美國銀行 (BAC) 2012 Q3 法說會逐字稿

Welcome to today's third-quarter earnings review program.

At this time, all participants are in listen-only mode.

(Operator Instructions).

Please note today's call is being recorded.

It is now my pleasure to turn the program over to Kevin Stitt.

Please begin, sir.

Good morning.

Before Brian and Bruce begin their comments, I'd like to remind you that this presentation does contain some forward-looking statements regarding both our financial condition and financial results, and that these statements involve certain risks that may cause actual results in the future to be different from our current expectations.

For additional factors, please see our press release and SEC documents.

And with that, let me turn it over to Bruce.

Thanks, Kevin, and good morning, everyone.

I'm going to start the presentation on slide four, and as I'm sure you've all seen, for the third quarter of 2012, we reported net revenue of $20.6 billion.

Importantly, that number was reduced by about $1.9 billion for FVO and DVA, and if we adjust for that, you get to a revenue net of interest expense of $22.5 billion for the quarter.

Net income was $340 million or $0.00 a share after preferred dividends.

The results reflect the previously announced charges in late September that relate to $1.9 billion for the combination of FVO adjustments as well as DVA resulting from the significant tightening that we saw in our credit spreads during the quarter.

In addition, we had $1.6 billion pretax of total litigation expense, including the charge for the Merrill Lynch class-action settlement.

Lastly, we had about $800 million of tax expense related to the reduction in the UK tax rate.

In the aggregate, these items negatively impacted EPS by approximately $0.28.

If we turn to slide five, the results in the third quarter demonstrated ongoing momentum on several fronts.

Period-end deposits across the Company grew $28 billion or 2.7% versus the second quarter, which is an 11% annualized rate, and we accomplished that as the rates on our deposits declined slightly from 20 basis points to 18 basis points.

The net interest yield increased by 11 basis points as our liability management actions continued to benefit net interest income.

Our mortgage business, Home Loans, had its most profitable quarter, excluding asset sales, since we started reporting its results separately, with first lien production up by 13%.

Wealth & Investment Management showed growth in long-term assets under management, deposits and record loan levels, while maintaining solid margins.

Ending loans in our Global Banking segment increased 2.5% from the second quarter or 10% on an annualized basis.

Results in the capital markets area reflected strong performances both on a quarter-over-quarter as well as a year-ago basis.

We continue to invest in growth areas of our Company, such as mortgage lending, small-business banking and financial advisors.

Our 60-plus-day delinquent loans serviced out in our legacy servicing business declined 12% from second-quarter levels, and we will spend some time later in the presentation talking about what that means going forward.

Our number of full-time equivalent employees declined approximately 3000 from the end of the second quarter related to our different -- new BAC initiatives.

If you turn to slide six, a lot of information on the balance sheet highlight area.

I just want to draw your attention to three of the line items.

The first, our tangible common equity ratio improved by 12 basis points to 6.95%.

If you move down to tangible book value, it grew by $0.26 in the quarter up to $13.48.

And if you look at our adjusted loan coverage, where we look at the allowance for loans over annualized charge-offs, it improved during the quarter to 2.2 times.

If you turn to slide seven, as we've seen all year, regulatory capital continued to strengthen.

Our Basel 1 Tier 1 common capital ratio was up 17 basis points to 11.41%.

Remember, FVO and the tax charge do not impact regulatory capital.

As we near the 2013 implementation period for Basel III, we've estimated our Tier 1 common equity ratio and its components to provide a better understanding of where we are relative to the expected 2019 Basel III requirements.

Our estimate is per the final US market risk rules in the US Basel III NPRs.

As of the end of the third quarter on a fully phased-in basis, we estimate that that Basel III Tier 1 capital ratio would have been 8.97%.

Recall last quarter, we estimated Basel III under BIS Basel III guidelines to be approximately 8.1%, and 7.95% applying the US Basel III NPRs.

If we look at the components of the ratio, our Tier 1 common equity was $134.6 billion, while our risk-weighted assets would have been $1.501 trillion.

A couple points I'd like to make before we leave this slide.

If we look at the improvement in the numerator of roughly $8 billion, we did benefit during the quarter, given the reduction that we saw in the rate environment, where OCI, which goes through the balance sheet not the income statement, was up about $3.2 billion and contributed 21 basis points to that ratio.

We also benefited on the denominator in a portion of the increase due to the tightening credit spreads that we saw across the market that did benefit the denominator.

If we turn to slide eight and look at liquidity, Global Excess Liquidity Sources increased modestly from $378 billion to $380 billion during the quarter.

That was accomplished while we reduced the long-term debt footprint across the entire enterprise by about $15 billion.

A couple actions of note during the third quarter.

We had $6.2 billion of liability management actions, which consisted primarily of parent redemptions of trust preferred securities, as well as sub-debt.

And in addition to that, we had $12 billion of maturities that were repaid at the parent.

We took an additional action during the first quarter of October of calling $5.1 billion of additional trust preferred securities that will benefit NII by about $50 million in the fourth quarter of this year, and on a go-forward basis, about $300 million.

As we noted before, there will be a loss upon the redemption that we will take in the fourth quarter of about $100 million.

If we focus on the parent company for just a moment, parent company remained very strong at $102 billion.

And if you look at the reduction in liquidity compared to the reduction in the debt footprint, liquidity at the parent declined by $9 billion when the overall debt footprint at the parent shrank by $18 billion as we continued to move money from our bank subsidiaries up to the parent.

Time to required funding at the end of the quarter was at 35 months.

And as we move forward and continue to shrink the debt footprint and smooth out the maturity profile, we expect over the next six to eight quarters that you will see that time to required funding migrate down to a targeted range in the 21 to 24 month timeframe.

On slide nine, if we look at net interest income, net interest income on a reported basis increased from $9.8 billion or a yield of 2.21% in the second quarter to $10.2 billion or 2.32% during the third quarter.

If we adjust those numbers for market-related hedging effectiveness, as well as market-related premium amortization, or FAS 91, our net interest income increased from $10.3 billion or 2.32% up to $10.5 billion or 2.39% during the quarter.

If we look at the activity within the quarter, we benefited during the quarter from the reduction in long-term debt driven by both our liability management actions as well as debt repayment.

In addition, our trading-related net interest income improved during the quarter.

Partially offsetting these improvements were lower consumer loan balances and yields, as well as lower investment security yields.

Near term, if we look at where we are at the end of the third quarter and given existing rate levels, we estimate that quarterly net interest income will start at a base of approximately $10.5 billion.

The impact of our liability management actions and our long-term debt maturities are expected to offset any headwinds that we see from continued pressure on both consumer loan balances, as well as investment security portfolio repricing.

In general, as you consider the rate environment, if rates increase from the end of September, we would look to see benefits in our net interest income.

And on the other side, to the extent that rates decline, you could see reductions.

On slide 10, if we get into the businesses, in Consumer & Business Banking, earnings were $1.3 billion during the quarter, an increase of $130 million from the second quarter, driven by lower noninterest expense and provision, which were partially offset by lower revenue.

Non-interest income decreased from the second quarter due mainly to the impact of our consumer protection products.

Credit quality improved again as net charge-offs dropped $170 million.

Average deposits increased almost $4 billion or 1% from the second quarter.

On slide 11, we give you some key indicators for our Consumer & Business Banking area for the quarter.

Compared to the second quarter, debit card purchase volumes declined seasonally, while credit card purchase volumes adjusted for our portfolio divestitures were relatively flat.

Retail credit spend per active account was up 6% from the third quarter of 2011.

If we look at the US credit card loss rate, it is the lowest that we've seen since the third quarter of 2006, while the 30-plus-day delinquency rate is at a historic low.

Banking Centers declined as we continue to optimize the delivery network around customer behaviors.

We did continue to increase our mobile banking customer base to more than 11 million people, which is an 8% increase from the prior quarter and up 30% from the year-ago quarter.

If we turn to slide 12, Consumer Real Estate Services reported a loss of $877 million during the quarter versus a loss of $766 million in the second quarter of this year.

Higher revenue, which included MSR gains net of hedge results, the sale of a business and lower rep and warrant expense, were more than offset by higher expenses, as well as a higher provision.

