Good day, everyone, and welcome to today's program. At this time, all participants are in listen only mode. Later, you will have the opportunity to ask questions during the question and answer session. Please note this call is being recorded. It is now my pleasure to turn the conference over to Mr.
Lee McIntyre. Please go ahead, sir.
Good morning. Thanks to everybody on the phone. Thanks on the webcast for joining us as well. Welcome to the 3rd quarter results. Hopefully everybody has had a chance to review the earnings release.
It's only available on the Bank of America Investor Relations website. So before I turn over the call to Brian, let me just remind you, we have our new CFO that will be going through the results this morning, Mr. Paul DiNofrio. And so we will we may make some forward looking statements. For further information on those, please refer to either our earnings release documents on their website or our SEC filings.
So with that, I'll turn it over to Brian.
Thank you, Lee, and good morning, everyone, and thank you for joining us to review our Q3 results. Today we reported $4,500,000,000 in after tax earnings or $0.37 per diluted share. When we think about the quarter, the key message is we continue
to make good progress in
a tough revenue environment due to low interest rates and sluggish economic recovery. In addition, with the late summer's volatility, especially in the fixed income trading markets are remaining challenging. But with that, we produced another good quarter of progress in all the businesses. Before Paul takes you through the details of the quarter, I want to provide a little context from my vantage point. We continue to make progress towards our full earnings capacity here at Bank of America and this quarter represents the 4th consecutive quarter of solid results following the resolution of our large legacy exposures in the Q3 of last year.
When you think about it over the last four quarters, we reported over $16,000,000,000 in after tax income. That compares to the previous four quarters leading up to Q3 of 2014 of about $5,200,000,000 including the significant litigation costs. Returns over the last 4 quarters in aggregate have generated an ROA of about 76 basis points and a 10% return on tangible common equity. This quarter, we were able to keep the absolute level of our balance sheet flat to the quarter to the 2nd quarter. But by doing that, we continue to replace discretionary assets with good core customer loans and we believe that's a very good trend.
We continue to build record liquidity and we believe we're well positioned against 2017 LCR requirement. Our capital is again at record levels and we returned over $3,000,000,000 back to shareholders so far this year through common share repurchases and dividends. Our tangible book value per share improved this quarter to $15.50 It is about the highest level in many, many years. So I want to spend a couple more minutes focusing on a few drivers in our business. Our teams here at Bank of America are focused on the everyday engagement with our customers, deepening relationships by growing the core things we do with them, deposits, loans, managing the risk, helping the investor assets, all while keeping our costs down and you can see that in our results.
When you think about our deposit franchise, we grew $50,000,000,000 in deposits over the last year on an all organic basis. That in and of itself is a large bank. As a reminder, our consumer franchise is the largest retail bank in the United States. In our consumer banking business, as you can see, we grew revenue and earnings year over year despite the low interest rate in value. We've been restructuring our branch structure, selling some branches, closing some branches and changing account structures.
And with that, this quarter our core consumer checking accounts continue to grow. We grew those accounts and improved the percentage of customers who use us as a primary bank. And importantly, the average balance per account continues to grow. On cards, on credit cards, we issued another 1,300,000 credit cards this quarter and active accounts continue to grow. The good news is that we're doing it through the lowest cost possible through our core franchise, much lower than other means of growth.
When you go to the change in our financial services business through mobile and digital banking, we now have 18,400,000 active mobile customers and 31,000,000 active online customers. Digital sales this quarter up 30% over last year. More customers are using mobile device deposit checks and access their accounts and now are starting to buy products as well as book appointments. To get a sense that we're now booking 15,000 appointments a week off of our mobile devices. Our Merrill Edge teammates who work within our consumer business helped push us through a new standard of 2,000,000 accounts this quarter.
When we go to our wealth management business, this business is showing the effects of lower market valuations pressuring revenue, but activity here has reflected good long term flows, good deposit flows and good loan growth. In addition, we continue to invest in long term growth in this business, more advisors, better products and better advice in building preserving wealth for our clients. And these clients continue to use the full range of our products, including banking products. As we switch to our commercial banking business, the business we call Global Banking, loans to commercial and corporate clients around the globe grew nicely from last quarter and the year ago quarter. And although investment banking fees were down year over year, the industry fee pools appear to be down as much or more.
We maintained our leadership across many of the products. In our Global Markets business, despite the challenging market conditions in the late August September timeframe, we reported $1,000,000,000 in after tax earnings in that business. Excluding DDA impacts, this is the best Q3 in earnings for this business we've seen in recent memory. Our net interest income in the company is benefiting from loan and deposit growth, showing momentum this quarter, if you exclude the impact of that 91. Focusing on expenses, which we've talked to you much about.
We continue to hold our costs in check. Expense less litigation and LAS costs remain well below the $13,000,000,000 threshold of $12,700,000,000 and that was in line with our Q2, despite the additional cost of CCAR and additional investments in the business. We're taking the benefits of our Simplify, Improve program, which keeps our costs flat, while we can continue to invest in customer facing client people to grow our businesses. This ability to invest in growth is key to driving our franchise forward. When you go to the risk side of the house, credit risk remains very strong, market risk remains subdued and we get a great return on that bar as you look at it across the competitors.
We continue to feel good about our legacy exposure risk and Allianz business continues to work itself down. So in the context of the environment we faced, we're operating what we feel is a solid quarter and is evidence of continued progress on our strategy, a strategy of responsible growth with our customers. With that, let me hand it over to Paul.
Thanks, Brian, and good morning, everybody. Starting on Slide 3, we present a summary of our income statement and returns for this quarter as well as Q2 and Q3 last year. As Brian said, we earned $4,500,000,000 in the quarter compared to a loss of a couple of $100,000,000 last year and earnings of $5,300,000,000 in Q2. Earnings per share this quarter were $0.37 Let me mention a few larger items that in aggregate benefited diluted EPS this quarter by a penny. First, a negative $597,000,000 market related NII adjustment, primarily FAS 91 cost us about $0.03 More than offsetting this was a $0.02 benefit from DVA of $313,000,000 and a $0.02 benefit from a collective impact of 3 other items, gains from selling some consumer real estate loans,
tax
benefits from restructuring some non U. S. Subsidiaries and a provision for payment protection insurance in the UK. Revenues were $20,900,000,000 this quarter. Expenses were $13,800,000,000 significantly lower than a year ago because of litigation costs.
