And welcome to today's Third Quarter Earnings Review Program. At this time, all participants are in listen only mode. Call. And please note today's call is being recorded. It's now my pleasure to turn the program over to Kevin Stitt.
Please begin, sir.
Good morning. Before Brian and Bruce begin their comments, let me remind you that this presentation does contain some forward looking statements regarding both our financial condition and financial results and that these statements involve certain risks that may cause actual results in the future to be different from our current expectations. For additional factors, please see our press release and SEC documents. And with that, let me turn it over to Bruce. Great.
Thanks, Kevin, and good morning, everyone. I'm going to start the presentation on Slide 4. And as I'm sure you've all seen, for the Q3 of 2012, we reported net revenue of 20 point $6,000,000,000 Importantly, that number was reduced by about $1,900,000,000 for FVO and DVA. And if we adjust for you get to a revenue net of interest expense of $22,500,000,000 for the quarter. Net income was $340,000,000 or $0.00 a share after preferred dividends.
The results reflect the previously announced charges in late September that relate to $1,900,000,000 for the combination of FBO adjustments as well as DVA resulting from the significant tightening that we saw in our credit spreads during the quarter. In addition, we had $1,600,000,000 pre tax of total litigation expense, including the charge for the Merrill Lynch class K. Tax rate. In the aggregate, these items negatively impacted EPS by approximately 0.2 $8 If we turn to Slide 5, the results in the 3rd quarter demonstrated ongoing momentum on several fronts. Period end deposits across the company grew $28,000,000,000 or 2.7% versus the 2nd quarter, which is an 11% annualized rate and we accomplished that as the rates on our deposits declined slightly from 20 basis points to 18 basis points.
The net interest yield increased by 11 basis points as our liability management actions continued to benefit net interest income. Our mortgage business home loans had its most profitable quarter excluding asset sales since we started reporting its results separately with 1st lien production up by 13%. Wealth and Investment Management showed growth in long term assets under management, deposits and record loan levels while maintaining solid margins. Ending loans in our Global Banking segment increased 2.5% from the 2nd quarter or 10% on an annualized basis. Results in the Capital Markets area reflected strong performances both on a quarter over quarter as well as a year ago basis.
We continue to invest in growth areas of our company such as mortgage lending, small business banking and financial advisors. Our 60 plus day delinquent loans serviced out in our legacy servicing business declined 12% from 2nd quarter levels and we'll spend some time later in the presentation talking about what that means going forward. Our number of full time equivalent employees declined approximately 3,000 from the end of the second quarter related to our different new BAC initiatives. You turn to slide 6, a lot of information on the balance sheet highlight area. I just want to draw your attention to 3 of the line items.
The first, our tangible common equity ratio improved by 12 basis points to 6.95 percent. If you move down to tangible book value, it grew by 0 point quarter up to $13.48 And if you look at our adjusted loan coverage where we look at the allowance for loans over annualized charge offs, it improved during the quarter to 2.2 times. If you turn to Slide 7, as we've seen all year, regulatory capital continued to strengthen. Our Basel 1 Tier 1 common capital ratio was up 17 basis points to 11.41%. Remember FBO and the tax charge do not impact regulatory capital.
As we near the 2013 implementation period for Basel III, we've estimated our Tier 1 common equity ratio and its components to provide a better understanding of where we are relative to the expected 2019 Basel III requirements. Our estimate is per the final U. S. Market risk rules in the U. S.
Basel III NPRs. As of the end of the Q3, on a fully phased in basis, we estimate that that Basel III Tier 1 capital ratio would have been 8.97%. Recall last quarter, we estimated Basel III under BIS Basel III guidelines to be approximately 8.1% and 7.95% applying the U. S. Basel III NPRs.
If we look at the components of the ratio, our Tier 1 common equity was $134,600,000,000 while our risk weighted assets would have been $1,501,000,000,000 A couple of points I'd like to make before we leave this slide. If we look at the improvement in the numerator of roughly $8,000,000,000 we did benefit during the quarter given the reduction that we saw in the rate environment where our OCI which goes through the balance sheet not the income statement was up about $3,200,000,000 and contributed 21 basis points to that ratio. We also benefited on the denominator in a portion of the increase due to the tightening credit spreads that we saw across the market that did benefit the denominator. We turn to Slide 8 and look at liquidity. Global excess liquidity sources increased modestly from $378,000,000,000 to $380,000,000,000 during the quarter.
That was accomplished while we reduced the long term debt footprint across the entire enterprise by about $15,000,000,000 A couple actions of note during the Q3. We had 6 point $2,000,000,000 of liability management actions, which consisted primarily of parent redemptions of trust preferred securities as well as sub debt. And in addition to that, we had $12,000,000,000 of maturities that were repaid at the parent. We took an additional action during the Q1 of October of calling $5,100,000,000 of additional trust preferred securities that will benefit NII by about $50,000,000 in the Q4 of this year and on a go forward basis about $300,000,000 And as we noted before, there will be a loss upon the redemption that will take in the Q4 of about $100,000,000 If we focus on the parent company for just a moment, parent company remained very strong at $102,000,000,000 And if you look at the reduction in liquidity combined or compared to the reduction in the debt footprint, liquidity at the parent declined by $9,000,000,000 when the overall debt footprint at the parent shrank by $18,000,000,000 as we continued to move money from our bank subsidiaries up to the parent. Time to required funding at the end of the quarter was at 35 months And as we move forward and continue to shrink the debt footprint and smooth out the maturity profile, we'd expect over the next 6 to 8 quarters that you'll see that time to required funding migrate down to a targeted range in the 21 to 24 month timeframe.
On Slide 9, if we look at net interest income, net interest income on a reported basis increased from $9,800,000,000 or a yield of 2.21 percent in the 2nd quarter to $10,200,000,000 or 2.32 percent during the Q3. If we adjust those numbers for market related hedging effectiveness as well as market related premium amortization or FAS 91, our net interest income increased from $10,300,000,000 or 2.32 percent up to $10,500,000,000 or 2.39 percent during the quarter. If we look at the activity within the quarter, we benefited during the quarter from the reduction in long term debt driven by both our liability management actions as well as debt repayment. In addition, our trading related net interest income improved during the quarter. Partially offsetting these improvements were lower consumer loan balances and yields as well as lower investment security yields.
Near term, if we look at where we are at the end of the Q3 and given existing rate levels, we estimate that quarterly net interest income will start at a base of approximately $10,500,000,000 The impact of our liability management actions and our long term debt maturities are expected to offset any headwinds that we see from continued pressure on both consumer loan balances as well as investment security portfolio repricing. In general, as you consider the rate environment, if rates increase from the end of September, we would look to see benefits in our net interest income. And on the other side, to the extent that rates decline, you see reductions. On Slide 10, if we get into the businesses. In Consumer and Business Banking, earnings were $1,300,000,000 during the quarter, an increase of $130,000,000 from the 2nd quarter, driven by lower non interest expense and provision which were partially offset by lower revenue.
Non interest income decreased from the 2nd quarter due mainly to the impact of our consumer protection products. Credit quality improved again as net charge offs dropped to $170,000,000 Average deposits increased almost $4,000,000,000 or 1% from the 2nd quarter. On Slide 11, we give you some key indicators for our consumer and business banking area for the quarter. Compared to the Q2, debit card purchase volumes declined seasonally, while credit card purchase volumes adjusted for our portfolio divestitures were relatively flat. Retail credit spend per active account was up 6% from the Q3 of 2011.
We look at the U. S. Credit card loss rate, it's the lowest that we've seen since the Q3 of 2,006, while the 30 plus day delinquency rate is at a historic low. Banking centers declined as we continue optimize the delivery network around customer behaviors. We did continue to increase our mobile banking customer base to more than 11,000,000 people, which is an 8% increase from the prior quarter and up 30% from the year ago quarter.
