美國銀行 (BAC) 2013 Q3 法說會逐字稿

Good day and welcome to the Bank of America third-quarter earnings announcement.

(Operator Instructions) Please be advised today's program may be recorded.

It is now my pleasure to turn the program over to Lee McEntire.

You may begin.

Good morning to those on the phone and joining us by webcast.

Before Brian Moynihan and Bruce Thompson begin their comments, let me remind you that this presentation, which is available at BankofAmerica.com, 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.

Please see our press release and SEC documents for further information.

So with that, let me turn it over to our CEO, Brian Moynihan.

Thanks, Lee.

Good morning, everyone.

I will cover a few points, and then I will turn it over to Bruce to go through the details of the quarter, as we have done in other quarters.

Consistent with prior quarters, our Company continued to show progress on the areas we have been focused upon -- capital generation, managing risk, achieving cost savings, addressing legacy issues, and driving our core growth strategies in our core lines of business.

On the capital front this quarter, we generated $3 billion-plus of Basel 1 Tier 1 common capital.

Our Basel 3 ratios now approach 10% on a fully phased-in basis.

That capital and liquidity and the balance sheet optimization that has been going on for the last several quarters holds us in good shape with regards to the regulatory suggested or proposed requirements that we see on the horizon.

The strength and capital is allowing us to return capital to shareholders.

In the past six months we have repurchased 140 million shares, equalling about $2 billion of our $5 billion authorization.

Turning to the revenue side, we have experienced relative stability this quarter.

But of course we felt the impacts of the industrywide headwinds on a slower refi business in mortgage and a slowdown in the capital markets from a typical summer slowdown as well as the investor concerns of a political and monetary uncertainty.

On expenses, this quarter we incurred additional litigation costs.

Outside of that we continue to make progress on our expense initiatives, remaining on track to deliver the cost savings that we told you about two years ago in New BAC, and also reducing the costs in our Legacy Assets and Servicing area.

In the credit area we continue to see asset quality improve, and our net loss rates are at levels not seen since 2005.

As the macro environment slowly improved we experienced a 20% drop in net charge-offs and a decline in delinquencies from the second quarter.

Our 248,000 teammates have been fully engaged with our customer clients to drive activity.

We are pleased to see another quarter of solid loan growth in our commercial businesses, while we continue to see the consumer lending activity stabilize in our card balances and modest growth elsewhere, which has offset the runoff in our non-core portfolios.

As a Company, we reached record deposit levels this quarter, more than $1.1 trillion in deposits.

Our client balance flows in our Wealth Management clients helped us maintain our industry-leading positions.

And you have seen that Bank of America Merrill Lynch has assumed prominent roles in the marquee investment banking deals that have gone on this quarter.

We have also seen a nice trend of progress, absent some seasonality, of results in our equity trading business.

It has been gaining market share and continuing to improve.

So to sum it up, it is another solid quarter of progress in our core businesses; and I'm going to turn it over to Bruce to cover in detail the presentation.

Bruce?

Thanks, Brian, and good morning, everyone.

I am going to start my presentation on slide 5. During the quarter, we earned $2.5 billion or $0.20 per diluted share.

Before I address the core business trends let me mention a few noteworthy items from our results that we have disclosed to you previously.

First, we sold our remaining stake in CCB, recording a pretax gain of $753 million, which was partially offset by a $443 million negative impact of FVO and DVA, as our as our credit spreads continued to tighten during the quarter.

The net of these items benefited EPS by $0.02 in the quarter.

We also recorded a $1.1 billion charge to remeasure our UK deferred tax asset, given the 3% decline in the tax rate, which reduced EPS by $0.10 a share.

The net of these is obviously a reduction of $0.08.

Moving to the core business, total revenues in the quarter on an FTE basis were solid at $21.7 billion, or $22.2 billion if we exclude the FVO and DVA charges.

If we compare this to the second quarter, revenues declined on lower mortgage banking revenue as well as mostly seasonal declines within our sales and trading area.

Total non-interest expense of $16.4 billion included $1.1 billion in litigation costs, a $600 million increase in litigation cost from second-quarter levels.

The increase in these costs was partially offset by the improvement in both our Legacy Assets and Servicing costs as well as the benefits of our New BAC initiatives.

Asset quality improved significantly, with net charge-offs improving 20% from the second quarter of 2013 to $1.7 billion.

And with the reserve reductions we took in the quarter, we recorded provision expense of just under $300 million in the quarter.

On slide 6 you can see that our period-end balance sheet remained relatively stable versus the prior quarter at about $2.13 billion.

Customer activity remained solid with loans, largely led by commercial loans, up $12.8 billion.

Consumer lending activity in the quarter improved as we saw increased loan generation in our Dealer Financial Services area and our continued stabilization of card balances, which was partially offset by the runoff within our home equity portfolio.

Period-end deposits were up over $29 billion or 2.7%, led by commercial client activity and solid flows from our Wealth Management clients.

If we move down the page, tangible book value per share improved to $13.62, and our tangible common equity ratio increased above 7%.

A couple other things that I would like to mention during the quarter.

We repurchased 60 million shares for roughly $900 million during the quarter.

OCI increased by about $900 million during the quarter.

And our preferred stock includes the completion of our previously announced preferred stock redemption for just under $1 billion.

On slide 7 you can see our Basel 1 Tier 1 common ratio of 11.08% increased 25 basis points from the second quarter of 2013.

Under Basel 3 on a fully phased-in basis under the Advanced Approach, Tier 1 common capital increased by approximately $6 billion to an estimated $131.8 billion.