And compared to Q2, expenses were flat as we managed costs well while investing in our franchise. Return on assets was 82 basis points this quarter and return on tangible common equity was 10%. Turning to Slide 4, the balance sheet ended basically flat relative to Q2 with assets of $2,150,000,000,000 However, we grew deposits $12,000,000,000 from Q2, while long term debt declined by approximately $6,000,000,000 Liquidity rose to nearly $500,000,000,000 a record level and the time required for funding is now 3.5 years. Tangible common equity of 162,000,000,000 dollars improved because of earnings supplemented by $1,500,000,000 in OCI. This was partially offset by $1,300,000,000 in capital return to common shareholders through share repurchases and dividends.
Tangible booked idle increased 10% from Q3 last year and our tangible common equity ratio grew to 7.8% as equity improvements outpaced asset growth. With regard to regulatory capital, I want to start by pointing out that our transition ratios under Basel III increased with CET1 ending the quarter at 11.6%. However, I will focus my comments on Basel III fully phased in regulatory capital ratios. CET1 capital improved $4,800,000,000 to $153,000,000,000 driven by net income, positive OPI and DTA utilization. This was partially offset by capital return to shareholders.
Under the standardized approach, our CET1 ratio improved to 10.8% as risk weighted assets decreased modestly even as loans grew. Under the standardized approaches, the CET1 ratio increased from 10.4% to 11% as RWA improved by roughly $30,000,000,000 largely due to reductions in risk. During the quarter, we announced that we exited parallel runs and will begin reporting on the advanced approaches beginning in 4Q. So we've also presented our CET1 ratio 4.930 on a pro form a basis, which includes the addition of approximately $170,000,000,000 in RWA, primarily for wholesale credits under the advanced approaches. The pro form a CET1 ratio at ninethirty was 9.7%, an increase of approximately 40 basis points from Q2 on the same pro form a basis.
In terms of the supplementary leverage ratio, we estimate that as of ninethirty, we continue to exceed U. S. Rules applicable at the beginning of 2018 at both bank and parent. Turning to Slide 5, we grew loans and deposits, both of which are key drivers to our financial performance. Reported loans on an end of period basis increased $1,200,000,000 from Q2.
However, underneath the consolidated number, there was significant activity I want to take a moment to point out. With that in mind, let's review why loans in all other and LAS are declining. First, the portion of our mortgages that we report in all other continue to run off due to pay downs. This run off is being replaced by new loans which are now recorded in business segments like GWIM and consumer where they are originated. 2nd, also in all other, we converted $6,200,000,000 of mortgages with long term standby agreements into securities thereby improving HQLA.
These types of conversions are largely complete. 3rd, we sold roughly $3,600,000,000 of other mortgages and NPLs as we continue to clean up and optimize the balance sheet. Lastly, in LES, where we record our legacy home equity portfolio, 2nd lien loans continue to run off. Now if one excludes these other activities in LES and all other, ending loans in our primary lending segments increased $19,000,000,000 or 3% from Q2. Turning to deposits, on an ending basis they reached $1,160,000,000,000 this quarter, growing $50,000,000,000 or 4% over Q3 last year.
We produced solid growth across the franchise. Global Banking grew deposits 6% year over year, Groom grew 3% and consumer grew 7%. However, as you can see at the bottom right, if one includes CD run off, consumer deposits grew 10%. We've also included 2 other tables to give you a sense of the composition of our deposits. Turning to asset quality on Slide 6, I won't spend a lot of time here as asset quality continues to be strong and mostly consistent with Q2.
Net charge offs were flat around $930,000,000 versus adjusted Q2. Q3 provision expense of $806,000,000 and we released a net $126,000,000 in reserves. Releases in consumer real estate and credit card were partially offset by reserve bills in commercial. In commercial, we saw small increases in reserve criticized exposure from Q2, driven by downgrades in oil and gas that were partially offset by some improvements in the rest of the commercial portfolio. Also noteworthy, the increase in oil and gas reserve will criticize in Q3 was less than half the size of the increase from Q1 to Q2.
Turning to Slide 7, net interest income on a reported FTE basis was $9,700,000,000 declining $1,000,000,000 from Q2. The decline in long end rates in the quarter caused adjustments in our bond premium amortization, which resulted in a late quarter decline in NII of $1,300,000,000 partially offset by good growth in NII otherwise. The Q2 adjustment increased NII by $669,000,000 while the Q3 adjustment decreased NII by 597,000,000 dollars NII, excluding these adjustments, improved $292,000,000 from Q2 to $10,300,000,000 Three factors drove this increase. First, we grew core commercial loans. 2nd, we improved the composition of the balance sheet in our global markets business, which improved trading related NII.
And third, we benefited from one extra day in the quarter. With regard to asset sensitivity, at the end of the third quarter, our overall asset sensitivity increased as a result of the decline in long end rates, which drove the Fab 91 adjustment. As of ninethirty, an instantaneous 100 basis point parallel increase in rates is estimated to increase NII by approximately $4,500,000,000 over the subsequent year, with a little more than half of that improvement caused by increases in short end rates. Turning to Slide 8, non interest expense was $13,800,000,000 in Q3, matching the level of expense reported in Q2. The $20,100,000,000 expense in Q3 last year included $6,000,000,000 in litigation costs.
Litigation this quarter and in Q2 was less than $250,000,000 Excluding litigation, expenses were $13,600,000,000 in the quarter, a decline of $600,000,000 or 4% from last year and consistent with Q2 despite additional costs related to our CCAR submission. Headcount continues to trend lower, down 6% compared to Q3 last year. LAS costs, excluding litigation, were relatively stable compared to Q2. However, we still expect to lower that number to roughly $800,000,000 in Q4 and move lower in 2016. As a reminder, in 4th quarters, we tend to experience some seasonal increase in expenses as we close out the year.
Let's walk through the business segments starting on Slide 9 with Consumer Banking. Consumer earned $1,800,000,000 5 percent greater than Q3 last year. The business segment generated strong 24 percent return on allocated capital. Revenue increased over last year as increases in non interest income outpaced a decline in NII. With respect to NII compared to last year, the benefit of higher deposit levels was more than offset by the allocation of ALM activities and lower card yields.
