you might take, how might they impact your projections of rate sensitivity to rising short and long rates?
Well to the extent that we don't reinvest and build up cash it will increase our asset sensitivity and the benefit to rising rates when that occurs.
Okay. So you're not talking about a major restructuring of the bond think just
realizing what we've seen during the quarter, I think just realizing what we've seen during the quarter and being cautious on buy ticket during the Q4 to manage net interest income risk with OCI risk. But we're not talking about any kind of material shift. We're just flagging something for you given 91
or the 91 or the premium amortization charges that move around with the 10 year, is that pretty proportional to how the 10 year moves up and down or other levels where it stops kind of being a straight line impact?
I would say that the it tends to move the FAS ninety one moves most and is most correlated to the 10 year. And I would say that as you look at OCI risk, it tends to be more correlated to long term mortgage rates.
Okay. And just a follow-up on the provision. $600,000,000 reported or the 200 ex DOJ this quarter? How should we think about where to start off with that?
Yes. I think John I would look at the charge offs economic environment doesn't change, we have continued to see improvements in the credit portfolios. And I think practically speaking, if you look at the reserve release during the quarter, once you adjust for the DOJ amount of 4 $100,000,000 that you're not going to see reserve releases. I think clearly they be a fair bit below the $800,000,000 that we would have seen this quarter on an adjusted basis.
Okay. That's helpful. And then just on capital builds, Bruce, it seems like you're still able to grow that Tier 1 comment at a multiple of the GAAP earnings. Is that primarily the DTA? And could you remind us what the status of the DTA balance is and how much is disallowed currently?
Sure. The disallowed amount continues to be in the $15,000,000,000 to $16,000,000,000 type area. And as we look out between now and the end of 2015, we would expect to that the CET1 should build generally consistent with pre tax earnings all the way through the end of 2015.
Okay. Thank you.
Thank you, John.
And we'll go next to Mike Mayo with CLSA. Please go ahead.
Hi, good morning. What were there any gains from the $2,500,000,000 of NPA sales?
I believe between what came through in the charge off line and the net, I think the NPAs were roughly 150,000,000 dollars
Mike. $150,000,000 gain? Correct. Okay. And as far as the outlook for rates, have you changed your rate assumptions for next year given what the 10 year has
done? As we look at rate assumptions, what we do is when we go through And clearly, I think if we look out at and look at the rate movement that we've seen over the course of the last couple of weeks, people are obviously more cautious that rates may not be moving up at the level that they had had, but it's clearly been very volatile over the last 30 days.
And is that changing the way you're managing the portfolio or the company? In other words, at what point do you look at the low rate environment and say, our prior assumptions might have been off a little bit, we need to revise the approach?
Well, I think that the as we look forward, Mike, we're and I think it's a little bit of why we said what we did about a little bit of caution during the Q4 that at this point as we look out and given the impact that OCI has the capital until we see where rates settle out as they continue to move around. We just we continue to be very cautious with the buy ticket. And when we do it, we're investing clearly a little bit shorter than longer at this point given the risk that OCI has the capital and being mindful of that.
Sure. No, it's tough figuring out the rate environment right now. As I'm revisiting the comment you made, you said expenses should move more directionally with revenues. And if I look at the 1st 9 months, I guess revenues are down, but expenses are down more. Do you mean that instead of having positive operating leverage, it might be flat operating leverage looking ahead?
No. I think a couple of things, Mike. The first is that I want to make sure that we emphasize is that we still have a couple of $100,000,000 of expenses to get out in the LAS area between now and the Q1 of 2015. And clearly, one $100,000,000 of LAS expenses that we've set to get to in the Q1 of 2015 is not where we would expect to operate on a longer term basis given what litigation has been that that over time is going to come down. And then the third thing and when I said directionally expenses moving with revenues is just if we look at some of the areas particularly within the wealth management area that we've seen, there is a component of compensation and incentives that's very clearly tied to revenues, not unlike what you see within the global banking and the global markets.
Know I asked this before, but if rates do not go higher in 2015, what is Bank of America's ROE target?