If we turn to Slide 12, Consumer Real Estate Services reported a loss of $877,000,000 during the quarter versus a loss of $766,000,000 in the Q2 of this year. Higher revenue, which included MSR gains net of hedge results, the sale of a business and lower rep and warrant expense were more than offset by higher expenses as well as a higher provision. The provision for reps and warrants was $307,000,000 in the quarter, a decrease from $395,000,000 that we experienced in the 2nd quarter. Expenses were up $672,000,000 LAS drove that expense increase due to higher litigation expense, servicing cost and other mortgage related matters. Provision increased $75,000,000 during the quarter driven by the impact of new regulatory guidance on loans discharged in bankruptcy, which I'll discuss when I get to credit quality later in this presentation.
And it was partially offset by a recovery in the home equity PCI portfolio due to an improvement in the home price outlook. The home loans business, which is responsible for 1st lien and home equity originations within this segment, recorded a profit of $264,000,000 for the quarter. 1st mortgage retail originations of $20,000,000,000 were up 13% from the prior quarter due to lower rates and up 19% compared with retail originations a year ago. As you'll recall, we exited the correspondent business late last year, so current correspondent originations are non existent versus volumes of approximately $16,000,000,000 a year ago. Even with the exit from the correspondent channel, core production income is higher than a year ago.
Our MSR asset decreased by $621,000,000 during the quarter, driven primarily by lower mortgage rates and ended the quarter at $5,100,000,000 MSR hedge results more than offset market valuation declines. And if we look at the cap rate on the MSR at the end of the period, it was at 45 basis points versus 47 basis points in the 2nd quarter and 52 basis points a year ago. On Slide 13, we showed some comparisons of certain metrics in our legacy asset and servicing area on a linked quarter basis as well as compared to a year ago as we continue to work very hard to reduce delinquent loans and find solutions for homeowners. As you recall, the legacy assets in servicing area reflects all of our servicing operations and the results of our MSR activities. Our domestic FTEs excluding contractors decreased for the first time in this area in 14 quarters.
The number of 1st lien serviced dropped 6% in the quarter, but more importantly the number of 60 plus day delinquent loans dropped by 12%. The drop in 60 day plus delinquencies will have a positive impact on our staffing levels in the Q4 and beyond as servicing costs going forward should benefit given that we were fully staffed in the Q3 to handle the various new programs and regulations. And as we've discussed previously, we'll continue hard both working through these delinquent loans internally as well as looking externally for solutions to reduce this number of delinquent loans. On Slide 14, you can see that our outstanding rep and warrant claims increased by 12% from the end of June versus the 41% increase we experienced during the Q2 of this year. Outstanding claims from the GSEs did increase albeit at a slower rate as a result of ongoing disagreements with Fannie Mae about what constitutes a valid repurchase request.
Since June, given the settlement we discussed last quarter with Syncora, the backlog with Monoline has decreased. On the private label side, we had a $1,900,000,000 increase in outstanding claims to a total of $10,500,000,000 at the end of the quarter. The increase on the private label side is primarily due to claims received from trust consideration when we developed the increase in our reserves at the time of the Bank of New York settlement during the Q2 of last year. We would expect these claims to continue to grow as the process for ultimate resolution continues to evolve and remain somewhat unclear. The other thing we ask you to keep in mind is this table reflects the unpaid principal amount of the loans, not the actual amount of losses that are incurred on the loans.
Our reserve for reps and warrants at the end of the quarter increased slightly to $16,300,000,000 In the second quarter, we provided a range of possible loss over and above existing reserve levels of up to $5,000,000,000 which only applied to non GSE loans. At the time, a range was not provided for GSE activity as we were unable to estimate such a range. In the Q3, as a result of ongoing dialogue and discussion with the GSEs, we have obtained additional information from which we are now able to determine a reasonable estimate of a range of possible loss in excess of our recorded reps and warrant liability for the GSEs. We currently estimate that the range of possible loss for both the GSEs and the non GSEs for rep and warrant exposures could be up to $6,000,000,000 over our accruals at September 30 and compared to the up to $5,000,000,000 over accruals at June 30, which once again were only for non GSE reps and warrant exposures. The increase in the range of possible loss from our June 30 period is the net impact of among other changes updated assumptions in the inclusion of GSE Rupp and Warren exposure as well as other developments.
We move to our Global Wealth and Investment Management area on Slide 15. Earnings for the quarter of $542,000,000 or a pretax margin of approximately 20% were in line with the results that we saw in the Q2. Period end deposit growth of $6,400,000,000 and period end loan growth of $2,100,000,000 helped to offset the impact of the continued low rate environment. Low rate environment. Ending loan balances as I mentioned earlier were at record levels and solid long term AUM flows of $5,700,000,000 helped should benefit our 4th quarter results.
If we move to Global Banking on Slide 16, We had net income in the Q3 of $1,300,000,000 which reflected higher net interest income and a reduction in expenses that was offset by gains in the 2nd quarter related to certain legacy asset dispositions, which did not recur in the 3rd quarter. Period end loans and leases increased $6,700,000,000 or 2.5 percent from the 2nd quarter with growth across C and I, commercial real estate, leasing as well as some quarter end fundings. Average deposit balances were up 5% from the 2nd quarter to $252,000,000,000 as our corporate customers remain very liquid. Asset quality continued to be very strong and continued the trend from prior quarters. Net charge offs were down, NPAs dropped 20 percent to 2,600,000,000 dollars and our reservable utilized criticized exposure declined 17%.
On Slide 17, investment banking fees. Investment Banking fees at $1,336,000,000 were up nicely over both the prior quarter, up 17% as well as up 42% from the year ago period. If We look at where we were relative to our competitors. We maintained a strong number 2 global ranking in fees to date. And as you can see below, we continue to have leading market shares globally in many of these businesses.
We switch to Global Markets on Slide 18. Earnings were impacted by a DVA loss of approximately $580,000,000 in the tax charge for changes in the UK corporate tax rate. If we back out the DVA and the charge for taxes, net income actually increased 41% from the 2nd quarter to $789,000,000 Revenue ex DVA for the entire segment was up 5 percent and once again DVA losses in the quarter 580, last quarter losses were 156,000,000 dollars and those compared to gains in the year ago period to approximately $1,700,000,000 Sales and trading revenue ex TVA was down 3% from the 2nd quarter, but improved substantially from year ago levels. Within FIC, the core businesses of credit, mortgages and rates and currencies performed very well. Our FIC revenue ex DBA was essentially flat with the 2nd quarter at $2,500,000,000 delivering a solid performance.
In equities, excluding DVA, results decreased 8% from the 2nd quarter as lower volatility and a continued lack of investor appetite for equity products depressed volumes. On the expense side, expenses declined from both the 2nd quarter and the prior year driven by lower personnel related expense as well as lower operational cost. Average VAR for the quarter was $55,000,000 down 12% from the 2nd quarter and 67% from the prior year. And as we look at that, we continue to generate increasing levels of revenue for each dollar of risk that we take within this segment. On slide 19, we show you the results of all other, which includes our global principal investments business, the non U.
S. Consumer card business, our discretionary portfolio associated with interest rate risk management, insurance as well as the discontinued real estate portfolio. The revenue decrease from the Q2 of this year was due to a negative valuation of adjustment of $1,300,000,000 on structured liabilities under FVO and lower gains on debt and trust preferred repurchases, partially offset by higher equity investment income during the quarter. The increase in non interest expense was due to higher litigation expense and if we were to exclude that non interest expense declined compared to the 2nd quarter. On Slide 20, non interest expense, I'd like to make a couple of comments here.
Non interest expense of $17,500,000,000 was down slightly from the Q3 of last year and up relative to the Q2 of this year. If we were to back out the increase in litigation expense that we incurred during the quarter, non interest expense actually declined from Q2 to Q3. If we look at the components of that, we saw improvements in personnel cost and other cost savings realized from our new BAC initiatives and that was partially offset by higher cost of mortgage servicing and other mortgage related matters, which as I mentioned previously, we'd expect to see come down in the 4th quarter relative to 3rd. We also invested in selected growth areas during the quarter in our mortgage loan officers, our small business bankers and our financial solutions advisors. If we move down and you look at the number of full time equivalent employees, we started to implement Phase 1 of new BAC in the Q4 of 2011.