The provision for refs and warrants was $307 million in the quarter, a decrease from $395 million that we experienced in the second quarter.

Expenses were up $672 million.

LAS drove expense increase due to higher litigation expense, servicing cost and other mortgage-related matters.

Provision increased $75 million during the quarter, driven by the impact of new regulatory guidance on loans discharged in bankruptcy, which I will discuss when I get to credit quality later in this presentation.

And it was partially offset by a recovery in the home-equity PCI portfolio due to an improvement in the home price outlook.

The Home Loans business, which is responsible for a first-lien and home-equity originations within this segment, recorded a profit of $264 million for the quarter.

First mortgage retail originations of $20 billion were up 13% from the prior quarter due to lower rates and up 19% compared with retail originations a year ago.

As you'll recall, we exited the correspondent business late last year, so current correspondent originations are non-existent versus volumes of approximately $16 billion a year ago.

Even with the exit from the correspondent channel, core production income is higher than a year ago.

Our MSR asset decreased by $621 million during the quarter, driven primarily by lower mortgage rates, and ended the quarter at $5.1 billion.

MSR hedge results more than offset market valuation decline.

And if we look at the cap rate on the MSR at the end of the period, it was at 45 basis points versus 47 basis points in the second quarter and 52 basis points a year ago.

On slide 13, we showed some comparisons of certain metrics in our legacy asset and servicing area on a linked-quarter basis, as well as compared to a year ago, as we continue to work very hard to reduce delinquent loans and find solutions for homeowners.

As you recall, the legacy assets and servicing area reflects all of our servicing operations and the results of our MSR activities.

Our domestic FTEs, excluding contractors, decreased for the first time in this area in 14 quarters.

The number of first liens serviced dropped 6% in the quarter; but more importantly, the number of 60-plus-day delinquent loans dropped by 12%.

The drop in 60-day-plus delinquencies will have a positive impact on our staffing levels in the fourth quarter and beyond as servicing costs going forward should benefit, given that we were fully staffed in the third quarter to handle the various new programs and regulations.

And as we've discussed previously, we will continue hard both working through these delinquent loans internally, as well as looking externally for solutions to reduce this number of delinquent loans.

On slide 14, you can see that our outstanding rep and warrant claims increased by 12% from the end of June versus the 41% increase we experienced during the second quarter of this year.

Outstanding claims from the GSEs did increase, albeit at a slower rate, as a result of ongoing disagreements with Fannie Mae about what constitutes a valid repurchase request.

Since June, given the settlement we discussed last quarter with Syncora, the backlog with Monolines has decreased.

On the private-label side, we had a $1.9 billion increase in outstanding claims to a total of $10.5 billion at the end of the quarter.

The increase on the private-label side is primarily due to claims received from trustees and securitization sponsors, but keep in mind, this increase in aggregate non-GSE claims was taken into consideration when we developed the increase in our reserves at the time of the Bank of New York settlement during the second quarter of last year.

We would expect these claims to continue to grow as the process for ultimate resolution continues to evolve and remains somewhat unclear.

The other thing we'd ask you to keep in mind is this table reflects the unpaid principal amount of the loans, not the actual amount of losses that are incurred on the loans.

Our reserve for refs and warrant at the end of the quarter increased slightly to $16.3 billion.

In the second quarter, we provided a range of possible loss over and above existing reserve levels of up to $5 billion, which only applied to non-GSE loans.

At the time, a range was not provided for GSE activity, as we were unable to estimate such a range.

In the third quarter, as a result of ongoing dialogue and discussion with the GSEs, we have obtained additional information from which we are now able to determine a reasonable estimate of a range of possible loss in excess of our recorded reps and warrant liability for the GSEs.

We currently estimate that the range of possible loss for both the GSEs and the non-GSEs for rep and warrant exposures could be up to $6 billion over our accruals at September 30 and compared to the up to $5 billion over accruals at June 30, which once again were only for non-GSE reps and warrant exposures.

The increase in the range of possible loss from our June 30 period is the net impact of, among other changes, updated assumptions in the inclusion of GSE rep and warrant exposure, as well as other developments.

If we move to our Global Wealth & Investment Management area on slide 15, earnings for the quarter of $542 million or a pretax margin of approximately 20% were in line with the results that we saw in the second quarter.

Period-end deposit growth of $6.4 billion and period-end loan growth of $2.1 billion helped offset the impact of the continued low rate environment.

Ending loan balances, as I mentioned earlier, were at record levels, and solid long-term AUM flows of $5.7 billion helped offset seasonal declines.

This client activity, along with the strong overall market performance in the third quarter, should benefit our fourth-quarter results.

If we move to Global Banking on slide 16, we had net income in the third quarter of $1.3 billion, which reflected higher net interest income and a reduction in expenses that was offset by gains in the second quarter related to certain legacy asset dispositions which did not recur in the third quarter.

Period-end loans and leases increased $6.7 billion or 2.5% from the second quarter, with growth across C&I, Commercial Real Estate, Leasing, as well as some quarter-end fundings.

Average deposit balances were up 5% from the second quarter to $252 billion as our corporate customers remain very liquid.

Asset quality continued to be very strong and continued the trend from prior quarters.

Net charge-offs were down, NPAs dropped 20% to $2.6 billion, and our reservable utilized criticized exposure declined 17%.

On slide 17, Investment Banking fees, Investment Banking fees at $1.336 billion were up nicely over both the prior quarter, up 17%, as well as up 42% from the year-ago period.

If we look at where we were relative to our competitors, we maintain a strong number two global ranking in fees to date.

And as you can see below, we continue to have leading market shares globally in many of these businesses.

If we switch to Global Markets on slide 18, earnings were impacted by a DVA loss of approximately $580 million and the tax charge for changes in the UK corporate tax rate.

If we back out the DVA and the charge for taxes, net income actually increased 41% from the second quarter to $789 million.

Revenue ex DVA for the entire segment was up 5%; and once again, DVA losses in the quarter, $580 million; last quarter, losses were $156 million.

And those compared to gains in the year-ago period to approximately $1.7 billion.

Sales and trading revenue ex DVA was down 3% from the second quarter, but improved substantially from year-ago levels.

Within FICC, the core businesses of credit, mortgages and rates and currencies performed very well.

Our FICC revenue ex DVA was essentially flat with the second quarter at $2.5 billion, delivering a solid performance.

In equities, excluding DVA, results decreased 8% from the second quarter as lower volatility and a continued lack of investor appetite for equity products depressed volumes.

On the expense side, expenses declined from both the second quarter and the prior year driven by lower personnel-related expense, as well as lower operational cost.

Average VaR for the quarter was $55 million, down 12% from the second quarter and 67% from the prior year.

As we look at that, we continue to generate increasing levels of revenue for each dollar of risk that we take within this segment.

On slide 19, we show you the results of All Other, which includes our Global Principal Investments business, the non-US consumer card business, our discretionary portfolio associated with interest rate risk management, insurance, as well as the discontinued real estate portfolio.

The revenue decrease from the second quarter of this year was due to a negative valuation of adjustment of $1.3 billion on structured liabilities under FVO and lower gains on debt and trust preferred repurchases, partially offset by higher equity investment income during the quarter.

The increase in non-interest expense was due to higher litigation expense, and if we were to exclude that, non-interest expense declined compared to the second quarter.

On slide 20, non-interest expense, I'd like to make a couple comments here.

Non-interest expense of $17.5 billion was down slightly from the third quarter of last year and up relative to the second quarter of this year.

If we were to back out the increase in litigation expense that we incurred during the quarter, non-interest expense actually declined from Q2 to Q3.

If we look at the components of that, we saw improvements in personnel costs and other cost savings realized from our new BAC initiatives, and that was partially offset by higher cost of mortgage servicing and other mortgage-related matters, which, as I mentioned previously, we'd expect to see come down in the fourth quarter relative to the third.

We also invested in selected growth areas during the quarter, in our mortgage loan officers or small-business bankers and our financial solutions advisors.

If we move down and you look at the number of full-time equivalent employees, we started to implement phase one of new BAC in the fourth quarter of 2011.

Outside of LAS, which is the gray bar, you can see since we began the implementation, we've reduced the FTEs across the Company, outside of legacy assets and servicing, by almost 21,000 people, or over 8% since we began that implementation.