I think if rates don't go higher, what you see in terms of earnings is what we're what we got to drive through this quarter. So Mike, when you look at the charts Bruce showed you and I showed you, you can see that the core businesses have earned several $1,000,000,000 after tax this quarter and the Crest business took it away. And as that comes down, you'll see those earnings flow through. We don't and so you can based on that. But basically we're earning you can see on Page 18, the net income levels across each quarter.
And our job is to take commercial real estate business, which is, you see for the year to date, take commercial real estate business, which has lost money and get that back to breakeven and that's the work we'll do. In absence of rate rising, it's not a lot different than it is right now.
And then lastly, just following up on the other question relating to the separation of the CEO and the Chairman role. When you consult with regulators, do they care one way or another if the CEO and Chair position is split? And there's several corporate governance experts who say that it's better to have those 2 roles split and others say it doesn't matter. Do you know what the regulator view is on that because you're going from what some consider a preferred corporate governance approach splitting the CEO and chair role to now combining them?
I think that what they've been clear about in the published documents, but despite the OCC in their patent standards or enhanced standards and recently in the Fed, they care about the engagement of the Board and the diversity of Board and the experience of the Board and we have a good Board and it's experienced and has all the diversity and the incredible challenge and all the words that are used to describe that. And that's the core of the governance point that they make.
All right. Thank you.
And we'll go next to Matt O'Connor with Deutsche Bank. Please go ahead.
Good morning. Good morning. So I could just follow-up on some of the capital commentary you provided, especially in the deck here. It seems like there's a number of adjustments that were made this quarter and then just right after the quarter you consolidated the bank subs. There is some increase in operational risk RWAs.
You commented on OCI managing for that. Just as we think kind of big picture on managing capital, what's left? And is there opportunity to bring down some of the off balance sheet exposures now that you have kind of more final rules on the SLR?
Sure. I think I would start and just reiterate as we look at capital on a go forward basis, you basically have three items that are going to affect things. The first is your level of profitability and just want to reiterate that we would expect once again a go forward basis to accrete capital on a pre tax basis. And the second is the impact that OCI has to those capital ratios. We obviously saw during the quarter rates went up on the mortgage side.
I believe it was about 5 basis points during the quarter and there were some security gains as well. And that was what was led to the change in overall OCI. And as I said before, given the environment we're in where rates are down about 30 basis points so far quarter to date that would have a benefit today to capital and we're just mindful of reinvesting so that we don't take on any greater OCI risk on a go forward basis. As it relates to what we're looking through, the overall risk weighted asset work that's been done, I would say that clearly as we continue to work through the legacy home equity as well as the first mortgage portfolios that do not benefit from a standby agreement. As we continue to work those assets down, that should enable us to grow the core and still keep risk weighted assets generally constant.
And I think more specific to your point, the other two things are that we continue to look to work through and we have the runoff of some of the structured credit and other portfolios that we're trying to accelerate that come off between now and 2017. And then the last piece that we continue to work hard on and you saw it in the op risk that as we updated the models for the time series, you do have the increase to risk weighted assets. And we're working hard to get to where we need to be from that model perspective as we would hope in 2015 if we're successful to go ahead and exit Parallel Run at that point.
Okay. And then as you think about I guess the adjustment on the operational risk RWA side, do you think that's about done? Or is it an ongoing process until you hopefully exit the parallel run?
Yes, I think it's obviously as others have noted it's an ongoing process. I think the important thing is if you compare our operational risk number relative to our peers, we're at roughly 30%. And if you do the math against the risk weighted assets, we're at the it's not the top, the upper end of where others are from that. But we obviously have work to do to get that finalized to be in a position to exit.
Okay. And then just separately within the C and I lending book you talked about pricing pressure as well as some pay downs. But I guess specifically in the pricing pressure, what are you seeing now versus a quarter or 2 ago when you're still trying to grow or growing the book in terms of not just the magnitude of pricing, but what types of products?
