Participants are in listen only mode.
We'll
And please note today's call is being recorded. It is now my pleasure to turn the program over to Kevin Stitt. Please begin, sir.
Good morning.
Before Brian Moynihan and Chuck Noske begin their comments, let me remind you that this presentation does contain some forward looking statements regarding both our financial condition and financial results and that these statements involve certain risks that may cause actual results in the future to be different from our current expectations. These factors include, among other things, changes in economic conditions, changes in interest rates, competitive pressures within the financial services industry, and legislative or regulatory requirements that may affect our businesses. For additional factors, see our press release and SEC documents. Also joining us this morning will be Neil Coddy, our Chief Accounting Officer. And with that, let me turn it over
to Brian. Thank you all of you and good morning. We know this has been a busy week for all of you and thank you for joining us on a Friday. Before Chuck takes you through the quarter, I was going to give you some perspectives and provide some thoughts about the economy and the priorities we have for 2011. I'll stay mostly with the key takeaway slide on Slide 4 and touch on a couple of other slides and then turn it over to Chuck to begin on Slide 9.
As we think about 2010, we came into the year with a focus on continuing to clean up the issues left over from the crisis while continuing to driving the franchise forward, finishing the integration work at Merrill Lynch and Country Wise and continuing to simplify our business model. During the year, we made progress on many of these items. In an area of credit, our improvement has been strong. Charge offs have now improved for 7 consecutive quarters and yet there's still room to improve here. We continue to see improvements in delinquencies this quarter and over the last few quarters.
The underwriting changes we made in 2,008 across all the products, whether it's credit card, home equity or first mortgage, are performing better than we would have expected when we made those changes in those years. This ought to hold us in good stead as we move towards 2011 in terms of credit. On the credit side, we released reserves this year of $7,000,000,000 during 20 10. And while we know this is not core earnings, it helped offset some of the cost of representation of warranties about $7,000,000,000 in other litigation costs and other matters during the year. But even with that release, our reserve coverage ratio of 1.6 times annualized charge offs is the highest this company had in many, many years.
We also identified the non core loan portfolios and began to work those off out of the company. As we showed you, that's about $130,000,000,000 at the start of the year and now it's down around $100,000,000,000 Now the good news on the loan side driven forward as we're starting to see stability in the core loan balances that we want to carry forward for this company. We're even seeing some modest growth in some of the areas. Our utilization rates, for example, on our commercial area was stable in the Q4 from quarter 3 and that bodes well for 2011. As we think about capital, we ended the year with questions around it, especially given the fact that the new Basel rules are starting to emerge along with the other changes in adopting Basel II and the Fed market risk rules, etcetera.
We told you at the beginning of the year we need to hit targets of 5.5% to 6 percent tangible common equity ratios and 8.5% to 9% Tier 1 common ratios under Basel I by year end in order
to have the capital to run this company.
This represents the view that we have that the risk capital we need to run the company. We achieved both of those goals this year. We'd also started early and made good progress to mitigating the changes that are going to come about in both capital and risk weighted asset measures that will come with the new VASA rules. This gives us strong confidence that we have a clear path to meeting all these rules as they're adopted and staying above regulatory minimums during the next couple of years as they come through. And even during that period, we'll have the ability to pay dividends and do buybacks over time as approved by our regulators.
During the year, we're also focused our franchise. And what we mean by focus, we sold non core positions and businesses, 20 some units overall, netting $19,000,000,000 proceeds, at the same time fulfilling the commitments to our TARPU payment and streamlining the franchise and focusing on the 3 core customer groups and the core products for them. In addition to that work, we redesigned our consumer account strategy to deal with the new regulations that came in, in 2,009, 2010. As you've read in the press, we piloted our new account structure to mitigate the revenue loss from these regulations and still provide strong customer choice. By providing that choice and the change we made, we seen dramatically lower attrition and complaints and account closure in our consumer businesses.
From the shareholder side, our stock did underperform. And our returns on equity and returns on assets are not where we want them and continue to be affected by one time events. But during the year, we did successfully grow our change of value per share by 15% and we look forward to driving that forward in the future. By far the biggest legacy issue we continue to deal with is on the mortgage side. On Pages 78, we highlight some of the changes and Chuck will talk about some of the rep and warranty and put back issues later.
But let me summarize some of the key elements. As we entered the year 20 10, a lot of the operational work was around the modification area and building up the teams to do the foreclosures. As we move through the year, discussions around representation and warranty started to dominate the discussions. This year, we took a total of $7,000,000,000 of representation and warranty costs as offsets to revenue. And significant portion of our litigation expense this year was also due to mortgage issues.
We are pleased that they put the GSEs behind us this quarter as we announced on January 3rd. You When you think about modifications, our efforts continue to build. We did 285,000 modifications during 2010, including 76 1,000 during the Q4 alone, the most in the industry. We completed a review of the foreclosure practices. The process is working and we've restarted the efforts cautiously.
We'll continue to face regulatory and other scrutiny here, but the work is proceeding and we are very focused on doing this right for all the parties involved. During 2010, we also completed a milestone of $2,000,000,000 of merger integration work. The next quarter we'll actually complete the final touches of the Merrill Lynch integration. And for the first time in many years, we'll have no integration work to do in this company. What that gives us the ability to do is turn that energy and focus to managing our simplification.
Included in that, we'll be taking our 4 deposit systems during 2011, 2012 to 1 deposit system and many other like activities. Our expense levels are not where we want them right now. They're higher because of debt collection and other costs related to legacy issues. But if you think about what we've been doing in managing expenses, we continue to invest in the franchise while managing through the post crisis issues. To help you think about that, think of the headcount in the company.
During the year, we've raised about our headcount has gone up by about 3,000 people. Modifications and collection areas. We've invested 2,000 people in growth areas, about half in the wealth management and other areas in the United States and about half outside the United States. That means the rest of the franchise effect will be down about 10000 to 12000 people. So we continue to manage costs while we deal with the legacy issues and invest and sheet capital in the franchise, the core business has continued to progress.
First, our job is to drive the integration of this franchise to bring the combination, which can do better than any one of our business as a standalone business could do. If you look at the appendix Slides 3334, you can see some of year. Our deposits performance, while challenged by the low interest rate environment and regulatory changes, has improving customer scores and our share in deposits continues to grow on the retail side even giving effect to our disciplined pricing strategies. Our deposits did not cross $1,000,000,000,000 of Bank of America for the first time. Our wealth management business is seeing strong growth, both in assets under management flows, assets under management, deposits and leasing loans stabilize in that business.
We've made good progress in hiring financial advisors, wealth management bankers and other client facing teammates. The group has produced a solid profit including record revenue in the Q4 of 2010 and still has lots of great opportunity ahead. Our Global Commercial Banking business, our middle market and small business banking business recovered to strong earnings and returns this year as credit normalized and our market leading positions showed their strength. In our global banking and markets area, which would be large corporate investment banking and trading and capital markets activity, we maintained our number 2 position in our investment banking business throughout the year. Our investment banking fees from 3rd parties were the highest this quarter they've been since we merged with Merrell.