Our Tier 1 common ratio is 9.94%, showing a 34 basis point improvement from the second quarter of 2013.

And our estimate of the Basel 3 Tier 1 common ratio on a fully phased-in basis under the Standardized Approach would be just over 9% above our proposed 8.5% 2019 minimum requirement.

If we move to the supplemental leverage ratio, based on the proposed US requirements that don't take effect until 2018, at the end of the third quarter our bank holding company leverage ratio improved to above the proposed minimum of 5%; and our two primary banking subsidiaries, BANA and FIA, continue to be in excess of the 6% proposed minimum.

So to reiterate what Brian mentioned, there are a lot of new capital regulations proposed or finalized, and we already exceed the requirements for the various known rules on Basel 3 capital and the supplementary leverage ratio.

On slide 8, funding and liquidity, you can see our long-term debt ended the quarter $7 billion lower as maturities and the completion of our $5 billion tender offer outpaced issuances.

We have $40 billion of parent Company maturities through 2014; and as we look forward, we expect issuances to be materially below that number as we continue to reduce and smooth the maturity profile of our debt footprint.

Global excess liquidity sources of $359 billion increased from $342 billion at the end of the second quarter of 2013, and parent Company liquidity remained strong at $95 billion.

That translates into a Time to Required Funding of 35 months, well above our two-year coverage that we target.

I would also like to highlight that on October 1 of this year we have completed the legal entity merger of the Merrill Lynch Holding Company into Bank of America Corporation as part of our continued efforts to both simplify the Company and reduce cost.

We turn to slide 9, net interest income.

Net interest income on a reported basis was $10.5 billion, down from the second quarter of 2013, as the improvement in our core net interest income was more than offset by a negative impact from market-related impacts.

If we exclude those market-related impacts, net interest income built off of Q2 2013's $10.4 billion to be just north of $10.5 billion.

During the quarter, we benefited from higher rates in our discretionary book, lower long-term debt levels, higher commercial loans, and lower rates paid on deposits.

These positives were partially mitigated by lower loan yields and lower trading-related NII.

As you will note on the slide, the net interest yield excluding market-related impacts improved from 2.36% to 2.44%, driven by the lower balance sheet levels as well as our lower funding cost.

And consistent with what we mentioned last quarter, we expect to realize the benefit of higher long-term rates as we reinvest, but note that some of those benefits will occur through time.

On slide 10, we will spend a few minutes on expenses.

Total expenses for the quarter were $16.4 billion, a $1.1 billion improvement from the year-ago quarter, but up $371 million from the second quarter of this year.

I want to be clear.

As you look at expenses and see the uptick in the linked-quarter expense, we continue to deliver on our non-litigation expense reductions in our Legacy Assets and Servicing area as well as the ongoing benefits from our New BAC initiatives in the balance of the Company.

Compared to the second quarter of 2013, progress on LAS and New BAC, in addition to lower revenue-related incentive compensation, was more than offset by increased cost of litigation as well as some marketing initiatives that were accelerated from the fourth quarter of 2013.

Our litigation expenses did increase as the continued evaluation of legacy exposures led to an addition to reserves.

Our LAS expenses ex-litigation, which are shown on the gray bar on slide 10, of $2.2 billion declined $110 million from the second quarter of 2013.

And we continue to expect our fourth-quarter LAS expenses ex-litigation to be below $2 billion as we continue to make very good progress on reducing the number of 60-plus-day delinquents that we have in that business.

Our New BAC savings in the third quarter were approximately $100 million and are included in All Other, the red bar.

We also remain on track to achieve the expected $1.5 billion of New BAC quarterly cost benefits by the end of 2013 and ultimately the $2 billion quarterly benefit upon completion of the project.

From an employee staffing perspective, our number of FTEs ended the quarter at 248,000, a decline of more than 9,000 or 3.6% from the second quarter of 2013.

That was driven by staff reductions within our Legacy Assets and Servicing area, declines in home loans given the slowdown in mortgage production, as well as the continued optimization of our branch network.

While we were down by 3.6% from the end of the second quarter to the end of the third quarter, the average FTEs only declined 2.3%.

So we will get some additional benefits during the fourth quarter relative to the third from those reductions.

We touched on asset quality, slide 11.

You can see that credit quality once again improved significantly.

Net charge-offs declined to $1.7 billion, a 20% improvement on a linked-quarter basis.

As Brian referenced, our third quarter of 2013 loss rate of 73 basis points declined 21 basis points from the second quarter and is now at 2005 levels.

Delinquencies, a leading indicator of charge-offs, again declined nicely.

During the quarter, we did reduce reserves by $1.4 billion on the back of steadily improving consumer data, which resulted in a provision expense of just under $300 million.

Given what we see from the improving delinquencies as well as the current HPI trends, absent any unexpected changes in the economy, we expect net charge-offs to decline again in the fourth quarter and stabilize sometime in 2014 at approximately $1.5 billion per quarter.

Let's move into the individual lines of business on slide 12.

Our Consumer and Business Banking segment, we were very pleased with the results during the third quarter as we delivered improved earnings, with revenues growing modestly and expenses declining from both the previous quarter as well as the year-ago quarter.

This, coupled with lower credit costs within the segment resulted in net income of approximately $1.8 billion during the quarter, a 28% improvement over the previous quarter and a 32% improvement over last year.

That was achieved as we continued to do more business with our core customers.

Our average deposits were stable as our organic customer growth was offset by small branch divestitures as well as migrations to our Global Wealth and Investment Management area.