Sure. I would say that the most competitive area that we continue to see is within the commercial banking space of our Global Banking segment, which are those middle market type companies that tend to be loans that have 1 or 2 banks provide all of the credit and clearly the remaining services that go along with servicing those customers tends to go to those that provide the credit and that's where you've seen the most competition. I think it's interesting if you look at and go back to our table on the international side as we've continued to shape the balance sheet and look for return, you've actually seen a step up in the yield in our international lending activity focus probably most importantly it's within the commercial the middle market commercial space where we're seeing the most pressure on yields. Just
to add a little color to that. Our view was the team along two dimensions. 1 on the international side, we had strong loan growth a couple of years ago into last year and now we have to materialize the treasury management and other revenue streams under increasing our credit exposure and Tom and the team growing the business. So there's sort of a was a growth of loans that then has to be a follow through of growth of transactional revenue etcetera. And on the middle market, I think the team went for optimization and we are continuing to stress that they need to be able to manage both the optimization and the growth
of the portfolio. So we're pushing on them to get the balance probably back
a little bit more Okay. All right. Thank you very much.
Okay. All right. Thank you very much.
And we'll go next to Gabe Makovsky with Autonomous Research. Please go ahead.
Good morning. This is Guy. Question on, first of all, the optimization that securities financing transactions. We look at those two things as a direct as directly related to each other?
I think they're related to each other that we think it's prudent balance sheet management, but they're independent actions that are part of prudent balance sheet management.
So Guy, I'd say thematically not, but not necessarily directly.
Okay. So the $15,000,000,000 isn't all essentially prime brokerage related as well like the asset reduction that you're talking about?
No, it's not.
Okay. That's helpful. Another question is with respect to the provision related to the DOJ settlement. Should we look at this $400,000,000 which as you said offset what would have been an $800,000,000 reserve release. Should we look at that as a essentially now a one time true up and going forward you now feel that you have the provision that you'll need for multiple years to fulfill the settlement terms?
Or is the settlement going to essentially be a pay as you go thing through the provision? The
provision? So to be clear, when we set up the $5,000,000,000 reserve or the $5,300,000,000 hit this quarter was to cover cash payments as well as all expected costs associated with implementing our $7,000,000,000 of consumer relief. And the part of it that flows into the provision line item that's $400,000,000 that is a reserve to take care of the what would have been the P and L impact from the modifications that would happen within the different loans that we're modifying. So on a go forward basis, assuming that we've got this set up the way that we do, there should not be any future P and L impact from DOJ. The only impact will be on the balance sheet as you see the reserve number come down as we implement the consumer relief programs.
Got it. That's a very helpful explanation. Thanks. And finally, And finally, cyber security issues, obviously you were not the bank that's been in the crosshairs here and yet I imagine that this is something that has caused some consternation internally and some spending. JPMorgan has talked about a $250,000,000 budget for cybersecurity issues, which is expected to double.
Can you give us a sense for what you're spending there and how you would expect it to increase?
We obviously it's a matter that we take very seriously from the Board engagement, the talents we have on the Board to help us with this all the way through management. Kathy Pessant and her team in tech and ops and we spend 100 of 1,000,000 of dollars on the year and it's been growing and we expect to continue to grow. It's the key to keep our customers and our teammates secure and we continue to work on it. So this is nothing but hard work and we continue to work with both the law enforcement authorities, the various government agencies and among our industry through the various trade groups and formal engagements to try to drive our competencies in the industry up. So we're spending a lot of money on it several 100 of 1,000,000 of dollars.
We expect that to continue to increase.
Thanks. I actually do have one more if that's all right. And it's with respect to the rep and warranty RPL, which in the footnote you say that's the same as it was last quarter at about 4,000,000,000 dollars Can you update us on where you are with any lawsuits related to the non countrywide originations which are which add up to around $420,000,000,000 of UPB?
So if you recall, Guy, what we've done and what we continue to refine each quarter is that as we continue to see rep and warrant claims, there was a reserve set up back in the Q2 of 2011. A piece of it was for Gibson Bruns. There was a piece of it that was for bank issued rep and warrant and then there was a piece that was for 3rd party. And we obviously look at those reserves each quarter and adjust those reserves for the activity. In those cases where we have enough activity to have our reserve, we obviously have those into those areas that are still uncertain.
We provide the range of possible loss. And as you referenced that the range of possible loss with respect to rep and warrant activity continues to be up to $4,000,000,000
Okay. So no movement there obviously this quarter.
That's correct.
Yes. Thanks very much.
Thank you.
And we'll go next to Brennan Hawken with UBS. Please go ahead.