Our sales and trading revenue team had a solid year, but we had very results by quarter, going from a high $7,000,000,000 in revenue to a low of around $3,000,000,000 We're 10, 10, we made progress. We stabilized the balance sheet and capital and you can see that in Slide 6 and some of the statistics on the balance sheet statistics given there. We did lose $2,000,000,000 for the year $2010,000,000,000 in the 4th quarter. Both of those numbers were not we are disappointed with. But with the year came large ins announced and they're all nearly driven by legacy issues, which we continue to put behind us.
Dollars 12,000,000,000 in after tax goodwill impairments, dollars 7,000,000,000 in representation and warranty and back costs as a contract to revenue, dollars 3,000,000,000 in litigation expense, nearly $2,000,000,000 in merger and restructuring charges and other charges like that. And those of course were offset in part by the $7,000,000,000 in reserve releases and $3,000,000,000 in asset sales. We clearly need to continue to reduce the ins and outs and let the core franchise performance come through for you, our investors. As we look to 2011, the priorities are clear. We're going to make progress in putting the mortgage operational issues behind us, meaning modifications, foreclosures and related process improvements.
On a representation of warranty and put back area, we're going to make progress only if we can do it on a basis consistent with our shareholder interest. But our best guess is this will take a longer period of time, perhaps a few years. We're going to drive the core customer business, integrating this powerful franchise and delivering to each customer. We're going to drive our expense management during the year, ensuring the expenses out of here as we continue to recover in the mortgage and other credit related costs. And importantly, we're going to deliver on the growth opportunities in our franchise, be it wealth management, the affluent affluent customer base in the consumer area, the investment banking areas all within the United States and abroad, and we'll continue to invest in those businesses as we did in 2010.
As we look to 2011, we see the economy continue to recover. All the key metrics we see in our customer base that we monitor externally like you do, including the credit demand, consumer spending, especially spending among middle class and affluent clients, the debt burdens the households are carrying, the asset quality of our portfolios, all those are pushing ahead. We still face however the realities of high and sticky unemployment in this country and a slow and stagnant recovery in housing and modest overall U. S. Growth.
In this context, we'll continue to drive towards delivering shareholder returns by continuing to grow our tangible guide per share as we materialize in recovery in the franchise. We continue to believe we're in a position to modestly increase our common dividend in the back half of twenty eleven, but of course we need our regulators' approval to do so. So we still have a lot to do. But at the same time, we have the best franchise in the industry with number 1 or 2 positions in every product area and the largest customer client base in the industry. We can't and will not lose our focus on levering this franchise as the economy 2010 was the year to repair the balance sheet, rebuild some of the capital ratios and reserve ratios and also tough but necessary decisions as we focused on cleaning up our legacy issues.
But as the economy continues to improve and we continue to execute, I have every confidence the franchise will keep moving to the performance that it's capable of. Finally, I want to thank our 290,000 associates for the tireless efforts they made during 2010, and I'll turn it over to Chuck starting on slide 9.
Thanks, Brian, and good morning, everyone. As you can see on Slide 9, we reported a net loss of $0.16 per share for the quarter. Our results reflected the non cash, non tax deductible write down of $2,000,000,000 or $0.20 per share of goodwill associated with our home loans and insurance business that we discussed on January 3rd. Excluding this goodwill impairment charge, earnings were approximately 750 $1,000,000 or $0.04 per share after preferred dividends. Results for the 4th quarter reflected the positive and negative impact of several items, which makes for a difficult comparison this quarter.
If you turn to Slide 10, we've listed some of the larger items. The credit mark on structured liabilities under the fair value option resulted in a negative adjustment of $1,200,000,000 reflecting a tightening of our credit spreads compared to a negative adjustment of $190,000,000 in the 3rd quarter and as reported in other income. Asset sales during the quarter included our partial ownership
in BlackRock, reducing our ownership from 34% to 7%
majority of the Global Security Solutions business. And the sale of a majority of the Global Security Solutions business. We had $872,000,000 in security gains during the quarter. Already touched on the goodwill impairment charge. Excluding fees paid to external legal service providers, litigation expense for the quarter was $1,500,000,000 primarily related to our consumer businesses, including the mortgage business.
Merger related and restructuring charges were $370,000,000 loan loss reserves were reduced by $1,700,000,000 in the quarter versus 1,800,000,000 in the Q3. And finally, we had a tax benefit of $2,400,000,000 primarily reflecting the pre tax loss before the goodwill impairment charges, the release of a capital loss carryover valuation allowance of about $1,200,000,000 and normal tax preference items. Turning to Slide 11, you can see that 4 of our business segments made money in the 4th quarter. Deposits lost money due to increased litigation costs this quarter and was also affected by the full impact of Reg E and continued low interest rates. Global Card Services benefited from improving credit quality and reported 1,500,000,000 dollars in net income.
Global Wealth and Investment Management had a very good quarter, earning $332,000,000 primarily to near record quarterly revenue levels driven by market activity, strong long term client flows and a shift in the mix of assets towards higher margin products. Home loans and insurance was significantly impacted by legacy costs, including the goodwill impairment charge, reps and warranties and litigation costs. Our 1st mortgage banking business, however, excluding these costs was profitable in the quarter. Global Commercial Banking earned more than $1,000,000,000 this quarter as credit quality continued to improve and has delivered stable revenue through the cycle reflecting strong client retention. Global Banking and Markets showed continued solid results in investment in corporate banking, offset by a difficult trading environment in global markets.
Let's turn to net interest income on Slide 12. Net interest income on an FTE basis was $12,700,000,000 essentially flat with the 3rd quarter. The impact of low rates and lower consumer balances, excluding residential mortgages, were offset by positive hedge income of $250,000,000 increased balances in the discretionary portfolio and a reduction in long term debt. Our average earning assets for the quarter were up $20,000,000,000 mainly due to growth in consumer loans and securities. Cash declined due to a shift in liquidity mix from cash to liquid securities in addition to a net reduction in our outstanding debt.
Consumer loans increased due to retained mortgage originations. Commercial loan demand stabilized in the quarter and as we said earlier, average commercial loans excluding real estate were up 1% from the prior quarter. Although we were flat with the 3rd quarter, we expect net interest income to decline over the next couple of quarters. In the Q1 of 2011 in particular, we expect net interest income to drop from 4th quarter levels due to fewer days in the quarter, continued of the year. We're also on track to lower our long term debt footprint by 15% to 20% by the end of 2011 relative to Q3 2010 level.
Slide 13 shows you that both average loans and deposits were up for the quarter. Deposits remains a good story of growth as Wealth Management clients continue to do more business with us and commercial customers continue to prefer to hold rather than were up approximately $6,500,000,000 due to growth of almost $17,000,000,000 partially offset by net charge offs and decreases in our runoff portfolios. We have a slide in the appendix that details our runoff portfolios for you. The $17,000,000,000 increase in total loans was driven by residential mortgages, primarily FHA insured originations, as we used Sun Access liquidity and C and I loans offset by a slight decrease in commercial real estate. Turning to Slide 15.
