Good day, everyone, and welcome to Bank of America's 3rd Quarter Earnings Announcement Conference Call. At this time, all participants are in a listen only mode. Later, you will have the opportunity to ask questions during the question and answer session. Please note this call may be recorded and I will be standing by if you should need any assistance. It is now my pleasure to hand the call over to Kevin Stitt.
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ahead. 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, please see our press release and SEC documents.
And also joining us this morning, as he did last quarter, will be Neil Coddy, our Chief Accounting Officer. With that, let me turn it over to Brian.
Good morning, everyone. Thank you for joining. Today, we're going to talk about the 3rd quarter earnings results. And as part of the documents as you see today are based on the conversations that we've had with many of you over the last few months and especially obviously the mortgage discussions occurred over the last few weeks. So we try to put some data in the package that will help frame some of those issues and we'll go through that.
As we told you many times, we committed that we would provide you additional data on our runoff portfolios, which we've done. Chuck will take you through some data on the reps and warnings, and I'll take you through some of the foreclosure discussion. We've also included our preliminary Basel III view. In addition, we've included information on what we're doing in the consumer franchise, including the outline of how we're trying to mitigate the impacts of various regulatory changes. We know these are key issues that are on your mind and on our mind as shareholders and what our franchise faces.
So let's dive into the into the document. On Page 4, you can see the headlines for the quarter. Excluding goodwill, the goodwill write off, which Chuck will cover later, earnings were $3,100,000,000 and that's consistent with the past few quarters, as the continued credit improvement has offset some of the impacts of lower rates, higher rep and warranty costs and other matters. But as we look across the business units, just to frame how I think we did this quarter, let me hit them from the high level. I think Tom Montag and his team in Global Capital Markets had a nice recovery as the sales and trading revenue there increased to $4,500,000,000 Once again, for the Q2 out of the last 3, we made money every trading day.
We continue to hold the risk of our relatively flat and continue to drive that business off the core customer franchise it represents. When we move into Tom's corporate banking side and David Darnell's commercial banking side, the good news this quarter is we've seen stabilization in our C and I loan book. We've had good investment banking results and good treasury management results. In our commercial customer side, the credit quality continues to improve across the board. Net non performing assets and all the credit statistics have decreased.
The charge offs are better. And even in CRE, we've seen the charge offs fall pretty over the last several quarters. Sally Krawcheck and the Global Wealth Investment Management team had another solid quarter. This business is going through the transition. In earnest, we sold First Republic this quarter.
They converted millions of customer accounts and billions of customer balances. But it's all during the last few quarters. We've had continuous growth in financial advisors and wealth managers and private bankers through the period. Capture, stable loan balances and improving net customer flows over the last few quarters. Let me get to our consumer businesses.
Our card business continues to recover. Its net charge offs continue to go down as Joe and the team have worked hard to get that portfolio in shape. Interesting enough, this is the Q1 in many quarters where the actual yield on the portfolio exceeds the charge off and that's a good sign as we move back to core profitability. Joe and the team also sold more cards in the United States this quarter than last quarter and we continue to see a recovery in our origination capabilities. As we move to Joe's deposit side, we continue to make good customer progress there.
Our customer scores are up, our account closures are down. During the quarter, Joe and the team implemented some of the mitigation plans, the e account, which, as you know, it basically charges fees if customers don't use our lowest cost delivery mechanisms an ATM emergency cash, which allows a customer to make the choice to withdraw cash in an emergency and pay an overdraft fee and then other items, including new account structure, which I'll talk about later. These will ultimately mitigate the cost of regulatory reform over time. In the mortgage area, it's interesting enough there's been a lot of discussion about this business and I'm sure we'll talk a lot about today. But we'll continue to make progress.
The operating loss continues to move forward and Barbara and her team continue to make progress on driving that business back to profitability. Their origination volumes have been strong in that business and frankly will only get stronger going forward as a market share and a percent of the market because as we went through integration, we had to hold back volume because of our need to get the integration done. We've seen the delinquencies and charge offs in the mortgage products stabilize also. We're going to provide you a lot of data later in the presentation to help you assess the future cost from reps and warranties. But the one thing that we want to be clear is that when we look at this rep and warranty claims and the claims by the various investors, we're not going to put we're not going to just put this behind us to make us feel good.
We're protecting your money, we're protecting the shareholders' money, and we're going to make sure that we'll pay when due, but not just do a settlement to move that matter behind us. The thing I want to be clear about is how we repositioning the company. We started the year and said we'd fortress balance sheet from a company that had a balance sheet that needed repair. We've increased capital levels. We increased reserve coverage.
We shed non core activities. This quarter, we continued to make good progress. Capital ratios were up, RWA was down. We have developed clarity on how we're going to manage through the Basel core changes. In addition, due to the fact that the capital levels in our industry are going to be higher, we have an intense focus on tangible book value per share growth and we continue to grow that this quarter.
So if you flip to page 5, you can see how that how those figures roll out. From the beginning of the year, our RWA is down $87,000,000,000 and we've taken a snapshot from January 1st year because of the impact of 166, 167 we wanted to show you. The long term debt, which is something we don't talk a lot about, is down $44,000,000,000 this year. We inherited a lot of high cost debt in the prior transactions that we took over the company and we're restructuring that. Mark Linds and the team under truck have done a good job.
We think over the next several years, we can take that down by another $150,000,000,000 to $200,000,000,000 which helps our margin. You can see that the dollar amounts of tangible common, Tier 1 common and the ratios that result from that common are all going to increase during the year due to earnings and importantly by our willingness and desire to streamline this franchise and remove capital from non core and capital intensive activities. The asset quality improvements you can see are strong. And then you can see at the bottom of the are clear with you that when we thought from a pure risk basis that this company should run on 8.5% to 9% Tier 1 common ratio under the current Basel Accord and a 5.5% to 6% tangible common ratio, and we thought we'd get there by year end 2010. We've, in fact, hit those targets a quarter earlier and we continue to work on them.
This discipline that got us there on these targets is what we're going to depend on to manage through the environment of Basel II, Basel III, the Fed market rules, Dodd Frank and the provisions thereof. What we've done gives us confidence that there's a lot of optimization left in this balance sheet. Simply put, there's a lot of work to do, but there's a lot of areas to do it upon. On slide 7, we want to make it clear how we view the current Basel III guidelines and the preliminary impacts we'll have. You have to start from the beginning of the ratios and bringing down risk weighted assets.
We do those efforts consistent with the customer centric focus we've had to sell those low rated assets in the non core equity stakes. Tier 1 common has reached 8.5% at the end of this quarter with $1,500,000,000,000 in RWA. By 2019, as you well know, we have to have a Tier 1 comp ratio of 7%. And also still to be decided are the couple of big unanswered questions. 1st, what incremental capital we would need were systemically important.
And second, what the rights of is estimated to remain above 8%, while we implement Basel II, the market risk rules in 2011 and Basel III in 2012. The way we calculated this assumes no phase in period and in fact there is going to be 1. So just to be clear on this, we simply took all the rules that are going to be applied in 2011, took all the rules that are going to be applied in 2012, assumed they're effective on the date they became and there's no phase in for any of the provisions. What that will result in is our reported numbers during those times will actually be higher than the 8% we're telling you because that allows for the phase in. The key of about $600,000,000,000 in risk weighted assets.
The mitigation we have will reduce that significantly by the end of 2012. And these activities are not core to this franchise. We've laid out the activities in some of the bullet points on the page. They include running down loan our discretionary portfolio and other activities to reduce the positions that are subject to high capital charges, including the benefits from counterparty risk and CV exposure as the derivatives go through exchanges. Now, let me give an example of a transaction that's been written about there.