Hey, good morning guys. A quick one on loan growth. So at first glance, it looked kind of weak. It was seemed to be driven by consumer. I just want to make sure I've got sort of the right adjustments here that I think you guys have laid out.
In mortgage, dollars 12,500,000,000 decline sequentially, but should we be backing out the $2,500,000,000 of NPL sales and then the $6,500,000,000 of agency conversion from that decline? So you get kind of like a normalized decline rate sequentially of more like $3,500,000,000 on the mortgage side?
Yes. I think the it's a good question. So the decision to move the 6.5% from loan to security form was based on LCR. It doesn't change the fact that when you move that that you still have the asset on the balance sheet. So I think that $6,500,000,000 is a fair adjustment to make.
And I would agree that the $2,500,000,000 where we sold the non performing loans and quite frankly there's not much left there to attack. It is a fair adjustment, which gets you to the $9,000,000,000 The other thing when you look at those loans that I do think is important is that from on the home equity side, with those legacy home equity portfolios, which we equity portfolios which we want to get repaid that repayments within those were roughly $3,500,000,000 which were greater than the funded amount that came on from a new home equity origination perspective. So I come back to that the within those more discretionary portfolios, what's happening there is what we want to happen there that they're repaying and we're converting them to more liquid instruments. And I think as we look at actual business activity and how we're doing, we'd focus you back within the segments. And as we talked about within the consumer business where average loans were up a little bit linked quarter on a card basis where we saw very strong continued growth within the home equity space.
Go back to the wealth management area where loans reached a record level. And then I think we've already addressed the work that we need to do on the commercial front.
Sure. Sure. And maybe if you could, is it possible to give us an idea about the runoff portfolio what's left in that at this stage and what your guys' expectations are for like a runoff headwind just so we can think about it for modeling purposes?
Sure. I think it's I would look at as you go forward given that we're not buying whole loans from 3rd with respect to whole loans that we hold for others. The second thing that I'd say that you have is you've got roughly 3 $1,000,000,000 a quarter in home equity payoffs, a portion of which will be mitigated by new originations. But you are looking at roughly 3 there. And then you have some other kind of less than $1,000,000,000 type items.
But I think it's fair to say that as you go forward outside of what we think is core, you're probably looking at in the consumer businesses in the zip code of $10,000,000,000 to $12,000,000,000 that will go away. It will either have the ability to reinvest and make new loans or otherwise reinvest.
Okay. And that's on a quarterly headwind basis?
Correct.
Okay. Terrific. And then thinking about Wealth Management, could you break down the expansion in the margins there this quarter? How much of it came from reduced spending? I know you guys have been investing there.
So maybe could you help us understand how much of a contributing factor that was here this quarter and how much investment is left to wind down here?
I'm sorry, when you referenced margin, margin in what area?
Sorry, wealth management pretax?
Yes. If you look at it and you go through the different areas, you tend to have 40% type payouts with respect to the revenue piece. So when you look at the margin improvement of a couple of 100 basis points, I would put it more in the context of just good core expense management. I do think there was a little bit less litigation within the quarter that benefited us, but it tends to be just across the board whether it be a little bit lower support cost, a little bit lower licensing fee number, a little bit less mitigation. There was no one number that was particularly dominant in driving the margin.
And last quarter, we had some start up costs for the MeraOne product and that you can see has had strong success in terms of AUM. So that sort of in the Q2 technology expenses have to roll that out that comes back offshore.
Yes. And so that technology spend also rolled off too which probably helped right? Is that my way?
Yes. Exactly. If we remember last quarter when we talked about it they had a decline it was because some of the stuff was going in this quarter, you saw it revert back to more where they've pretty consistently been over the last many quarters.
Cool, cool. And I seem to remember that being somewhere in the ballpark of like $50,000,000 to $100,000,000 is that right?
I think it was all in that much, but not whether it was all in that one quarter or not I don't remember.
Okay. So the decline from that might be less so? Yes. Cool. Then last one, I know you guys have talked about here that the repositioning that you guys want to take as far as AOCI risk and such.
When we think about the AOCI hit that you guys lay out versus other money centers in the interest rate shock, it's a little bit higher than where some of the other folks are. And so hoping to maybe get a little bit of color on where the current duration is, where you expect the duration to go based upon the actions that you take? And then maybe help us also square the circle of understanding the larger AOCI hit and whether that's a result of a barbelling with the portfolio or what?