Card revenue was up 7% from 3rd quarter results due to a 12% increase in interchange income. Increases in retail spending were 4% versus the prior quarter and 5% versus the prior year. These the impact of the Card Act. On Slide 16, we show service charges were down $176,000,000 from 3rd quarter levels to $2,000,000,000
which is
the number we targeted for you 2 quarters ago. The decrease was due to the approximately 2 $75,000,000 impact of Reg E this quarter after becoming effective midway through the Q3. So now that the full impact of Reg E is embedded in our results, you can use this quarter's results as a base going forward. Remember though that the full impact from both Reg E and the Card Act was reflected in quarterly results in service charges and card revenue for the 1st 3 quarters of impacts that will affect service charges in 2011 are the Durbin Amendment, which is scheduled to occur in the last half of the year. We expect this would cost us approximately $1,000,000,000 in revenue.
We won't know the expected impact on debit card at interchange though until late April, so we hope to update you on that during our Q1 earnings call. While we expect to mitigate some of the impact over time, we do expect the impact the impact of mitigation efforts will be modest in 2011. Mortgage Banking revenue on Slide 17 decreased from the Q3 as a result of higher reps and warranties expense, which includes the impact of the GSE agreements and additional accrued liabilities. MSR performance net of hedges was 2 $57,000,000 this quarter, an increase of $347,000,000 compared to the loss last quarter. Although production volume in 1st mortgage at $85,000,000,000 was up from the 3rd quarter, production revenue was down due to lower and production margins.
The capitalization rate for the consumer mortgage MSR asset ended the quarter at 92 basis points versus 73 basis points in the 3rd quarter. Given the direction of interest rates since Thanksgiving and the redeployment of some of our sales force to assist with our distressed customers, we forecast production levels will be lower over the near term. Turning to Slide 18, you can see the total reps and warranties expense in the quarter was $4,100,000,000 up $3,300,000,000 from the prior quarter. Much of the increase was the result of our recent agreements with the GSEs. The liability we have accrued on the balance sheet increased approximately $1,000,000,000 to 5 point $4,000,000,000 as the $4,100,000,000 representations of warranties expense was partially offset by approximately $3,000,000,000 in charge offs and other activities.
As you can see, our unresolved repurchase requests totaled approximately $10,700,000,000 at year end. This amount includes 1 point $7,000,000,000 of demands contained in the communication from private label securitization investors. We believe these do not have the contractual right to demand the repurchase of loans directly or the right to access loan files. The inclusion of these claims in the amounts reflected in the chart does not mean that we believe these claims are satisfied with the contractual requirements that would permit them to direct the securitization trustee to take action or that they are otherwise procedurally or substantively valid. Outstanding claims were reduced by $2,300,000,000 driven by the resolution of $8,000,000,000 of claims during the quarter, including $4,900,000,000 as part of the GSE agreements.
Monoline claims outstanding continue to grow as the monoline's continue to submit claims and are generally unwilling to withdraw these claims even when they've been given evidence refuting the claims. The increase in rescissions and approvals in the 4th quarter was substantially impacted by the agreements with the GSEs. We've included slides in the appendix that update the information the information we presented earlier this year on our GSE experience. On Slide 19, we've provided additional information around our experience with non GSE counterparties, which would encompass whole loan sales and private label securitizations, including those where model lines have insured some or all of the debt. On Slide 37 in the appendix, we break down our non GSE experience much as we did for the GSEs.
As you can see on Slide 19, from 2004 through 2,008, dollars 963,000,000,000 of loans were sold into private label securitizations or through whole loan sales where we believe we have originated reps and warranties exposure. We broke out the originations for you by both legacy entity as well as product to give you a bit more clarity on the portfolio. Through December 31, repurchase claims received the 2004 to 2008 vintages totaled $13,700,000,000 $6,000,000,000 in those claims have been resolved. And as you can see, resolution success and rescission rates are much higher with private investors versus the monologues. The losses on the resolved claims were approximately $1,700,000,000 Of the remaining outstanding claims, dollars 5,800,000,000 have been reviewed declined for repurchase.
Moving to Slide 20, of the $963,000,000,000 of original principal balance, 22% have defaulted or are severely delinquent. 58% of defaulted or severely delinquent loans made at least 24 payments prior to default or delinquency. As we have indicated previously, in those instances where we have had meaningful and consistent repurchase experience with counter parties, such as the GSEs and certain monoline insurers, a liability for reps and warranties has been established for not had meaningful and consistent repurchase experience with other non GSE counterparties. We do evaluate all asserted claims received from all parties in establishing our liability. However, as we and others in our industry have noted, analysts and other market participants have developed their own estimates of possible exposure for Bank of America and other institutions.
Although the non GSE claims experience remains we expect additional activity in this area going forward and it is possible that further losses may occur. We received a number of investor inquiries following our GSE announcement earlier this month regarding the extent of such possible non GSE exposure. In addition, in connection with our planning process, we evaluated various possible alternative scenarios. We've developed a preliminary estimate of a possible loss range using a variety of judgmental assumptions. That estimate suggests a possible upper range of loss that could be up $7,000,000,000 to $10,000,000,000 over existing accruals.
As a reminder, there are significant legal and procedural hurdles that counterparties would need to overcome before we believe any of these amounts could become probable. We would expect resolution of these matters to be a protracted process, which could take years to conclude. As you could see on Slide 21, for example, there are substantial differences between the reps and warranties provided to GSEs and those provided in private label transactions. Until we have meaningful repurchase liability with these counterparties, we do not believe it is possible to determine that a loss is probable and accordingly to accrue for any such loss. As we have previously described to you, where we conclude that a a breach of reps and warranties has occurred, we will act in a responsible manner.
On the other hand, where we've concluded that a valid basis for repurchase does not exist, we will vigorously contest such claims and defend the interest of Bank of America and its shareholders. Okay. Now back to earnings on Slide 22. As I said earlier, our activity with Wealth Management clients resulted in revenue approaching record quarterly levels, which is where we generate the bulk of the investment in brokerage revenues. Investment in brokerage revenue was up 150 $5,000,000 or 6% from the 3rd quarter due to both higher asset management fees and brokerage income.
Asset management fees were a management fees were a record $1,400,000,000 and brokerage revenue was approximately 1 point 5 into deposits and long term asset management products. Sales and trading revenue on Slide 23 of $2,600,000,000 which includes both net interest income and non interest income, decreased approximately 43% from the 3rd quarter, but was higher than last year by 17%. The decrease in sales and trading was partially from seasonal declines, but a few other factors stand out. We had softer trading environment as rates backed up, negatively impacting some of our risk positions. This also caused clients to exit bond funds with money flowing into or equity funds, putting pressure on prices.
We've experienced a significant tightening of credit spreads during the year and to a lesser extent during the Q4. Certain sectors such as European debt experienced spread widening. We've also been focused on
on the impact of the new Basel
capital rules and the impact to the amount of capital attracted to our markets business. Over the last couple of quarters, we've been focused on reducing the higher capital intensive assets and as well our exposure to shorter term funding agreements. FIC was impacted the most from these items, decreasing 49% to 1.8 $1,000,000,000 with lower results in credit, rates and commodities products. Equity revenue was down 19% to 7.80 $9,000,000 from the 3rd quarter as an increase in cash business commission revenue from inflows was more than offset by a decline in market volatility and client flows impacting equity derivatives. We didn't have any major impact from legacy assets in the quarter, while we continue to reduce our exposure to auction rate securities, CMBS and monowinds.