In the Q2, if you remember, we took a $700,000,000 hit to a re REMIC transaction because it would leave under the Basel 3 rules as fully implemented nearly $100,000,000,000 of risk weighted assets. That was a great trade in our sense and that put the issue behind us, increased the credit quality portfolio and obviously took a lot of RWA, future RWA risk away. Post mitigation, after we do all this work, we estimate that the risk weighted assets would be up about 25% from the $1,500,000,000,000 we had at the end of September. When you go to the numerator side of III, assuming no phase in, you're going to have a capital deduction of $12,000,000,000 and we said you can say here is large related to DTA. Now the mitigation we expect will be completed by year end 2012.
There are aspects of what we're doing that will actually occur after that. And we are very comfortable that we'll accomplish mitigation by the year end 2012, and there's going to be future opportunities to continue to manage this during periods through 2019. So with that, it gives us the confidence that given everything we know today and how we're operating this business that we won't have to raise additional capital through common stock issuance to meet the new capital guidelines. With that review of Basel III, I wanted to just tick quickly on Slide 8. You can see we've included some of the highlights from the customer franchise.
We've included some of those in release. Suffice to say, the customer franchise continues to move forward and continues to make good progress across all the different businesses, as I stated earlier. I'm going to move to Page 9 now. And one of the questions come up in the customer discussion was what did we do on overdrafts and why do we do it? Some of you have raised with me whether we've had the balance right between the customers and shareholders, we're too customer friendly in terms of the decision we made.
So what we tried to do on Page 9 is to make it clear that we made a business decision last summer to repair a customer franchise that will start to leak customers badly. Overdrafts on debit cards were fact driving strong fee growth, but the customer result has profiled widely and as we saw in our franchise was hurting our franchise industry and long term would hurt our shareholders. The impact of the economy, the uses of debit cards and how people are using had an impact on customers that no one had envisioned. The trust scores in the industry were down. Bank of America's customer scores were down.
We'd opened in the year before we implemented this change, we'd opened 10,000,000 checking accounts and closed 10,000,000. The closures had been growing at an annual rate of 18%. The complaints around debit charges and customer complaints around deposits were at an all time high. And also we knew that Reg E was coming. So as we looked ahead, had to plan for that outcome.
But most importantly, we had 80,000 people that work in Joe's group that work with our customers every day to do a great job in our stores and our call centers. Those associates didn't feel that we were doing the right thing for the customer. The reality was 10% of our customers are paying 70% of the overdraft over $1,000 per customer per year and the model was breaking and needed to fix it. So what did our team do? You can see in the upper left hand box.
We didn't stop overdrafts overall. What we stopped was unintentional small debit overdraft charge, which is causing this churn, this customer's dissatisfaction and complaints. Where a customer has a chance and a choice, whether it's a check, a recurring draft, initiating an online payment, emergency ATM cash, they can make the choice, pay the fee and get the transaction completed. So what's happened since our actions? You can see in the upper right, the closure rates have dropped to 27%.
So from a rise it was 18% per year to now drop 27%. The customers' scores have improved, complaint volumes are down and deposits do not allow us to take out costs. Associates are supportive and that gives us the right to have associates to get deeper penetration other products. And for people who overdrafted, we're seeing interest behavior still early, but their account balances are higher and are managing their cash better. We've seen debit card turndowns about half the rate we thought they do, I.
E. When somebody swipes a card and can't complete the transaction. But as we move ahead, mitigating the impacts of the regulatory reform are the core challenge for Joe and the consumer team. They've rolled out our new e account. We are the low cost platform by everything we see out there, but they rolled out the e account in an effort to drive those costs even lower.
They've implemented additional fares fees which we think are fair. They're piling as we speak a rollout of the new account structure, which will drive through the franchise over the next 12 months. They've introduced the ATM emergency cash. An example of that is that 50% of the customers actually accept the fee, but they make the volitional choice to do. We're going to continue to monitor these initiatives, do more work on pricing, more work on costs, more work on new products.
So, in the end, returns and deposits will get back to the pre regulatory change levels. And if customers' choices change, we will revisit the decisions we made to make sure that the shareholders get the return we need in this business. Now, I want to turn to one other consumer issue that I think is important. On the closure area, as you know, we announced that we changed on slides 10 and 11, we changed closure area, as you know, we announced that we changed on slides 10 and 11, we changed and started to reinitiate the closures yesterday. Barbara and her team, our Barbara and DeSor and her team, it's going to take us 3 to 5 weeks to get through and actually get all the judicial states taken care of.
The teams have not found information which was inaccurate or would affect the plain facts of the foreclosure, I. E. The customer's delinquency, etcetera. But we continue to do all we can to avoid foreclosure. We continue to modify the loans wherever we can.
We ensure that we check and recheck those. If a person fits in those programs, see where they can fit into any modification programs before we start the foreclosure. Our checking is checked by other third parties. But that being said, we have to get through this difficult work on foreclosures to help the real estate markets heal. Just to give you some examples of what went on in the 2nd quarter.
When we foreclosed and the foreclosure sales that took place in the 2nd quarter, 30 3% of those properties are vacant, 80% had not made a payment for a year. The delinquency averaged 1.5 years to those customers and reflecting the very tough times that these consumers are going through, 50% with unemployment loss or income. So on the closures, the key thing is we continue to do a lot of work. We fixed the half a day of signing problem, and we'll be fixing it in very short order. We've begun to initiate the foreclosure process.
But the broader context is that we need to get through the foreclosures and restore the real estate business. This is not something this is something that's ahead of us, but it's not something we're not doing a lot of today. The Q2, we transferred 40,000 houses from homeowner A to homeowner B through short sales and foreclosures that were actual transfers to people to have the home and living in it. And so our job is to continue to help heal this process on behalf of the American consumer and on behalf of the real estate markets. With that, I'm going to turn it over to Chuck to take you through the numbers.
Thanks, Brian, and good morning, everyone. As you can see on Slide 12, excluding the goodwill impairment charge, we earned 0.27 dollars a share in the 3rd quarter. Revenue was down $2,500,000,000 on an FTE basis from the 2nd quarter, which included the positive impact from a handful of items. This quarter, we saw a nice rebound in capital markets, strong investment banking and higher mortgage banking revenue that were offset by lower net interest income, which was down as anticipated. Credit quality continued to improve with provision expense dropping $2,700,000,000
from the
2nd quarter, reflecting lower charge offs and a decrease in reserve levels. Our income tax expense was approximately 31% this quarter after excluding the goodwill impact, which doesn't get a tax benefit. On Slide we have identified some of the larger items having both positive and negative impacts on results for the quarter. As you already know, the goodwill impairment in Global Card Services was 10 $400,000,000 Loan loss reserves were reduced by $1,800,000,000 versus a reduction of $1,500,000,000 last quarter. We also recorded a 5 $92,000,000 reserve for exposure related to industry wide sales practices in the UK involving payment protection insurance claims on consumer loan products.
Litigation expense across all of our businesses this quarter was up $380,000,000 Income tax expense includes a charge of approximately $400,000,000 that we highlighted last quarter related to the revaluation of deferred tax assets as a result of the July enactment of a 1 percent reduction in the UK corporate tax rate. We also had $883,000,000 in security gains during the quarter. This compares to $37,000,000 in the 2nd quarter, which included a $711,000,000 loss on securities sold to reduce certain lower rated position that flowed through securities gains in the Q2. The credit mark on structured liabilities under the fair value option resulted in a negative mark of $190,000,000 compared to a positive mark of $1,200,000,000 in the 2nd quarter and is reported in other income. Impacting our tangible capital and total risk based capital, but not Tier 1 capital or earnings, was the increase in the carrying value of our CCB investment through OCI since we are within 12 months of the expiration on sales restrictions.