Non interest income benefit from divestiture gains as well as higher card income driven by increased customer activity while service charges declined. Expenses declined from Q3 last year despite a 5% increase in sales specialists and higher product costs in advance of ruling changes regarding EMV chip implementation. Those increases were offset by savings from the continued optimization of our delivery network. The cost of operating our deposit franchise remains low at 180 basis points and the consumer bank reported an efficiency ratio of 57%. We continue to experience shifts in consumer activity away from branches towards self-service options.
Self-service trends are driven by mobile banking, online banking, and ATM usage. Mobile banking customers increased to $18,400,000 and deposits via mobile devices now represent 14% of consumer deposit transactions. Mobile processing is better for us and it's better for our customers. It is 1 tenth the cost relative to processing and financial centers and more convenient for customers. On Slide 10, we present key drivers and trends.
Average loans grew across mortgages, card and vehicle lending. Deposits, as Brian mentioned, continue to increase, particularly if what excludes the impact of CD declining. On this basis, deposits were up 10% from the year ago. Regarding brokerage assets, Merrill Lynch accounts crossed the $2,000,000 mark and are up 2%, while asset levels are up 8% from last year even with declines in equity markets this year. Mortgage production, although up from 3Q last year, was down from 2Q as the refinancings declined.
In the future, mortgage banking income in the consumer segment will be lower by approximately $30,000,000 per quarter given the Q3 sale of a small appraisal business. A similar amount of expense should reduce quarterly as well. Looking at card activity, card issuance was strong at 1,300,000 dollars Combined credit and debit spending volumes were up 3% from last year despite the decline in fuel prices. Average outstandings were down slightly from Q3 last year as customers paid off more of their balances. However, average balances showed modest growth over Q2.
U. S. Credit volume was strong as net charge offs declined this quarter to a decade low of 2.5%, driving risk adjusted margins higher to 9 point 3% excluding divestitures. Turning to service charges, they were down moderately versus Q3 last year as we continue to open higher quality accounts that carry higher balances. These higher quality accounts tend to have fewer account fees.
Turning to Slide 11, Global Wealth and Investment Management produced earnings of $656,000,000 Results were down from Q3 last year, driven by lower market values and lower related client activity. Compared to Q3 last year, asset management fees were up 2%, but more than offset by declines in transactional revenues. The trend of lower transactional revenues continued this quarter as clients migrated from brokerage to managed relationships, which was compounded by lower markets and muted new issuance. On NAI, the benefits of higher loan and deposit levels was more than offset by the company's ALM activities, driving NII down from Q3 last year. Non interest expense was modestly higher than the year ago period as litigation costs were higher and wealth advisers grew 6%.
Pre tax margin was 23%, down from a strong Q3 last year. Margins were pressured this quarter by a few factors. 1st, markets declined pressuring revenue across many products, especially those in which we record transactional revenues. 2nd, operating leverage was challenged as areas of revenue where incentives are high like asset management grew, while NII where incentives are much lower declined. Moving to Slide 12, despite the lower market levels, business drivers improved.
Wealth Advisors were up almost 1,000 or 6 percent from Q3 last year. Long term AUM flows were more than 4,000,000,000 dollars Deposits increased more than $7,000,000,000 Average loans were up 10% from last year, our 22nd consecutive quarter of loan growth in this segment. The last thing I would note that's not shown here is referral rates across the company remain strong. For example, our retirement solutions business continues to win in the marketplace. We have won more than 1200 retirement plans year to date, many of which were referred from Global Banking.
On a year to date basis, this is up more than 40% from 2014. Turning to Slide 13, Global Banking's earnings were $1,300,000,000 generating a 14% return on allocated capital. Earnings declined from Q3 last year, but were up modestly versus Q2. The comparison to Q3 last year reflects higher provision expense and lower NII driven by the company's ALM activities as well as increased liquidity costs. Additionally, we saw year over year compression in loan spreads.
However, loan growth was a positive contributor to NII. Growth from Q2 reflects improved NII from loan and deposit growth. Regarding provision expense, while flat to Q2, it is up $243,000,000 from last year. We added $125,000,000 to reserves in Q3 compared to a release of $116,000,000 in the year ago quarter. Looking at trends on Slide 14, let's first focus on fees relative to the same period last year given seasonality.
Despite a lower level of IB fees this quarter, we maintained our number 3 global fee position and believe we increased our market share as industry fees pools declined. Investment banking fees for the company this quarter were $1,300,000,000 down 5% from Q3 last year. Advisory fees were up 24%. Debt underwriting was down modestly. Equity underwriting was down from Q3 last year, in line with industry volume declines.
Outside of IB, our treasury fees improved from Q2 on increased activity. Looking at the balance sheet, loans on average were $310,000,000,000 up 9% year over year and a similar percent relative to Q2 on an annualized basis. The growth was broad across both corporate and commercial borrowers and asset quality was consistent with our overall portfolio. Importantly, the decline in spreads year over year flattened as decline from Q2 was relatively small. On deposits, we saw good performance with average deposits increasing by $8,000,000,000 over Q2 and we continue to optimize the portfolio, improving the composition towards higher quality deposits from an overall LCR perspective.
Switching to global markets on Slide 15, earnings were $1,000,000,000 on revenue of $4,100,000,000 despite challenging markets. We generated an 11% return this quarter. Earnings were up from Q3 last year, which included litigation costs of roughly $600,000,000 most of which was non deductible for tax purposes. As you can see, we had a net DVA gain this quarter, which was higher than last year. Total revenues, excluding net DVA, declined from Q3 last year driven by lower fixed sales and trading and to a lesser extent IB fees offset partially by improved equity sales and trading.
Non interest expense, excluding litigation, improved $102,000,000 versus Q3 last year, a 4% improvement. Moving to trends on Slide 16 and focusing on the components of our sales and trading performance. Sales and trading revenue of $3,200,000,000 excluding net DVA is down 4% from Q3 last year. Comparing to the same period a year ago, fixed sales and trading revenue declined 11%. Similar to the first half of this year, the year over year comparisons reflect good activity and macro related products like rates and FX.