Outside of LAS, which is the gray bar, you can see since we began the implementation, we've reduced the FTEs across the company outside of legacy assets and servicing by almost 21,000 people or over 8 percent since we began that implementation. And as you can see, legacy assets and services, servicing FTEs increased, but have now stabilized. And as I said, we would expect to start seeing come down in the 4th quarter. If we turn to Slide 21, although provision was relatively flat with the 2nd quarter, there were 2 events that impacted first, regulators did provide new guidance to the industry in the Q3 of this year that stated loans discharged from the courts as part of a Chapter 7 bankruptcy should be written down to collateral value and classified as non performing irrespective of the borrower's payment status. As a result, we charged off $478,000,000 in loans and reduced reserves by $139,000,000 resulting in a provision increase of $339,000,000 in the quarter as a result of this new guidance.
Non performing loans increased by $1,100,000,000 as a result of this change and 954,000,000 dollars or 91% of these borrowers are current on these on their contractual payments. Of these contractually performing loans, more than 70% were discharged from bankruptcy more than 12 months ago and nearly 40% were discharged 24 months or more ago. The other change recall in March, we and other large mortgage servicers agreed in the settlement with the DOJ and 49 state attorneys to provide programs to assist homeowners in modifying loans and other borrower assistance programs. We refer to that as the National Mortgage Settlement. As a result of these agreements, we incurred charge offs in the Q3 of $435,000,000 related to the extinguishment of non purchase credit impaired loans in this home equity portfolio.
This $435,000,000 had a corresponding decrease in non performing loans that we reported at the end of the Q3. These loans were underwater and in the later stages of delinquency or were loans that were current on their junior lien, but severely delinquent on their underlying first. Associated with the settlement, we also extinguished $1,700,000,000 of home equity loans in the PCI portfolio, resulting in a decline in both the portfolio as well as the corresponding reserve. These items had no provision impact as reserves for these loans were already established. If we turn to slide 22, We've laid out here the Q3 of last year, Q2 of this year and Q3 and then adjusted the numbers on the far right column for this change in regulatory guidance in the National Mortgage Settlement.
And what you see here are 3 points that we'd like to make. First is net charge offs after making these adjustments declined $417,000,000 or 11.5 percent as our underlying asset quality trends continue to strengthen. 2nd, 30 plus day performing consumer delinquencies, excluding fully insured consumer real estate loans declined about $200,000,000 or 2 percent and our non performers decreased $1,400,000,000 or 5 0.7% versus the 2nd quarter, driven equally by improvements in both commercial as well as consumer loan quality. And on the commercial side, our utilized reservable criticized exposure improved by 15% or about $3,000,000,000 As we look at credit quality for the balance of the year, we would expect the provision as we discussed at the end of last quarter to be in the range of $1,800,000,000 which is what we've seen over the last two quarters and $2,400,000,000 which we saw during the Q1. So that guidance is unchanged from what we have given before.
And with that, let me turn it over to Brian.
Thank you, Bruce. I'm going to cover Slide 23 and add a few thoughts before we take your questions. If you think back to when we started the year, we said that we'd focus on a few key areas, building the capital company, continuing to manage the risk, continue to reduce in the cost base of the company and driving our core business growth for the franchise. As you look at the results Bruce covered, I think we've shown strong results and we're moving in the right direction in every area. Leading Tier 1 common capital levels provide a solid base to serve our customers and a balance sheet that can do great customer business.
But what I wanted to draw your attention to on the slide is the progress we've made across our 3 groups of customers and clients, whether it's our consumers, our companies, our institutional investors. If you look at the business lines that Bruce described, our operational metrics are improving across the board and the cost in each of the operating businesses other than LIS were down linked quarter and year over year while revenues continue to be solid. For the individual consumers we serve, our deposits continue to grow. Our net account growth was solid this quarter and we're regaining the market share in a direct to consumer mortgage lending business. With our preferred clients in our consumer business, our growth continues as we continue to improve the offers we have for those clients with increased checking accounts and brokerage assets in our Merrill Edge platform.
If you think about our service network overall, we continue to optimize it, reducing branches as we make the customer behavior changes as they move to online and mobile banking, which continues to increase nicely with 11,000,000 users in a mobile and tablet platform. The companies we serve are also doing more business with us. Small business originations are up as Bruce stated earlier. Loans continue to expand and investment banking fees continue to grow. As we move to our institutional investor clients, we continue to add to our industry leading research capabilities and our sales and trading revenue continue to do well in our overall difficult environment in the markets that we had during the summer months.
So this quarter shows the progress that our company continues to make. It shows the hard work of all our teammates of streamlining and simplifying the company is paying off. It shows the strength of the integrated business model, which serves customers and clients in a way that no other firm can. And it shows how that combination deepens relationships, provides the best in class financial capabilities and will drive growth. With that, Bruce and I'd be happy to take your questions.
And we'll go first to the site of Moshe Orenbuch with Credit Suisse. Your line is open.
Hi. Can you hear me now? Yes. Thanks. Just some extraordinary, I would say, performance on the capital ratio.
I wanted to kind of talk about that a little bit. Did I hear correctly that that 8.97% is inclusive of the terms of the NPR?
That's correct. Okay.
Well, that's okay, that's good. So as you think about that going into I mean I heard that some notes that there were some kind of benefits that could be somewhat temporary. But obviously over the several quarters, one would expect that to continue to improve. Could you talk a little bit about whether you're looking for improvement either in RWAs or your deductions? And then also how you think about that since you're likely to be more or less either now or certainly in 3 months at the level that you'd be required by the combination of the Basel III capital requirement and a SIFI buffer?
When we look at the ratio, let's talk first about the numerator, then we can go to the denominator. As I said, there was about $3,000,000,000 on the numerator of the $8,000,000,000 that related to things that we benefit from rates. We'll obviously see how that goes going forward, but I do just want to make sure that there was $3,000,000,000 there. On the numerator side, because of where we are with respect to having NOLs as we go forward where we're going to be different than most of our peers is on the numerator side, our pretax income is going to tend to approximate the net income as it relates to capital build. So we've got benefits going forward relative to our peers based on using those NOLs, which is as you all are aware are excluded from a Basel perspective.
On the denominator side, there are 3 things that we would also continue to benefit from as we look to drive this number higher. The first is on the retail credit side, We noted here during the quarter that we had about $27,000,000,000 of benefit in risk weighted assets through both the reduction in consumer exposures as well as improvement within the credit portfolio that we saw on the consumer side. And as we continue to reduce non performing mortgages as well as one of the consumer credit portfolios in the card business, we'd look to continue to have benefit there. The second thing is that the structured credit in some of the legacy books will continue to run off between now and 2017. We'll benefit from that.
And then 3rd, there obviously continues to be a lot of work that's done with respect to models in developing the systems to make sure that your measurements are appropriate here. So we feel very good about the capital build during the quarter. And we think as we go forward that the ability to continue to optimize and drive that Basel III number continues to have real opportunity for us.
Just to follow-up on that, that's great on the tactical side. What about strategically now that you're pretty much where you need to be, How do you think about that capital level differently? Do you think about it in terms of your approach towards allocating to businesses or distributions? And how should we
think about that? I would and one of the things that we highlighted and I'm going to speak first on Basel I to that question that over the course of the last couple of quarters as we look to optimize our Basel I ratio, we were obviously very tight and had fairly firm limits on loan growth as we look to optimize the balance sheet as we've gotten the balance sheet to where we wanted to be that clearly pursuing loan growth in this rate environment is very much a priority. And if you look at what we did during this quarter, it's the culmination of several quarters of work where we started to see good loan growth within the G WIM business. We saw the increase in mortgage production, not all of which is loan growth, but some of it is loan growth. And then on the banking and market side, where loan growth was extraordinarily strong.
So we're using this strength in the balance sheet to look to drive growth in the loan side. We're obviously doing it in a prudent way with borrowers that have the credit quality that we should be extending to and you've seen the results of some of that. On Basel III, and as we work through Basel III, little bit of shift in mindset in that you're looking to optimize and consider both how things get measured as well as under Basel III as Basel I. Basel III going forward is going to be the governor on capital distributions. So we're obviously very mindful to be managing the balance sheet with Basel III front of mind.