In Investment Banking on Slide 24, our overall fee ranking remains solid as we were ranked at a strong number 2 globally and number 1 in the U. S. Investment Banking revenue increased 16% from the 3rd quarter and was on par with a great 4th quarter from a year ago. Results were driven by increases in all areas, namely M and A, Debt and Equity Capital Markets. Let me say a couple of things about expense levels on Slide 25.
Total expense excluding the goodwill impairment charges in last two quarters increased $2,000,000,000 from the 3rd quarter. Expenses this quarter included higher litigation expenses, as I said earlier. Personnel expense compared to the Q3 is up approximately $400,000,000 reflecting the build out of strategic hires in certain businesses, including international, as well as certain severance and benefit related expenses. Higher levels of headcount and expense in home loans and insurance were related to default management staff and other loss mitigation activities in that business. Reiterating what Brian said earlier, our expense levels, excluding goodwill charges, are up from 2,009 levels for several reasons, including additional headcount to address legacy mortgage issues.
For franchise. Moving to asset quality trends on Slide 26. As they did throughout most of the year, delinquencies excluding FHA loans, net charge offs and non performing assets continued to improve. On Slide 27, improving credit performance in almost all portfolios drove the decrease in net charge offs. Net charge offs of $6,800,000,000 decreased $414,000,000 compared to the Q3.
Consumer net charge offs were down 2 $52,000,000 even with a $330,000,000 valuation adjustment on certain mortgage loans, reflecting improvement in card and home equity. Commercial asset quality also improved as net charge offs dropped 15% from the prior quarter, with the biggest drivers being small business and commercial real estate. Reserve reductions included $1,100,000,000 on U. S. Card along with releases in commercial real estate, small business, directindirect consumer and commercial.
On our $36,000,000,000 purchase credit impaired consumer book, which is comprised of discontinued real estate, residential mortgages and home equity, we increased the reserve of $828,000,000 to reflect an adjusted outlook for home prices. Even with the decline in reserve levels, the ratio of allowance for loan losses to annualized net charge off was essentially flat compared to the 3rd quarter at roughly 1.6 times and is up from roughly 1.1 times a year ago. In thinking about credit costs in 2011, we think provision expense should continue to edge down through the year as charge offs continue to move lower, primarily in the consumer businesses. Loan loss reserve reductions will continue as long as portfolio performance and the economy continue to improve and our other credit metrics warrant lower reserves. That concludes my prepared remarks for this morning.
As you may know, we've scheduled March 8 to have our Investor Day in New York. So I look forward to seeing all of you there. And with that, let's open it up for questions.
Thank you, sir.
About the tail risk on the mortgage and the cleanup that you mentioned, Brian, at the beginning of the call. You've indicated that you could range private label $7,000,000,000 to $10,000,000,000 based on your assumptions. Why not take a large reserve against that and kind of be done with it in the next quarter or 2?
Betsy, I want to be very clear for you and everyone on the line as to what that the range is that we gave today. This is a possible range, not a probable range. It could be as low as 0 theoretically up to a high end of the range that we think could be $7,000,000,000 to $10,000,000,000 based upon an array of different assumptions and judgments, none of which we've seen in evidence through current behavior either in the portfolios or by the counterparties. So we really as I said, we really don't have a basis to make an accrual. We had a lot of interest from investors asking us to help understand what we thought about a possible exposure in the future.
And until we can meet the accounting criteria to judge this as probable, we really don't have a basis to make an accrual. And certainly, we expect there will be additional provisions in future quarters.
We don't think they're going
to fall to 0. But we really don't have a basis. This is an array of alternative scenarios we did during our year end planning process coming into the new year to try to rise to level of probability that would allow us to do any accounting nor do we frankly expect that we would lose that amount.
You do have some private label experience though right that you've paid out on. Is that what's the reason for why that experience that you've had so far is insufficient?
Actually, Betsy, most of that other repurchase experience was with whole loan investors and that's rather episodic as it relates to private label investors and securitizations. That has been extremely modest.
Okay. And the litigation reserve or the litigation costs that you had in the quarter, should we take that as a run rate for the foreseeable future? Or is there any color you can give us as to expected volatility in that line?
I think you should probably expect it will have some provisions there. There were both, as I mentioned, that the provision in the quarter was in our consumer businesses. So, it was more than just mortgage. And so, there will be you saw in the deposits business for the quarter that we reported a loss without the litigation provision associated with deposits, that business would have been profitable in the quarter. But I think it's hard to think about a run rate for litigation expenses.
Again, those will be based on the facts and circumstances and the judgments of our attorneys each quarter about the status of our overall litigation portfolio. Although certainly a disproportionate part of our litigation portfolio is in the former Countrywide space.
And then last on FICC. In broad strokes, could you give us a sense as to how much of the FICC decline was due to either actively managing down due to Basel III, passively allowing things to roll off because of that Basel III DDA or just the market being difficult? I would say it
would be largely the market being difficult and client and the lack of client flows. But certainly as we look to manage our balance sheet more effectively and think about the new capital rules, that has also had an impact.
Is there any DVA in there?
No, I think that's another income.
Okay.
And you outlined how much that is?
Yes, maybe a small amount, but most of the big adjustment is the fair value option adjustment on the Merrill Lynch structured notes.
Okay. Thank you.
Thanks, Betsy.
We'll go next to the site of Paul Miller with FBR Capital Markets. Your line is open.
Yes. I know did you guys have been given guidance on core pre tax pre provision numbers because that's one of the numbers that we really like to look at and I think numbers that tend to be all over the street. Can you help us out a little bit on how we should be looking at those numbers?
We have not given guidance on PPNR and there are a couple of reasons. But the main one is that with a credit card business and you can lead yourself to and we talked about this a few earnings calls ago, you can lead yourself to a number when we had $30,000,000,000 $40,000,000,000 of credit card charge offs that the PM and R is fine, but you're always going to have a charge off rate of some magnitude in there. And that then could lead to conclusion that it will go to 0 and it won't because the cost of goods sold in credit card is a part of credit card costs. So I think Chuck gave you various as he went through his presentation various points of view about net interest income and it would sort of continue down as the interest rate environment and we had a good hedge quarter on that and that helped this quarter as it flattens and comes down and will flatten in the middle of next year and come back up. Expenses, I think we gave you some guidance.
But in terms of PPNR, we struggle a little bit. I know that that's a number you track closely, but we struggle a little bit at how you guide people on it overall, but also importantly how it really plays into the context of a company that has a large credit card portfolio.
And Kean, just one really quick follow-up on Betsy's question is how much exposure do you have to the whole loan sales on the private label? In other words, how much do you have to disclose how much you've sold out there? So I know and I disclosed last quarter what you've paid out on private label. I didn't see that disclosure this time around. I might have missed it.
Let's see. I think if you went looking in the appendix, probably your best sense of the non GSE portfolio would be back on Page 38, Paul. But I don't think we've cut back at all on the disclosure we've given you with respect to the performance of these individual portfolios and the actions with counterparties.
But I was just wondering, do you actually disclose how much you sold and hold loans to private label? So I know we get some inside mortgage finance, we can get the overall private label exposure, but what's the exposure on the whole loan side? Because that's what you've been paying out at this point, am I correct?
We'll get to that. It was it's disclosed Kevin and Lee can get to that.
Yes, we'll
get you that Paul. I don't think it's here in our slides today.