Our brokerage assets are at record levels within this business, up 6% from the second quarter and up 18% over the prior year's quarter.

Average loans, as I mentioned, reflect stability in card balances as well as growth within our Dealer Financial Services area.

Card issuance during the quarter remained strong.

We issued more than 1 million new cards in the third quarter, which is at the highest level going back to 2008.

Consistent with our relationship strategy, 63% of this issuance was to people that we have existing relationships with.

And credit quality continues to be strong as delinquencies and net losses continued to improve during the quarter.

Reduced expense levels in the segment reflect the benefits of our network optimization, partially offset by investments we continue to make as we build out our specialist salesforce in this area.

On slide 13, Commercial Real Estate Services, where we operate the production, origination, and servicing of consumer real estate loans.

In our supplemental information we report the two separate components of this segment, one focused on loan origination and the other focused on servicing and legacy issues.

On originations this quarter, first mortgage retail originations were $22.6 billion, which was down 11% from the prior quarter and up 11% compared with originations in the year-ago period.

We believe that the current-period decline in production is less than our industry peers, as we have been working through our existing pipeline.

Our current pipeline at the end of the third quarter is, however, down approximately 60% compared to the end of the second quarter of 2013, which reflects the significant reduction in market demand, particularly in the refinancing space.

Since our production revenue is booked at the point in which you lock a loan, as opposed to funding, I should point out that our lock volume was down 23% from the second quarter of 2013.

In addition to those lower lock volumes, we saw a gain on sale margins decline compared to the second quarter of 2013.

Our reduction was about 60 basis points during the quarter.

As a result of all these factors, core production revenue was down 46% to $465 million from the second quarter of 2013.

From a staffing point of view, just on the origination side, as we saw demand slow we reduced headcount by more than 1,000 employees toward the end of the quarter.

We will continue to reduce these staffing levels, to be consistent with the lower volumes that we have seen.

The other primary component in this segment, servicing revenue, declined approximately $100 million versus the second quarter as our servicing portfolio declined as we continued to complete certain servicing transfers.

The other item that I want to highlight on this slide that is particularly important is the servicing costs that we see within the Legacy Assets and Servicing area.

We have spoken a lot about reducing the number of 60-plus-day delinquencies in this portfolio, and we had a lot of success during the quarter as the number of 60-plus-day delinquent loans dropped below 400,000 units at the end of September, nearly 100,000 lower than what we had at the end of June.

Roughly half of the decline was driven by the transfers of servicing that I referenced in conjunction with the MSR sales agreements that we announced in the first quarter of 2013.

Once again, as a result of this work we continue to believe that our LAS expenses, ex-litigation, will be below $2 billion during the fourth quarter of 2013.

On slide 14, our Global Wealth and Investment Management area had another strong quarter, generating solid earnings and solid returns.

Within this segment, both Merrill Lynch and U.S. Trust maintained their leadership positions with a total of $2.3 trillion of client balances.

Revenue remains near record highs at $4.4 billion, up 8% over the third quarter of 2012.

Relative to the third quarter of 2012, net income improved 26% and was the third consecutive quarter in which our pretax margin was above 25%.

Asset management fees achieved a new record during the quarter, while our brokerage income did decline from the second quarter due to reduced market activity.

Client engagement remains quite strong.

Long-term AUM flows were $10.3 billion, near doubling last year's production.

Ending deposits were up $6.5 billion or roughly 3% from the prior quarter; and our ending client loan balances of $117.2 billion reached record levels and are up 2% from the second quarter of 2013 and 11% over the third quarter of a year ago as we continue to provide more banking products to both our Merrill Lynch and U.S. Trust clients.

On slide 15, you can see Global Banking earnings were stable relative to the year-ago period.

Revenue compared to a year ago includes the benefit of strong loan growth and stable investment banking fees.

Expenses this quarter include very good cost controls offset slightly by elevated litigation expense.

Global fee pools did decline, but we maintained our strong second-place ranking of global net investment banking fees, recording $1.3 billion of fees and improving our market share to 7.7%.

In addition, if you look at it fees within the Americas, we ranked number 1 with an 11% market share.

During 2013, we have advised on 7 of the top 15 announced M&A deals.

As we head into the last quarter of the year, the pipeline looks quite strong.

But I do want to highlight that during the fourth quarter of last year we did see record levels of debt issuance during that period.

If we look at the balance sheet, average loans increased $4.4 billion from the second quarter, with more than half of that growth driven by commercial real estate lending, with the balance by C&I lending, particularly with our large corporate clients.

Average deposits increased $12.2 billion from the second quarter of 2013, above our expectations, given certain timing considerations as well as customer liquidity that has been built around fiscal cliff concerns.

If we move to slide 16, Global Markets, we earned $531 million during the quarter after excluding the $1.1 billion UK tax charge as well as DVA losses of $291 million.

On a comparable basis, this is a decrease of $341 million compared to the third quarter of 2012 and down $403 million from the second quarter of 2013 due to lower sales and trading revenue as well as higher expense from litigation.

Sales and trading revenue, ex-DVA, was $3 billion during the quarter, an 8% declined from the comparable year-ago period.

FICC sales and trading revenue was down 20% versus the year-ago period, once again impacted by concerns regarding the Fed's position on its stimulus program as well as political uncertainty both domestically and abroad.

Our equity sales and trading area had another very strong quarter with revenues, ex-DVA, up 36% over the year-ago period as we experienced higher market volumes and continued to benefit from the repositioning of this business that has happened over the last 18 months.