That investment was written up $9,800,000,000 or $6,200,000,000 after tax. As a result of the sale of First Republic, $17,000,000,000 of loans and $18,000,000,000 of deposits came off the balance sheet on July 1, reducing net interest income by approximately $230,000,000 in the 3rd quarter. Sale of Santander Mexico closed in late September and was carried on the Slide 14 and discuss the details around the goodwill charge of $10,400,000,000 Based upon our current interpretation of the Durbin Amendment, which has not changed from when we last spoke with in July, the interchange revenue reported in our Global Card Services segment going forward will be significantly impacted. The charge to goodwill slightly exceeds the estimated range we announced in July because we refined certain model assumptions. While it represents approximately 50% of the goodwill carried in the Card Services segment, it is 25 percent of book value, roughly $40,000,000,000 down to $30,000,000,000
It's important to note
that goodwill impairment testing is done on a segment basis, not on a company total basis. Because some mitigation activities will mostly benefit other business segments, mainly the Deposit segment, these activities were not included in determining the impairment in the card service' goodwill. On that point and echoing Brian's earlier comments, we continue to be diligent in how we are repositioning the consumer bank for future bank for future success given Durbin and other headwinds. We believe we can mitigate a good portion of the lost revenue across our retail businesses by offering new and attractive customer solutions based on our understanding of the customer and offering straightforward choices for how they want to do business with us. Over the next several months, we'll be piloting new products, pricing deposits and accounts differently, as well as incenting the customer to do more business with us.
Since Brian gave some color around our business FTE basis was $12,700,000,000 down $480,000,000 from the 2nd quarter. Similar to what we saw in the 2nd quarter, this trend was due to the impact of the low rate environment and lower loan levels further impacted by the sale of First Republic Bank. During the quarter, the net interest yield of 2.72 percent decreased 5 basis points due mainly to a shift in the mix of earnings assets as yielding assets were replaced with lower yielding assets. Our average balance sheet for the quarter was down $119,000,000,000 reflecting decreases in average loans and cash reserves held with effect. Cash declined due to a shift in liquidity mix from cash to liquid securities.
Consumer loans were down due to pay downs as well as charge offs and weak demand. However, commercial loan demand stabilized in the second half of the quarter. And as we said earlier, commercial loans less real estate ended the quarter up 1% from the prior quarter. These trends to continue over the next few quarters, but to diminish as loans and yields begin to stabilize. While we have little control over rates and customer demand, we plan to offset these impacts through reductions of long term debt.
Our mergers with Merrill Lynch and Countrywide resulted in a larger long term footprint than what we think is ideal. Consequently, over the next few years, we will allow long term debt levels to decline through maturities. We believe we can lower our long term debt footprint by 15% to 20% by the end of 20 11. On Slide 17, we show the trends in loan levels and yields as well as deposit level and rates paid for the past 3 quarters. Since the Q2, while consumer loan yields have dropped 5 basis points, we've been able to drop rates paid by 3 basis points.
Excluding First Republic, deposits are flat with the 2nd quarter, but up nicely from the Q1 driven by our wealth management customers and commercial customers. On Slide 18, we've listed the portfolios where we expect to experience further loan runoff. The sale of First Republic was effective July 1 and drove much of the decrease in levels from the 2nd quarter. Out of the total expected runoff of approximately $132,000,000,000 at the end of September, I don't think any of the areas should be of much of a surprise. Going forward, we'll continue to provide this information so that you can differentiate between real growth and expected loan runoff.
For instance, this quarter, excluding the run off portfolios and net charge offs, we had period end loan growth of approximately $9,000,000,000 which we detailed for you on Slide 19. As you can see on 2019, after adjusting for the run off portfolios and net charge offs, we had period end net loan growth in the quarter approximately $10,000,000,000 of consumer, dollars 4,000,000,000 of C and I and a decrease in commercial real estate of $5,000,000,000 Card revenue on Slide 20 has been somewhat flat over the past 3 quarters, reflecting the bulk of the impact from the charges were down from 2nd quarter levels to $2,200,000,000 Driving the decrease was the impact of Reg E, which became effective in July customers and August for existing customers. We're estimating overall service charges in the 4th quarter to be around $2,000,000,000 which we estimate fully reflects the impact of Raghu. Mortgage banking revenue on Slide 22 increased from the the in the quarter, MSR performance net of hedges was lower than the prior quarter. Production volume in the first mortgage was flat with the 2nd quarter at $72,000,000,000 but we experienced higher production margins.
The capitalization rate for the consumer mortgage MSR asset ended the quarter at 73 basis points versus 86 basis points in the 2nd quarter. Given the level of mortgage interest rates over the past few weeks, we would expect production levels to remain in line with the Q3. Turning to Slide 23, you can see the total reps and warranties expense in the quarter was $872,000,000 down from the $1,200,000,000 in the prior quarter. The reserve increased approximately $500,000,000 to $4,400,000,000 Our unresolved repurchase request totaled approximately $12,900,000,000 of which $6,800,000,000 or 53 percent are from the GSEs. There have been a number of questions raised about the Reston Warranties exposure that exists across the industry and specifically at Bank of America.
We've addressed this topic in the past in both our forms 10 ks and 10 Q and on our prior earnings calls. But given the level of discussion, we thought it made sense to try to lay out the components for you today. So first, let's consider the exposures we have with loans sold to the GSEs. Both legacy Bank of America and Legacy Countrywide have a
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maintain constructive relationships with the GSEs. Our experience with them continues to evolve, but generally, once the facts surrounding a particular loan are fully developed, we usually have been able to reach agreement on whether we, as the originator, are obligated to repurchase a loan or indemnify the GSE for the related loss. That is not to say that we never have disputes. We do. But generally, they are in those areas creating the most controversy in the most difficult vintages, such as reasonableness of stated income, occupancy and undisclosed liabilities.
To give you a feel for the experience that we have at the GSEs, let me offer a few statistics as you can see on Slide 24. From 2,004 through 2,008, Legacy Bank of America and $18,000,000,000 in repurchase claims associated with that population, $18,000,000,000 in repurchase claims associated with that population, representing only 1.5% of the total loans sold to them. We've been able to successfully resolve $11,400,000,000 of these claims to date with a net loss experience of approximately 22 percent or roughly $2,500,000,000 The level of repurchase claims from the GSEs has been elevated for the last few quarters, driving the outstanding repurchase claims up as it takes some time to work loans through the claims process. Our reserve for the GSA reps and warranties exposures at September 30 is computed to cover both the existing pipeline of claims and a projection of future claims we might receive on loans that have already defaulted and on future defaults predicted by our loss forecast models. When we compute our reserve for GSE related exposures, we take into account our experience with them in working through these repurchase claims.
So the repurchase experience I mentioned earlier on a base of $11,400,000,000 in claims, along with current developments, gives us a good data set to project future experience. In fact, one of the drivers of our provision this quarter is an expectation that our repurchase rate with the GSEs will increase. Based on our current models, we believe we have already received more than 2 thirds of expected repurchase claims from the GSEs for loans originated in the 2004 to 2,008 vintages. Although our experience with the GSEs could change in the future, we believe our predictive repurchase models, utilizing our historical repurchase experience with the GSEs and projections of future defaults leads us to the appropriate reserve amount for the exposures we have in this sold loan portfolio as we execute repurchases on a loan by loan have some amount of protection from losses through insurance written by monoline insurers. I think it's important to understand that each of these reps and warranties counterparties has different contractual rights and experience with us and as such experience from one should not necessarily be extrapolated to another.