Okay. Thanks a lot gentlemen.
Thank you Paul.
We'll go next to the site of John McDonald with Sanford Bernstein. Your line is open.
Hi. Another clarification on the private label. Chuck, in the illustrative scenario of the $7,000,000,000 to $10,000,000,000 when you say over existing accruals, just want to clarify which existing accruals are you referring to? Is that litigation reserves or the rep and warranty
reserve? It's both the rep and warranty reserves and the associated litigation reserves.
Okay. So there's some contemplation of private label losses in both of those?
We've really frankly, it's the entire portfolio. So if you look back on slide
38,
which shows the original principal balance I talked about earlier of 963 $1,000,000,000 how much remains unpaid and what we do as potentially at risk. Our estimate GSEs GSEs already. But it's primarily it's monoline, it's private label, it's whole loan sales, it's all of that.
Okay. And where do the litigation reserves stand at year end?
John, we don't disclose the amount of our litigation reserves, the balances. We're talking about provisions, but we're not going to share that.
Okay. In terms of the SCAP test, do you know if this upper range illustration that you give today is what the federal accept as the adverse scenario outcome for that component of the
SCAP? John, certainly as one of the 19 banks that participated in the process, we provided a whole array of information to our regulator. But I think that's viewed as supervisory information. I don't think we could really comment.
Okay. Could you give any more color on what kind of magnitude of a drop in NII we might look for in the first half of twenty eleven? Or how much the hedge results helped in the Q4?
Yes. I think I mentioned the hedge results in the Q4 was a benefit of about $250,000,000 We love to continue that, but anticipating that we don't have that level of help in the Q1 of 2011 is probably a good guess.
That all of that goes away?
I think certainly a substantial part of
Okay. And then also just on the expense that you talked about, what adjustments should we make to the 4th quarter expense level to get to a sense of what the run rate is going into 2011? Could you help us with that? Just kind of think about the expense run rate?
I think John, I'd give a perspective Chuck to give you perspective. I think there's as you think about expense run rate and if you look at Page 25, you can sort of see you've got sort of 2 broad concepts. One is sort of the some of the one time expenses, the extra litigation, higher level litigation in the quarter, things like that, year end clean up professional fees and things that typically happen in the Q4. So that's sort of one thing that you can neutralize. You can look over the quarters and smooth some of that out and think about that as a runway question.
But the second is that the retention of personnel to work on the bad credit in the mortgage and that's what I tried to shape for a little bit. So during 2010, we had 13,000 people dedicated that we otherwise wouldn't need, but they're working to help dedicate the task of helping on the mortgage cleanup. That's going to be elevated all through 11. It will take us 11 in the part probably halfway through 12 before we sort of really get on a downward side of being able to get through all that work. And so those costs will stay in.
So I think Chuck said overall, we don't think expenses are going to stay at these levels. And if they go up on comp or something like that, that's going to be revenue related, which would be good news. But the core expense run rate is sort of there. And then as we work through this year and we'll be able to start to take it out as the mortgage activity in particular and other activities like that start to subside.
And John, remember there's a spike in the Q1 from FAS 123, which is when we pay equity compensation and some of that has to get recognized upfront because of some of
effects.
Okay. And last thing here, just back on the private label. Can you give an update on the status of discussions with the group that sent a letter in October, the PIMCO BlackRock Group? Is there a late January deadline for resolving that? And will we know when that's
over? There's no real news on the discussions. And there was an extension that was filed that led to the end of January. And we continue to work to talk to people, but we haven't changed our posture. We're not doing anything.
It's not going be in our shareholders' best interest. But we always want to talk to everybody in the world to make sure we understand where they stand.
Thank you.
Thanks, John.
We'll go next to the site of Matt O'Connor with Deutsche Bank. Your line is open.
Hi, guys. Good morning, Matt.
If I could circle back on the FICC revenues and I guess just bigger picture as we think about implementing all the changes for Basel III, what do you think the longer term impact is versus a more normal run rate? And maybe I'll just throw out there maybe annual level of FICC revenues are in the $10,000,000,000 to $12,000,000,000 range. Basel III would reduce that by 10%, 20% or you think you can offset over time? Just any thoughts on what the near and longer term impact could be?
I would say that we have been taking out we would take about 3 in bulk and other things. We've been downsizing our we took our prop business down and it's actually almost done and we've done early this year. But overall, the rest of the impact is relatively modest. And I would not put the Q4 into Basel III, those types of things. I think it just was a tougher quarter in terms of client activity, a tougher quarter in terms of market.
And it's not any one area. It was across the board, we just had lower revenues and in the latter part December nothing happened. So I wouldn't be focused on that. I think we're still comfortable with the average type of run rates we talked about, dollars 4,500,000,000 $5,000,000,000 $1,000,000,000 in total revenue in the sales trading platform that you can see if you look back. And we continue to size the business appropriately that way.
Tom has made the changes there. So I wouldn't say that Basel III is going to affect this. We're going to run it tightly. We're going to run the balance sheet tightly. It's more because of the economics involved than anything else.
In this quarter, I'd really chalk it up to sort of a malaise and a tougher market quarter.
Okay. And sorry, the 4.5
$1,000,000,000 to $5,000,000,000 of sales and trading, that's a quarterly level including both equities and fixed income?
Yes. That's total revenue in there in the capital market activity. It's going to bounce around. I mean, just look at the last four quarters, you can see a wide range. And so, we I think the ins and outs are a little more pronounced this year, especially because the long quarter was so high.
But I think if you look at it over time, if we don't get that run rate, we're going to have to resize the business because that's what's needed to produce the right returns.
Okay. That's helpful. And then just separately, I guess on the whole broader foreclosure issue for the issue for the industry, I'm personally surprised that it's kind of lasted this long. It feels like there's a lot of incentive for everyone to figure out some sort of settlement and move on. I know when you're in discussions, it's hard to just talk about these things publicly, but any color you can give on maybe timing of putting this issue behind the industry or maybe what needs to happen to get people at the table to hammer out an agreement
here? I think it's hard to reflect on that. There's a lot of groups involved and you've seen them talk in the press about what's going on and we won't do that. What I will tell you though is we did a thorough review. We identified what we need to do to make sure that we could erase from anybody's memory that there's any lack of precision integrity, discipline in the process.
And we've been we've restarted the process based on that. And we've restarted the process based on that. And we've dedicated lots of people, lots of work to make sure that there'll be no question about it. Resolving the types of things you're talking about will take some time. But the reality is the key is that we've actually done the work, completed it, brought in the outside review, brought in the inside review and are back working on it and working through this very difficult situation for the borrowers.
So I'd separate sort of the regulatory and other issues away from is the activity starting to progress? And the answer to that is yes.
And then just lastly
on the debit card, you're starting to have more banks come out publicly and say there's offsets or I think one bank said they think they can offset at 50%, one bank said 100%, one bank is claiming it's illegal. Just any updated thoughts you have on that in terms of how this plays out when all is said and done?
I think what we have said in the past over time, we have to mitigate all of it because we have to get the returns of the business back to what we need. But in the short term, the transition and as Chuck said in his comments will be slower just because you lose the revenue instantaneously and it takes a while. Now the key thing that we've done and you've seen in the press report is that we have restructured our account structure. And during the course of 2011 that is out in pilot state, it will ultimately roll through the entire customer base over the next 3, 4 quarters. And that allows us to, we think in the right way, recover the revenue that were then in 12 13 as that account structure goes through.