We are gaining market share and we are improving our performance in each of the product lines.

Expenses in the quarter compared to the third quarter of 2012 included higher litigation costs that were partially offset by a reduction in operating expenses.

Average trading-related assets were down 4% from the year-ago period while our VaR was effectively flat.

On slide 17, we show you the results of All Other.

Gains on the sale of debt securities were $347 million in the third quarter, down $105 million from the second quarter of 2013.

You can also see the breakout of $1.1 billion of equity investment income, which reflects the CCB gains I mentioned earlier as well as an additional $368 million of gains.

The FVO that I mentioned earlier is also recorded in this segment.

Expenses include roughly $350 million during this quarter for litigation.

That compares to $100 million in the second quarter of 2013 and $950 million in the third quarter of 2012.

As we close on All Other, I would note that the effective tax rate for the quarter, ex-the impact of the UK tax reduction charge, was 25%.

And as we look forward to the fourth quarter of 2013, we expect the effective rate to be in the high 20%s.

Before we take questions I would like to leave you with several thoughts about our results.

Capital and liquidity both strengthened during the quarter.

We had encouraging business results as we saw improvement in both activity and profitability within Consumer and Business Banking.

We saw continued strength in Global Wealth Management.

We maintained our top position in Investment Banking and had another quarter of strong growth in our equity sales and trading business.

Credit continued to improve.

Our cost initiative work remains on track.

And to the extent that the steepened yield curve environment stays with us, it should allow us to move NII upward as we move forward.

We will continue to execute on our strategy and continue to deliver on the earnings power of the Company.

With that we will go ahead and open it up for questions.

(Operator Instructions) Moshe Orenbuch, Credit Suisse.

Great, thanks.

In addition, the slides have got a good breakdown of the rep and warrant reserving.

Could you talk a little bit about the litigation and how to think about the litigation costs as we go forward?

Because that is obviously still volatile.

Maybe discuss what is still remaining that could get roped into that as we go forward.

Yes, I think, Moshe, what I would say is that if you look, as we referenced, it was roughly $1.6 billion a year ago.

It was $500 million in the second quarter, and it was roughly $1 billion this quarter.

I'd go back to -- and I think we've been pretty consistent.

If you go back to 2010 and look at the build over the course of four years from both a litigation and a rep and warrant perspective, I think you can see that we have had more of that over the course of a three-and-a-half year period than anyone else out there.

And as we look at the remaining pipeline we put it in really four different buckets.

The first is the GSE bucket for rep and warrant, which with one exception we have got global settlements from the end of 2008 back with Freddie and Fannie.

So as we look at that bucket we feel very good about that.

We then go to the second bucket which is mono-lines.

You've got global settlements with three of the five mono-lines, and we have established the reserves for the remaining two based on that history of the three.

We then go to the rep and warrant.

With respect to the private label securities, the $8.5 billion Gibbs & Bruns case, which represents half the exposure, continues to go through the court process and we'll be back in court on that I believe in November.

And obviously we set up reserves at that point based on the Gibbs & Bruns history; and as we have said before, for that which we didn't have the basis to establish a reserve, we put out a range of possible loss for rep and warrant that continues to be up to $4 billion.

And then you move into the other piece that we have, that's the RMBS securities litigation.

During the quarter, the Luther, Maine settlement received preliminary approval during the quarter, and we will look to get final approval by that sometime during the fourth quarter.

And we obviously set up a reserve; and that settlement was for $500 million which represents in the ZIP Code of 65% to 70% of the Companywide exposure that we have for RMBS litigation.

And then the other two pieces that we continue to work through in that bucket are the HAFA litigation on behalf of Freddie and Fannie as well as AIG.

And there is really nothing to report new on either of those fronts.

And what you saw during the quarter, as we said, was really an adjustment to the reserves based on as we get more information and to the extent that there are additional discussions with some of the people that we're in a party with those discussions, too.

I guess just to follow up on that, because JPMorgan had indicated that they had expenses in this quarter that were substantially higher than what they would have anticipated as possible even three months ago because of a change of the regulatory environment.

Do you feel like you have taken that fully into account?

Yes, I think -- let me be a little bit more specific when we go back to it, because I think the one thing that has been overlooked a little bit -- and this is not a number we are particularly pleased with.

But if you go back to the beginning of 2010 and look at the combined litigation and rep and warrant expense that we have had in this Company, it has been over $40 billion, which I think is quite a bit higher than the number that they quoted.

Obviously, those numbers are particular to each institution.

But I think as you look at what we have tried to do, that those numbers have been significant and I think at this point relative to our peers we have tried to be out front and get through some of the larger settlements that we have.

And we think that $40-billion-plus number reflects that.

Just shifting gears on the mortgage business, you had a decline in rate locks that you identified; but the pipeline actually is down substantially more.

Could you talk a little bit about how you see the fourth quarter and into 2014?

Because you have got both the potential for obviously a further decline as the pipeline moves through.

But then again you also had a fairly high rep and warrant in the quarter.

Like how should we think about that from a revenue perspective?

I think let's talk about the production first.

You remember that we had a lot of HAMP going on, and that has been dropping each quarter as we get through the volumes of that.

And that had a pretty good impact; I think it was down roughly $3.5 billion or so linked quarter.

The rest of the production continues to move forward.

But if you look at what is really going on as we speak, because during the third quarter you had significant changes July/August as we ran through pipeline, etc.

The current pipeline stands at a level of 30,000-odd.