The Monoline insurers wrote protection for securitizations of both 1st and second lien transactions on legacy countrywide loans included in securitization vehicles. In total, approximately $160,000,000,000 of loans were sold into these monoline wrap securitizations, including $73,000,000,000 of 1st lien mortgages and $87,000,000,000 of 2nd lien mortgages. Of these balances, approximately 1 third of the 1st lien mortgages and 60% of the 2nd lien mortgages have paid off as of September 30. In addition of the 1st lien sold, we estimate 38 dollars were sold as whole loans to other institutions, which subsequently included these loans with those of other originators in private label securitization deals in which the the related to the Monoline insured deals, of which $4,200,000,000 remains outstanding and approximately $550,000,000 were repurchased. Of the $4,200,000,000 still outstanding, we have completed our review on $2,700,000,000 and declined the repurchase based on our assessment of whether a material breach exists.
And we continue to look at the remaining $1,500,000,000 As we noted last quarter, we have had limited engagement with most of the monoline insurers in a repurchase process, which has meaningfully which further constraints a normal business relationship. Without this engagement, we believe it is not possible at this time to reasonably estimate future repurchase experience and therefore the liability that may exist in connection with these securitizations. However, there is a subset of the Monoline universe that has engaged with us in the repurchase process. Although the history with them is not as deep as the history we have with the GSEs, we do believe we can use that experience as a basis for computing a reserve on existing and future claims with this subset of counterparties and have done so. The last category of potential reps and warranties exposure relates to loans either sold to whole loan investors or included in private label securitization transactions in which we believe there is no participation by monoline insurers.
Much has been written speculated about in recent months regarding this exposure, with a good part of the discussion implying a high degree of correlation between losses and Brexit warranties liability for the banks. We believe too little attention has been focused on some fundamental factors that call into question this linkage. For example, we believe many of the losses observed in these deals have been and continue to be driven by external factors like the substantial depreciation in home prices, persistently high unemployment and other economic trends, diminishing the likelihood that any loan defect, assuming one exists at all, was the cause of the loan's default. The expansion of underwriting standards over time, including higher loan to value ratios, lower FICOs, less loan documentation and the fact that exceptions were made to underwriting guidelines were disclosed to market participants. The length of time a loan performs prior to a default is an important GSEs, make it difficult to extrapolate the experience with the GSEs over this population.
Here are some data points about this private investor universe excluding those with ModelLine Insurance. From 2,004 to 2,008, the total principal balance of loans sold in this in this category, mostly by legacy Countrywide and to a lesser extent, legacy Bank of America, was approximately $750,000,000,000 of which almost 40% paid off. Through September of this year, we've received approximately $3,900,000,000 of reps and warranties claims related to this population and to repurchase based on our assessment of whether a material breach exists. Repurchase based on our assessment of whether a material breach exists. Many of the claims that we have received so far are from whole loan investors.
As it relates to private label securities, the ultimate reps in warranties exposure requires that counterparties have the ability to both assert a claim and actually prove that a loan has an actionable defect under the applicable contracts. However, until we have a meaningful repurchase experience with these counterparties, we believe it is not possible to reasonably estimate this exposure. Just last week,
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a minimum percentage of bondholders' voting rights necessary to direct the trustee to act. More recently, in our capacity as a servicer on 115 private label security transactions, we received a letter from 8 investors purportedly owning interests in these transactions. Servicing obligations, including an alleged failure to provide notice of breaches of reps and warranties. While we continue to review and assess the letter and have a number of questions about its content, including whether these investors actually have standing to bring these claims, we continue to believe the servicer is in compliance with its servicing obligations. The 100 and 15 deals have an original and current principal balance of approximately $104,000,000,000 $46,000,000,000 respectively.
We will continue to closely monitor the activities of this group and other developments. Overall, where we have concluded that a valid basis for repurchase does not exist, we think it is important for investors to know that we will vigorously contest such claims and defend the interests of Bank of America shareholders. As for future provisions, as conditions change from period to period, this will have an impact on the level of required reserve and related provision. Also, as our experience with counterparties evolves, this too will have an impact on our reserve and provision. As a result, as we told you last quarter, we expect that the provision from quarter to quarter may be lumpy.
In fact, if you look back over the past 5 quarters, as we've shown in the upper left hand corner of Slide 23, you see the provision is variable driven by the impact of specific developments from quarter to quarter. With that, let me turn to Slide 25. Investment in brokerage revenue was down 9% from 2nd quarter due to lower asset management fees and lower brokerage income. Excluding the impact from the sale of the former Columbia Management Long Term Business, asset management fees are flat despite lower market valuations at the end of the second quarter and the absence of seasonal tax fees. Net client balances grew to more than $2,100,000,000,000 during the quarter and we continue to see strong flows into long term asset management products.
Sales and trading revenue on slide 26 of $4,500,000,000 which includes both net interest income and non interest income, increased approximately 42% from the Q2 due to an improved trading environment, particularly in our credit markets. Compared to the prior quarter, FIC revenue increased 52% to $3,500,000,000 driven mainly by higher results in credit products as well as commodities and mortgages. Equity revenue was up 14% due to the rebound in the markets and marks on legacy assets within FIC resulted in gains of $264,000,000 versus losses of $179,000,000 in the 2nd quarter. Investment Banking revenue on Slide 27 increased 4% from the 2nd quarter and was up 9 percent from levels a year ago. Results were driven by an increase in M and A and Debt Capital Markets and our overall global fee ranking remains stable at a strong number 2, while we rank number 1 in the U.
S. Let me say a couple of things about expense levels on Slide 28. Total expense excluding the goodwill impairment charge decreased $437,000,000 from last quarter. Expenses this quarter included higher litigation expenses I said earlier. Personnel expense compared to a year ago was up 10%, reflecting the build out of strategic hires in certain of our businesses, including international, as well as the higher level of headcount and expense at home loans and insurance related to default management staff and other loss mitigation activities.
As we continue to adjust to a new regulatory environment, renew our focus on customers and to achieve our longer term objectives. Moving to asset quality on slide 29, let me comment on the trends we're seeing in credit quality. In short, credit quality is improving on most fronts and it's ironic that we talk so much about it when it is deteriorating, but spend so little on it when it turns positive. Both net charge offs and delinquencies continue to improve excluding FHA insured loans. Net charge offs of $7,200,000,000 decreased $2,400,000,000 compared to the 2nd quarter.
Consumer losses versus 2nd quarter were down $2,000,000,000 mainly in consumer card and consumer real estate. Commercial asset quality also improved as net charge offs, reservable criticized and non performing levels all declined. Turning to Slide 30. The total allowance decreased $1,800,000,000 through reductions in provision expense, reflecting improving credit performance. Even with this decline in reserve levels, the allowance for loan losses remained relatively stable at 4.7 percent versus the loan portfolio.
As you can see on this slide, the current allowance coverage versus annualized net charge offs remains very strong in residential mortgage, home equity and commercial portfolios even when you exclude the purchase credit impaired allowance. Since we believe credit trends will continue to improve, we expect continued reserve reduction over the next few quarters. In summary, I realize remarks have been lengthy this morning, but we had several issues we wanted to discuss with you. Excluding the goodwill impact, earnings demonstrated progress on several fronts. Credit quality continues to get better.
Our capital continues to grow, and we believe we can manage through the Basel requirements. The mortgage situation has several facets, and we are addressing and managing all of them. With that, let's open it up for questions.
We'll move first to the site of John
McDonald with Sanford Bernstein.
Your line is open.
Yes. Hi, good morning.
Hi, John.
Chuck, so I guess start on the reps and warranties. So it sounds like there are 2 areas where you indicated you might not have a reasonable basis for estimating potential claims that you mentioned the monologues that you're litigating with and then some portion of the private securitizations. Just wondering if I heard that correctly and if so, how are you reserving for potential exposure in those areas?
John, I do think you have that right. I appreciate that the experience that we've had with the monoline is a bit episodic. And in the case of the whole loan and private label securitizations, it's even less mature. And given the fact we don't have maturity in those experiences other than the monologues we are dealing with, we have been recognizing the losses that we've paid on an as incurred basis. If and when we get enough of an experience that we can actually make a rational estimate, we would then increase our reserves.