And so I think that's our that'd be our statement sort of that'd be our clarity on sort of timing. 11, it's a transition year. 12, we start to recover and it'll take a little time. And as interest rates rise, we have to remember that interest rates are a multitude of effect on that business, the low interest rate environment, value deposits than the fee side over time. So, as interest rate rise, we're going to have to have disciplined pricing in our structure.
And the team has done that to gather back some of it there too. Yes, particularly with our scale.
Okay. All right. Thank you very much.
Thank you.
We'll go next to the site of Ned Najarian with ISI Group. Your line is open.
Good morning, guys. Good morning, Ed. Good morning. My first question has to do with credit. I guess, we saw obviously improvement in the charge off ratio and in NPAs, but 90 day delinquencies were flat and we saw only pretty modest improvement in 30 plus day delinquencies.
So I'm wondering, if you have any comments sort of on your outlook for the pace of credit quality improvement going forward. Looking at the delinquency trends, it seems like it's likely to slow down relative to prior quarters. Any comments there?
So I think the pace has slowed in prior quarters only because in a grand scheme we've gone from I think $12,000,000,000 ish at the high point down to $6,000,000 in pure charge offs now. But we continue to see the delinquencies approved. The card business. And especially if you look at the core portfolios that we've got the run off portfolios and the non run off portfolios in some of these businesses even you look at it, it's very solid. So we're encouraged on the consumer side and what we've seen in early stage delinquencies in all the portfolios.
But the pace of improvement will flow only because we quite honestly had a long way to come from. And then if you looked in the commercial, you can look at our criticized assets, you're seeing them start to come down. And not only we see charge offs and that bodes well for future credit costs obviously. So it's slower, but it's relentless and it will continue to improve. And if you look at the what I was saying earlier, if you look at the vintages of the underwriting we did in 2008, especially like halfway through 2018 and out.
If you we had a prediction for unemployment, things like that in card and mortgage and stuff, it has been worse than that as of things like that in card and mortgage and stuff, it has been worse than that as nobody would have predicted it right at the time. But our vendor is actually performing better than they would have predicted in a worse economic scenario. And so our confidence is as we move each quarter this will continue to improve, but the pace will be slower just
because we had a long way to come from.
Okay. Thanks for that. And then secondarily, just going back to Page 10 with all the one timers, we add that all back to get sort of a $0.17 core EPS level this quarter excluding all those one timers that annualizes to $0.68 I guess the question would be given sort of that annualized core earnings run rate and knowing that we've got some revenue headwinds on the way, you talked about lower NII and we know Durbin is on the way. Is there any thought to launching somewhat of a more broad based efficiency improvement initiative over at least some point over the next 12 months? I know you talked about the idea that credit related operating costs and those 13,000 people would come out over time.
But is there a desire to try to launch something more substantial in terms of efficiency enhancement? Or would you say there's just too much going on within the company right now to get into some kind of a plan like that?
Let me a couple of things. One is, so in all our businesses we continue to manage that and reposition. So if you take our Global Banking and Markets business, the headcount for the year is sort of flattish, but we have 100 to 1000 more people working outside United States and reduced inside United States and in Europe to fund that Asia growing Latin America places. So we continue to reposition people even within the context of headcount being very flat. I'd say that it's absolutely something we will continue to focus on as expenses.
We'll continue to focus on it across the company broadly. And as we shape the company more normally, I gave you the one group in mortgage, but it's actually a broader group. That's just the additional people we put on in 10.
And then
you've got mortgage, you've got in card business, we continue to get the dividend as you see the delinquencies and costs come down And then you've got in even in the commercial area, as we continue to collect and bring criticized assets down. And then overall, we've got bring the overhead in this company down and the team we're working on that and we'll continue to embed that as we go through the next several quarters. You are exactly right. We are still right now, we have to be careful to make sure that we don't have any backwards movement in terms of some of the improvements in risk and controls and getting the mortgage foreclosure. So we're trying to balance that.
But we know how to take out costs. We've done it many times before and we'll continue to do that. And so what we really ought to do is get strong operating leverage as revenues do improve and there's still some headwinds we agree with you, but you got trading revenue this quarter is down and it will come back up. And if it doesn't, we'll adjust that size of that platform to make up for it. But as revenues improve, the key is to continue to get the expenses to sort of stay in the flattish category even as revenues are coming back up and that's what teams are working on.
In some place like the retail area, and Joe in the consumer branch system, we continue to downsize. I think we're down 250 branches. We'll continue to work on that as customer change takes place. So this is all over the area. But we are doing more broad based work and we'll continue to do that.
But there is a balance here of just making sure that we keep this keep the stability and the strength moving forward in the reality of where we are in a cycle and some of these collection and other issues.
So maybe a more formal plan is more like a 2012 event than a 2011 event?
Yes, I would maybe not clear out there, but we have a form plan every month when we do our business reviews. So it's not as mysterious as letting it happen, but we drive
it. Okay. And then finally, you've alluded a couple of times on this well, once on this call and then in a prior call to 2011. And I guess, I'm wondering, A, like some other banks are willing to, are you willing to disclose what you think your Basel III based Tier I common ratio is, would be interested in that. And given that and your discussions with the regulators, what gives you confidence that you can raise the dividend this year?
On Abasil, what we have said is as each of the rules becomes effective at the end of this year, 2 in market based risk rules and the end of next year or 3. At the day it becomes effective with no implementation timeframe, we would have 8 common under the current rules. And so as you think about what we submit in these plans, you're submitting the standards of the current Basel I and the levels you have are in the things and we exceed those. And then as we implement, we exceed it. And so we have confidence that what we've done with the balance sheet and how we manage the balance sheet has produced a lot of capital improvement for the year.
And you can see on the slide earlier, I mentioned in terms of Tier 1 improvement and things like that. So we put in the plans. We'll let the regulators are looking at them, as you know, with everybody else. We did not contemplate something early this year. It's in the back half of the year.
So it'd be very modest. But the idea is that it is consistent with the balance sheet, the operating earnings, the work we've done this year to build Tier 1 common and the Tier 1 common ratio from 8.5 8.6 this quarter, we feel confident we got it. Now we still got to get through the approval. And this was a pretty sizable. And embedded in all of that is all the operating statistics and adverse scenarios and everything you've heard about.
So we feel confident that we've asked for it. We'll see what happens with the regulators. But it's because we've done a lot of hard work in 2010, selling businesses, reposition the franchise to get us there. And just can you tell me
one more time, the 8% by the end of 2011, what was that again?
The idea what we said is that as each of the rules becomes effective, remember there's more than just Basel III, there's Basel II, we go on the Basel II rules, the market based risk rules and then the Basel III. As each of them becomes effective, our Tier 1 common ratio under the rules as they become effective with no phase in period would be above 800 basis points.
Oh, I see. Okay. Thank you. That's helpful.
And we'll go next to the site of Chris Kotowski with Oppenheimer. Your line is open.