And as you can see, legacy assets and servicing FTEs increased, but have now stabilized.

And as I said, we would expect to start seeing come down in the fourth quarter.

If we turn to slide 21, although provision was relatively flat with the second quarter, there were two events that impacted both the net charge-offs and nonperforming loans that you've heard others speak about.

The first, regulators did provide new guidance to the industry in the third quarter of this year that stated loans discharged from the courts as part of a Chapter 7 bankruptcy should be written down to collateral value and classified as nonperforming, irrespective of the borrower's payment status.

As a result, we charged off $478 million in loans and reduced reserves by $139 million, resulting in a provision increase of $339 million in the quarter as a result of this new guidance.

Nonperforming loans increased by $1.1 billion as a result of this change, and $954 million or 91% of these borrowers are current on their contractual payments.

Of these contractually performing loans, more than 70% were discharged from bankruptcy more than 12 months ago and nearly 40% were discharged 24 months or more ago.

The other change -- recall in March, we and other large mortgage servicers agreed in a settlement with the DoJ and 49 state attorneys to provide programs to assist homeowners in modifying loans and other borrower assistant programs.

We refer to that as the National Mortgage Settlement.

As a result of these agreements, we incurred charge-offs in the third quarter of $435 million related to the extinguishment of non-purchase credit impaired loans in this home equity portfolio.

This $435 million had a corresponding decrease in nonperforming loans that we reported at the end of the third quarter.

These loans were underwater and in the later stages of delinquency or were loans that were current on their junior lien, but severely delinquent on their underlying first.

Associated with the settlement, we also extinguished $1.7 billion of home equity loans in the PCI portfolio, resulting in a decline in both the portfolio, as well as the corresponding reserve.

These items have no provision impact, as reserves for these loans were already established.

If we turn to slide 22, we've laid out here the third quarter of last year, second quarter of this year and third quarter, and then adjusted the numbers on the far right column for this change in regulatory guidance in the National Mortgage Settlement.

And what you see here are three points that we'd like to make.

First is, net charge-off after making these adjustments declined $417 million or 11.5%, as our underlying asset quality trends continue to strengthen.

Second, 30-plus-day performing consumer delinquencies, excluding fully-insured consumer real estate loans, declined about $200 million or 2%.

And our nonperformers decreased $1.4 billion or 5.7% versus the second quarter, driven equally by improvements in both commercial as well as consumer loan quality.

And on the commercial side, our utilized reservable criticized exposure improved by 15% or about $3 billion.

As we look at credit quality for the balance of the year, we would expect the provision, as we discussed at the end of last quarter, to be in the range of $1.8 billion, which is what we've seen over the last two quarters, and $2.4 billion, which we saw during the first quarter.

So that guidance is unchanged from what we have given before.

With that, let me turn it over to Brian.

Thank you, Bruce.

I'm going to cover slide 23 and add a few thoughts before we take your questions.

If you think back to when we started the year, we said that we would focus on a few key areas -- building the (inaudible) Company, continuing to manage the risk, continuing reducing the cost base of the Company and driving our core business growth for the franchise.

As you look at the results Bruce covered, I think we have shown strong results and we are moving in the right direction in every area.

Our industry-leading Tier 1 common capital levels provide a solid base to serve our customers and a balance sheet that can do a great customer business.

But what I wanted to draw your attention to on this slide is the progress we've made across our three groups of customers and clients, whether it's our consumers, our companies or institutional investors.

If you look at the business lines that Bruce described, our operational metrics are improving across the board, and the costs in each of the operating businesses other than LAS were down linked-quarter and year over year while revenues continue to be solid.

For the individual consumers we serve, our deposits continue to grow.

Our net account growth was solid this quarter and we're regaining the market share in our direct-to-consumer mortgage lending business.

With our preferred clients in our consumer business, our growth continues as we continue to improve the offers we have for those clients, with increased checking account and brokerage assets in our Merrill Lynch platform.

If you think about our service network overall, we continue to optimize it, reducing branches as we meet the customer behavior changes as they move to online and mobile banking, which continues to increase nicely with 11 million users in the mobile and tablet platform.

The companies we serve are also doing more business with us.

Small-business originations are up, as Bruce stated earlier.

Loans continue to expand and investment banking fees continue to grow.

As we move to our institutional investor clients, we continue to add to our industry-leading research capabilities and our sales and trading revenue continue to do well in our overall difficult environment in the markets that we had during the summer months.

So this quarter shows the progress that our Company continues to make.

It shows the hard work of all our teammates of streamlining and simplifying the Company is paying off.

It shows the strength of the integrated business model, which serves customers and clients in a way that no other firm can.

And it shows how that combination deepens relationships, provides the best-in-class financial capabilities and will drive growth.

With that, Bruce and I would be happy to take your questions.

(Operator Instructions) Moshe Orenbuch, Credit Suisse.

Just some extraordinary, I would say, performance on the capital ratio.

I wanted to talk about that a little bit.

Did I hear correctly that that 8.97 is inclusive of the terms of the NPR?

That's correct.

Okay, that's good.

As you think about that going into -- I've heard some notes that there were some kind of benefits that could be somewhat temporary.

But obviously over the next several quarters, one would expect that to continue to improve.

Could you talk a little bit about whether you are looking for improvement either in RWAs or your deductions?

And then also how you think about that since you are likely to be more or less -- either now or certainly in three months -- at the level that you would be required by the combination of the Basel III capital requirement and the SIFI buffer.

When we look at the ratio, let's talk first about the numerator; then we can go to the denominator.

As I said, there was about $3 billion on the numerator of the $8 billion that related to things that we benefited from rates.

We'll obviously see how that goes going forward, but I do want to make sure that there was $3 billion there.

On the numerator side, because of where we are with respect to having NOLs, as we go forward, where we are going to be different than most of our peers is on the numerator side, our pretax income is going to tend to approximate the net income as it relates to capital build.

So we've got benefits going forward relative to our peers based on using those NOLs, which, as you all are aware, are excluded from a Basel perspective.

On the denominator side, there are three things that we would also continue to benefit from as we look to drive this number higher.

The first is on the retail credit side.

We noted here during the quarter that we had about $27 billion of benefit in risk-weighted assets through both the reduction in consumer exposures, as well as improvement within the credit portfolio that we saw on the consumer side.

And as we continue to reduce nonperforming mortgages, as well as one of the consumer credit portfolios in the card business, we'd look to continue to have benefit there.

The second thing is that the structured credit in some of the legacy books will continue to run off between now and 2017; we will benefit from that.

And then third, there obviously continues to be a lot of work that is done with respect to models and developing the systems to make sure that your measurements are appropriate here.

So we feel very good about the capital build during the quarter and we think as we go forward that the ability to continue to optimize and drive that Basel III number continues to have real opportunity for us.

Just to follow up on that -- that's great on the tactical side.

What about strategically, now that you are pretty much where you need to be?

How do you think about that capital level differently?

Do you think about it in terms of your approach towards allocating to businesses or distributions, and how should we think about that?

I would -- and one of the things that we highlighted -- and I'm going to speak first on Basel I, to that question -- that over the course of the last couple quarters, as we looked to optimize our Basel I ratio, we were obviously very tight and had fairly firm limits on loan growth as we looked to optimize the balance sheet.

As we've gotten the balance sheet to where we want it to be, that clearly pursuing loan growth in this rate environment is very much a priority.

And if you look at what we did during this quarter, it is the culmination of several quarters of work, where we started to see good loan growth within the GWIM business, we saw the increase in mortgage production, not all of which is loan growth, but some of it is loan growth, and then on the banking and market side, where loan growth was extraordinarily strong.

So we are using this strength in the balance sheet to look to drive growth in the loan side.

We are obviously doing it in a prudent way, with borrowers that have the credit quality that we should be extending to, and you've seen the results of some of that.

On Basel III, as we work through Basel III, a little bit of shift in mindset in that you are looking to optimize and consider both how things get measured as well as under Basel III as Basel I. Basel III going forward is going to be the governor on capital distributions, so we are obviously very mindful to be managing the balance sheet with Basel III front of mind.

We are obviously at a point at the end of the quarter, upwards of 9%, where we are very close to or in excess of the stated minimums.

We will need to see where the SIFI buffer comes out.