You can't use your experience with the other monolines to kind of analogize to what you might experience on the others?
John, it's really it's very episodic. I'll give you an example. For example, one of the monolines that we're not dealing with regularly not too long ago sent us some number of thousands of mortgages. We had a third party look at those mortgages and well less than 10% of those mortgages appeared to qualify for repurchase. In other cases, it's just it's all over the map.
We just don't have a mature enough population and experience to be able to make any statistically reasonable estimate.
Okay. The second thing was on the whole loan privates piece on the bottom of Page a high success rate for the claimants, even though you indicated the reps and warranties are less vigorous and causation is tougher to prove there. Is that am I reading that correctly or can you comment on
that? Yes.
John, let me try to give you a little bit more color in that area. As you saw on Chart 24, we said there's about $750,000,000,000 of loans sold, 40% of which have been paid back. Of that $750,000,000,000 something approaching, but less than 50% of those loans are basically jumbo prime loans. And so pretty good quality. And similarly, when you think about the $1,000,000,000 we did repurchase, in that particular limited set of instances, I think our loss on that was about half of the repurchase amount.
Okay. Got it. The other thing on that one was what about securitizations from legacy Merrell? You mentioned legacy Countrywide and legacy BAC. Are the Merrell securitizations in your legacy Bank America?
Or is that not an area where we should think about exposure?
It's really modest, John.
And why is that, Chuck? How is it different there?
No, no, no. I'm saying the dollar amount involved is quite modest.
Okay, got it. Okay, so that's not in there, but not material enough to
Yes. John, it's in the table on the upper right hand corner of Table 23. Okay. It's embedded in other.
Got it. Got it. Okay.
It's just not a big number.
And one more thing on rapid warranty. Just reconciling on the GSE side being 2 thirds done in your estimate with the idea that it looks like the pre-two thousand and four claims are still growing. Is it the vintage analysis gives you the confidence that you're maybe 2 thirds down on the GSE side and how could that be if you're still seeing some 2,004 growth?
Well, remember that says pre-two thousand and four. This is not a big number. Again, all of the claim experience, all of the reporting that we're getting is cranked into our loan forecasting models. And again, roughly we're saying roughly 2 thirds of it has been.
And remember, John, those are gross dollar claims coming in, so it's $140,000,000 of total dollars.
Got it. That's
not what we paid out. That's total dollars of unpaid pencil balance coming.
Got it. It's small. Okay. Okay. That's great.
One thing finally on the NIM, Chuck. Just when you consider your ability that you mentioned to lower funding costs in 2011 and then what you see on asset repricing. Can you give some framing of where you see the NIM headed next year or maybe just contextualize the smaller decline this quarter and how that might fold into next year?
John, I think we
see it flattening out. Obviously, there's different elements to the NIM. There's obviously interest rates we collect from customers. There's our deposit pricing and then there's also what we may be able to do with long term debt.
So more decline next quarter or kind of flattening out next quarter in your press, guys?
Yes. We've got a couple more quarters of reaching the flattening out as we look forward, but it's the rate of decline is slowing, but we've got a couple more quarters middle of next year to flatten out. And you can see, John, back on 43, we've got the classic bubble charts there that you can see the different impacts based on different rate structures.
Okay. And is the pace of decline of this quarter more likely what you'd expect than last quarter's where it dropped more?
Yes.
Okay, great. Thanks guys.
Thanks, John.
And we'll move next to the site of Glenn Schorr with Nomura. Your line is open.
Thanks very much. First of all, we appreciate all the detail on capital and everything else. It brings up a couple of questions on Slide 7. On the mitigation, here, but A, I didn't realize those 2 categories were that big, but I guess my question is on what do you think of or how should we think about what the revenue impact on those assets are? They strike me as higher ROA type assets, but just thoughts around that.
Tom and his team, he's
at the travel this across the next several years. And so without having to get into LVNs and out of different categories, think about that the total increase in size would have more than doubled the RWA through the various means. But when we said, okay, come back and run the business differently, he could peel off several 100,000,000,000 of the RWAs with about basically $1,000,000,000 of revenue because we are still consolidating the systems of Merrell and consolidating the positions. We are only on Basel II for the Q2, now in parallel. There's a lot of optimization involved.
And if you just look at our RWA as a percentage of our total assets versus anybody else out there that has businesses that look somewhat similar, there's a lot of optimization as your models and the work you can do. So think about us as being inefficient here because of the fact we took 2 portfolios and put it together. Then you have these new rules which change the market based risk rules, especially change the ratings dramatically. And then you go to work on it and you can actually pull out a lot, but not a lot of core revenue. I know that sounds surprising, but it's the multiplier effect of the future rules on the certain types of categories that is the real efficient means of optimizing example I gave you earlier on the REMIC, just a very specific example.
That would have been $20,000,000,000 $30,000,000,000 of assets for our numbers or something like that if I remember Neil and Chuck last quarter, it would have gone to $100,000,000,000 plus because the multiplier effect of the new Basel rules and by taking it out you save $8,000,000,000 of Tier 1 common. So it's an optimization around that. Not a lot of revenue involved. And also activity, which frankly is not core to the customer activity, which is the purpose of what we're trying to accomplish with the rules and also the purpose of what we're trying to accomplish with the franchise.
Got it. I understand that. Are those assets should we of them as in a more of a natural runoff or is somebody out there actually purchasing some of these less liquid or higher future RWA assets?
Let's put that in 2 categories. We've been running down our legacy asset pools because we think it's in the best interest. So even like the commercial real estate declines this quarter in part because we're pushing stuff off. But let me give you an example of a kind of asset class, which I think is something you think about. Our structured credit trading book, we can't it's not buy for shareholders to sell it, but it runs off 13, 14, 15
and will help a lot
of mitigation as we move towards the end of this. There's a lot of this stuff is rolling off that we've sealed and stopped doing 2 years ago or 3 years ago, frankly, as we get to 20 10 Q3 here that has a duration to it. So most of this is natural occurring, not marks. We don't have big losses to move this stuff because it just runs off, Frank.
Got it. Understood. And then just on the repricing side, maybe last question on the timing mismatches of I heard your comments on being able to recoup a lot of what gets lost with the new reg rules. What is the timing? It sounds like you're starting to bring trying to incent the customer as you put it to bring in new business your way.
But what is the timing impact on when we can start seeing some of those revenues come back in? How quickly can you move to the customer base that way?
Well, I think this is a multi quarter and even multi year work, Glenn, because you guys I mean, 1st of all, Durbin doesn't even take effect till next year Q3. So all the revenue on debiting changes here. The rules aren't clear. So this is a relentless pursuit over quarters and 11, 12 to get this position. So I don't want to this is not a snap your fingers that happens overnight.
This will take time. But importantly, you got to do it at the right pace for the customers because of what we don't want to do, watching the competitors, watching what we're doing is making sure that we're competitive, make sure we're doing it to preserve the franchise long term. So this will take some time.
Okay. Appreciate all your answers. Thanks.
Thanks, Glenn.
And we'll move next to the site of Nancy Bush with NAB Research LLC. Your line is now open.
Good morning.
Good morning, Nancy.
Couple of questions here. Brian, could you just clarify where you are on this foreclosure review? I'm reading this slide here. Your the moratorium that you had on in the judicial states is now off, but you I see at the bottom of the slide, you say we'll not complete a foreclosure sale at this time. So when do we get to that point when you actually start selling foreclosed assets again?
I think we said this sort of timed out with the statements that we put out yesterday. I think you should look at those in terms of timing. I thought said that we'd begin putting affidavits back in the process next week. And then that's the judicial process. And then the judge looks at the papers and takes you through.