We're obviously at a point at the end of the quarter upwards of 9%, where we're very close to or in excess of the stated minimums, we'll need to see where the SIFI buffer comes out. But I think we've positioned ourselves very well for both growing the business as well as as we look forward going through the CCAR process.
Great. So that should mean that if this process is ongoing that you would expect to see loan growth accelerate modestly from here? I'm not going
to suggest when on an annualized basis that we saw commercial and corporate loan growth of 10% that you're going to see it accelerate. It can bump around a little bit in any quarter, but there you should expect and know that internally with those areas that have returns, we're pushing and looking to drive loan growth. That's correct. I'd add the impact of
the portfolios that we've identified going back a couple of years to run off, which helps in the capital because as Bruce said earlier, they are actually providing capital. It's less now than it was then because they're A, they're smaller and the quarterly runoff is more muted, which then allows the loan growth to come through the bottom line. So think about the card business, for example, we're getting a place where we've got it pretty well positioned where we want. And I think we've produced 875,000 new card customers this quarter. That's a little bit more than we did last quarter and we're driving with a very high credit quality exactly what we want and we're driving that out there.
So as you think about the ability to show loan growth through the sort of all the ins and outs of the runoff portfolios, that's what you're starting to see too is where those things are getting smaller as a whole.
Great. Thanks so
much. We'll
take our next question from the site of John McDonald with Sanford Bernstein. Your line is open.
Yes. Hi. Bruce on the net interest income, you said that the $10,500,000,000 is a good starting point for the Q4 NII?
That's correct, John.
And I guess what are the puts and takes from there? Did you say that you hope to get some debt reductions or the benefits from debt reductions could offset the headwinds that you expect from low rates and runoff? Did I hear that right?
Sure. During the Q3, we had $6,200,000,000 as I mentioned that occurred during the quarter and $12,000,000,000 of stated maturities. We'll have the full benefit of those during the Q4 as opposed to just a partial benefit. The second thing is the redemption of the TRUPS will have the $50,000,000 benefit that I mentioned in the Q4 and we're continuing to push deposit pricing down. So that's a benefit as well.
So as we look at the Q4, absent any unexpected decline in rates and any impact of negative hedging effectiveness or FAS91, we would expect net interest income to be at least in the Q4 what it was in the
Q3. Okay. What about next year on NII Bruce? Do you have additional tools on the cost funding side? Do you hope to keep that 10 $500,000,000 run rate or grow or see some pressure from there?
Could you give us some perspective for next year?
We're managing the footprint as well as deposit pricing. So the goal is to continue to push that up. We think we've got a good plan in place to continue to do that. We obviously can't predict interest rates, but if they were to stay where they are on the in the forward curve were to materialize, we think we'll be successful in doing that.
Okay. And then switching over to expenses, do you have any sense of where you might be on the
Merrill Lynch class action settlement was a significant litigation item to get behind us. And as you look at litigation going forward, we've narrowed it with this settlement in large part that there are cases obviously outside of mortgage, but largely the majority of the litigation that we have now with the Merrill Lynch settlement is within the mortgage area. And we obviously provide reserves for what we think we have. And in the disclosure, we give guidance on range of possible loss for what we'd expect within the litigation area. And we continue to work through those.
With where we've built the balance sheet, obviously getting these behind us is something that we'd like to do, but we're only going to do it in a way that makes sense for the shareholder.
Okay. And then on the LAS side, you mentioned that the with the 60 plus delinquents moving down, you should start to see the LAS expenses come down next quarter?
From an operating basis, John, we saw the first decline in FD. You can see the contractors are a little higher. The Q3 was a big a lot of work because it was a combination of the Department of Justice, the timely mod work and also just the general work. But as we look at it and even since the quarter end, we've seen the headcount start to come down already even further. So this thing has been a lot of work for an operating basis.
We'd say from the numbers of people and stuff like that, it will be down in the Q4. The question is from the litigation perspective, those are things bounce around a little bit if you look across all the last quarters. But from an operating basis, we've already reduced the headcount in the Q4 from where it was in the Q3.
Okay. So I guess from a total expenses all in jumping off point for the Q4, if we adjust for our own estimate of litigation reserves versus what would you think would be a number for the expenses to jump off from?
I think if you adjust for litigation expenses, those are going to be a good place to jump off from. And as Brian referenced, we think that there is the opportunity within the LAS area to start driving those expenses down in the Q4 and clearly into 2013. Yes.
John, the way we think about it is we look at it year over year, Q3 last year, Q3 this year, you had sort of flat expenses. But if you look at the impact of the increase in litigation, increase in LAS, the rest of the company is down $1,000,000,000 or so in operating expenses. And that will move up or down because if we have a better trading quarter, we could have some more compensation there. But you are seeing the impacts of new BAC plus the other initiatives in the company taking the expenses down and we're just continuing to work at it. But that being said, we're still making investments in this company to make sure that we're doing the right thing to have the franchise coming out of it.
So more loan officers, FSAs, preferred bankers and $3,000,000,000 plus in systems development work this year, dollars 700,000,000 to $800,000,000 of which is going to help us get the expense base down in future years. So we're trying to balance that, but you can see the expenses from the core basis what you're pointing out continuing to trend down and we're feeling better about that. And the best news in this quarter is we think as you look at the LIS, you see the breakpoint here and we'll see how we'll keep driving that down in the Q4.
Okay. Last thing for me is on the mortgage banking fee results. Bruce, could you drill down a little bit into the drivers of the strong mortgage banking fees? You mentioned the origination volumes. Just what you saw on gain on sale margins?
And then also how did the MSR hedge gains contribute? And was there a business sale as well that you mentioned?
Sure. Within mortgage banking, we did see a business sale that was about $175,000,000 of a small ancillary business that materialized in the quarter. The second thing is with respect to mortgage margins, they stayed relatively firm in the Q3 relative to the Q2 given the activities that the industry had industry wide. And the third point of your question is if you go and look at Page 26 of our supplement, when you mentioned the MSR hedge that relative to the last couple of quarters, we were about $350,000,000 better in the Q3 than we had been the prior several quarters and we detail that on Slide 26. John, one thing I'd say tying those two questions together.
On the origination side, you can see the volumes coming up, but we've added 3,000 more people during this year than we thought we'd have in
the underwriting fulfillment side of the good mortgage side to help us get the volumes going and those people continue to come on stream. So our capacity to grow there is expanding. And some of the people that were and they're all in the headcount numbers you see, but some of the people that were taking out LAS were converting to the 1st mortgage business because teammates are experiencing mortgage and to help build our capacity. Like a lot of our colleagues, the volume levels have been high and our capacity get them closed with the underwriting standards has been a lot of work. And so we've added 3000 or 4000 people, I think, at this point than what we thought we'd be this year.
And we'll continue to do that to capture the revenue that you spoke about.
Okay. Thanks guys.
Thank you.
We'll move next to the site of Chris Kotowski with Oppenheimer
and Company. Your line is open. Yes. Good morning. I'm looking at Slide 39 and Slide 7 on the capital and I'm sorry, maybe I'm a little sick, but the slide I mean I'm trying to reconcile them.
And slide 39 is very helpful and it's obviously nice in that the numerator is going up and the denominator is going down. But if we're looking at Slide 39, I guess which I'm confused about which of these movements are due to say changes in markets and rates and spreads and so on. How much of the movement models and assumptions, if you look at the main categories on Slide 39.
Okay. If you on in this bridge between June 30 September 30 will be very close. Recall that when we reported it June, we were using BIS as opposed to September 30 that we're now using the U. S. NPR that had some about 15 basis points difference.
But with that being said, if you look at the 126.8 to the 13046, it's roughly $8,000,000,000 and of that 8, roughly $3,200,000,000 was due to the impact that rates had on our securities portfolio as well as our MSR. That's the piece that was impacted by rates that there was nothing that we directly did to impact that. The rest of what you saw during the quarter had to do with pretax earnings before FBO, which does not affect regulatory capital. It had to do with some different assets at the bank that are no longer excluded from the calculation. And it had to do with a variety of other things, including the fact that we no longer have any 10% threshold deductions in the number.