The current application volumes today are 1,000 plus, around 1,000.

The purchased piece of that has maintained relatively constant, 300-ish a day.

So if you think about that, we have sort of a month-and-a-half pipeline, and that has been pretty consistent as we got into September and to October.

So if you extrapolate that out you should see production levels that will be down again in the fourth quarter, but will start to mitigate.

The issue on the revenue is the spreads come in and the refinancing volume is at a higher profit margin because the work is not as much.

So we expect to see a lot like we are seeing now, spreads that have come in a couple hundred basis points or so, and we expect that to hold and the volumes will come down, and so I think the number will continue to work in that direction.

What you do mention is the other side, which is the rep and warrant exposure, and stuff that goes through there, and stuff that changes it.

Bruce can touch on that.

But in terms of overall volumes, we have started taking the people down to match the volumes.

You remember we had a lot of work to do here.

If you look at our non-HAMP production it has continued to grow each quarter.

Our home equity loan production has doubled in the last few quarters and we'll continue to drive that forward.

As we have told you many times it will never be a huge business for this Company, because it is a business which is very competitive out there and the profit margins will always be thin.

But we need to do it for our customers and clients.

And on the rep and warrant front, you are right, the rep and warrant expense was just over $300 million a quarter.

And we clearly would expect that the run rate of that expense is going to be much more in the $150 million a quarter type run rate as opposed to the $300 million-plus.

Got it.

The very last one for me is you had mentioned expected improvement in charge-offs.

The provision obviously was substantially lower.

How should we think about the provision relative to those charge-offs in Q4 and into 2014?

Yes, I think once again our comments will be assuming that we don't see any slippage in the economy.

During the quarter, if you look at the reserve release, roughly $250 million of it was from purchased credit-impaired, and roughly $1.150 billion from the core.

As we go forward I would think about the provision -- or excuse me, think about the reserve release much more consistent with what you saw in the first and second quarters of this year over the next couple quarters.

And then ultimately as we get into the latter part of 2014 and beyond, you'd expect most of that to go away.

But I do think there are probably another couple quarters where it could be in line with what we saw in the first and second quarter.

Clearly not at the third quarter of this year given the sharp improvement in credit we saw.

Great.

Thanks very much.

Betsy Graseck, Morgan Stanley.

Hi, good morning.

Just one follow-up on the conversation that we just had regarding the reps and warranties and litigation.

I heard you that the mono-line, three out of five are done; you established reserves for the other two based on the three out of five.

Is that part of the rep and warranty this quarter, the establishing reserves for the other two based on the three out of five done?

No, it is not.

Okay.

Then on the litigation reserve, there's obviously a long list of stuff in your Q; so is it fair to say that litigation reserve was just all of the above of that long list?

Or was there something specific that you saw in the quarter that drove the higher number?

I am just wondering; do we do the $1 billion quarterly in our model going forward?

Or is it going to be more episodic than that?

I think as we have said, that number tends to be lumpy.

And I wouldn't say that there was any one specific item during the quarter that you could point to.

It was really just a continued evaluation of the reserves as well as reflective of any current discussions that we are having with the different parties that we are trying to work through this with.

Okay.

Then on the LAS expenses, you indicated that next quarter is sub $2 billion.

That's correct.

Okay.

So you highlighted that your delinquents are down half from the asset sales and half from your own actions.

So is it fair to say that the reduction, roughly $300 million or so -- well, $200 million to $300 million or so, that you are calling out for next quarter is also equally half and half?

And part of the question is trying to understand.

You know the run rate of how those expenses are coming out associated with the asset sale.

And I am wondering; is that front-end loaded in 4Q?

Is that going to be 4Q through 2Q next year?

And are the organic actions you are taking likely to be equal in size in terms of the decline in the LAS expenses?

Yes, I think I would say a couple things on that, Betsy.

That once again we told you at the end of the second quarter that we would get the number of 60-plus-day units down below 375,000 units by the end of the year.

And you can see during the third quarter alone we got them down below 400,000, so we feel particularly good with that guidance.

There is a lot of work that goes on in a quarter to move out and to get these servicing transfers done as it relates to both our own teammates as well as people that we use to help us with that.

So that is why you saw some of the numbers Q2 to Q3 a little bit sticky.

But the point that you raise I think is the right one, which is -- now that you've got the loans out you have the ability to take the expense out.

And that is why we would expect the expense reduction in the fourth quarter to be greater than what we had seen in the third quarter.

I think as you look out at and as you look through 2014, the guidance that we have given is very -- really remains the same.

And we feel more comfortable with, given the delinquencies, that as you go through 2014 you should see that expense number go from below $2 billion in the fourth quarter of 2013 to below $1 billion by the end of 2014.

And it always can be a little bit lumpy, but you should see that occur generally consistently throughout the year.

Okay, thanks.

Then lastly, on page 7 you highlight the regulatory capital.

Obviously it seems like you have set yourself up well for a bigger ask in CCAR from a buyback perspective.

Is that a fair assumption to make?

Could you highlight how SLR factors into that?

And are your SLR numbers that you present fully loaded in 3Q, or is it on a phased-in approach?

Our SLR numbers are fully loaded at both the Bank Holding Company as well as at the subs.

And as we look at CCAR what I would say is I think we have been consistent on this, that we have done it and done everything we can both in the way -- intrinsically the way we run the Company, which in many respects is not inconsistent with what you get tested in CCAR, in that we have built our Basel 1.5 ratio up significantly from last year.

The Basel 3 ratios across the board are up.