And then the non judicial states will take a few more weeks to complete the review. So it begins next week, but it builds back up. There's a basically if you step back and there's 1,000 people working on this, it's 100,000 some in the judicial states. So it's not an amount of work that we're not used to getting done. And then we'll turn to the non judicial states in that series.
So the actual refilings, I think, start next Monday, as I'll be said.
Okay. But this about foreclosure sales are suspended until assessment is complete. So that doesn't mean you've completely backed off selling foreclosed homes. It's just
No, no. I mean, we're selling REO. That's all calling out this. This is literally going through the actual step in the process. It says the title of changes from the homeowner to us.
And that will start as the affidavit start to go through the system next week.
Okay. And could you just sort of step back from I mean this foreclosure issue foreclosure moratorium got blown out basically in the last week or so to a lot of other stuff. The fact that REMICs are not valid, that titles are not being conveyed properly in the REMIC process, etcetera, etcetera. Could you just kind of give us your view of whether this is a big deal, not a big deal, not as big a deal as the press has presented, etcetera?
Here is what I'd say is I think when you're going through the issue of people losing their home, Nancy, there's going to be a lot of obstacles put up in front of that process by people who want to keep their homes and people representing them and we know that, but that's been going on forever, frankly. And so I think that on the affidavits that some judges said, we want these done right. We went and did them. I'm sure there'll be other issues raised. But as we look at the so called mayor's issue, as we look at some of the other stuff that's raised, and I think you've seen a lot of people write on this and talk about it.
We don't see the issues that people were worried about quite frankly, but we're taking very seriously. We're making sure we're right. But for example, one of the issues was you need to take title in your own name prior to foreclosure out of Mayors, and we've done that. That's been our policy. So, there's nuances in how all those things plays out.
But I think you're right. I think the best way to think about it is I don't think the technical issue is a bigger deal. The issue for closure is a big deal and the issue is we got to get on with it because it will restore the health of the market. And I think the overstatement that this is all messed up, it's been going on for a while. We've been ramping up the people, us and the other servicers.
There's been a big volume of transactions have gone through in this last quarter. It will get bigger over the next few quarters, but within 3 or 4 quarters, we'll peak and come down the other side in terms of this activity. It will still be elevated. And so I think it's a big issue because people are losing their homes. It's not a big issue for the kinds of issues in service.
Okay. And just another quick question. On the implementation of the new retail strategy, are you having to do intensive training at the branch level on this? And are we going to see sort of additional training expenses, consultant expenses, etcetera, etcetera over the next few quarters as this gets ramped up?
I don't think so. I think we stabilized our headcount at the store level last year about this time because there have been a move to move it out just to take the cost out, which didn't help in the whole equation. I talked about. Joe, we stabilized that Joe stabilized the number of people. That transaction volume moves to the ATM and things like that, that helps free up the time to do it.
Our customer service, I think we fell behind the industry in terms of scores. But when you look at it at the branch level and the scores we get from we get very strong scores. The question is, is the overall brand has more damaging. It's improving and we'll continue to train people to do that, but it's not a big expense item. It's embedded in the amount of expenses we spend and we're saving money on certain things and reinvesting those things.
Okay, great. Thank you.
And it looks like our next question will come from the side of Moshe Orenbuch with Credit Suisse. Your line is open.
Thanks. I was hoping Maybe you could talk for a minute about the card business. 3 of the other large players that have reported had significant sequential improvement in revenue as credit was getting better because of less of a, I guess, clawback of interest and fees. And your revenue, the margin was up very slightly, but the dollars were kind of down. Any thoughts you could share in terms of the outlook there and how we should be thinking about that?
I'll give you a couple of comments. I'll let Chuck fill in. I think in the overall issue, this is one that that's why I made the point about sort of the yield minus the charge off. We have been bringing down a lot of portfolios that were not strong and had revenue, but also had charge offs that were excessive. So, as we're bringing that down, I think we're behind other people and finally stabilizing this, but we're closer to stability now than we have been.
You've seen the balances start to stabilize. The credit quality of what's coming on is very high. The credit quality portfolio is high. But I still think, remember, we're still at a charge off rate, 10 percent round numbers. That's got to get down to the 5% or 6%, 5.5% level for this business to return to normalcy.
So we still got work to do. And look, we were worse than other people. On these statistics, we lag them. We're catching up faster. And I think as you look forward, you'll see this continue to improve in this area for us.
Neil, in terms of the but the revenue is more because we've also taken a portfolio down because of the risk we want to take them. Yes.
I know, Brian, you said that. I think you sort of, as we mentioned earlier in the speech, volumes origination is starting to improve. I think but not to the extent you've seen in the past. So, I think we've seen the worst is over.
Got it. On a separate issue and you touched on this a little bit at the beginning. The number of the banks, regional banks, smaller and larger are reporting rates of opt in on the point of sale overdrafts that are fairly high and in some cases over 50%. Could you just address kind of that idea? I mean, I know you've got some thoughts on that and maybe how you kind of think about that part of the debit process as you go forward for your customers?
Yes. I think we've seen some of those reports. And as I said earlier, we continue to study this to make sure we didn't miss something on customer choice. We estimated that the levels of opt in would be in the 30s. We made our judgment based on that whether it was worth it or not.
We've heard higher, we've heard lower. And so and I think it's still early too mostly when you look at the actual data. But the question is and so just as you think about that, ask the question what does OPTIM mean? 40% of our customers take overdraft protection programs now on the new accounts we sold. So there's a lot of things going on factor.
But I wouldn't get caught in all the ins and outs. We fundamentally would believe that if you opt somebody into a transaction that they've told you they don't like and then they get hit with it, they come back and they're fired up and mad. And then when you say, well, you told us you want to do it, that's a tricky execution. And that's why we said, look, it's probably not worth it because it can probably just lead to more and more customer churn. And that's why in the point of sale debit, which is the most confusing to customers, we made the decision we made.
I think there are other business models we see out there similar to what we're doing in the ATM, which is that we see out there an ability to do as technology continues to improve, where you could say that you're going to get turned down for this transaction. Approve it and pay more of a convenience fee type? And we're looking at those types of models with not only ourselves, but also some of the card issuers and stuff on a theory that is $5 a more reasonable payment or $10 more reasonable payment when you want to do something as opposed to $35 And so what we try to stop and I think people, whether people opt in or not, the account churn in that part of our portfolio was so high and the people just burned themselves up over time. If you 10% or 70% of revenue, but actually 3% had a high number of it too and you start to look down at those times of customers. So, we've made the decision.
We're trying to be clear with customers. But on the other hand, we think there are payment models that could evolved that says maybe it's more of a convenience type fee. Think of an ATM convenience fee where customers will say, you know what, I just need to get this done. I'm willing to the fee to get it done. Great.
Thanks very
much. And we'll move next to the site of Matt O'Connor with Deutsche Bank. Your line is open.
Hi, guys. Good morning.
Just another follow-up, I guess, on the private label repurchase risk. I mean I would guess as you look out over the next few months, we'll start getting you'll start getting a little more clarity on what some of the risks might be. And as you think about trying to set up some sort of reserve and get some of these issues behind you, is this something that we can expect looking forward next quarter or do you think it's going to take a little bit longer?
Well, as we've said, there's not much experience, not much activity in this private label space. I think, Matt, again, if you go back to Slide 23, the upper left hand quadrant, you can see the behavior that we've had for provisions. You can see the earlier periods where we didn't have events and can see in the later periods where we did have events kind of gives you a sense of the scale of what our experience has been to date. And as we learn more and again, our perspective on this, we're going to be quite diligent, as I said, in defending the interest of our shareholders. This really gets down to a loan by loan determination and we have, we believe, the resources
2,000,000 going back on the chart in 'twenty three, you can see that the 'seven, 'six vintages are producing the highest volume and the 'eight is much lower. We'll continue to work this through. So, time is on your side because the activities have either occurred or not occurred. We're 3 years past the last almost the last quarter of it being 3 years past the date of origination. But if you think about people who come back and say, I bought a Vega, but I want it to be a Chevy Vega, but I wanted to be a Mercedes with a 12 cylinder, we're not putting up with that.