But think we've positioned ourselves very well for both growing the business, as well, as we look forward, going through the CCAR process.

Great.

So that should mean that if this process is ongoing that you would expect to see loan growth accelerate modestly from here?

I'm not going to suggest on an annualized basis that we saw commercial and corporate loan growth of 10% that you are going to see it accelerate.

It can bump around a little bit in any quarter.

But you should expect and know that internally with those areas that have returns, we are pushing and looking to drive loan growth.

That's correct.

I would add the impact of the portfolios that we had identified going back a couple years to run off, which helps in the capital, because as Bruce said earlier, they are actually providing capital, is less now than it was then, because, A, they are smaller and the quarterly runoff is more muted, which then allows the loan growth to come through to the bottom line.

So think about the card business, for example.

We are getting to a place where we've got it pretty well-positioned where we want, and I think we approved [875,000] new card customers this quarter.

That is a little bit more than we did last quarter.

And we are driving very high credit, exactly what we want, and we are driving that out there.

So as you think about the ability to show loan growth through the sort of all the ins and outs of the runoff portfolios, that is what you're starting to see, too, is those things are getting smaller as to the whole.

Great.

Thanks so much.

John McDonald, Sanford Bernstein.

Bruce, on the net interest income, you said that the $10.5 billion is a good starting point for the fourth quarter NII?

That's correct, John.

I guess what are the puts and takes from there?

Did you say you hope to get some debt reductions -- or the benefit from debt reductions could offset the headwinds that you expect from low rates and runoff?

Did I hear that right?

Sure.

During the third quarter we had $6.2 billion as I mentioned, of TruPS that occurred during the quarter, and $12 billion of stated maturities.

We will have the full benefit of those during the fourth quarter as opposed to just a partial benefit.

The second thing is the redemption of the TruPS will have the $50 million benefit that I mentioned in the fourth quarter, and we are continuing to push deposit pricing down.

So that is a benefit as well.

So as we look at the fourth quarter absent any unexpected decline in rates and any impact of negative hedging effectiveness or FAS 91, we would expect net interest income to be at least in the fourth quarter what it was in the third quarter.

What about next year on NII, Bruce?

Do you have additional tools on the cost funding side?

Do you hope to keep that $10.5 billion run rate or grow or see some pressure from there?

Could you give us some perspective for next year?

We are managing the portfolio to look to be able to continue to have modest increases in NII through what we are doing on the debt footprint, as well as deposit pricing.

So the goal is to continue to push that up.

We think we've got a good plan in place to continue to do that.

We obviously can't predict interest rates, but if they were to stay where they are in the forward curve or to materialize, we think we will be successful in doing that.

Okay.

Then switching over to expenses, do you have any sense of where you might be on the litigation reserve build cycle later innings, or any way to frame that for us?

The Merrill Lynch class-action settlement was a significant litigation item to get behind us.

And as you look at litigation going forward, we've narrowed it with this settlement in large part -- there are cases obviously outside of mortgage, but largely the majority of the litigation that we have now with the Merrill Lynch settlement is within the mortgage area.

And we obviously provide reserves for what we think we have, and in the disclosure we give guidance on range of possible loss for what we'd expect within the litigation area, and we continue to work through those.

With where we've built the balance sheet, obviously getting these behind us is something that we'd like to do, but we are only going to do it in a way that makes sense for the shareholder.

Okay, and then on the LAS side you mention that with the 60 plus delinquents moving down, you should start to see the LAS expenses come down next quarter?

From an operating basis, John, we saw the first decline in FTE.

You can see the contractors a little higher.

The third quarter was a big -- a lot of work because it was a combination of the Department of Justice, the timely mod work and also just the general work.

But as we look at it even since the quarter end, we've seen the headcount start to come down already even further.

So this thing has been a lot of work.

From an operating basis, we would say from the numbers of people and stuff like that, it will be down in the fourth quarter.

The question is from the litigation perspective, those are things that bounce around a little bit if you look across all the last quarters.

But from an operating basis, we've already reduced the headcount in the fourth quarter from where it was in the third quarter.

So I guess from a total expenses, all-in jumping off point for the fourth quarter, if we adjust for our own estimate of litigation reserves [purse], what would you think would be a number for the expenses to jump off from?

I think if you adjust for the litigation expenses, those are going to be a good place to jump off from.

And as Brian referenced, we think there is the opportunity within the LAS area to start driving those expenses down in the fourth quarter and clearly into 2013.

John, the way we think about it is we look at it year-over-year.

Third quarter last year, third quarter this year, you had sort of flat expenses.

But if you look at the impact of the increase in litigation, increase in LAS, the rest of the Company is down $1 billion or so in operating expenses.

And that will move up or down, because if we have a better trading quarter, we could have some more compensation there.

But you are seeing the impacts of New BAC plus the other initiatives in the Company taking the expenses down, and we are just continuing to work at it.

That being said, we are still making investments in this Company to make sure that we are doing the right thing to have the franchise we want coming out of it; so more loan officers, FSAs, preferred bankers, and $3 billion plus in systems development work this year, $700 million, $800 million of which is going to help us get the expense base down in future years.

So we're trying to balance that, but you can see the expenses from the core basis, what you are pointing out, continuing to trend down, and we are feeling better about that.

And the best news in this quarter is we think -- as you look at the LAS, you see that the breakpoint here, and we'll see how -- we will keep driving that down in the fourth quarter.

Okay.

Last thing for me is on the Mortgage Banking Fee results.

First, could you drill down a little bit for the drivers of the strong Mortgage Banking Fees?

You mentioned the origination volumes.

Just what you saw on gain on sale margins, and then also how did the MSR hedge gains contribute.

And was there a business sale as well that you mentioned?

Sure, within Mortgage Banking, we did see a business sale that was about $175 million of a small ancillary business that materialized in the quarter.

The second thing is with respect to mortgage margins, they stayed relatively firm in the third quarter relative to the second quarter, given the activities that the industry had industrywide.

And the third point of your question is if you go and look at page 26 of our supplement, when you mention the MSR hedge, that relative to the last couple quarters, we were about $350 million better in the third quarter than we had been the prior several quarters.

And we detail that on slide 26.

John, one thing I would say tying those two questions together.

On the origination side, you can see the volumes coming up.

But we've added 3000 more people during this year than we thought we would have in the underwriting fulfillment side of the good mortgage side to help us get the volumes going, and those people continue to come onstream.

So our capacity to grow there is expanding.

And some of the people that -- and they are all in the headcount numbers you see.

But some of the people that we're taking out of LAS, we're converting to the first mortgage business because teammates are experienced in mortgage and to help build our capacity.

Like a lot of our colleagues, the volume levels have been high and our capacity to get them closed with the underwriting standards has been a lot of work.

And so we've added 3000 or 4000 people, I think at this point, than where we thought we would be this year, and we will continue to do that to capture the revenue that you spoke of.

Okay.

Thanks, guys.

Chris Kotowski, Oppenheimer & Company.

I'm looking at slide 39 and slide seven on the capital, and I'm sorry, maybe I'm a little thick.

But on the slide -- and I'm trying to reconcile them.

And slide 39 is very helpful, and it's obviously nice in that the numerator is going up and the denominator is going down.

But if we were looking at slide 39, I guess which -- I'm confused about which of these movements are due to, say, changes in markets and rates and spreads and so on -- how much of the movement is actually due to changes in the underlying assets?

And then how much of the movement is due to changes in models and assumptions, if you look at the main categories on slide 39?

If you -- and this bridge between June 30 and September 30 will be very close.

Recall that when we reported it in June, we were using BIS, as opposed to at September 30, that we are now using the US NPR.

That had some about 15 basis points difference.

But with that being said, if you look at the $126.8 billion to the $134.6 billion, it is roughly $8 billion.

And of that $8 billion, roughly $3.2 billion was due to the impact that rates had on our securities portfolio, as well as our MSR.

That is the piece that was impacted by rates, that there was nothing that we directly did to impact that.

The rest of what you saw during the quarter had to do with pretax earnings before FBO, which does not affect regulatory capital.

It had to do with some different assets at the Bank that are no longer excluded from the calculation.

And it had to do with a variety of other things, including the fact that we no longer have any 10% threshold deductions in the number.