Conversely, market activity remained muted in credit products, driving lower client activity this quarter than Q3 last year. As a reminder, our mix remains more heavily weighted towards credit products, driven by the strength of our new issues capability and market share. Equity rose 12% driven by strong performance in equity derivatives reflecting favorable market conditions. Asset levels were down modestly from Q3 last year. Turning to legacy asset servicing on Slide 17, this segment lost roughly $200,000,000 I want to focus on 3 things here, the reduction in delinquent loans, mortgage banking income and expenses, and compare each to Q2.
First, the number of delinquency for mortgage loans continued to decline, down 14% this quarter as the teams continue to work through solutions for customers. 2nd, mortgage banking income declined by more than $400,000,000 This decline was driven primarily by 3 factors. Servicing fees declined about $50,000,000 as the units we service declined. Net MSR and hedge performance declined $100,000,000 driven by gains on MSR sales in Q2. Reps and warranty provisioning swung nearly $300,000,000 from a benefit of $204,000,000 in Q2 to a provision of $77,000,000 this quarter.
Lastly, I want to focus on expenses, which excluding litigation were flat compared to Q2 as increased professional fees offset improved operating costs from the decline in delinquent loans. We believe we are on track to achieve our goal of reducing expenses excluding litigation to approximately $800,000,000 in Q4. On Slide 18, we show all other, which primarily includes our ALM actions and the operations of our UK card business and other smaller activities. All other reported a $503,000,000 pre tax loss, more than offset by certain tax benefits. The pre tax loss was a result of the negative NII market related adjustments and an increase in provisioning for UK credit card payment protection insurance.
This was partially offset by gains from securities and loan sales. Regarding the change in PPI liability, we increased it because of the notice of future regulatory guidance regarding treatments of claims and a case ruling. A comment on to our taxes before we wrap up, the company's effective tax rate for the quarter was 26%. It was lower than Q2 due to the tax benefits I mentioned earlier. I would expect the tax rate to roughly 30% next quarter excluding unusual items and specifically the UK, the recent UK tax proposals.
In terms of 2016, I would expect it to be in the low 30s. As a reminder from last quarter's announcement, we expect that the U. K. Tax proposal announced in July will result in a one time tax charge of approximately $300,000,000 upon enactment from revaluing our U. K.
DTAs. Let me conclude our prepared comments by offering these takeaways. Although the U. S. Economy is improving slowly, revenue growth remains challenging in this interest rate environment.
We are focused on those things we can control and drive. These include delivering for our clients and customers within our risk framework and driving those things we know will result in sustainable profits and returns. Our results reflect this focus. We grew both loans and deposits across our business. We delivered for our corporate and institutional clients in a challenging market environment.
We stayed focused on managing risk and we kept costs in check while investing in the business. We are getting better positioned each quarter for the current business environment and we remain well positioned to benefit when rates rise. With that, let's open it up for Q and A.
And we can take our first question from Eric Wasserstrom with Guggenheim Securities. Please go ahead.
Thanks. Good morning.
I was just wondering if we could maybe just speak a
little bit about the NII outlook, given the dynamics about the stable balance sheet, the shifts within the balance sheet and how we should think about the both the GAAP and adjusted NIM, if the interest rate environment continues to look more
or less like it does today.
Can you just kind of help us think through what all those dynamics mean for NII?
Sure. So assuming some loan growth and adjusting for day count, we would expect normalized NAI, excluding market related adjustments, to be flat to grind up as long as rates don't decline in the future. In the Q4, we think they'll grind up slightly based upon the realization of the expected forward curve and some loan growth. Okay.
And with respect to the loan growth, is that in the context of growth in the overall balance sheet or continued stability given mix shift?
I think if you just look at commercial loans year over year up 10%, last quarter up 3%, so you got to analyze that out. And what we're looking at is that we replaced discretionary assets with actually good core assets. So whether the balance sheet grows a little bit or not, it's not as critical as the assets within Sprint. So it's probably driven in near term more by mix than aggregate size growth from a GAAP basis.
Great. Thanks very much.
And we'll take the next question from John McDonald with Bernstein. Please go ahead.
Yes, hi. Wondering on expenses, you kept the core expenses flat to last quarter. Did you digest additional CCAR expenses and also some costs related to the proxy vote? What are the puts and takes on keeping that flat? And what's your outlook on the core expenses going from here in this kind of environment?
Sure. So the short answer to your question, but then I'd like to elaborate a little bit more is, yes, kept core expenses flat and we absorbed CCAR and other CCAR expenses and other investments in the business in the quarter. Just take a step back, I think the way we would ask you to think about expenses is we are seeing good expense progress within our business importantly, as we continue to invest in the future. So core expenses, which for everybody excludes litigation and LAS, are expected to remain relatively flat at, call it, a little less than $13,000,000,000 per quarter in a moderately improving business environment. As we invest in growth and use SIM and other initiatives to offset inflationary pressures.
If the business environment slows, closed, we would have to adjust. If the business environment is better, we're going to use SIEM and other efforts to improve the operating leverage of this company even incentives and other expenses increase. So, John? I would remind everybody that we did guide you that we would have increased CCAR expenses in the second half of the year. So we do have a little bit of that in the Q4 as well.
So John, just as you think about it from a headcount perspective, because that's what's going to drive 60% people cost now. For the quarter, we were down about 1,500, 1.5 In that, we actually had an increase in client facing headcount for the quarter of 1.6. So basically, we were able to achieve a reduction while we continue to invest. On top of that, the risk in CCAR FTE count, it was up about 400 for the quarter and other business hiring, especially the new kids from school were up about 1,000. So through attrition and then through other reductions, we got that down net 1.5.
So if you follow that course, last quarter we're down 3,000 or so and that was just 15 quarters in a row or something like that down that we're down a little less this quarter, but just expect it to be similar pickup next quarter. So the 12.7% we did in the 2nd quarter, remember, was a surprise to all of you. We thought it flat this quarter, which I think exceeds what our expectations were. We are laser focused on keeping it to that kind of level where we continue to invest in 1,000 plus people to go generate the business growth you're starting to see.