That's the bridge on the numerator.
Okay.
If you move to the denominator and you look at the Page 39, it's about $65,000,000,000 reduction in risk weighted assets. Let me give you the 3 biggest buckets of that. As I mentioned earlier, the first bucket is about $27,000,000,000 as it relates to retail or consumer exposures. The lion's share of that $27,000,000,000 had to do with either reductions in the actual exposure or the core credit improvement that we saw within the book and a very small amount of that had to do with any model changes or model optimization. The second big bucket that's out there is in OTC derivatives and repo, which was about $26,000,000,000 If you look at those numbers, almost all of that $26,000,000 had to do with either reductions in exposure, improvements with how we manage collateral or improvements in the underlying quality of the counterparty.
The 3rd bucket and the smallest bucket of which about is about $18,000,000,000 is a variety of things including within that $18,000,000,000 bucket spread tightening that we saw out in the market that resulted in the ratio coming down. You can see though that the $18,000,000,000 is relatively small compared to the overall 65,000,000
dollars Thank you for that. That's the best explanation any bank has ever offered. And I think that it's a model for the rest of the industry and I appreciate that. The other thing I was just wondering on Slide 21, you are the only bank that flagged the impact of the mortgage settlement. Everybody talked about the OCC guidance.
But is this roughly $400,000,000 is this going to be a quarterly thing for a while that we're going to obviously, you've made provisions for these the impact of the NMS, but should we expect to see charge offs at an elevated level for a year or 2?
No. As we work through the National Mortgage Settlement, we're working very hard to beat through a significant portion of the obligations that we have for modifications. The 3rd quarter, if we and I think we have a pretty good sense for this, without question will be the largest number like this that comes through, probably very small in the Q4 and maybe a little bit of carryover into next year. But this is by far the most significant quarter that you'll see with this. As you said, it doesn't affect the provision because you've got both a write off as well as an allowance, but that should be a lot smaller going forward.
Okay, great. Thank you. Thank you.
We'll go next to the site of Matt O'Connor with Deutsche Bank. Your line is open.
Hey, Matt. Good morning. A couple
of follow ups on the legacy mortgage costs and looking out beyond Q4, just trying to get a sense of how quickly they may come down. And I guess how easy you think it may be to forecast, just thinking about modest home price appreciation from here and nothing unusual on the regulatory side?
Well, I think I'd say that we expect them to come down. There have been one of the things that's been difficult about this is the 3rd party impacts and timing of that and from what we may have thought last year at this time for example. So the Department of Justice settlement took longer to get finalized therefore it took longer to put in. So those so those outside impacts could have it. But given everything we know, we'd expect them to come down next quarter and beyond.
We've got to be careful because sometimes there's sort of non operating adjustments in there. So just but if you think about the headcount and the work we do because the 60 plus day delinquencies are down as you see on the slide. That we can forecast in the work and what we're seeing is we're modifying a lot of loans and getting through those. We the short sale volumes are as high as they've ever been and the liquidation volumes are high. So everything we see says that we just have to be a little careful about how we work quarter to quarter based on ebbs and flows and some of the legislation gets passed at state levels and things like that and they can have an impact.
I would tell you that what we're seeing is the inventory clears very quickly. So as we get to the properties they sell quickly within 60, 90 days that's been true. We're seeing by geography that areas where the process can move forward and we're seeing the outstanding 60 plus dray drop more dramatically, that'd be example in California, Arizona versus areas where it's moved a little slower, New Jersey or Illinois, for example. But everything we said is this is coming down because the work is going away. You point your finger to the one key question, which is if changes are made to policies or programs that can slow it down.
But I don't think with as much volume we've seen reduction 60 plus that would overcome that frankly.
And maybe I'll just toss some numbers out there. You're at a $12,000,000,000 annual run rate right now. I feel like at one point you said $2,000,000,000 could be a more sustainable level as you move through all this. So that's a $10,000,000,000 decline. Any guess on does it take 2 years to get through that?
Is it 5 years to get through that?
I think we'd look at it and say 2013 and into 2014 you'd be through that based on everything we know today. Okay.
All
right. But again, that's subject to caveat of some change in the rules, something's changing the rules. But right now, as we said, we'd expect that the as we move through next year, the year end numbers would still be elevated. But as we move into 2014, you'd see them come down to more normalized levels. We're doing everything we can to move to get through it as quickly as possible.
Okay. And then just separate topic here. As we think about maybe some of the interest rates out there outside the treasuries, so like mortgage rates, the agency RMBS rates and I think a lot of other asset classes you've seen rates come down in the security side. How do you just conceptually think about managing the discretionary book from here? And I understand you're trying to grow C and I loans a little bit more, but obviously the discretionary book is still a pretty big chunk and you have a lot of deposits that you need to try and balance?
The one of the things that we're not going to do in this rate environment is stretch for yield and create an OCI problem under Basel III going forward. So on the securities portfolio, if you aggregate the securities portfolio as well as our whole loan portfolio, it's about a $600,000,000,000 total number that we're managing. It has an average life of about 2.5 years. And as I mentioned on the questions for net interest income, even with where we're reinvesting things that are either come due or repaid, we think the shrinkage in the long term debt footprint will at least cover what we've got as far as repricing absent no changes in forward rates going forward. You bring up a good point, which the industry is obviously focused on is that the one area in the one asset class that doesn't have OCI risk and that's funded on the asset side the way we fund our liabilities is loan growth.
And we've been pushing over the last couple of quarters for that loan growth. And as we talked about what we saw in GWIM as well as in the institutional side, we've started to see that loan growth and it's obviously as it relates to matching in the way that we manage capital where we'd like to be. So we're it's obviously an environment that's not easy to manage in, but we think we've got a variety of levers, most notably high cost debt that we can continue to take down so that you see similar type results to what we saw this quarter.
Okay. All right. Thank you very much.
We'll go next to the side of Ed Najarian with ISI Group. Your line is open.
Good morning, guys.
Hey, Ed. Good morning.
I guess two questions. The first, just in terms of the GSE related mortgage repurchase claims. Obviously, we're seeing other banks sort of move through that process, build reserves to sort of put that claim risk behind them. I know you're in a dispute with Fannie. Any sense of how you expect that dispute to get resolved?
Do you think that's something that you'll just sort of gradually resolve with additional reserves and resolutions over time? Do you expect to see some kind of a settlement with Fannie? Any sense of when that overhang might get sort of put into the rearview mirror or how it will be put into the rearview mirror?
Sure. The first point, Ed, that we'd make here and you see it in the numbers is that with respect to current vintages, things that have been underwritten over the last couple of years where we have an obligation to repurchase those, we have been repurchasing those. And what you see when you look at the schedules are that the increases in the unpaid or the balance of outstanding claims, which as I said are notional not losses, where you're seeing the buildup is in those payments where they're greater than 24 months. So with respect to the piece that's greater than 24 months, I would really just repeat what we've said previously that there are 2 ways that this gets resolved. We have different points of view on this.
We sort or there's some other way that we look to resolve that. And that core disagreement remains. And as we've said in the disclosures and how we
The The two sides have this core disagreement. I guess you're probably unwilling to speculate how you sort of come to the middle on that core disagreement. But do you feel like it's in your best interest now to sort of maybe be more proactive on that, try to meet in the middle, try to get that settled and try to get that put behind you? Or do you feel pretty firm in your stance that we're right and we're going to keep digging in our heels on this issue?
Given the disclosure we've put out, we obviously feel pretty strongly about what our position is here. At the same time, as we've seen it in Merrill Lynch, getting these legacy issues to the extent it makes any type of economic sense for the shareholder behind us is a good thing and eliminates an element of uncertainty your mind. And the last thing I just said, it's got to be the right decision for the shareholders and that's what we do day in, day out as we try to put these different issues behind us.
Okay. Okay. Thanks. And then the second question has to do with capital. It was only about a little over a year ago that Warren Buffett was making an investment in your company and the chatter was all around the potential to have to build capital.