That's the bridge on the numerator.

Okay.

If you move to the denominator and you look at page 39, it is about $65 billion reduction in risk-weighted assets.

Let me give you the three biggest buckets of that.

As I mentioned earlier, the first bucket is about $27 billion as it relates to retail or consumer exposures.

The lion's share of that $27 billion had to do with either reductions in the actual exposure or the core credit improvement that we saw within the book.

And a very small amount of that had to do with any model changes or model optimization.

The second big bucket that is out there is in OTC derivatives and repos, which was about $26 billion.

If you look at those numbers, almost all of that $26 billion had to do with either reductions in exposure, improvements with how we manage collateral or improvements in the underlying quality of the counterparty.

The third bucket and the smallest bucket of which is about $18 billion is a variety of things, including within that $18 billion bucket, spread tightening that we saw out in the market that resulted in the ratio coming down.

You can see, though, that the $18 billion is relatively small compared to the overall $65 billion.

Thank you for that.

That is the best explanation any bank has ever offered, and I think it is a model for the rest of the industry, and I appreciate that.

The other thing I was just wondering, on slide 21, you were the only bank that flagged the impact of the mortgage settlement.

Everybody talked about the OCC guidance.

But is this roughly $400 million -- is this going to be a quarterly thing for a while, that we are going to -- obviously, you've made provisions for the impact of the NMS; but should we expect to see charge-offs at an elevated level for a year or two?

No, as we work through the National Mortgage Settlement, we are working very hard to be through a significant portion of the obligations that we have for modifications.

The third quarter -- if we -- and I think we have a pretty good sense for this -- without question will be the largest number like this that comes through.

Probably very small in the fourth quarter and maybe a little bit of carryover into next year, but this is by far the most significant quarter that you will see with this.

As you said, it doesn't affect the provision because you've got both a writeoff as well as an allowance, but that should be a lot smaller going forward.

Okay, great.

Thank you.

That's it for me.

Matt O'Connor, Deutsche Bank.

A couple of follow-ups on the legacy mortgage costs, and looking out beyond fourth quarter, just trying to get a sense of how quickly they may come down.

And I guess how easy you think it may be to forecast, just thinking about modest home price appreciation from here and nothing unusual on the regulatory side.

I think I would say we expect them to come down.

There have been -- one of the things that has been difficult about this is the third-party impacts and timing of that, from what we may have thought last year at this time, for example.

So the Department of Justice settlement took longer to get finalized; therefore, it took longer to put in.

So those outside impacts could happen.

But given everything we know, we would expect them to come down next quarter and beyond.

We've got to be careful because sometimes there are sort of nonoperating adjustments in there.

So just maybe think about the headcount and the work we do, because the 60-plus-day delinquencies are down, as you see on this slide, that we can forecast in the work and what we are seeing.

As we are modifying a lot of loans and getting through those, the short-sale volumes are as high as they've ever been, and the liquidation volumes are high.

So everything we see says that we just have to be a little careful about how we work quarter to quarter based on ebbs and flows and some of the legislation gets passed at state levels and things like that, and they can have an impact.

I would tell you that what we are seeing is the inventory clears very quickly.

So as we get to the properties, they sell quickly -- within 60, 90 days, that has been true.

We are seeing by geography the areas where the process can move forward, and we are seeing the outstanding 60-plus-day drop more dramatically.

That would be an example in California, Arizona, versus areas where it has moved a little slower, New Jersey or Illinois, for example.

But everything we said, this is coming down because the work is going away.

You point your finger to the one key question, which is if changes are made to policies or programs, that can slow it down.

But I don't think with as much volume we've seen reduction in 60-plus, that would overcome that, frankly.

Maybe I will just toss some numbers out there.

You're at a $12 billion annual run rate right now.

I feel like at one point you said $2 billion could be a more sustainable level as you move through all this.

So that is a $10 billion decline.

Any guess on does it take two years to get through that?

Is it five years to get through that?

I think we'd look at it and say 2013 and into 2014 you would be through that, based on everything we know today.

Okay.

But again, that is subject to caveat of somebody changing the rules, something changing the rules.

But right now, as we said, we would expect that the -- as we move through next year, the year-end numbers would still be elevated.

But as we move into 2014, you would see them come down to more normalized levels.

We are doing everything we can to get through it as quickly as possible.

Okay.

And a just separate topic here.

As we think about maybe some of the interest rates out there outside the Treasuries, so like mortgage rates, the agency RMBS rates, and I think a lot of other asset classes, you've seen rates come down in the securities side.

How do you conceptually think about managing the discretionary book from here?

I understand you're trying to grow C&I loans a little bit more, but obviously, the discretionary book is still a pretty big chunk and you have a lot of deposits that you need to try and balance.

One of the things that we are not going to do in this rate environment is stretch for yield and create an OCI problem under Basel III going forward.

So on the securities portfolio, if you aggregate the securities portfolio as well as our whole loan portfolio, it's about a $600 billion total number that we are managing.

It has an average life of about 2.5 years.

And as I mentioned on the questions for net interest income, even with where we're reinvesting things that are either come due or repaid, we think the shrinkage in the long-term debt footprint will at least cover what we've got as far as repricing, absent no changes in forward rates going forward.

You bring up a good point, which the industry is obviously focused on, is that the one area and the one asset class that doesn't have OCI risk and that is funded on the asset side the way we fund our liabilities is loan growth.

And we've been pushing over the last couple quarters for that loan growth.

And as we talked about what we saw in GWIM, as well as in the institutional side, we've started to see that loan growth.

And it's obviously, as it relates to matching in the way that we manage capital, where we would like to be.

So we are -- it is obviously an environment that is not easy to manage in, but we think we've got a variety of levers, most notably high-cost debt that we can continue to take down so that you see similar type results to what we saw this quarter.

Okay.

All right.

Thank you very much.

Ed Najarian, ISI Group.

So I guess two questions.

The first, just in terms of the GSE related mortgage repurchase claims.

Obviously, we are seeing other banks sort of move through that process, build reserves to sort of put that claim risk behind them.

Know you are in a dispute with Fannie.

Any sense of how you expect that dispute to get resolved?

Do you think that is something that you will just sort of gradually resolve with additional reserves and resolutions over time?

Do you expect to see some kind of a settlement with Fannie?

Any sense of when that overhang might get sort of put into the rearview mirror or how it will be put into the rearview mirror?

The first point we would make here, and you see it in the numbers, is that with respect to current vintages, things that have been underwritten over the last couple years, where we have an obligation to repurchase those, we have been repurchasing those.

And what you see when you look at the schedules are that the increases in the unpaid or the balance of outstanding claims, which as I said are notional, not losses, where you are seeing the buildup is in those payments where they are greater than 24 months.

So with respect to the piece that is greater than 24 months, I would really just repeat what we've said previously, that there are two ways that this gets resolved.

We have different points of view on this.

We continue to have ongoing discussions.

And I think the most likely outcomes are either that there is a settlement of sort or there is some other way that we would look to resolve that.

And that core disagreement remains, and as we've said in the disclosures and how we updated the range of possible loss, there are ongoing discussions, but there is obviously nothing done.

Yes, I guess that sort of is my point.

The two sides have this core disagreement.

I guess you are probably unwilling to speculate how you sort of come to the middle on that core disagreement.

But do you feel like it is in your best interest now to sort of maybe be more proactive on that and try to meet in the middle, try to get that settled and try to get that put behind you?

Or do you feel pretty firm in your stance that we are right and we are going to keep digging in our heels on this issue?

Given the disclosure we put out, we obviously feel pretty strongly about what our position is here.

At the same time, as we've seen in Merrill Lynch, getting these legacy issues to the extent it makes any type of economic sense for the shareholder behind us is a good thing and eliminates an element of uncertainty in your mind.

And the last thing I just said, it has got to be the right decision for the shareholders, and that is what we do day in, day out as we try to put these different issues behind us.

Okay, thanks.

And then the second question has to do with capital.

It was only about a little over a year ago that Warren Buffett was making an investment in your Company and the chatter was all around the potential to have to build capital.

Now all of a sudden, we are looking at your capital ratios and thinking a lot about excess capital.

I'm sure you probably don't want to give us outlook and predictions in terms of capital return in conjunction with the CCAR.