Sure. First thing I just want to clear up that there's in the quarter, the only comment with respect to the quarter that we're referencing is just some caution on the buy ticket given where interest rates are at this point during the quarter. I think if you go back and you look at over the last couple of quarters, it's been a very consistent message and that we've said that we're going to direct more the buy ticket to shorter dated treasuries. And you can see that there's been a buildup of those treasuries over the course of the last 3 to 4 quarters. So this quarter was a continuation of that and we were just calling out a note of caution given the rate environment.
I as it relates to overall OCI sensitivity, if you look at what we've typically said is in 100 basis point parallel move up in rates, how long does it take back or take to earn back that OCI? We've said consistently it's been around 3 years. It peaked at about 3.5 years. And at the end of September, it would have been less than 3 years. So we have kind of in a consistent trend line continued to look to move down the overall OCI risk as it presents itself to capital.
Okay. So is it right then to assume the duration on the AFS portfolio is a little under 3 years? Or is that not a correct inference?
No, that's the period of time that it takes to earn it back. You're looking at the overall I think the overall duration is going be in the 5 plus years.
And we'll go next to Ken Usdin with Jefferies. Please go ahead.
Hi, thanks. Just a question just on the trading business. Obviously, you guys and the other companies did well amidst the volatility in September. And I'm just wondering with regard to this balance sheet changes you guys have been making and the optimization of RWAs and given what's happening in the environment right now, Any changes in terms of how Tom's running that business as far as being able to capture the revenue opportunity out there and or any inhibition given by your views around risk taking and these capital balance sheet changes
that you guys have talked about today?
I'd refer you to Page 21 in the appendix in the lower left hand corner and you can see this is the Q3 of 2012, 2013 2014 laid out side by side. And so I don't think this is a change in position if you look at it. The average trading related assets are $460,000,000 to $440,000,000 The VAR is $55,000,000 $56,000,000 $50,000,000 and you can see the revenue. So this what Tom and his team have done a good job is building a relatively stable business is going to fluctuate the markets, but a relatively stable core amount of activity comes through this. And if you look at it over several quarters with a section of seasonality in the first quarter that typically occurs each year.
But we laid this out for you Q2 2012, 2013, 2014 last quarter, Q3. You see it's a relatively consistent 3,000,000,000 dollars revenue type of number and we've maintained that. So the adjustments we made in the business on expenses, scope of activities and stuff we actually made in 2010 and 2011 to bring the business in line. So we're very comfortable where they are now. They are always moving around and pairing risk and continuing to manage carefully that overall return to the business.
It's relative size to our company. We think we've gotten a good place. We simplified it. And so there's no change in strategy here. And in fact, you can see there's a fairly consistent result from that activity.
And what's different this quarter versus last quarter obviously is without the U. K. Taxing you're seeing the bottom line come through the Q3. But we made $700 odd 1,000,000 after tax and that's good performance.
Thanks, Brian. And follow-up just on the mortgage business. The servicing line has continued to just trickle out. I'm just wondering, have we seen the bottoming of the former related revenues moving away from that?
I think if you look at the servicing revenue, as I said, the biggest reason for the decline was an adjustment in the cost to serve. If you saw the actual servicing fee line that came through linked quarter, it was only down about $25,000,000 on a linked quarter basis. And so the what you're going to see on a go forward basis is not so much the servicing revenue that's derived based on the size of the MSR assets. So given that there aren't any more large scale sales of MSRs, you're going to see that more vary on a core basis as opposed to a step function. And the biggest change
you'll see is that number 60 plus delinquents that it's got to continue continues to normalize now and we have to continue to push that. That's where we think that we get the additional expense leverage in LAS going forward. And so it's $100,000,000 this quarter and a couple $100,000,000 of course just grinding through and working those loans with the customers and modifying or short selling or going through foreclosure. So that number is still elevated as a percentage. You can see it.
And if you look at our delinquency off of the things we produced really since after the crisis, the numbers are much smaller and apply at delinquency level ultimately of half that amount that you see now. So that's where the real work will come in unit reduction. The overall 3,900,000 units is fluctuating around a little bit, but we're kind of getting equilibrium where our production is nearly what runs off absent sales and the 60 plus bucket.