And we will be very hard to protect the shareholders' interest. On the other hand, you guys, we'd love never have to talk about this, but until we have a history or accounting event, we can't put it behind. So we will do as we fight this. It is to our benefit. We have thousands of people who are willing to stand and look at every one of these loans.
And it's in your best interest and our best interest to be diligent about it. And so what we'd love to put it behind us and never talk about it again, the right answer is to fight for it. If we make a decision to settle with somebody, it's good because of the right answer to the shareholders.
Okay. And then separately, on Page 18, where you detail the loan runoff, I think that's very helpful. My guess is these portfolios in aggregate aren't generating that much if any profit because of the credit costs. But as we think about just all the components, the revenue, the expenses, are there any details that you can provide us on those things for this $132,000,000,000 runoff book?
We'll take a look at trying to give you a charge out. It's a little we just want to make sure we isolate it for you. Your instinct is not wrong in terms of the credit costs embedded in these portfolios and that's why the credit costs are coming down as these run down. So we'll take a look at whether we can give you a little more clarity on the charge offs by portfolio.
Okay. And also I think the revenue and expenses would be helpful.
Yes.
And just lastly, I think those last ones are the months before you made some comments that you weren't reinvesting cash flow from your discretionary book just because you didn't want to take much duration risk, which I think makes sense. But as we think about the discretionary book, the securities the mortgages, the swaps, I guess the total is maybe $400,000,000,000 or so. How should we think about that level over time?
I think the way that we're going to run the balance sheet, it will be run to extract the value of the excess deposit position. And that's what we do is to balance the book back. So it is not another way to make money in this company. And so by and large, as loan demand picks up, it will probably come down as a percentage of the assets. And we are not we either are reinvesting and hedging it, so that we don't have long rate risk or not reinvesting.
And we think that's the right answer. So, if you see growth in this, it's pretty much hedged off, as you said. And that's why when you look in the bubble chart, there's very little movement. And even in the Basel III, we assume 0 on the OCI risk, and we're working to manage the company to protect that, that is the outcome.
And as we said, Matt, we're also looking to shrink the long term debt footprint.
And we'll move next to the site of Betsy Graseck with Morgan Stanley. Your line is open.
Thanks. Good morning.
Good morning, Betsy. Good morning, Betsy. Good morning, Betsy.
Question, just a follow-up on Page 18 with regards to the runoff loan portfolios. Can you just give us a sense as to what the estimated time to of decay is for these portfolios and if they differ from your core portfolio?
Betsy, I think the way to think about this, if you look at the change over the quarter and adjust it for the impact of First Republic, that's probably a good indicator of the pace of change.
Okay.
Yes. I mean, we aren't doing anything to force these out, but I mean, it's just running off naturally. So I think Chuck's guidance
It's collection and charge offs, that sort of thing.
Okay. All right. But to the extent foreclosures ramp up, that would be, I would expect, more skewed towards this portfolio than your non runoff portfolio. Is that fair?
It could be. We'll get to some detail on that as we move forward. Okay.
All right. Thanks.
And we'll move next to the site of Ed Najarian with ISI Group. Your line is open.
Yes. Good morning. It's Ed and Jerian.
Good morning.
Yes, just a couple of quick questions. First, back to the Basel III analysis. It sounds like you're sort of implying that there's not a real good chance of any return of capital in 2012. Obviously, we've got other banks talking about the return of capital, but I suspect that your outlook is that that's more of a 2013 or 2014 event. That would be the first question.
I would not assume that. We have baked in this paying dividends and etcetera, but we have to make sure we understand the phase in periods and what the regulators are required on the capital management. But the way to think about that is remember, I'm giving you the 8% as if things were fully phased in. We will report higher numbers because, for example, the 2.5% is phased in over many years, the 2.5% over the 4.5%. So, you've got it will be much higher than said.
And I think the regulator has been clear that they understand from you as investors that there has to be a sharing of this as we build it up. And the idea was to build up across time. So I wouldn't assume that, we didn't mean to create that impression, but embedded in here is a reasonable dividend policy.
Okay. So you're saying I should not assume no return of capital? Excuse my double negative or maybe you're just saying no assumption
on capital? No, that's it. I'm saying despite the fact that your grammar teacher might shoot me, I'm saying the first. Okay.
All right. Thanks. And then I guess the follow-up question would be, I'm just looking at the 16,800,000,000 dollars of operating expense run rate, it seems like there's some things in there that could come down over time in terms of potentially litigation or credit related costs, what have you. And then but you're also talking a lot about different types of investment spending and things you're doing with new products, offsetting Reg E, what have you. Could you provide us with any kind of an outlook on where you think that run rate goes just over the next few quarters or over the next 12 months?
I think you've got the exact trade off. We're trying to make sure we make let's take Tom Montag for example. He's building up against the opportunity outside the United States. And so we talked a lot about but at the same time we're managing the headcount inside the United States where he has number one market position in the capital markets fairly effectively. So, we're sort of having a rotation.
Joe's got a Joe's a low cost producer. If you look at our cost as a percentage of deposits and compare it to anybody you can get the information on, you'll find out we're very effective there. And our cost paid for deposits are the same as the 39 basis points or whatever it was this quarter very effective. That being said, we've also brought the branch count down by a couple of 100 and he'll continue to do that. At the same time, we want to get Northwest and California and that's going to take some investments.
So we're going to make these judgments, but I think the run rate we're at right now is kind of the run rate we are. And we don't see things that we need to invest huge amounts of money. But we think even though the earnings are not what we want, we think in the near term we got make sure we take care of some things. So we got the benefits of rundowns and some of the work we've done on integration, but we got some build up in some areas. A dominant part of cost structure in the near term from a now looking forward over the next several quarters will be getting through the HL and I problems and reducing the amount of people dedicated to the workout task dramatically in some of the other businesses.
So, I think we're going to have positive and negative pressures here, but we're trying to manage both the short term aspects of being very disciplined. And I'd ask Chuck to make sure that the overhead is coming down and doing the things the CFO needs to do, at the same time making sure we're making investments where we need to make them.
Okay. Thanks. And just a quick follow-up on that. It looks like your level of revenue trading revenue, investment banking revenue in the Ibank was a fairly normal quarter.
Always tough to predict,
but were the incentive comp expenses around that number this quarter something that you would consider pretty normal as well given that level of revenue?
Yes. I think in the on a full year basis, it's probably in the mid to upper 30s.
Yes, I mean, I figure 38 to 39 we've been doing based on performance. That's consistent with last quarter. You may get some noise in Q3 of last year versus Q3 of this year because we did a catch up last year on the amount of deferral, we increased the percentage. So, there will be some noise related to that, but pretty much a normal percentage accrual.
Okay. Thanks a lot.
And we'll move next to the site of Mike Mayo with CLSA. Your line is now open.
Good morning. Good morning, Mike. Good morning, Mike.
Can you give us more color on why OREO declined by 10% linked quarter?
Mike, we'll get Kevin and those guys get it to you. Chuck just looked at me and said, I mean, we're moving stuff out and we're doing the work, but we'll get you some details of where it came from which portfolio.
But I guess the point is the properties are moving on the back end even if it was clogged some on the front end.
Yes. Not fast enough because we're still building inventories, but we are moving stuff out the back end at a better pace now. I think over the last three quarters on the consumer side for example, we've moved up by 50% in terms of quarter liquidations of properties that are on our books.
Remember a lot
of the REO and the consumer also goes back to the agencies to handle.
And know this question has been asked many times, but so why did provisions for reps and warranties decline 1 fourth linked quarter when the outstanding claims strictly related to the GSE side increased?