But can you give us a sense -- you spent so much time in the last 18 months building capital.

Clearly, there are shareholders that are obviously looking for a dividend increase.

Some are, I'm sure, looking for a stock buyback, especially after looking at the capital ratios today.

Can you give us any sense of how you are thinking about capital over the next 12 months, above and beyond what is going to be used for internal loan growth?

Those capital ratios are going to continue to build, based on some of the guidance that you just gave us over the last 45 minutes.

And there is going to be a lot of people interested in thinking about how you are your thoughts are around dividend increases and stock buyback for the next 12 months as those ratios continue to build.

I think we are doing the work on the -- we will start the work on the CCAR process in 30 days or so, when we get the information, and so we won't speculate on that.

But I think starting off at a broader perspective, we have made it clear that the capital we have in this Company has been sufficient based on all of the work that we've been doing over the last couple years.

We've included that the capital is sufficient to run the Company and to support the Company growth, and that all the capital above that, when we get the approval to do it, will go back to the shareholders, either as dividends or share repurchases.

Because we frankly built the capital level so we -- there is no reason to retain the capital at all.

So it is all your capital; it is all the shareholders' capital.

Until we get to the levels that we can return it, it is on the balance sheet and our tangible book value per share, which we focus on in growing and see that continue to grow.

And then after we hit the levels that would be the SIFI buffer plus or minus whatever cushion that we would feel comfortable and pass the CCAR, it is all going back in one way or the other way.

Last question related to that, Brian, in your mind, there still are some overhanging litigation issues.

There is still the up to $6 billion of mortgage repurchase related costs that you outlined.

Is that -- are those things that sort of, at least in the near term, will make you a little bit extra cautious on capital retention relative to where we otherwise think you might be, until you sort of get those litigation and repo issues more fully resolved?

Well, all of that has to be taken into account.

It is in the technical rules, the QRAs and things that we look at.

But think about this quarter.

We basically had a breakeven quarter.

We passed a major milestone in putting behind us a major piece of litigation that we -- and the litigation expenses were $1.6 billion or whatever they were -- and we still built capital.

So it factors into it obviously, but on the other hand, we have lots of ways to build capital.

And so we are focused on getting to a position that you suggest, which is we start returning all the capital we've promised.

We have to get through the CCAR process and until we sort of see that, we can't project on that.

But in those processes and in our mindset, all of that is factored in.

But if you look at the track record, we continue to build capital even though we've been putting behind us this major piece of litigation every quarter -- or on several quarters.

Okay, thanks a lot, guys.

Betsy Graseck, Morgan Stanley.

Two questions.

One was on the hedge that you've historically had on the AOCI book.

Have you been changing the size of that at this stage at all?

I'm sorry, you cut out, Betsy.

Can you hear me better now?

Yes.

You have a hedge on the AOCI book, and I was just wondering if you still have that in place.

On the overall securities book?

Yes.

Yes, as we've said, a lot of the longer-duration fixed rates, we do swap to floating to minimize the OCI risk.

Okay, and did you change the size of that hedge at all during the quarter?

Nothing material within the securities book this quarter, no.

Okay.

And then separately, there are some regulators who are suggesting that the debt portion of the balance sheet, from senior debt through -- actually all the way through equity -- should be somewhere in the 25% to 30% range.

And I'm wondering if -- this is a Title II question -- and I'm wondering if you've had any conversations with regulators about that?

Do you feel there is anything you would need to do in that side of the debt stack?

It is something that is very topical.

Even with the changes that we've made to our debt footprint, if you look at our debt footprint on any type of absolute and relative measure relative to our peers, we are at the high end, which obviously from an expense perspective is not a good thing.

So I can -- we are not going to predict what is going to happen going forward from a regulatory perspective.

But I think given that we have, on a relative basis, more between the parent and Merrill Lynch than our peers, that we will be able to manage that well.

We look at maturities, and over the course of the next year, we have maturities of about $30 billion of debt, and we would expect to repay a large portion of that through cash that we generate and through the existing cash resources we have with the Company.

Okay, so as we model through the next couple of years, we should assume the same pace of long-term debt decline, or a little bit of an acceleration into the next year or two?

As you model in -- what I would model in is that a large portion of the maturities the way that we lay those out will be taken out with existing cash, not new long-term debt.

Periodically, we will raise debt; we've said 21 to 24 months time to funding.

That would tend to migrate you down to a liquidity at the parent level in the ZIP code of $75 billion to $80 billion.

And as we've said, think 2013, think 2014, that the majority of that debt will be repaid with cash resources.

Okay.

Lastly on capital, one of the capital rules has to do with holding a haircut against the CRM.

I think it is an 8% haircut or so.

So when you talk about full model approvals, you're assuming that haircut goes away.

Is that correct?

Are you referring to CM -- which model -- are you referring to CEM?

Right.

As we look at and the capital numbers that we quote, we've assumed CEM and IMM approval.

And with the different work that we've done, the spread between what our IMM numbers are versus our CMM numbers has gotten much tighter.

So to the extent any model were to take longer to get approved, we've reduced that risk significantly as we've built capital.

Okay, thank you.

Nancy Bush, NAB Research, LLC.

Good morning, guys.

Two questions.

On GWIM, the 20.1% pretax margin, obviously depressed by the interest rate environment, et cetera, et cetera.

Is there a target operating margin there or is there some way we can sort of imagine a more, quote, normalized margin over the next few years?

Because it seems like that businesses is sort of undercontributing significantly at this point.

I think you point out that one of the strategies to increase margins in the Wealth Management business overall has been to drive the loans and deposits, along with the strong asset management business we have.

And I think as rates normalize, Nancy, and I guess normal is going to be hard to define here for the near term, but as they normalize, you will see those values come back up.

And that will the increase pretax margin because we don't need to do any more work to gather that in, i.e.

on the deposit side especially.

If you look at them year-over-year, they are down about 4% and expenses.

John Thiel and Keith Banks, who run the two businesses for us -- they are in US Trust and Merrill Lynch Global Wealth Management -- have been working on expenses.

So revenues year-over-year are flat and expenses are down, and they are continuing to work on the non-client-facing expenses especially, and they will be a beneficiary of all of that work.

So I think that will help the margins.

But remember that the core brokerage revenue, which is Investment Management revenue for the Merrill Lynch Group of the Company, is a lower-margin business.

Our margins are better than anybody else, and so we've got to continue to improve them.

But we'd look for that to improve, but I would be careful about assuming how much improvement.

Moving it up 3%, 4% might be doable, but I wouldn't assume it will get back to a private banking style margin, because the dominance of the Merrill Lynch -- or the traditional brokerage revenue streams.

The other thing is in that -- overall -- so remember that we are selling the International GWIM, which had low margin, which will help improve the margins going forward.

Okay.

One more question on the litigation front.

We've seen a couple of new lawsuits dumped on the banking industry over the past couple weeks.

You've got see the Schneiderman suit with JPM regarding stuff acquired in Bear Stearns, and then you've got the Fed, of course, suing Wells Fargo on FHA way pre-crisis stuff.

Are you guys vulnerable to either of those?

And have you already had provisions in the various other settlements that you have been involved in that would address any of those issues?

I think as an industry, there is no question that there has been an increase in that activity.

So by virtue of being in the industry, you are out there.

I think that one thing that is important -- and if you go back to our DOJ AG settlement, and when we took the hit for about $500 million when we announced that settlement, it covered a lot of the FHA activity predating, I believe, it was sometime in the latter half of 2009.

So that piece of it relative to others, we've resolved several quarters ago.

It was obviously -- it was a big number to resolve.

So we do have that one that is out there behind us, whereas some others don't, and it was one of the key parts of that settlement for us.

So we are a little bit different from that perspective, and we will just have to see how the balance of it unfolds and if other things come up.

Okay, thank you.

Mike Mayo, CLSA.

First question on loan growth.

What has commercial loan utilization done this quarter versus the last quarter or two?

It really -- it is not so much the utilization of revolvers that has remained in that low 30s level.

The loan growth that we are seeing is more actual funded loans that we are making as opposed to revolver draws.

And I noticed that commercial loans grew 14% annualized linked-quarter, and that the period-end loans were up a lot more than the average loans.