As you look at both credit risk and market risk, those have obviously gotten better.

And we have continued to put the legacy issues behind us.

So as we look at -- we obviously were able to return $5 billion to the common shareholders during this year as part of the CCAR process, and we will look to move forward from that, realizing that until we see the exact case that we are running and what the test is, I think it is probably premature to say anything more than that.

Okay.

Thanks a lot.

John McDonald, Sanford Bernstein.

Yes.

Hi, good morning.

Bruce, was wondering on the net interest income side; do you think that the core NII should grind higher at a similar pace that we saw this quarter?

Looks like it was up $100 million, assuming no big change in rates.

I think that is fair, John.

You are always a little bit subject to mix, loan pricing, as well as rate environment.

But that is clearly the trajectory that we are on; so the answer would be yes.

How should we think about the market-sensitive component?

Do you still have the NII hedges on?

Or is it really the FAS 91 that adds volatility from here?

Yes, think it is important -- and the one thing that doesn't come out when you look at this slide is, it is not that we saw much variability in either FAS 91 or hedging effectiveness during the third quarter.

It was that we had some benefit in the second quarter when you had the sharp increase in rate.

So as long as you are within a reasonable range where rates aren't bouncing around, you shouldn't see much of that.

But keep in mind that what you saw in the first and second quarters was because of the largely unprecedented movement up in rates that we saw, that gave us the FAS 91 benefit.

Okay.

Over time does that FAS 91 affect dissipate, over time?

Or is that always going to be with you?

Well, it gets reset so that you don't have any aberration from quarter to quarter.

The only time you have an aberration on a run rate basis is when the underlying rates move.

Okay.

Then just any update on your rate sensitivity relative to where you stood at the end of last quarter for a 100 basis point move in long rates?

Yes, I want to think we are in the same ZIP Code both on a 100 basis point steepening as well as a 100 basis point parallel shift.

The guidance that we have given was it takes us about three years to earn back any impact in OCI.

We are a touch better than that this quarter.

If you look at the supplemental you will see that the level of debt securities is down modestly, as we are very sensitive to managing that OCI risk.

Okay.

Then just a follow-up on litigation expense.

Back in July you were thinking perhaps $500 million per quarter and clearly came in much higher than that this quarter.

Recognize things are fluid here, but should we be thinking of litigation expense more like this quarter or more like last?

Are you able to say?

John, that is really difficult to say.

I think that the punchline is that it can be lumpy.

And we obviously do and work hard each quarter -- to the extent that we can get things put behind us at reasonable levels for the shareholders, we do that.

It is an evolving process and it is something that we are working hard on.

At the same time there is no question that the expense was elevated this quarter.

Okay.

Then one more clarification on the core expenses.

How much did the expenses come down for mortgage so far and what do you see left on that?

And then just any comment on the IB comp ratio, how we should think about that going forward.

Sure.

I am not sure I understand your question on the mortgage expense --

Yes, any capacity reduction that you are doing as originations come down, have you gotten the benefit from that?

And how much might we expect for you to do that going forward?

No, as we referenced on the front -- on the legacy piece we talked about the 2.3 going to 2.2 and how we will have that below 2. As we talked about, we needed to get through the pipeline on the front end during the third quarter, which we did.

The 1,000 people that we referenced on the front end happened late in the quarter.

As I mentioned we are 1going to continue to reduce t1hat, to size that for the volumes that we are seeing now.

But we have not put out a specific number on that.

Okay.

In terms of IB comp, what we saw this quarter and how we should think about that?

Yes, we typically -- if you look at combined Investment Banking and sales and trading you tend to be in the mid to high 30s, and I don't think you are going to see any significant variations in that Q3 to Q4.

Okay, thanks.

John, one thing on the -- both in the mortgage and otherwise, as Bruce talked about, the actions we've taken during the quarter to reduce headcount overall in the Company, a lot of it is in the second half of the quarter.

So you always get a continuing-on effect of that.

And by the way, next quarter as we reduce further LAS and mortgage you will see it go into the first quarter.

So it does lag; and it is just the nature of the severance accruals you take at the time plus as we move the headcounts out, paying them on, as you go on the severance also in certain cases.

So you should expect that those volume-related reductions will continue to move forward.

And the economics of what we did in the third quarter is probably more in the fourth quarter than it is in the third quarter.

Got it.

Okay, thank you.

Glenn Schorr, ISI.

Hi, thank you.

Question on FICC.

I think the explanation on the down 20% was fair enough, and a lot of macro and political reasons, which I get.

Just curious on if you had any early comments on swaps execution and clearing impact in the quarter and what you see going forward as clients migrate.

Yes, I wouldn't really note any specific change there, Glenn.

It is something that we continue to look at.

The one thing I would say that we are working hard on -- and this really flips more to some of the capital and central clearing type things -- that as we continue to have more and more of that migrated, that is going to benefit certain capital ratios as we look at counterparty.

So I think that the ongoing -- to the extent that there is an economic negative going forward, we are obviously continuing to spend a lot of time with that.

The one piece that is a little bit more tangible that we worked through is that there will be some decent benefits over the course of 12 to 18 months as more and more of that gets migrated.

Okay.

I think as you think about the markets business, one of the things that Tom and team have done is got the -- as we talked about in various quarters -- has kept the breakeven point relatively low.

So in a quarter which the equities business was very good for us, comparatively -- but the fixed income business, which is a lot bigger than the equity business, was obviously down -- we still made $0.5 billion.