Okay. And Paul, in terms of the credit outlook, do you expect to kind of bounce around here? You've got charge offs in the low 900s and you did about 100 dollars in reserve release. So charge offs $900,000,000 provisions $800,000 Is that the kind of ballpark you expect to stay in near term?
I would expect to see provision in 2016 roughly where it is today.
So that's around $800,000 a quarter, something like that ballpark?
Yes. Because we're going to get a little help. John, if you look at it, you still got a little excess mortgage charge offs going through. Card continues to work its way down because this is superior credit quality and the question on the commercial side is the bounce around, it gets lumpy. But you look at bounce around gets lumpy.
But you look at the reserve release, we're down to 100. So think of that sort of 800 to 900 range a quarter and I think that's a way to think about it over the next several quarters.
Okay. Thank you.
We'll take our next question from Betsy Graseck with Morgan Stanley. Please go ahead.
Hi, good morning. Paul, I just wanted to ask you to elaborate a little bit on the comment that you made during your prepared remarks regarding the composition of the balance sheet improving, that being a benefit for trading related NII. Could you just talk through what you did and is that sustainable, the benefit to NII?
Sure. I think the answer is we just sold, for lack of a better word, sold some lower yielding assets that we use to run our business in markets and repositioned them to high yielding assets. So maybe we led a little bit of as an example, we would do a little bit of a less in prime brokerage and a little bit more in fixed income, where some yields are higher.
Okay. And then on the conversion of loans to securities for HQLA, given the fact that you mentioned that's done, what kind of core loan growth are we looking for as we move forward here?
By core, do you mean loan growth in the business segments or for the consolidated company?
Well, I guess I'll take a consolidated more than I said.
Yes. So, we grew loans as a consolidated company year over year by 1%. It was up slightly quarter over quarter. I would expect that we would be able to continue to grow the whole company in the sort of in that range. You're going to see faster growth in the core lending businesses.
We grew that year over year 9%. I'm not going to stand here and tell you that we're going to do that every quarter, but we would expect to see more robust growth in our lending segments. You have to remember that in LAS, home equity loans are still coming down. And in the discretionary portfolio, even though we're not going to have $6,000,000,000 as much as $6,000,000,000 in LTSB conversions, we still are going to see 1st mortgages run off there.
And just then lastly on this topic, when you're thinking about reinvesting deposit growth, etcetera, in securities, where are you relative to your new investments in securities versus what the portfolio yields are? Are you close to breakeven there or?
In terms of running off yield, Betsy versus the coming on yield?
Correct.
It's relatively stable.
Okay.
Our portfolio has been priced down over the years and so it's relatively stable.
Okay, thanks.
And our next question will be from Matt O'Connor with Deutsche Bank.
Good morning. Can you give us an update on the CCAR resubmission and then also comment on some of the management changes that occurred there as we think about the 2016 process, just how you might approach it differently or similar to what you've done in the past?
Why don't I start with CCAR and then maybe Brian will speak to some management. So in terms of CCAR, we submitted our resubmission on September 30 as planned. That had the involvement of the leadership of the company and the Board, significant involvement for the line of business. We tried to keep the regulators involved and up to speed every step of the way. And they have until 75 days after that submission to get back to us.
Yes, in terms of the changes, 3 months ago we told you that we were making the changes, nothing's changed in that. Terry continues to work on the CCAR process, Terry Lockland and Andrea has moved over as Chief Administrative Officer and been heavy in the process from the day that we announced it. And that transition will continue to take place over the period of time between now and the next CCAR submission in 'sixteen.
Okay. And then just separately in terms of the credit quality comments that you provided for the next several quarters, how are you thinking about energy as part of that?
I think we mentioned in the prepared remarks that our criticized assets were up modestly. If you sort of dive into the oil and gas segment, and remember last quarter we increased criticized assets about a $1,000,000,000 because of oil and gas. This quarter, we saw that increase decline significantly to about 40% of that level and then be offset by improvements in the rest of the portfolio. So we saw a modest increase in criticized assets. We feel pretty good right now where we are with oil and gas.
As you know, clients are going through the redetermination process.
And just a big picture question following up on that. There's a lot concern I think among credit folks that energy defaults have increased a lot and will continue to increase from here. But we're not really seeing all that much pressure either at you guys or the banks. Is it are you guys higher in the structure, different customer base? Why do you think there's kind of less pressure maybe with you guys and we're seeing for the industry as a whole outside of banks?
I think the answer is yes, higher in the structure and that a lot of the risk is distributed out to investors and things like that. And the companies have the reverse reserve based methodologies have hedges involved and it's more complex, I think just oil price changes. So I think as you look at it, our lending portfolio is done with our credit quality standards and settled up pretty well under the significant change in oil revenue from oil price changes.
In large corporates, we're dealing with larger companies that have a lot of different options. And in middle market, as Brian said, a lot of that lending is secured. If you look at our overall energy portfolio, we're at about 22 ish and really only about 40% of that really isn't tied. Of course, everything in that sector is tied in some way to oil and gas, but 40% of that's not really directly tied to the price of oil and gas. So, when you start just working through the numbers and you whittle that down and then you whittle down for the number of loans that we have where we have reserves, it gets to something I think that's manageable.
Okay. Thank you very much.
And the next question will come from Jim Mitchell with Buckingham Research. Please go ahead.
Hey, good morning, Paul. Just a quick question on the liability side of the balance sheet. You had highlighted that long term debt was down $6,000,000,000 or so in the quarter. I noticed that the long term debt costs were down about 11 basis points quarter over quarter. Is that sustainable in the context of TLAC?
Is there just some movement underneath the hood or is it timing? Just kind of help me think about where that debt footprint and costs go from here?
Sure. Well, we generally don't comment on our issuance plans. I guess the only guidance I would give you is we're going to try to have preferred that's roughly 1.5% of Tier 1 capital and sub debts it's roughly 2%. And in terms of TLAC, we don't know what the rules are yet. We may have to issue a little bit more debt.
But based upon what we're hearing, at least from a sort of brewer perspective, it looks to be quite manageable.
Just technically quarter to quarter there were some hedges that went from a deductive benefit that the other way around that changed that rate. So I wouldn't think that the rates the underlying rates haven't changed much. That's the way you think about it. There's just a head of cost and benefit that came through, not that it improves the spread.