Now all of a sudden, we're looking at your capital ratios thinking a lot about excess capital. I'm sure you probably don't want to give us outlook and predictions in terms of capital return in conjunction with the CCAR. But can you give us a sense, you spent so much time in the last 18 months building capital. Clearly, there are shareholders that are obviously looking for a dividend increase. Some are, I'm sure, looking for a stock buyback, especially after looking at the capital ratios today.
Can you give us any sense of how you're thinking about capital over the next 12 months above and beyond what's going to be used for internal loan growth? Those capital ratios are going to continue to build based on some of the guidance that you just gave us over the last 45 minutes. And there's going to be a lot of people interested in thinking about what how your thoughts are around dividend increases and stock buybacks for the next 12 months as those ratios continue to build?
I think we will we're doing the work on the we'll start to work on CCAR process in 30 days or so when we get the information. And so we won't speculate on that. But I think starting off with a broader perspective, we have made it clear that the capital we have in this company has been sufficient based on all the work that we've been doing over the last couple of years. We've been clear that we did that the capital is sufficient to run the company and to support the company growth and that all the capital above that when we have get the approval to do it will go back to the shareholders either as dividends or share repurchases. We frankly built the capital level, so we there's no reason to retain the capital at all.
So it's all your capital. It's all the shareholders' capital until we get to the levels that we can return it. It's on the balance sheet and our tangible book value per share, which we focus on and growing. You can see that continues to grow. And then after we hit the levels, that would be the SIFI buffer plus or minus whatever cushion that we feel comfortable and pass the CCAR, it's all going back in one way or
other way.
And then just last question related to that. Brian, in your mind, there still are some overhanging litigation issues. There's still the up to $6,000,000,000 of mortgage repurchase related costs that you outlined. Is that are those things that sort of at least in the near term will make you a little bit extra cautious on capital retention relative to where we otherwise think you might be until you sort of get those litigation and repo issues more fully resolved?
Well, all that has to be taken into account. It's in the technical rules, the QRAs and things that we look at. But think about this quarter. We basically had a breakeven quarter. We passed a major milestone in putting behind us a major piece of litigation that we and the litigation expenses were $1,600,000,000 or whatever they were and we still build capital.
So it factors into it obviously, but on the other hand, we have lots of ways to build capital. And so we are focused on getting the position that you suggest, which is that we start returning all the capital that we've promised. We have to get through the CCAR process and until we sort of see that we can't project on that. But in those processes and in our mindset all that is factored in. But if you look at the track record, we continue to build capital even though we've been putting behind this major piece of litigation every quarter or on several quarters.
Okay. Okay. Thanks a lot guys.
We'll go next to the site of Betsy Graseck with Morgan Stanley. Your line is open.
Hi. Two questions. One was on the hedge that you've historically had on the AOCI book. Have you been changing the size of that and at this stage of
all? I'm sorry, you cut out Betsy.
Can you
hear me better now? Yes. So you have a hedge on the AOCI book and I was just wondering if you still have that in place?
On the overall securities book? Yes. Yes. As we've said, a lot of the longer duration fixed rates, we do swap to floating to minimize the OCI risk.
Okay. And did you change the size of that hedge at
all during the quarter?
Nothing material within the securities book this quarter, no.
Okay. And then separately, there are some regulators who are suggesting that the debt portion of the balance sheet from senior debt through well actually all the way through equity should be somewhere in the 25% to 30% range. And I'm wondering if this is a Title II question and I'm wondering if you've had any conversations with regulators about that. Do you feel that there's anything that you would need to do in that side of the debt stack?
It's something that's very topical. Even with the changes that we've made to our debt footprint, if you look at our debt footprint on any type of absolute and relative measure relative to our peers, to our peers. We're at the high end, which obviously from an expense perspective is not a good thing. So I can't we're not going to predict what's going to happen going forward from a regulatory perspective. But I think given that we have on a relative basis more between the parent and Merrill Lynch that our peers that we'll be able to manage that well.
And we look at maturities and over the course of the next year we have maturities of about $30,000,000,000 of debt and we would expect to repay a large portion of that through cash that we generate and through the existing cash resources we have with the company.
Okay. So as we model through next couple of years, we should assume the same pace of long term debt decline or in a little bit of an acceleration into the next year or 2?
What I would as you model in the what I would model in is that a large portion of the maturities the way that we lay those out will be taken out with existing cash, not new long term debt. Periodically, we will raise debt. We've said 21 to 24 months time to funding. That would tend to migrate you down to a liquidity at the parent level in the zip code of $75,000,000,000 to $80,000,000,000 And as we've said, I think 2013, I think 2014 that the majority of that debt will be repaid with cash resources.
Okay. And then just lastly on capital. One of the capital rules has to do with holding a haircut against the CRM. I think it's an 8% haircut or so. So when you talk about full model approvals, you're assuming that that haircut goes away.
Is that correct?
Vic, are you referring to Centimeters which model you're referring to CEM?
Right.
As we look in the capital numbers that we quote, we've assumed CEM and IMM approval. And with the different work that we've done, the spread between what our IMM numbers are versus our CMM numbers has gotten much tighter. So to the extent any model were to take longer to get approved, we've reduced that risk significantly as we've built capital.
Okay. Thank you.
We'll go next to the site of Nancy Bush with NAB Research LLC. Your line is open.
Good morning, guys.
Good morning, Nancy.
Two questions. On GOM, the 20.1% pretax margin, obviously depressed by the interest rate environment, etcetera, etcetera. Is there a target operating margin there? Or is there some way we can sort of a more normalized margin over the next few years? Because it seems like that business is sort of under contributing significantly at this point.
Well, I think that you point out that one of the strategies to increase margins in Wealth Management Businesses overall has been to drive the loans and deposits in the along with the strong Asset Management business we have. And I think as rates normalize, Nancy, and I guess normal is going to be hard to define here for the near term. But as they normalize, you'll see that values come back up and that will increase the pre tax margin because we don't need to do any more work to gather that in, I. E. The on the deposit side especially.
If you look at them year over year, they're down about 4% in expenses. John Peele and Keith Banks have run the 2 business for us there in U. S. Trust and Global Merrill Lynch Global Wealth Management have been working on expenses. So revenues year over year are flat and expenses are down and they're continuing to work on the non client facing expenses especially and they'll be a beneficiary of all that work.
So I think that will help the margins. But remember that the core brokerage revenue which is an investment management revenue for the Merrill Lynch side group of the company is a lower margin business. Our margins are better than anybody else. And so we've got to continue to improve them. But we look for that to improve, but I'd be careful about assuming how much improvement.
Moving up 3%, 4% might be doable, but I wouldn't assume that it will get back to a private banking style margin because of the dominance of the Merrill Lynch the traditional brokerage revenue streams. The other thing is in that in overall, so remember that we're selling the international GWIM, which had low margin, which will help improve the margins going forward.
Okay. One more question on the litigation front. We've seen a couple of new lawsuits dumped on the banking industry over the past couple of weeks. You've got the Schneiderman suit with JPM regarding stuff acquired in Bear Stearns and then you've got the Feds, of course, suing Wells Fargo on FHA way pre crisis stuff. Are you guys vulnerable to either of those?
And have you already had provisions in the various other settlements that you've been involved in that would address any of those issues?
I think as an industry, there's no question that there's been an increase in that activity. So by virtue of being in the industry, you're out there. I think the one thing that's important, and if you go back to our DOJ AG settlement and when we took the hit for about $500,000,000 when we announced that settlement, It covered a lot of the FHA activity predating, I believe it was sometime in the latter half of two thousand and nine. So that piece of it relative to others, we've resolved several quarters ago. It was obviously it was a big number to resolve.
So we do have that one that's out there behind us whereas some others don't and it was one of the key parts of that settlement for us. So we're a little bit different from that perspective and we'll just have to see how the balance of it unfolds and if other things come up.
Okay. Thank you.
We'll go next to the line of Mike Mayo with CLSA. Your line is open.
Good morning. First question on loan growth. What has commercial loan utilization done this quarter versus the last quarter or 2?
It really it's not so much the utilization of revolvers that has maintained and has remained in that low 30s level. The loan growth that we're seeing is more actual funded loans that we're making as opposed to revolver draws.