Is anything happening in the economy to accelerate that commercial loan growth, I guess, at the end of the quarter, or is this Bank of America's specific strategy?

I think we've been pushing and looking to do more on the lending front for several quarters, and we saw some of that materialize.

And the one note I would make, Mike -- and we have it back in the slide, if you look at our Banking segment -- we did have one or two fundings at the end of the quarter that will get repaid during the fourth quarter.

So it was a little bit accelerated in the fourth quarter.

But even if you account for that fact, we still saw very strong loan growth in the quarter.

All right.

So that will be noise when we compare fourth quarter to third quarter?

It will be, but like I said, even without that, the growth was very strong.

And you said loan growth is a priority.

Are you willing to lower rates in order to stimulate more loan growth?

We've been very disciplined, and if you look in the supplement and look at the average spread in our loan growth on the commercial side, that the new originations and the spreads on that have remained at relatively flat on both -- on a quarter-over-quarter basis.

And while we want to make loans, the loans that we make have to make economic sense and have to have the returns on capital that are consistent with where we are taking the business.

And the opportunities that we've seen and the ability to grow the book are generating those returns, and we feel good about it.

I think you have to take a step back and look at the macro environment, where here in the US, you've got banks that are competing and, given the large liquidity bases that we have and capital bases, looking to get invested.

Some of the loan growth -- and if you look at it outside of the US, as we see some of the different foreign banks pull back, the opportunities for us to grow our loan base, where, relatively speaking, we're smaller internationally, we are using the opportunity with the capital and liquidity that we have to take advantage of that.

And you can see it in some of the trade finance and other loan areas outside the United States.

All right.

So demand is not a whole lot better, you are not doing it with rates, you are gaining share from foreign banks might be part of it.

Anything else you would want to add to that list?

We referenced in the slide that in the real estate area, for the first time in several quarters, that we've seen growth in commercial real estate.

We shaped that business down when things got tough to a level that we thought made sense from a risk perspective, and we are now in a position to be able to start growing that.

And while we are focused on doing things with our customers, we've seen one or two portfolios, not huge size, that have come up that we've been able to bring in.

And when we do that, the first thing that we look at in those portfolios are how much of the exposure of the portfolio is to people that we do business with and we would like to do more.

And we've had a couple situations where we've been able to bring those portfolios in and become more significant with clients that we want to become more significant with.

And then switching gears, it was a good mortgage quarter.

Are you holding any of the newly-originated mortgages on the balance sheet or are you securitizing and selling those immediately?

A couple points on that.

The first is within -- we talked about loan growth within our Global Wealth & Investment Management area of a little over $2 billion on a notional amount for the quarter.

A portion of that was mortgage lending that we do with that client base, as well as securities-based lending, so that there was some growth in mortgages within the GWIM space.

Outside of the Global Wealth & Investment Management space, we are looking at starting to hold a little bit of conforming product, where the product is priced and has the returns that we think make sense.

So you may see in the fourth quarter and into the first quarter of next year holding a little bit more conforming product.

But there was nothing material in that light during the third quarter.

With spreads the way they are, why would you want to hold any mortgage loans on the balance sheet?

Some of the -- for the mortgage loans that we make that in many cases tend to be more nonconforming, not conforming.

Because the nonconforming pricing can make sense.

And depending on the duration, some of the conforming stuff may or may not make sense.

But your point is the right one and it is consistent with how we manage the different portfolios.

We are not going to go out on the curve and take undue interest-rate risk, chasing yield in the short term.

Last question, there has been some articles recently about Merrill Lynch hiring brokers from other firms, financial advisors.

Are we about to see a war for financial advisor talent?

Are you looking to beef up your number of financial advisors?

Or just your general strategy for expanding the thundering herd?

We haven't changed our strategy.

We've been fairly consistent in how we've worked on it.

So we basically hire experienced advisors and we bring advisors in the business through our PMD and our FSA programs, but no change from our standpoint.

Thank you.

Paul Miller, FBR.

Yes, just to piggyback on Michael on the Mortgage Banking side, you guys used to be a very large player in the mortgage banking.

We know you've exited both the wholesale and the correspondent business.

But given where we are today and how profitable the mortgage banking space is, are you rethinking that strategy?

Could you reenter the correspondent market or are you just planning to grow through the retail markets?

We are not changing the strategy.

We'll continue to grow as we've grown 14% this quarter, and a like amount in the first quarter through the direct-to-retail.

It's part of the focus of the strategy of the Company, to make mortgages to our customers and do a great job of it, as opposed to buy closed loans in the secondary market.

So therefore, just the retail side, so how much market share do you think you can gain on the retail side?

I think you are probably right around 4% or 5%.

Can we see you materially increase that or that is probably where you are going to sit?

I think 4% to 5% of the overall mortgage market.

On the direct-to-real, we are higher than that, because you take out the correspondent.

But if you just look at the number of customers who have a mortgage somewhere else who are our customers in our Wealth Management business or in our Preferred business, the amount of mortgage growth we could have would be very strong, and that will continue to build as we focus the sales teams on those efforts.

And if you look at the productivity of the mortgage loan officers we hire that work with our teams in the branches and stuff, it is multiples of the productivity of the people out working in the general field.

So as that business system continues to take hold, and even with the mortgage loan officers today, if we can get the loans processed, we could close 15%, 20%, 25% more loans per day than we do today.

So we've got lots of room to grow in this business, but we are going to do it the way which is focused on our clients with high quality loans, because the economics of the business do not support anything else.

And then just last question is your dispute with Fannie Mae, I believe you're not selling any loans to Fannie Mae; you are selling to Freddie Mac, which are both really run by the FHFA.

Is the dispute with Fannie Mae at all hindering your ability to sell loans to the GSEs?

I think we are growing faster than other people in mortgage production on a quarterly basis.

Okay, thank you very much, guys.

Thank you.

Glenn Schorr, Bank Nomura.

Two quick follow-ups.

And I appreciate all the disclosure; I just want to make sure I'm trying to compare apples to apples.

On the 8.97%, that includes all model approval.

When listening and looking at your disclosure, it sounds like excluding model approval, it would be maybe 40 basis points lower.

Am I in the ballpark?

Without IMM, it would be slightly more of a reduction than that but still below 100 basis points for IMM, Glenn.

Okay, perfect.

I know it's early, but just general gut check, what should we focus on more, with or without as we approach CCAR?

In other words, again trying to put the whole industry on an apples to apples basis of --

With or without --

IMM approval.

We are spending an inordinate amount of time making sure through the different governance channels, and the like, that we will be in a position as quickly as possible to be IMM compliant.

Obviously nobody has been declared to be IMM compliant yet, and I don't want to speculate on becoming IMM compliant.

I think the important thing is, Glenn, if you look at the work that we've done with respect to Basel III, and you look at where we are relative to our peers, we are in very good shape.

And I think the CCAR piece -- there is two things that you have to be mindful of.

The first is that last year the stated CCAR results are where your Basel I Tier 1 common is, probably gets adjusted this year to be Basel I.5 relative to a 5% reference rate.

That is the CCAR test the way it was done last year, and our sense is probably the way that it ends up being done this year.

That is the base test.

The second test is the glide path and do you show a path to being where you need to be from a Basel III perspective.

And that is why when we talk about capital, we are very focused on both of those measures, and we feel like we are in very good shape under both Basel I and Basel III at this point.

I appreciate that.

I just want to make sure I heard what I think I heard.

Some of the mortgages you are originating are putting on balance sheet.

Now obviously good credit, the customer, because it is originated from your channel.

But when gain on sale of margins are at all-time highs, is that -- it feels as an outsider that it would make sense to be selling them into the market.

But curious on how you view that balance sheeting versus selling them out.

I think what Bruce said is in the third quarter, we sold them out.

We are looking at retaining some, but it would not be material amount relative to the overall production of our mortgage business.

Okay, appreciate that.

Glenn, the second thing is you've got to remember, we got a mortgage portfolio that runs off on a balance sheet today that is $200 billion plus.

So just to have that stay in place, for lack of a better term, you have to fill it back up.

Unless someone wants to pay you a lot of money for it.

But I hear you.

And finally, the focus on earnings growth and loan growth, I think you talked effectively at all the price competition.