But you were referring to the decline in the yield, sorry.
Right. No, that's all helpful. And maybe just on the loan growth side, what are you seeing on the demand side? Consumer has begun to pick up for you guys. Where are you seeing the most strength?
And do you think the environment still is pretty positive from a loan demand perspective in the U.
S? Yes. Well, remember, we're focused on in the consumer business on 2 things that we've been consistently focused on. We're making loans to our customers, I. E, in connection with the whole franchise.
And then secondly, we're staying in the very prime orientation. So as you think about this quarter, home equity production was $3,000,000,000 ish, which was kind of consistent with other quarters, it had grown from $1,000,000,000 up to $3,000,000,000 across the last couple of years and been very consistent. As Paul said earlier, mortgages ticked down a little bit, but year over year, they're up strong, bit seasonality in there and a little bit of refi run off. Our auto lending business is still was strong. The direct to consumer piece of that, we didn't have 2, 3 years ago, we're up to $500,000,000 a quarter production.
So we're seeing good demand, but part of it just capturing that inherent client share, wallet share that we've been after and you're seeing that materialize. The other key honestly in terms of nominal growth for us is the run off non core part that's gotten small enough over the last couple of years that we can overcome it. So the only place we still have that whole from a corporate perspective is really the home equity business. So we've resized the card business and you're seeing all the hard work, the 1,300,000 cars producing some loans even though it's a huge payment, get rate on that. You're seeing the auto lending business both direct to consumer and then what we do with dealers and stuff, strong and stable when you saw the car sales numbers strong.
And you're seeing the consumer real estate strong from the home equity production and I think solid. When you go over to GWEN, you saw loan growth there between U. S. Trust and what we call structured lending, but I don't think that that way it's lending gets started, assets, wealth assets and then also in the margin lending was more stable. It was fairly stable.
I talked to John Steele. We haven't seen a big change in our margin lending. A lot of people think investors have lowered the risk, but it's basically been relatively stable across the last few
months. Okay, great. That's helpful. Thanks.
Our next question comes from Steven Chubak with Nomura. Please go ahead.
Hello, Steven?
Hello, Steven. Your line is open. Please check the mute button.
Sorry, can you hear me
now? Yes.
All right, apologies for that. So one of your competitors revealed that their efforts to mitigate some of the G SIV indicators had actually helped push them into a lower G SIV bucket. And looking at the metrics that have been published as of year end, it looks like you're actually closer to the lower end of that 3% threshold. And we've seen some progress in terms of reduction in Level 3 assets at year end. I'm just wanting to see if you actually opportunities to manage that bucket lower somewhere closer to 2.5%.
We always manage the balance sheet against all the different constraints. And whether that's you can see the improvement in the pro form a advance ratio by 40 basis points this quarter, closing out the gaps. So we're always looking to manage the balance sheet. I wouldn't put a lot of stake in us moving ourselves fundamentally in buckets at this point, because we've been working at that the last 3 years to make sure as this rule is going to come out that we ourselves positioned as well as we could. So we'll continue to work on it, but I wouldn't expect this to change.
If you look about the risk assets and Level 3 assets and things like that in our company continue to trend down and we just work the balance sheet, but I wouldn't say that we expect to move a bucket. We could, but we don't expect to.
Okay. That's really helpful. Thanks, Brian. And maybe just digging into some of the GWIM guidance that Paul you had given earlier, the negative operating leverage has been fairly pronounced, which you acknowledged. And I did appreciate the detail at least on some of the specific factors that weighed on the margin, such as litigation and maybe some remixing in terms of revenue.
But just wanted to get a sense as to how we should be thinking about that margin trajectory going forward, assuming no elevated litigation and without any rate boost, just to get a sense as to how we should be thinking about that profitability trajectory?
Let me if you remember last quarter we talked a bit about this. There are some things that will help us, which are that some of the deal stuff runs off this year relative to next year, which would give us some positive help. But it's round numbers, nearly $100,000,000 a quarter of expense help. That's just amortization that finally runs off. So that's positive.
And I think Paul cited it and you cited back the examples of some of the non recurring things. I think you have to be careful in the year over year comparisons on the margin, because this business there is a big bank in Sutter G1 business, so $250,000,000,000 deposit franchise, a big money franchise. So all the dynamics that we talk about from the corporate obviously hit them also. And so they'll benefit more by stability in that as we compare quarters and then hopefully they'll grow out of that as they grow loans and deposits. But I think that's the thing.
The question then comes down to more philosophically, would you pull quit investing in new advisors to get a point on margin or so. And in the context of that business earning $600,000,000 to $700,000,000 after tax for us in the context of needing to drive it to another level, We still believe the right trade is to continue to invest in growth. And if the world changed and those people weren't becoming you don't see that in other people's franchises and we're doing it in connection with consumer bank, which is a critical increased success factor for our advisors. In other words, we hire people in what they call BFAs without getting that work within the consumer franchise, but our Merrell teams and we're seeing them get up to speed fast. We think that's a competitive advantage for people entering this business and we'll continue to invest in that.
So if we can't see the successful pullback on that, but right now it's worth it for our shareholders and our customers.
Okay. Thanks for that detail, Brian. And maybe just one more for me on the investment banking side. One of your competitors was talking about a pause in activity that they've experienced so far in 4Q. I recognize it's early days, but just wanted to get a sense as to what you're seeing within the Global Banking and Markets businesses.
And also if you could provide just some color or detail on what you're seeing in the backlogs by channel that would be really helpful too?
I'll let Paul hit that. But in terms of the just want to make sure, you're talking about trading or investment banking fees or both?
Both.
Okay, Paul. So,
I guess in terms of the pipeline, the pipeline right now looks quite this is investment banking fees. Pipeline right now looks quite strong. There's a decent amount of M and A in it, the timing of which can move around a lot. Some of the pipeline increase, I guess, can be attributed to transactions that were in our pipeline in the Q3, didn't come out in the Q3 and are rolling over into the Q4. We saw that type of activity in ECM.