And I noticed that commercial loans grew 14% annualized linked quarter and that the period end loans were up a lot more than the average loans. Is anything happening in the economy to accelerate that commercial loan growth, I guess, at the end of the quarter? Or is this Bank of America specific strategy?
I think we've been pushing and looking to do more on the lending front for several quarters and we saw some of that materialize. And the one note I would make, Mike, and we have it back in the slide, if you look at our Banking segment, we did have 1 or 2 fundings at the end of the quarter that will get repaid during the Q4. So it was a little bit accelerated in the Q4, but even if you account for that fact, we still saw very strong loan growth in the quarter.
All right. So that will be noise when we compare Q4 to Q3?
It will be. But like I said, even without that the growth was very strong.
And you said loan growth is a priority. Are you willing to lower rates in order to stimulate more loan
growth? We've been very disciplined. And if you look in the supplement and look at the average spread in our loan growth on the commercial side that the new originations and the spreads on that have remained at relatively flat on both on a quarter over quarter basis. And while we want to make loans, the loans that we make have to make economic sense and have to have the returns on capital that are consistent with where we're taking the business. And the opportunities that we've seen and the ability to grow the book are generating those returns and we feel good about it.
I think you have to take a step back and look at the macro environment where here in the U. S. You've got banks that are competing and given the large liquidity basis that we have and capital basis looking to get invested. Some of the loan growth and if you look at it outside of the U. S.
As we see some of the different foreign banks pull back, the opportunities for us to grow our loan base where relatively speaking, we're smaller internationally. We're using the opportunity with the capital and liquidity that we have to take advantage of that and you can see it in some of the trade finance and other loan areas outside the United States.
All right. So demand is not a whole lot better. You're not doing it with rates. You're gaining share from foreign banks might be part of it. Anything else you'd want to add to that list?
We referenced in the slide that in the real estate area, the first time in several quarters that we've seen growth in commercial real estate, We shaped that business down when things got tough to a level that we thought made sense from a risk perspective. And we're now in a position to be able to start growing that. And while we're focused on doing things with our customers, we've seen 1 or 2 portfolios, not huge size that have come up that we've been able to bring in. And when we do that, the first thing that we look at in those portfolios are how much of the exposure of the portfolio is to people that we do business with and we'd like to do more. And we've had a couple of situations where we've been able to bring those portfolios in and become more significant with clients that we want to become more significant with.
And then switching gears, it was a good mortgage quarter. Are you holding any of the newly originated mortgages on the balance sheet? Or are you securitizing and selling those immediately?
The couple of points on that. The first is within we talked about loan growth within our Global Wealth and Investment Management area of a little over $2,000,000,000 on an notional amount for the quarter. A portion of that was mortgage lending that we do with that client base as well as securities based lending. So there was some growth in mortgages within the GWIM space. Outside of the Global Wealth and Investment Management space, we are looking at starting to hold a little bit of conforming product where the product is priced and has the return that we think makes sense.
So you may see in the Q4 and into the Q1 of next year holding a little bit more conforming product, but there was nothing material in that light during the Q3.
But why would I mean just with spreads the way they are, why would you want to hold any mortgage loans on the balance sheet?
Some of the mortgage loans that we make that in many cases tend to be more non conforming, not conforming. But the non conforming pricing can make sense. And depending on the duration, some of the conforming stuff may or may not make sense. But your point is the right one and it's consistent with how we manage different portfolios. We're not going to go out on the curve and take undue interest rate risk chasing yield in the short
term. And then last question. There's been some articles recently about Merrill Lynch hiring brokers from other firms, financial advisors. Are we about to see a war for financial advisor talent? Are you looking to beef up your number of financial advisors?
Or just your general strategy for expanding the thundering herd?
There has we haven't changed our strategy. We have a Mike, we've been fairly consistent in how we worked on it. So we basically hire experienced advisors and we bring advisors in the business through our PMD and our FSA programs, but no change from our standpoint.
Thank you.
Thank you.
Next is the site of Paul Miller with FBR. Your line is open.
Yes. Just to piggyback on Michael on the mortgage banking side. You guys used to be a very large player in the mortgage banking. We know you've exited both the wholesale and the correspondent business. But given where we are today and how profitable the mortgage banking space is, are you rethinking that strategy?
Could you reenter the correspondent market? Or you just plan to grow through the retail markets?
We're not changing the strategy. We're going to we'll continue to grow as we've grown 14% this quarter and like amount in the Q1 through the direct to retail. It's part of the focus of the strategy of the company to make mortgages to our customers and do a great job of it as opposed to buy closed loans in the secondary market.
And so therefore, just the retail side, so how much market share you think you can gain on the retail side? I think you're probably right around 4% or 5%. Can we see you materially increase that? Or that's probably where you're going to
sit? We're I think 4% to 5% of the overall mortgage market. On the direct to retail, we're higher than that because you take out the correspondent. But if you just look at the number of customers who have a mortgage somewhere else who are our customers in our wealth management business or in our preferred business, the amount
of mortgage growth we could have
would be very strong and that will continue to build as we focus the sales teams on those efforts. And if you look at the productivity of the mortgage loan officers we hired that work with our teams in the branches and stuff, it is multiples of the productivity of the people out working in the general field. So as that business system continues to take hold and even with the mortgage loan officers today, if we can get the loans processed, we could close 15%, 20%, 25% more loans per day than we do today. So we've got lots of room to grow in this business, but we're going to do it the way which is focused on our clients with high quality loans because the economics of business do not support anything
else. And then just last question is your dispute with Fannie Mae, I believe you're not selling any loans to Fannie Mae, you're selling to Freddie Mac, which are both really run by the FHFA. Is the dispute with Fannie Mae at all hindering your ability to sell loans to the GSEs?
I think we're growing faster than other people in mortgage production on a quarterly basis.
Okay. Thank you very much guys.
Thank you.
We'll go next to the site of Glenn Schorr with Bank of America. Your line is open.
Thank you. Just two quick follow ups. And I appreciate all the disclosure. I just want to make sure I'm trying to compare apples to apples. On the 8.97% that includes all model approval, When listening and looking at your disclosure, it sounds like excluding model approval it would be maybe 40 basis points lower.
Am I in the ballpark?
Without IMM, it would be slightly more of a reduction in that, but still below 100 basis points for IMM, Glenn.
Okay, perfect. And I know it's early, but just general gut check, what should we focus on more with or without as we approach CCAR? In other words, again, trying to put the whole industry on an apples to apples basis of
With or without
IMM approval.
We are spending an inordinate amount of time making sure through the different governance channels and the like that we will be in a position as quickly as possible to be IMM compliant. Obviously, nobody has been declared to be IMM compliant yet. And I don't want to speculate on becoming IMM compliant. I think the important thing is, Glenn, if you look at the work that we've done with respect to Basel III and you look at where we are relative to our peers, we're in very good shape. And I think the CCAR piece, there's 2 things that you have to be mindful of.
The first is that last year the stated CCAR results are where your Basel 1 Tier 1 common is probably gets adjusted this year to be Basel 1.5 relative to a 5 percent reference rate. That is the CCAR test the way it was done last year and our sense is probably the way that ends up being done this year. That's the base test. The second test is the glide path and do you show a path to being where you need to be from a Basel III perspective. And that's why when we talk about capital, we're very focused on both of those measures and we feel like we're in very good shape under both Basel I and Basel III at this point.
I appreciate that. I just want to make sure I heard what I think I heard. Some of the mortgages you're originating are putting on balance sheet. Now obviously good credit, the customer because it's originated from your channel. But when gain on sale margins are at all time highs, is that it feels as an outsider that it would make sense to be selling them into the market?
But curious on how you view that in balance sheeting versus selling them out?
I think what Bruce said is in the Q3, we sold them out. We're looking at retaining some, but it would not be material amount relative to the overall production of our mortgage business.
Okay. Appreciate that.
And Glenn, the second thing is you got to remember, we got a mortgage portfolio runs off on the balance sheet. Today, it's $200,000,000,000 plus. So just to have that stay in place for lack of better term, you have to fill it back up.