And my follow-up just on that point. You had talked about $1,100,000,000 by 1Q, 2015. You had previously talked about getting it down to about $500,000,000 a year out from that. Is that still a reasonable expectation given that backdrop you just laid
out? I think the first thing that we're focused on is getting it down to $1,100,000,000 And then longer term, I think if you look at any metric with where we would see from a number of loans serviced as well as the number of delinquent loans in the portfolio, we still have some significant work to do to drive that $1,100,000,000 down because given the size of the portfolio, it's way too high.
Okay. Thanks guys.
And we'll go next to Paul Miller with FBR Capital Markets. Please go ahead.
Yes. I just want to follow-up on that. You talked about 6 day delinquent loans down $42,000 to $221,000 I don't think there's any sales of that. Is that just working through the portfolio? And that seems like a very high pace.
Can we expect that type of pace? Or what type of pace of loans do you think you can work out on a quarterly or
annualized basis? Yes. There were some servicing transfers during the quarter. My recollection is that it's between 20,000 and 25,000 units that were actually transferred during the quarter. So it was a very good quarter for us as far as MSR sales and driving that number down.
But I think you're right that on a go forward basis, it's not going to be at that level, although we do think that we'll make some significant progress between now and the end of 2015.
I mean, outside of servicing transaction, I'll give you this is 20 to 25. So it was down roughly about 15 ks give or take I mean, given take 1,000 loans. Is that a pace that we could model going forward?
There are obviously a lot of factors that can go into that that are going to have it bump around. But I don't think if you believe that with what we're seeing from the quality of the portfolio and you believe the foreclosure process continues along the same trend, you're probably looking at plusminus20,000 units a quarter on an organic basis, on a net basis.
Okay. And then relative to the big down Department of Justice settlement,
what do you think you
are in legal costs? I know it's hard to sit down and say, but we've seen a couple other competitors get the Department of Justice behind them, but there still tends to be this nagging $1,000,000,000 here and there legal costs that just won't go away. What do you think we are is Bank of America since they've paid probably the most out than anybody, are you more through that than most other people?
Some of that stuff
that people experience are pieces that we taking care of in prior quarters and some of it relates to completely different as it relates to mortgage matters, some relates to other matters. So we'll always have litigation expense in this company. But in terms of the mortgage, we've talked to you in many quarters, but if you think just the last 3 major pieces fell behind it. And we're still waiting for the ultimate approval of the Gibson and Brent settlement, 95% of the RMBS by principal amount. We had settlements at this point are waiting and awaiting final approval.
So yes, we've done a lot of the pieces we had settled up FHA and things like that along the way. So we've got it in the monoline, 4 out of the 5 are settled. So we've been picking away. So, without knowing all the ins and outs of the other competitors from our standpoint, a lot of the smaller stuff was getting done as you as a lot of you focused on the largest things, a lot of smaller stuff was coming in and out every quarter underneath that and we should see less of that going forward.
Okay. Hey guys, thank you very much.
Thank you.
And we'll go next to Matthew Breunnel with Wells Fargo. Please go ahead.
Hey, Matt. Hi, Brian. Thanks for
taking my question. I guess just a question in terms of the investment banking product rankings on Page 32. Obviously, most of the numbers are in the top 3, particularly in the more important categories. I guess just looking at the global rankings in terms of some of the numbers that aren't in the top 3, are there further investments you all plan to make in that business that would have any effect on the operating expense ratios in Global Banking? Or is that pretty much steady state in terms investments you all are putting into those businesses?
I think as a broad construct and I think you're asking more strategic level, Christian Meissner and the team with Tom have done a good job of adding people in the markets where we needed to build our capabilities. And while we're always looking to add more and more talent, more and more capabilities, I don't think there's any huge change in expenses or numbers. It's more of a continuously upgrading our talent and adding incremental talent. But in the grand scheme of things, it's a pretty small expense base in the context of our company with the level of expenses. But your point is exactly right.
The global the U. S. Competitor versus our franchise is obviously demonstrably stronger as you can see in the U. S. Rankings versus the global.