And as markets improve, we hope that that pipeline activity will come out. In terms of sales and trading, we talked a little bit about that in the prepared remarks. We saw, I think, good activity in equity sales and trading as clients needed to rebalance risk or take advantage of opportunities, particularly in Asia. We were getting some of that flow and feel good about it. On the other hand, we do have a strong FICC business that's tied to new issuance and the new issuance market in the Q3 wasn't as strong, so some of those flows just weren't
there? The year over year last year's Q4 was pretty tough. So I think getting better than that wouldn't be great performance in sales and trading, but Tom and the team have got business pretty well positioned in terms of effectiveness. And that's why even with the slowdown in a lot of part of the quarter, we still made $1,000,000,000 and we tracked out DVA's $800,000,000 or so and that's good performance numbers.
All right, great. That's it for me. Thank you for taking my questions.
And we'll go next to Glenn Schorr with Evercore ISI. Please go ahead.
Hi, thanks. A couple of quick follow ups. Here, all your comments, so no need to repeat them on the feeling decent about credit quality and energy specifically. Just looking for 2 pieces of info, if you're willing to share either reserve as a percentage of loans for energy specifically or maybe what percentage of the criticized exposure is energy related? Just looking for more detail behind the comfort.
Thanks.
I don't think we have any of that perspective with us handy. And I'm not sure we disclosed that, but we'll follow-up with you if we do.
Okay, worth trying. In terms of what's going on in terms of the mix shift on balance sheet out of some of the discretionary assets and then to the core loan growth? I think everybody will take that all day long. And I'm curious on the if there are RWA implications that we need to think about, do those is that a heavier RWA mix even though we'll take it? I'm just curious on how that plays on the capital side.
Yes, I think that as we grow loans, obviously, our RWA is going to increase particularly on a standardized basis. It's less of an increase on an advanced basis, but they are completely tied. And as you said, we're comfortable with that given the interaction with our clients and the opportunity that brings to increase the margin relative to other investment opportunities.
I think as you think about it, remember that if you look at Page 5, and you look at the content of what's leading, coming on, especially in the consumer business and then think about running that through all kinds of models, including in the CCAR process and think about getting rid of $5,000,000,000 of home equity loans, which are basically non performing and putting on $3,000,000,000 of good home equity loans, that dynamic is pretty favorable to the overall sort of calculations. And so it's not only within categories, it's all it's not only categories, it's also within categories that we're seeing improvement in credit quality on what's coming on, especially when we run through models and things like that.
Okay. I appreciate that. One last one on you commented earlier about the strength in equities, partially driven by the good performance in the Drives business during the quarter. I guess the question is, it ebbs and flows, but maybe over the last 12 months, not just the last quarter. Is the RIVs 40%, 50% of overall equities?
Is that a number you want to share? Are
you talking about the percentage of equities as a function of what?
I'm saying in any given period, your equity markets revenues, how much of that
is driven via the derivatives business? We'll get it, Keon. I think it's less than half, but I don't have the number off the top of my head. But I think you can look at it in various pieces. We're both checking it now.
But remember that it is an integrated business. It's between 30% 40%, we just found a number. But remember, it's an integrated business, so you can't say grow the derivatives, but the cash because clients do all things with us, including fixed income and equity. So we're going together, so think 30%, 40%.
Understood. All right. Thank you.
And our next question comes from Ken Usdin with Jefferies. Please go ahead.
Hi, good morning. Brian, just one question follow-up on the loan side. You talked about the demand and where you're seeing it. But I'm just wondering in terms of like the new no excuses growth mentality from the supply side, where are the lending officers now in terms of like using the excess capacity to continue to grow the balance sheet? Is there still room from the BofA supply side to extend that growth on top of what the economy and the marketplace is giving you broadly?
Yes, I think so if you look at the different segments, if you think about on the consumer side, using it's more sales force growth and effectiveness and so in building that team. And then also the digital sales coming up, whether it's autos, whether it's credit cards are up dramatically. So you think of that engine as being both people and machine for lack of better term, but don't think it is changing credit quality or taking any kind of more risk. So Tom and Dean that run that business for us has done a good job. And so I'd say the supply is there more from a delivery capacity than it is from expanding the box or anything like that.
We've really kept it to where we want it and we think that holds us in good stead as you think through all the different dynamics in our company. When you go to the commercial side, it is simply a couple of things. In a very small business, which is reported in consumer, we've actually seen that business stabilize and start to make its way out of a runoff position. And that's again more automated scored approach. We set up approval times and done a lot of work to make ourselves more competitive, more on delivery than credit.
But if you go to the Business Banking, Commercial Banking, Global Corporate Investment Banking segment, our three versions, Katie and Knox and the team, they've actually hired over 100 people, loan officers this year. So think of that as 10% to 15% growth in loan officers, Got them hired during working, it takes time for them to get up to speed. Alistair Borswick in our middle market business, I think is up 60 this year or something like that, 70 people delivering lending and products and things behind that also is treasury services people. So again, capacity expansion in the Global Corp Investment Bank a little differently. As we look at middle market, I think that's an area where we are we used to think if we were going to take 10, let's only take 8, that's better.
We're now telling our teams, we need to understand why you're not taking 10 if that's our hold on in our capacity given transaction as example and they are doing that. So I think we are probably creating a little more not risk rating type of supply, but just that we're taking a little bit more loans because we're twice the equity we used to be. And therefore we can absorb it and the team does a great job in credit quality there. So I'd say, if you looked at across the board, consumer it's more both delivery capacity and then as you say, it's sort of taking a little more risk in terms of dollar denomination, but not in terms of on credit
quality. Okay, got it. And then Paul, one quick follow-up on GWIM. Can you just remind us how that business kind of marks itself in terms of
asset level pricing versus the transactions? It seems
like those kind of went versus the transactions? It seems like those kind of went different directions this quarter and the result was kind of flattish on a revenue perspective. So what do we need to think about in terms of where the markets have come and where we're looking ahead in terms of asset levels versus transaction type revenue activity?
Asset level would be AUM. Yes. So we continue to grow AUM and that's all good. I mean, we grew a little bit slower this quarter, but in a bad market environment, we continue to grow AM, we continue to grow deposits, we continue to grow loans. So I think everyone is doing their job.