So the goal there is to be able to serve our clients and customers well and keep the balance sheet in good shape, but also keep the expense base.

So that when we get $2.5 billion to $3 billion we start making some decent money.

And then in the good quarters we will make a good amount of money, and Tom and team have done a good job to keep that expense base in line.

And most of the expense increase here is with litigation and things that were not fundamental, just show up in line of business related to broader question.

I appreciate that.

Might be putting words in your mouth but it sounds like that there is a pretty good operating leverage built-in on the upside, then.

In other words, it doesn't necessarily scale up and down with revenues to the same degree.

Yes, if you just look across the last four quarters you see it.

But the key was going from 11 to 12 we move the fundamental level, so there is good operating leverage.

You get another $1 billion in revenues, a lot of it comes through net of -- with incremental compensation here.

Okay.

One other question just on cards.

Looks like issuance and balances have been growing good.

I am just curious how much of that is you turning up the heat on marketing, selling through the branches, and how you feel about the outlook.

Because it has been a while since we saw the industry in general have decent balance growth.

Yes, I think a couple things and I'd just kind of reiterate a little bit, we touched on, is that we have made over the course of the last 12 to 18 months the investment of having more bankers in the branches and trying to do more things with our customers.

And the two things that we feel best about as you look at that growth in cards to over 1 million cards in the quarter is that -- the first is that 63% of those people, once again, we already have an existing relationship with and obviously know something about and are trying to do more with.

And the second thing I would say is that as you look at the overall FICO and credit quality of those borrowers, they tend to be in the mid-700s on average.

So it is the right customer; it is sold the right way; and it is part of an overall deepening strategy.

And now that we are starting to see some of the balances creep up, it is reflective of that activity, which I think, quite frankly, was overshadowed a little bit as we cleaned out some of the affinity and other programs, that the new stuff that you saw got overshadowed by things that were leaving the books.

But now that we are largely through that, what we are doing on the front end is starting to come out.

Okay, perfect.

Thank you.

Derek De Vries, UBS.

I just have a detailed question on the OCI.

There was a $1.4 billion gain, I think from changes in pension.

Could you just explain what that was about?

Sure.

What happens is that typically you mark your pension OCI once a year as you update the asset values and assumptions at year end.

You typically do that on an annual basis.

Because we merged several pension plans at the end of August, we were required to remeasure those assets as of the end of August.

And that $1.4 billion reflects the change in value from Jan.

1 to August 31; and then obviously we will remeasure those again at year end.

That's clear.

Thanks.

Then just on -- talking more generally, you obviously have a lot of corporate relationships, and I guess there is some unease about what is going on in Washington.

But assuming we can get through that, do you get the sense that the corporates are looking to move from margin preservation to investment?

Or are they just really worried about the macro environment?

I am trying to get a sense of where loan growth could go, going forward.

Yes, I think if you look at our client base, which ranges from small businesses through the largest companies in the world, I would say all of them feel very good about their operating position.

They are making money, have done a tremendous job of keeping a cost structure in line.

I had an example of a company that had 200 employees; their sales were going to grow by 25%; and they said we are only going to add five employees.

So American business has gotten very efficient.

But when you put on top of them the uncertainties, because they are all engaged in global commerce, the macro uncertainties at the world level, the US level, I think there has been an uncertainty hold-back here that will come through as more and more clarity both in the economy -- i.e., final demand for their products -- and the macro situation comes clear.

So is it a sprint out of the blocks?

No.

They are running forward; it will probably be a speedup of the process.

And you saw some of that this summer with some of the M&A activity and stuff in the larger companies has strengthened and you are seeing it go on.

So I think there is demand in the system, so to speak.

There is money on the sidelines from the investor side.

And the more clarity, you will see better activity.

Meanwhile, underneath it, you see the core economy continue to push forward even with all the things going on around the world.

That's very helpful.

Thanks.

Jim Mitchell, Buckingham Research.

hey, good morning.

Could you talk -- run me through the expense line a little bit on the compensation side?

I guess I am just struggling a little bit with, on a year-over-year basis you guys were down around $100 million on the comp line but headcount is down 25,000 employees.

Capital markets revenues are down.

Why are we seeing that stay elevated?

How do we see that go down more significantly going forward?

Sure.

You have a couple things going on.

The first thing I would say is that the expense number during the third quarter of last year -- and I'm going to speak to -- if you flip to slide 10 for a moment.

That if you look at that All Other bucket, which is I think what you are referring to, that $13 billion in the third quarter last year was particularly low.

If you look at where was in the fourth quarter it was at $13.4 billion; so that can bounce around by a couple hundred million dollars.

So realize it was off a low base.

You did see a couple things, though, in the third quarter of this year that you wouldn't have had.

The first is that the Wealth Management revenues, which there is a fair bit of formulaic compensation, are running at, as I mentioned, at higher levels in 2013 than 2012; so you have some compensation there.

The second thing that you had this quarter, as Brian referenced, is we took down headcount.

We had roughly $100 million of severance that came through the P&L during the quarter.

The third thing that you had during the quarter that I referenced is you had some elevated marketing expense that will go down in the fourth quarter, that you also didn't have in the third quarter.

So a combination of a variety of items.

But I think what we would say is as you look to go forward you should see that red bar come down based on our overall expense initiatives as well as New BAC.

And remember also that when we give you these reduction numbers we are not giving you a reduction and saying that then we are growing elsewhere.

This is a net number that you pointed out.

So all the investments we're making and from the third quarter last year to the third quarter of this year, you are seeing the mortgage production costs go up, which will come back down.