I'm curious if the industry has a potential to be lulled to sleep in this low-rate environment.

You mentioned you are getting the same kind of spreads on new loan originations.

It's coming at a lower rate, but we are in an excellent credit environment right now.

But curious if we were to see it turning the other way, if you feel like the industry might be putting on loans that we're being lulled to sleep on spread, but the rates actually can get eaten up pretty quickly if there is a turn in credit.

The one thing that we've not seen with loans coming is historically, when what you are referencing is the loans -- is the structuring of loans and credit quality of loans that you bring on the balance sheet starting to be impaired in this chase for yield.

The number of people globally that are looking to grow their loan books -- you have to think globally -- is less than it has historically been.

And when we are running the loan books, we are very focused on not just growing them, but making sure that the pricing returns out from a cost of capital perspective and that the structures continue to have integrity, so that if what you've just referenced happens, that we do not have losses that we are not comfortable living with.

And at this point, given what we are seeing in the global competitive market, the ability to put loans on that make sense for us and have the structures that protect us, we continue to feel very good about.

And when you think about the consumer side, even loans we originated in the -- after the standards were changed dramatically in 2008 in terms of mortgage standards, or even card standards in 2007, 2008 -- and you start to look at loans originated in the latter half of 2008 and 2009, now three years plus later -- in an environment three years plus later where I think the core environment would have been for unemployment to be lower than it is now and economic growth to be higher based on what people thought at that time, we are seeing credit performance which is much better than the expected outcome.

So we are not -- we are always checking ourselves and the question you raise, which is how do we make sure that we drive the business and don't have credit issues going forward.

What I will tell you, though, is that is where we want -- that we continue to frame this thing as to how we run the Company and focus on the core customer basis and do what they need, and aren't just changing chasing growth for growth's sake.

And that then will keep us in things like the card business, where in the past we may have drifted into credit that was more difficult from doing it.

And we are happy with our card business.

It is growing strong; it's growing with the right customers with the high credit quality.

We are not going to go reach for credit just to grow the business.

I really appreciate it.

Thanks.

Vivek Juneja, JPMorgan.

A couple of quick questions.

HARP, how much did that account for your volume into the third quarter?

The HARP volume was about 30% of the entire -- of the originations.

And how long further -- how far do you think you are in the process?

How much longer do you expect to be able to keep doing?

I think we would expect that business to continue through the lion's share of 2013.

Okay.

And then can you talk about the retail bank a little bit?

Seems like you are shutting branches, but deposits continue to grow.

So can you talk a little about what is going on there, where you are getting growth from?

And since the shutting of branches, where you are in that rationalization and despite that, it seems like you have been able to grow deposits quite a bit.

So let's go -- think about it from all different points, which is we need to bring the cost structure down, so we've been on a plan to continue to close branches.

And you can see that we did, again, 50, 60 this quarter and we will continue to do that.

We are doing it carefully, and as we close those branches, the attrition we see is well within and less than we thought it would be, so that is turning out to be good.

So that is sort of the branch closure, so we are getting what we want.

We are keeping the customers and (inaudible) less operating cost.

And that is a program that will continue carefully across many -- each quarter, there will be continued progress.

When we look at the core business, the things like the Durbin were in last year's third quarter; they're not this year's third quarter.

So you are starting to see the run rate come out of the post -- all the regulatory changes in revenue sort of linked-quarter are stabilizing, given the changes in fees have been behind us now for several quarters.

Account growth, continued net new accounts.

This mobile implementation, we're 11.1 million 800,000 new subscribers this quarter.

We are 1 million plus more than anybody else.

But the good news is the cost impact of that or the service impact of that is since we've allowed you to take a snapshot of your check, almost 1.75 million checks have gone through in literally a couple months of operations on that in the third quarter.

The payments made off of that platform are now running $1 billion plus a week, and we will probably do $60 billion in payments through that platform this year.

We've already done $40-some billion through 9/30.

And then the more important part is that's all cost optimization and service optimization, and our customer scores continue to increase -- each month, we see on our satisfaction scores -- we continue to see them increase.

But importantly in the growth areas, in the Preferred segment, we continue to see strong growth there.

We've added about 500,000 plus clients from Retail to Preferred; in other words, upgraded them through depth of relationship, which means they are bringing more than $50,000 in balances to us.

So we are quite pleased with that business, the Merrill Lynch growth.

So I think it is working, and it is working in the balance between getting the costs down on the Retail side, expanding the Preferred side and then also managing the customer experience in the middle.

All right.

Thank you.

Brennan Hawken, UBS.

Just a couple quick follow-ups.

It is encouraging, certainly, that you guys highlighted LAS expenses could come down next quarter.

But is there a way to give us a magnitude so we can know how to model this?

That's a different way to ask the same question.

The best way as you are looking to model is in the third quarter, we staffed to solve for doing everything from a change in regulation, compliance, as well as our own standards that we wanted to, as it relates to how we both service, as well as modify mortgages.

There was incremental work that was done in the third quarter to get to that point.

The best way to start and to go through the analysis is to look at the number of the 60-plus-day delinquent loans that we have, because those without question required the most amount of work.

Given where we are now, what we would expect going forward is that you would see the expenses trend down at the same rate that you see these 60-plus-day delinquencies come down, realizing it is going to be lagged by one and probably two quarters.

That is the best way to get a proxy for the manner in which you should see those expenses come down, as Brian said, ex anything unexpected that comes up from an expense perspective.

Two things.

We've got to make sure we do this right, and that is we had to build the staffing to make sure that we could do the modifications on a timely basis.

And then secondly, getting in the quarter-to-quarter, as you can see, we are trying to guide you to the longer-term.

But the key thing is we are doing everything we can as the work comes down to get the resources down at the same pace.

So it is something we are absolutely focused on, and we'll deliver for you.

But we just have to make sure we do the work right, handle the customers right.

This is a very difficult time for people to go through what is going on, because all these costs go to the modification, short sale, deed-in-lieu and foreclosure process.

Right, right.

And then how much of that decline in 60-day delinquencies was due to modified loans, and what is the re-default risk there?

Overall, we will get you some details on that, but just conceptually, each vintage of modifications performed better.

So we've gone from levels that would have been after maybe a year's worth of modification, back from 2009 and 2008 -- we've been at this longer than people remember -- that were running 50, to now we are running them in the low 20s or high teens.

So the re-default rate has gone way down because of the structure of the programs, and frankly, the duration of time after the crisis.

Okay.

And then just to make sure I understood, Brian, I think you had said that as far as the trajectory of the decline in expenses overall for 00 looking at the entire thing at LAS and taking a step back, moderate improvements in 2013, but the big lever there is 2014.

Is that right, or am I reading too much into that?

I think I was saying that you will get the improvements sort of on a quarterly basis all through 2013, and then in 2014, you will have the run rate of all that accumulated and for you in year-over-year comparisons.

But it's going to come all during 2013.

So it is not -- moderate -- we can debate about moderate when they have the expense base -- the earlier question I was discussing.

But it will come every single quarter.

So it is not going to be held up and wait.

It will come as fast as it can.

So the work we are getting out this quarter has to do with the declines in the 60-plus-day.

And the second quarter into the third quarter, it came out in the third.

And that third quarter comes out in the fourth; it just takes you a little time because you actually have to finish the work, reassign accounts and go on.

So it will come it is not even quarter by quarter; it will come month by month, week by week, all through 2013.

And your number of modifications during the quarter was 40,000.

Okay, thank you.

We will take one final question.

Absolutely, sir.

Jefferson Harralson, KBW.

Can you guys just remind us what your litigation costs were roughly per year through cycle?

We will happily get back to you on that.

I don't know off the top of my head.

That was a long time ago.

That seems like a long time ago; let's just say that.

All right.

And the other one, I just want to kind of zero in on one line item, which is on page four of the supplement.

The (inaudible) and other income, I heard you say something about that, but it went from $600 million positive to $790 million negative.

Was some of that the FVO or DVA, or is that all in the trading account piece?

The FVO switch in other income was roughly -- I believe it was $1.2 billion delta during the quarter, so that is it.

Okay.

Thank you very much, guys.

We're all set.

Thanks, everyone, for joining.

This concludes today's program.

Have a great day.

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