You're right that when market activity is lower, we tend to see less activity in the transactional side of that business. There's a lot of new issuance there, mutual funds, other products that just don't come to market. And so that sort of exacerbates things when the markets are bad. Does that answer your question?
And we can take our next question from Nancy Bush with NAB Research.
Good morning, Nancy.
Good morning, guys. How are you? Two questions. One, there is an issue out there, I think, supposed to happen in 2018 on credit quality. It's just current expected credit loss.
Can you just tell us where the argument is about that right now and whether you've been able to do any preliminary work about how that would impact you?
I don't think yes, Nancy, the idea of a life alone type of reserving on the commercial all loans, it's out there. It's a the FASB is working on it. I think there's been voluminous comments, big questions about it. But when it comes out, we'll make it it'll be basically a one time adjustment type of thing and then it'd be over with. And so over the course of time, it should come out the same because you think about it, this is just putting it all in front as you put the loans on in the commercial side, especially would be a change.
So we'll get to that when we get to that, but it hasn't been clarified what the rule is. Lots of people commented on it and it would be a one time thing and as you say somewhere out in 2018 is what people currently think.
Okay. Secondly, another credit quality question. I mean, there was a lot of speculation before the quarter that and I think this is probably based on the energy outlook, that this would be the inflection point quarter in beginning to build reserves. But what you're saying and what JPMorgan said yesterday was that the credit quality outlook remains pretty stable. Can you just comment on this inflection point issue and when you think we'll get there?
Well, we're still seeing reserve releases on the consumer side of the bank. They're certainly starting to moderate. And consistent with loan growth, we're seeing some reserve additions on the commercial side of the bank. And as I said earlier, if you're looking for when those lines are going to sort of cross, we think provision as Brian and I both said is going to be roughly sort of $800,000,000 to $916,000,000 that's kind of where the conversion is going to happen someplace per quarter, but that's someplace in 'sixteen.
Nancy, remember, so we still have massive risk coming off in consumer that we are not really reserves going over to the commercial side and some is coming out net of that 100 plus 1,000,000 this quarter. We expect that to probably mitigate. And then if you get loan growth, you'll build reserves at some point, but I think that's still a bit out there.
So sometime in 2016 probably?
Well, it depends on what the loan growth is and depends on the economic scenario. But I think it's we still we're still repositioning reserves in the consumer side that are excessive. You can see in the credit statistics, we're carrying a healthy reserve for areas that are continuing to come down in terms of risk.
Okay. Thank you.
Our next question comes from Paul Miller with FBR Capital Markets.
Good morning, guys. This is actually Thomas LaCherne on behalf of Paul. Most have been asked and answered, but one quick question on the servicing side. The servicing income has been coming down at sort of a faster rate than the portfolio. And I know you guys have sort of exited most of the sales on the portfolio side.
So at what point can we sort of expect the fees to level off and is that just a function of the legacy stuff continuing to run off?
So if you go to Page 17, you can see that the rate of reduction will come down will slow down, but it will still come down on the theory that units doing. But remember, the other issue we have is we're holding more of the loan so that from a corporate perspective that also has an effect here comes in yield and not in servicing fees. So expected to keep work its way down to it's 345 this quarter, I think 300 ish is where that is sort of flat now.
Okay. And then also on Slide 17, if I may, on the 60 days delinquent, how much of that is the quarterly change? How much of that is from sales? Or is that mostly just run off?
I would say most of it
is just runoff. We're just working it out continuously. And so we still got a room to go to get it normalized. But we didn't have there's nothing big material going on in terms of sales and stuff this quarter.
Okay, that's all. Thank you.
And we'll take today's last question from Mike Mayo with CLSA. Please go ahead.
Hi. I had 3 small questions. First, you sold $3,600,000,000 of assets, mortgages and NPLs. What was the gain or sale on those sales? As I'm trying to get the gain or loss?
In total, on our gains on all our sort of loan sales this quarter, they want to sell $400,000,000
I'm sorry, dollars 400,000,000
dollars 400,000,000
Okay. That added a little bit. Should we assume that repeats or this is kind of a one off?
Yes. If you look, Mike, it's in the puts and takes we put on the first slide there.
Okay, that's fine. Higher rates, you're more asset sensitive now, I guess, dollars 4,500,000,000 to 100 basis points, you were $3,900,000,000 last quarter. Are you intentionally I mean, how do you think about that? Are you leaving money on the table by being so asset asset sensitive? Do you want to be this asset sensitive?
Maybe give the answer in the context of the last jobs report, which seems to imply rates will increase later than previously expected?
So we have not changed how we manage the interest rates since the beginning of the company. All that happened was long end rates went down from Q2 to Q3,
increasing that number. The past 91 is really the major difference.
And then lastly, Paul, you're new in the job as CFO. Actually Brian, this is the first call when we can ask the question, the question, why did the old CFO leave? And we've heard a lot
of different reports. So why did
the last CFO leave?
And Paul, as you're new in the job
as CFO, what changes might you want to make? And Paul or Brian, what changes might you want to make? And Paul or Brian, if rates don't go up for a lot longer than you expected, what is your plan B to deal with the tougher environment?
So let me answer that and then I'll let Paul talk. As we just talked about 3 months ago, Bruce has served as Chief Risk Officer and CFO for a combined 6 years and wanted to get back and run a business or do something different. So we announced that and Paul became CFO. There's nothing new to add. In terms of what we do in the environment, as we've said multiple times to earlier questions, we continue to be able to hold the core expenses flat while we make the investments, pay the increased CCAR expenses, pay for the cost of repositioning the franchise, severance and everything and we'll continue to work that.
If the environment change, we didn't think we're getting returns on that, which is good for the long term interest of our shareholders, we would reduce the investment rate.
And Paul's philosophy on being CFO, any changes with your predecessor?
I think it's a little early for me to have developed a plan in terms of radical change. We have Bruce did a tremendous job of cleaning up the balance sheet and positioning our company for growth. We've got a great team that he built and I'm getting to know all that and we'll see how it goes.
All right. Thank you.
And as it appears we have no further questions, I'd like to return the program to Mr. Lee McIntyre for closing remarks.
Thanks for joining everybody. We'll talk to you next quarter.
And this does conclude today's program. Thanks for your participation. You may now disconnect.