Unless someone wants to pay you a lot of money for it, but I hear you. And finally, the focus on earnings growth and loan growth, I think you talked effectively at all the price competition. I'm curious if the industry has a potential to be low to sleep. We're in this low rate environment. So you mentioned that you're getting the same kind of spreads on new loan originations.
It's coming at a lower rate. But we're in an excellent credit environment right now, but curious if we were to see it turning the other way if you feel like the industry might be putting on loans that are were being lulled to sleep on spread, but the rates actually can get eaten pretty quickly if there's
a turn in credit.
The one thing that we've not seen with loans coming is historically when what you're referencing is the loans is the structuring of loans and credit quality of loans that you bring on the balance sheet starting to be impaired in this chase for yield. The number of people globally that are looking to grow their loan books, you have to think globally, is less than it's historically been. And when we're running the loan books, we're very focused on not just growing them, but making sure that the pricing returns out from a cost of capital perspective and that the structures continue to have integrity so that if what you've just referenced happens that we do not have losses that we're not comfortable living with. And at this point, given what we're seeing in the global competitive market, the ability to put loans on that makes sense for us and have the structures that protect us, we continue to feel very good about.
And when you think about the consumer side, even the loans originated in the back to the standards were changed dramatically in 2008 in terms of mortgage standards or even card standards in 2007, 2008. And you start to look at loans originated in the end of latter half of 'eight and 'nine now 3 years plus later in an environment 3 years plus later where I think the core environment would have been for unemployment to be lower than it is now and economic growth to be higher based on what people thought at that time. We're seeing credit performance, which is much better than the expected outcome. So we are not we are always checking ourselves in the question you raised, which is how do we make sure that we drive the business and don't have credit issues going forward. What I'll tell you though is that's where we want that we continue to frame this thing as how we run the company and focus on the core customer basis and do what they need aren't just chasing growth for growth sake.
And that then will keep us in things like the card business where in the past we may have drifted into credit that was more difficult from doing that. And we're happy with our card business. It's growing strong. It's growing with the right customers with a high credit quality. We're not going to go reach for credit just to grow the business.
Perfect. I really appreciate it. Thanks.
And we'll go next to the site of Vivek Juneja with JPMorgan. Your line is open.
Hi, Bruce. Hi, Brian. A couple of quick questions. HAARP, how much did that account for your volume in the Q3?
The HAARP volume was about 30% of the entire of the originations.
Okay. And how long further do you how far do you think you are in the process? How much longer do you expect it to be able to keep doing?
I think we'd expect that business to continue through the lion's share of 20 13. Okay.
And then can you talk about the retail bank a little bit? It seems like you are shutting branches, but deposits continue to grow. So can you talk a little bit about what's going on there? Where you're getting growth from? And since the shutting of branches where you are in that rationalization?
And despite that it seems like you have been able to grow deposits quite a bit?
So let's go think about it from all different points which is we need to bring the cost structure down. So we've been on a plan to continue to close branches. And you can see that we did again a fifty-sixty this quarter and we'll continue to do that. We're doing it turning out to be good. So that's where the bridge closure.
So we're getting what we want. We're keeping the customers and that but less operating cost. And that's a program that will continue carefully across many each quarter there'll be continued progress. When you look at the core business, the things like the Durbin were in last year's Q3, not this year's Q3. So you're starting to see the run rate come out as opposed to all the regulatory Account growth, containing net new accounts.
This mobile implementation were 11,100,000 new subscribers this quarter. We're 1,000,000 plus more than anybody else. But the good news is the cost impact of that or the service impact of that is since we've allowed you to take a snap shot of your check, we've almost 1,750,000 checks have gone through in literally a couple of months of operations on that in the Q3. The payments made off of that platform are now running $1,000,000,000 plus a week and we'll probably do $60,000,000,000 in payments platform this year. We've already done $40,000,000,000 through 9.30.
And then the more important part is that's all cost optimization, service optimization and our customer scores continue to increase each month. We see on our satisfaction scores and continue to see an increase. But importantly in the growth areas in the preferred sector, we continue to see strong growth there. We've added about 500,000 plus clients from retail to preferred. In other words, upgraded them through depths of relationship, which means they're bringing more than $50,000 in balances to us.
So we're quite pleased with that business, the Merrill Edge growth. And so I think it's working and it's working in the balance between getting the cost down on the retail side, expanding the preferred side and then also managing the customer experience in the middle. All
right. Thank you.
Thank you.
Next is the line of Bren Haughan with UBS. Your line is open. Good morning, guys. Just a couple of quick follow ups.
It's encouraging certainly that you guys highlighted LAS expenses could come down next quarter. But is there a way to give us a magnitude so we can know how to model this?
It's a different way to ask the same question. The best way is you're looking to model is in the Q3, we staffed to solve or doing everything from a change in regulation, compliance as well as our own standards that we wanted to as it relates to how we both service as well as modify mortgages. There was incremental work that was done in the Q3 to get to that point. The best way to start and to go through the analysis is to look at the number of 60 plus day delinquent loans that we have because those without question require the most amount of work. Given where we are now, what we would expect going forward is that you would see the expenses trend down at the same rate that you see these 60 plus day delinquencies come down, realizing it's going to be lagged by 1 in probably 2 quarters.
That's the best way to get a proxy for the manner in which you should see those expenses come down, as Brian said, ex anything unexpected that comes up from an expense perspective.
2 things. We got to make sure we do this right and that's we've had to build the staffing to make sure we could do the modifications on a timing basis. And then secondly, whether it's getting to the quarter to quarter, as you can see, we're trying to guide you the longer term. But the key thing is we are doing everything we can as the work comes down to get the resources down at the same pace. So it's not something it is something we're absolutely focused on and we'll deliver it for you.
But we just have to make sure we do the work right to handle the customers right. It's a very difficult time for people to go through what's going on because all these costs go to the modification, short sale, deed in lieu and foreclosure process.
Right, right. And then how much of that decline in 60 day delinquencies was due to modified loans? And what's the re default risk
there? Overall, we'll get you some details on that. But just conceptually, each vintage of modifications performed better. So we're we've gone from levels of 'eight 'nine and 'eight. We've been at this longer than people remember that we're running 50% to now we're running in the low 20s or high teens.
So the re default rate has gone way down because of structure of the programs and frankly the duration of time after the crisis.
Okay. And then just to make sure I understood, Brian, I think you had said that as far as the trajectory of the decline in expenses overall for the whole when looking at the entire thing at LAS and taking a step back, moderate improvements in 2013, but the big lever there is 2014. Is that right? Or am I reading too much into that?
Well, I think what we're I think I was saying that you'll get the improvements sort of on a quarterly basis all through 2013. And then 2014, you have the run rate of all that accumulated and for you in year over year comparison, but it's going to come all during 2013. So it's not moderate. We can debate about moderate when they had the expense base that the earlier question was discussing. But it will come every single quarter.
So don't it's not going to be held up in wait. It will come as fast as it can. So the work we're getting out this quarter has to do with the declines in the 60 plus day in the second quarter into the 3rd quarter, came out in the 3rd and the 3rd quarter comes out in the 4th. It just takes you a little time because you actually have to finish the work, reassign accounts and go on. So it will come it's not even quarter by quarter, it will come month by month, week by week all through 2013.
And your number of modifications during the quarter was 40,000.
Okay. Thank you.
We'll take that
final question from the site of Jefferson Harrelson with KBW. Your line is open. Thanks. Can you guys just remind us what your litigation costs were roughly per year pre cycle?
We'll have Lee get back to that. I don't know off the top of my head
it's That was a long time ago.
That seems like a long time ago. Let's just say that.
All right. And the other one just kind of want to 0 in on one line item which is on Page 4 of the supplement. The swing and other income, I heard you say something about that, but it went from $600,000,000 positive to $790,000,000 negative. Was some of that the FVO or DVA? Or is that all in the trading account piece?
The FVO switch and other income was roughly, believe it was $1,200,000,000 delta during the quarter. So that's it.
Okay. Thank you very much guys.
Thank you. Okay. We're all set. Thanks everyone for joining.
And this concludes today's program. Have a great day. You may disconnect your lines at this time.