The global have picked up honestly. And as activity picked up in Europe and Asia, we continue to drive forward. But we still are working hard to improve our positioning in it across the but we've made a lot of investments already.
And then if I could just ask a follow-up on the commercial non U. S. Commercial loans. A couple of competitors have mentioned that there's been some weakness in trade finance lending. And I'm just curious how much if any that has affected the loan growth within the non U.
S. Commercial side of the balance sheet?
It has affected it in 2 ways. And so when you look at the declines that we saw within the loans outside of the U. S, a chunk of that decline was a decline in trade finance. I think what's also notable is the trade finance tends to have the lowest spread. So when you look at the yields within the international loan portfolio, they're up and that's because you've got more corporate type loans that have higher spreads than trade finance which tends to have lower spreads.
Thanks very much Bruce.
Thank you.
And we'll go next to Chris Kotowski with Oppenheimer. Please go ahead.
Mine were asked and answered. Thank you.
And we'll go next to Steven Chubak with Nomura. Please go ahead.
Hi, good morning. Bruce, first question binding capital constraint for the bank, which is just that presumably you'll need to manage to a higher core Tier 1, which I guess from my perspective could put at risk the 14% ROT goal that you guys had established in the early part of this year. And I suppose it's really a 2 parter. First, what core Tier 1 target do you believe you'll need to manage over the cycle? And then as a follow-up to that, how does that inform your outlook for meeting that goal?
Well, a couple of things. I go back to the first comment, which is that you have to break out a little bit what's going to happen for our company over the next 5 quarters between the growth in tangible common equity versus the growth in regulatory capital that flows into the capital ratio because as I said before over the next five quarters, we'll accrete capital on a pre tax basis absent any other changes. But it's first thing I'd keep in mind. The second thing is that as we look out, we do believe at this point that CCAR is the governor and we're obviously getting ready to go into the 2015 CCAR process and without instructions or any assumptions or scenarios. I think it's premature to look at that.
The third thing is, as you look at return targets and Mike touched on this a little bit in his earlier question, I think that the thing that as we look to getting to those 12%, 14% type targets, the thing I would encourage you to do because I do think that you start to get a bridge to that is if you take the earnings that we announced today and normalize them for the things that I touched on in my comments, you tend to be you tend to be starting at a point that's in the 10 plus percent type return during the quarter from a tangible common equity perspective. And you've got really four things that are going to change that on a go forward basis. The continued reduction within our LAS expenses, we would expect obviously longer term litigation expenses to go down. You have the benefit of rates and then you've got what we do within the core businesses. So those are the 4 things that we're focused on.
And the last point I would say is as it relates to just CCAR, we feel like getting ready for CCAR during this quarter and quite frankly throughout the year that we've made a lot of work between moving out of the company, those assets that tend to have low or high loss contents in stress. We've augmented our CET1 ratios as we've gone forward and we think we've taken a lot of tail risk out. So long winded way of saying you can kind of look at the bridge to more normalized returns when you adjust what we saw this quarter. We feel very good about the progress that we've made as we prepare for CCAR. We'll look to see what the instructions are and we'll have to see if our assumption about that being the governor given the evolving regulatory landscape continues to be the case or if we need to update that assessment.
Helpful. And then just switching gears to the liquidity side of the equation. One measure which hasn't garnered very much attention is the net stable funding ratio. And my understanding is that Basel's at least intended goal was to have the NSFR calibration completed by the end of this year. And I was hoping you could disclose where you currently stand on this metric?
So we do not have an exact number to disclose at this point. What I would say is we've worked through and we've done the work to get to where we need to be from an LCR perspective that at this point there's not anything that gives us any concern that we're going to have to change in any material way what we're doing to satisfy NSFR.
All right. Thanks. And maybe just one more quick modeling question. I was hoping you could clarify given all the preferred issuance that's been done, assuming nothing incremental is completed going forward in terms of issuance, what the preferred coupon should be on an annualized basis next year?
I think you're let me just I've got an exact number for you. Bear with me one second. You should see during next year a preferred number of
And there are no further questions at this time.
Thank you, everyone. Look forward to seeing you next quarter.
This does conclude today's conference. You may now disconnect and have a wonderful day.