Remember last quarter we had a catch up on some monoline and stuff that was different. So there was a I think $600,000,000 $700,000,000 of additional catch up last quarter that wasn't there this quarter? Related to monoline.
And Mike, if you look at this quarter, the sort of additional amount over our historical numbers was related to
a reassessment of the
GSE obligation. I'm just trying to figure out what would be kind of a normal number going forward for this provision line?
This is if you take out sort of the ups and downs and look back, you can see $500,000,000 ish quarter and I've said that, Mike, on occasion. It's just going to be lumpy because as we gave that, we'll move something forward and that may move something would occur later on forward because these are looked at as like a portfolio. When we make an adjustment, it's not adjustment on what the claims received and it's on the exposure that we see in the whole portfolio if we have a basis to make it. So, but if you look at sort of the resolution type of thing and look back across the quarters we gave you, it's a half $1,000,000,000 $5,000,000,000 $5,000,000,000 So those are the kinds of numbers that would be more recurring. Last couple of quarters, we had some sort of significant movement in terms of catching up to some pieces.
So the danger here is it could be lumpy, so I don't but on average that's what we thought.
And how many years do you think that this provision expense might be incurred? I mean, I know there's a lot of uncertainties. Is this like another year, 3 years, 5 years, longer?
Obviously, Mike, it depends upon experience. We certainly think it's going to be pretty active the next couple of years or so.
Again, the GSPs we do life alone is our reserve and then a lot depends on where things go with the monolines and the private labels, which, as Chuck said earlier, is very hard to predict. So, we'll see how our experiences materialize over the
careful separating. The risk is relatively sealed in this in terms of the vintages that have given rise to most of the claims. So the issue is how long the fight will take.
On the GSE side?
On all of them. In other words, the loans that originated, if you're saying it's an origination defect, if you look at what's happened in 2008 and in 2009, there's just been very little activity. So in the loan quarter, we've changed the underwriting standards when we bought Countrywide. They'd already changed theirs. And so, that occurred in 2008.
So, you're not seeing new activity created here from new originations of any magnitude. So what I'm saying is the origination activity between 4, 5, 6, 7, that's where the balances are. That is in the decision the underwriting was done then and now we're going to spend the next few years sort of fighting it through.
But just I just want to understand this. Just to clarify, the new activity though is more people are coming to the window saying, I bought a Vega, I thought I'd get a Vega, I want my money back.
The activity from the put back, but it relates to periods and times of origination as opposed to the new activity of new underwriting of loans is not producing any activity. Right. And what I'm trying to say, so the pig
to get a read for incremental loan demand, if there is any.
It was in the C and I book and the revolver, it was flattish quarter to quarter and flattish. We can get you the number. I always give the number in David's middle market book, which is lower than the overall number. So we'll get to the number. I think it's 38 if I remember right.
In commercial, that's correct. In commercial loan.
So it's still around the all time low. So loan demand is still kind of sluggish?
Pretty slow. What we've seen, I'd say, is that, yes, overall demand is still slow. But I'd say as you look from Q1, Q2, Q3, we've seen the loan balances stabilize and demand the customers. It is not growing. We wouldn't say that, but it is stable.
And then lastly
sorry. It's just stronger this quarter than it was second quarter.
And then lastly, would you consider any strategic actions to further boost capital? I know you said you'd be above 8%, but you could juice a little bit more by doing some other things. Would you consider those other things such as BlackRock?
I'll let you speculate on what our ideas are. Thanks.
All right. Thanks.
Thanks, Mike. One last question please.
Yes. Our last question comes from the site of Chris Kukauski with Oppenheimer. Your line is open.
Yes. Couple of things. One is I was wondering, can you comment on the monthly October, do we find that normalizing at all or are investors still kind of in the risk adverse posture that they were in most of the summer?
I'd say it's better than the summer, but not normalized. It's still lower than we'd like to be, but it did improve. And the new issue calendar got very active. So, in terms of debt capital markets, especially some equity stuff's come through. The IPOs we have on file are actually bigger than we even had in the net bubble timeframe.
It's just the question whether equity markets support getting them out. Our investment banking pipeline is a high quality pipeline, 50% of the pipeline we think will close in the quarter, Q4, we'll get the fees in the Q4. And debt capital markets are really not a major part of that obviously because they come up more episodically. So, I'd say that issuer side activity is pretty strong, especially around the ability to access debt capital. You're seeing some buy outs being done in the recent past year.
Our private equity clients are getting active and visiting with them, many of them over the last several months. They're looking for deals. They're buying deals and are actually striking deals. But I'd say that when you go to the sort of the core trading activity, people, it's still lower than we thought, but it's been improved during the course of the quarter from July, August to September, it got better and October I think it's been reasonably the same.
Okay. And then just one last thing at a time on the risk weighted assets and you said you can drive those some of the or the mitigation efforts don't necessarily hit revenues that much. And I'm curious, is that because there's a big charge for the interdealer exposure? And is there a good way to net all that down? Or what does the industry need to do to because everyone's talking about mitigation and it's not totally clear what all the components of that are and why they don't impact revenues?
We are slightly different I think than other organizations in the sense that the Basel II implementation is new and we're finding more ability to optimize in that. But most importantly, remember that we're only converting the Merrell systems this fall in Tom Montag's business. And so we've been able to manage the risk. We've had to manage it, the legacy risk on a system and all the risks being put on since the first part 'nine has been going on the new system, but there's a book of legacy risk. As we bring those systems and put them both on the same system, we're able to manage them separate.
We're also finding a lot of room to optimize and counterparty optimization. So there's not a as the team working on it said, this should not be as easy as it is and that's really a shame on us. But the reality is we had 2 systems, we had to work through them, we had to get approvals for models and all the work you have to do. And busily doing it. It won't be snap your fingers, but this is not as hard for us because frankly, we just haven't had the chance to go through the optimization that other companies have that appears other companies have gone to.
So our RWA as a percent of A still run 60% plus and other people run 50% and other numbers. And as we get into that, we'll figure that. The other thing is don't forget every quarter more of the legacy stuff, which is very highly weighted under the Tom's got a team that's working on it. He's got a team that's dedicated to it, but they were able to get quite comfortable. They could mitigate a lot.
And a lot of it is because these are positions we don't want. Take auction rate securities. Over the next several years, they'll run down dramatically, yet it's $10,000,000,000 a day. It was $12,000,000,000 or $13,000,000,000 at the beginning of the year. So, it's just one thing after another, just hard work.
Okay. And then, lastly, just as kind of obviously, one of the other big banks put up a big litigation reserve and you didn't. And I'm kind of curious why. And then also, You mentioned that most of the problems are in the 'six, 'seven vintages obviously. And is there a statute of limitations on putting loans back and when does that kick in,
if at all?
You said last and then you asked 2 more questions. Your last is going to be your second one on there's no technical statute limitations from a standpoint on the repurchase. But the fact that the loan has performed for 36 months or more, obviously a defect that said this was a problem with the origination is getting a little hard to prove, especially on a no doc loan or something like that. So, think through that. I forget the first part of the question.
First question on litigation expense. We actually don't compare ourselves to other companies as such. I know you folks do. I think every company's portfolio of litigation is different and it comes at different times and there's different stages of progress. We're reserving for that that we know about and we think we can estimate I can't really help you with what others are doing.
Okay. Thank you. Thank you.
One follow-up before leaving. Moshe is still out there. On the card revenue line, it's flat. But remember, we had a big gain in the Q2 for Mastercard of about $450,000,000 and we had the U. K.
Charge relative to some of the sales situation over there, and that's about $600,000,000 So we had a flip of $1,200,000,000 If we hadn't had that, those two instances, we would have had revenue going up. So and I thank everyone for joining us.
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