Yes. Hi. I'm trying to navigate between Page 20 and Page 38. And when you put a number like $7,000,000,000 to $10,000,000,000 out there, it's just kind of natural to ask how did you come up with that. And so I'm wondering is the concept behind it that your risk is primarily in the bucket that's less than 13 payments?
And I mean, the 7 to 10 would be like about a quarter to a third of that amount there. Is that the guiding operating assumption behind the 7% to 10%?
Chris, unfortunately, the math is a bit more complex than that. So I don't know if able to answer. Certainly, it would be reasonable to think that the fewer payments that get made before a loan goes into default would suggest a higher level of risk. I'd also refer you to Page 21 because as we did our array of different scenarios and looked at a set of assumptions, and again, these were guesses because we don't have any experience. But if you look at some of significant differences between GSE and private label reps warranty rights, we tried to make different judgments around some of the criteria that you see on Page 21 to try to get a sense of what because those are important leverage points, materiality, causation, disclosures, the rights to actually make claim presentations and the like.
These are all pretty significant hurdles in our view, and you got to make some judgments about whether or not private label investors can aggregate and actually achieve and overcome those hurdles. And then you have to think about performance and the characteristics of the portfolio on Page 38.
Okay. And then going back to Page 18, if you look at the new claim trends in the lower left, I noticed that there is an uptick in the pre-five claims and then the-five claims and the two thousand and six claims. And so it's early kind of pre crisis vintages that seem to be picking up. And is that well, A, is that a trend? And B, is that driven by the private label and monoline claims,
I assume?
Yes. It's the private label claims that we have mentioned here. I'm not sure 1 quarter drives a trend, Chris. I think you need to appreciate and certainly we've seen this with both the monoline and the GSEs is that they don't follow they don't tend to follow a chronological order. So you and I might think, first, they'll do pre-two thousand and five, then they do 2,005, then 2,006, and 2,007.
That hasn't been our experience. We've had new claim submissions kind of all over the map. And so, it's certainly something we're watching, but it's
this is certainly impacted in the quarter by the
Yes, Chris. And then in the commentary too, the 1.9, that gives you some color as well.
Okay. And then just a little net or a question. I noticed in the supplement Page 25, mortgage production revenues up from $70,000,000,000 to $81,000,000 but production income was down. Is there a story behind that?
Yes. We book Chris, we book it when we lock the loan and the production is driven by the funding and that's just the difference. So production was up, but the actual lock loans were down.
And margins as well as rates came up and we thought about how to be competitive. And frankly, Chris, we're not driving for market share in this business. We're driving for solid risk management and good profitable performance.
Thank you.
Thanks, Chris.
We'll go next to the site of Glenn Schorr from Nomura. Your line is open.
Thanks very much. So I hear you on the production revenue being booked when you locked the loan. Can you give us an idea of how much of the pipeline you got through between late third quarter and early Q4? I guess, the industry in general is down about 40% looking for Q1, is that in the ballpark of right?
We'll get back with you, Glenn. I don't we don't have the number.
Okay. No worries. And then I noticed that there's higher resi mortgages held on balance sheet. Is that a trend we expect to continue? Is that just a temporary securitization marks aren't great, a little balance sheet growth, a little room as discretionary
portfolio. So, I'd in our discretionary portfolio. So, I not necessarily think of view that as a trend. I mean, we do look at our liquidity and rates and the like.
And if you look at 2014 just in terms of the core activity, Glenn, that $18,000,000,000 which includes the resi, which is on the balance sheet, would be a $3,400,000,000 net increase if you just took the residential out of the whole discussion in that corner. So, it's the rest of the core portfolio of consumers stabilized as we said and continues to move forward. And residential is more discretionary as to what we do on a given day holding it, except in our private banking and other areas where we hold those clients' loans because and we've always
done. Okay. That makes sense. One more nitty gritty on the average balance sheet on 9 in the supplement. The yield on debt securities, first of all, the book went up and the yield went up a lot, all things considered given the environment is up 36 basis points.
I'm just curious, is that just taking a little duration risk as you had a spike up in the 10 year?
We can get back to you, but we're not taking any different duration risks than we've been all year. So I think it's probably just we'll get back to you with the exact answer.
Okay. And I'm not sure if you've ever disclosed it, but have you ever disclosed the average duration on the securities portfolio?
I think we gave you some pretty broad description in the 10 ks, Glenn, but I think from
quarter to quarter we don't. Okay. Our strategy during the year is to keep it relatively it's 4, 4.5 years?
Yes, I
think it's 4 to 5 years.
Okay. Appreciate that. And last one is just a follow-up on your comments on the repricing efforts across the deposit franchise. You'd mentioned a couple of states upfront and then over the next 3 to 4 quarters roll throughout the rest of the platform. What things I mean this might be a simple question, but what things will you monitor to know if it's working or is this charging ahead and then plan being put in place or do you watch for leakage and things like that?
We monitor the customer reactions to the price points and the various things. I would say that the philosophy of the account structure, the 5 or 6 core accounts, I don't think will change. It will be what the account balance or the price point on particular elements. So as you think about it, think about it is a relentless push to get through and redo everything. The question whether you pay $9 a month if you want paper statements or $8 a month is the kind of thing we'll test in that.
So it's more of the price points around the structure and the acceptance. Now remember one of those accounts in the new structure is the Z account, which is 35% to 40% of the sales today has been in the market fully in all the states now for 6 months or 8 months and is very well received. And especially among the obvious people you'd point to, Lending of the younger people who are particularly happy to use the seller online platform we have, Chad, the text, the whole 9 yards.
Great. I appreciate all the answers. Thanks. Thanks, Glenn.
We'll go next to the site of Mike Mayo with CLSA. Your line is open. Good morning.
Good morning, Mike.
The possible upper range of $7,000,000,000 to 10 $1,000,000,000 is that before or after tax?
Before.
So after tax would be maybe $0.45 to $0.65 hit to book value?
Well, our statutory tax rate including state taxes is say 37%.
Okay. No, what I was referring that's helpful. But so if we look about it on a book value basis, I mean this might hurt, give 10,000,000,000 shares, just take 37% of the $7,000,000,000 to $10,000,000,000 divided by $10,000,000,000 shares would be a hit of around $0.45 to $0.65 to book value to clean up the issue. I just want to make sure I understand what you're saying.
Yes. I think the thing to think about, Glenn, again, we think this is a possible range. We're trying to respond to some investor concerns about given the broad range of estimates that are out there. We tried to bring some color to that. Again, we think this happens over a number of years in terms of the resolution of this.
But that's I mean, I'm not going to dispute your math given
that it's
a pretax number. It's after our accruals. We think it's going to occur over a number of years. We don't have a view as to where we will fall in that range. As we said, it's probably more than 0.
That's why we expect to have some level of future provisions. We'll have to see. And we just don't have enough experience in the portfolio to try to estimate any more precisely than that.
Yes. It's Mike, by the way. Can you confirm that this is tax deductible?
Excuse me?
Are these cost tax deductible?
Yes.
Okay. And then if you
could elaborate on the statement, the fewer payments made before default, the higher level of risk. So in other words, you said 58% of the non GSE loans that defaulted made at least 25 payments. I just would like to understand the significance of that a little
more. Oliver, the only comment is, and I mean this is a very rough assessment, is that you would imagine to the extent that there are fewer and fewer payments between origination and default might suggest that those might be areas of particular risk when it comes to reps and warranties. I wouldn't read anything more into the statement than that, Mike.
And then sticking to the same topic, Bank of New York on their conference call, they said that this is likely to be resolved in the next few weeks, either it's settled, there's increased oversight over you, I suppose, or that an extreme scenario, the servicer would be replaced. Do you agree with those scenarios and what's the timeline?
We have no idea what they said.
Okay. And then separate topic, compensation was up 5% linked quarter and you didn't highlight any one time items on Page 10. Is there anything unusual there, seasonal? It seems like a big comp quarter given the revenues.
Well, there was remember,
there was 4th quarter severance and some benefits adjustments across the whole associate population just from an accounting stand standpoint. In terms of the comp to revenue statistic that for the investment banks that people like to focus on, we ended the year kind of in the mid-30s, I think perhaps 37%.
And then also the GWIM revenues were up quarter to quarter and that drives it too. Yes.
And of course, remember with GWIM, those are our financial advisors. They operate and get paid on a grid basis. And so as they have a more and more successful year during the year, they move to different measures in that grid that reward them for volume.
And then last question. What was the actual loan utilization numbers Q3 to Q4? And how much did the increase in loan syndications linked quarter contribute to your loan growth? And just a little more color behind your comment, Brian, that you thought things were kind of picking up some.
In the middle I gave you the number for the middle market book, Mike, and it was around 31% in a stable Q3 and Q4. That's not in the large corporate book, you had the things that you could hold alone and sell it down and things like that. The middle market book just doesn't have anything, because that's this is loans to some size of the company from $2,000,000 in revenues up to $1,000,000,000 So there is more core activity. But if you separate all that out, what we're really seeing is for the in the November, October, November, December timeframe versus the last 8 quarters, you were starting to see activity start to move forward and get a grow a little bit here and there. And we have real estate coming out some of these books and stuff.
But so the activity is 31% stable. The activity in the core middle market, I don't think it's affected by that. That was more in our large corporate book and it would be in the that would be in the GCIB segment under GBAM. And so this is sort of this is just core activity, Mike. And it's not and believe me, it's not robust and growing at X percentage, it's stable and moving forward a little bit, which is better than it has been in a lot.
All right. Thank you.
Thank you.
And next question is from the side of Meredith Whitney from Meredith Whitney Advisory Group. Your line is open.
Good morning. If you'd indulge me in a few questions please. My first is to Brian. As there is so much movement and so much really structural change in so many of your businesses, could you talk about your budgeting of talent and headcount? So over the last couple of years, you've moved people into the collection efforts and the foreclosure restructuring modification efforts as credit quality starts to improve?
Where do you move those people as it looks like U. S. FICC is under a structural change and so much of European FICC is under structural change, where do you move those people? Can you talk about that on a 1, 2, 3 year outlook please?
So if you look, taking the basic businesses we operate outside the United States first, which would be the Global Wealth Management Business and the Global Corporate Investment Banking and the Global Markets Business. In Asia, Latin America and in Africa and EMEA. We have grown headcount by 1,000 and overall headcount is flat in our GCIB and our G band, the Global Banking Markets space to give you a sense. So I'd expect those trends to continue. So we're always adding new talent out of the business schools and we hired a robust class of business schools and undergraduates that we always do, Meredith.
But what we're doing is shifting the talent to where the bigger growth opportunity is, while still maintaining our leading presence in United States in a lot of those categories. So that trend, I think, would continue. And then the context that Tom has in the Q3, late Q4, went through around a series of headcount reductions overall and then we're adding people back. And if you think about our risk management organization, for example, we've had to also grow that outside the United States to help make sure we monitor the risk and manage that business well. When you go into GWIM, the answer is pretty clear that we want to grow our financial advisor account and our wealth management banker account and our private banker account and we've done that by 500 to 600 people this year.
And with that, you should expect that to continue. And I honestly would say that that growth rate this year was somewhat disappointing to me. I mean, not that from expense budget, but from a growth of the franchise, we'd expect that number to be stronger. And we've seen attrition is an all time low and our recruiting efforts are picking up, but we need to grow that because our biggest opportunity inside the United States is around the wealth management space, even though we got $4,300,000,000 in revenues and next nearest competitor might be 1,000,000,000 dollars below that. If you look at commercial banking, stable.
You look at the consumer business generally. We continue to manage down the headcount in the card business as the credit's gotten better. In the deposits business, I'd expect it to continue to come down. Going to the question earlier about sort of structural change. And then at the mortgage, you're running 55,000 people.
And I think the business 3 years out, assume this is all behind us type of thing is a 30,000, 35000 person business and maybe in a very robust production higher than that, but it's a different size. And it's just going to take us time to get through it. And I think that covered each of the
business. Okay. Great. Thank you. And then just a couple of cleanup questions.
On the putback risk which you've well detailed, What about the underwriter risk? So we have the GSE risk, we have the private label risk, the monoline risk. What about the underwriter risk? Can you comment on that and how you would reserve towards that?
Yes. We really don't see that as a significant risk Meredith.
Okay. And then two more clarifications. On the moving from a 4 deposit base system to a 1 deposit base system, what's the timetable there? And then I assume you need to run redundant systems, so it's more expensive to become ultimately less expensive?
That would be the goal is to go with more expense and less expensive. But also, we have products that frankly aren't available in parts of our franchise just because of all things have been going on, we're now the point we can actually do this. The planning is it's part of the expenses in the latter part of the year and deposits business has been to start to work. It takes it's an 18 month process. So it would occur in 2011 and then in 2012.
But there's absolutely an expense and a simplification value to this. But the real value is one of the 4 systems is a system we operate in a lot of franchises and it works. And that was that's been going on for about 2 or 3 years. But the real value of all this is to actually give 100% of our customers, 100% of our product capabilities with absolute flow. And that simplifies both our associates' life, our customers' life and also really unifies our franchise.
So, there's both the cost takeout value, but there's really an enhanced value in terms of each time we develop a consumer change, we have to do it 4 times.
Okay. Got it. And the question is, Chuck, you went through a comment on your reserves and you mentioned that you adjusted your home price assumptions. From what to what please?
I think we'll have to get back to you on that one, Meredith. It was a kind of a year end assessment as it related to certain of our real estate portfolios.
But we I mean your overall on right assumption.
Yes. The 03, 03 adjustments and those types of adjustments are based on the same statistics you look at. We objectively tie them to Kay Schiller and other metrics and then adjust. And as those came out a little less than was expected in the last couple of months, we've adjusted them down. So it's not some internal forecast.
These are adjusting based on the outside forecast.
I mean, we can get you the numbers.
I got them. All right. Thanks. See you soon.
Thanks, Meredith. One more question.
We'll take our final question from
the site of David Hilder from Susquehanna. Your line is open.
Good morning. Thanks very much. Just a question. You mentioned that there was some litigation expense in the deposit business. And I was just kind of wondering what would give rise to that in that business?
Yes. But it's just the usual cases and stuff like that. So I think there's nothing in particular that we talk about externally, but we have a series of cases around that everybody has around activities in there and this quarter we approved for part of it.
Okay. Thanks very much. Thank you. Thanks everyone.
Thank you.
And this