But all the investment we made in salespeople to do the cards that we talked about earlier, small business lending, investment services that you can see at the branch level, we can see the numbers growing there -- all those are in those numbers.

So all those investments are more commercial bankers that are helping our commercial loan growth.

And yet we are overcoming them.

And then you have the natural salary increases and stuff like that are all absorbed in that.

Then you have -- the nominal numbers are flat; and, frankly, if you back out a couple of the things that Bruce just mentioned are down.

So we are comfortable on course for New BAC.

But remember these numbers are absorbing all the usual costs that we do plus the investments in the business, which we are making strong investments in the areas that we have growth opportunity.

Okay.

No, that's helpful on the severance.

I guess I would assume that we would see some less of that going forward given the significant reductions in mortgage this quarter, right?

That's correct.

Okay, great.

Thank you.

Matt O'Connor, Deutsche Bank.

Hi, guys.

Just as we think about the overall size of the balance sheet, you mentioned managing the securities book with OCI risk in mind; and obviously the securities did come down as you mentioned this quarter, while the loans are growing.

How do we think about the net impact of those two, I guess looking out next several quarters?

As far as just notional size of the balance sheet?

Yes, I am really focused on the loans plus the securities; because obviously liquidity levels can vary quarter to quarter and the trading book can vary quarter to quarter.

So just -- I mean, loans are growing nicely, but it is being offset by securities coming down.

So I am really just focused on those two components.

Yes, I think at this point what I would expect is that generally speaking the securities book should remain relatively consistent with where it is.

And then if you look at the loan book I would say that you are going to see that the loan book as well as the shrinkage of the debt footprint will be absorbed through deposit growth, as well as a reduction to some extent in our parent Company liquidity as we are carrying an elevated level of parent Company liquidity to address the significant debt maturities in 2014.

The net of those, which I thought you were getting to initially, is that you should continue to see this balance sheet in the $2.125 billion to $2.15 billion type area.

But as we go forward we should continue to get it to be more and more efficient.

Yes, I think one of the things that we haven't talked about in a while is we still have significant runoff portfolios that we are replacing.

We still have -- which gives us the ability to grow the core business without growing the balance sheet footings.

And I think that is something that will help us in our capital levels, that are already very strong today, going forward.

Because effectively we don't need incremental capital to grow the balance sheet, even to have commercial loan growth and other types of growth that you are talking about.

Great.

So flattish balance sheet, but optimizing the capital usage; and then obviously the NIM probably benefiting from the remix there.

Yes, and you know, by the way everything is on the NIM is still -- the short rate move drives a lot of profit because the deposit franchise is an advantaged funding source, as you well know.

Then just separately, circling back on the core expenses of $13.1 billion.

I guess it is $13 billion ex- the severance and there is some of the mortgage staff reductions, still some New BAC coming in, and then maybe some investments.

Where does that -- on the revenue base that you have right now, where does that $13.1 billion go to, if you just fully loaded all the stuff that you can see?

I think the best guidance that we'd give at this point is we have got roughly $600 million a quarter in New BAC to get done over the next five to six quarters.

Okay, that is a net number; so think about it $12.4 billion, $12.5 billion?

Yes.

But then you've got to remember, you've got to add back some of the LAS costs -- the subtract in there.

But there is always -- LAS is a servicing business; it is always going to have some costs (inaudible) to.

Yes.

I guess I was just breaking the -- you've got the litigation, which is a moving target; you've got the LAS which you have been pretty explicit; and then everything else is the $13.1 billion that --

Sometimes people take that lower number and multiply it times 4, but you've got to remember parts of those other costs will also be in there.

Okay.

Thank you very much.

Vivek Juneja, JPMorgan.

My questions have been answered.

Thanks.

Mike Mayo, CLSA.

Hi, I just wanted to clarify the New BAC benefits.

How much of New BAC have you achieved?

Roughly $1.4 billion a quarter, Mike, relative to $2 billion a quarter that we had previously announced.

Originally I thought you were looking for mid-2015.

So when you say $600 million more, that is what you mean, when you say over six or so quarters?

That's correct.

Just to clarify the last answer, so you expect all that to hit the bottom line?

Or some of that will be offset by investments and salespeople and other investments?

I think what we said was at the current run rate level you should be expecting that to hit the bottom line.

Okay.

Switching back to the legal questions, you said you had taken over $40 billion of charges.

What is your legal reserve as of the end of the third quarter?

We do not put out a litigation reserve on a standalone basis.

The number that we do put out is where we are in rep and warrant, and that was just over $14 billion at the end of the third quarter.

$14 billion rep and warranty?

That's correct.

$14.1 billion.

Okay.

Would that include anything other than the $8.5 billion settlement?

That includes another $5.5 billion for a variety of matters.

So for the Gibbs & Bruns settlement you have an $8.5 billion reserve for that settlement.

I think I asked this on some other earnings calls; but if that agreement was not approved by the judge, what is the potential range for that $8.5 billion reserve?

As we have said before we would need to look at that based on the circumstances that come out at the time.

I don't think it is a foregone conclusion it goes one way or the other.

Okay.

Switching gears, in terms of loan growth, what is the loan utilization level?

And what are you seeing as far as acceleration or deceleration in loan growth?

I would say that the -- we really haven't -- and one of the things that we have tried to do and we will continue to optimize, particularly the way that the Basel 3 standardized ratio works, that we are focused more and more and for those places where we make credit commitments to have the loans be funded as opposed to unfunded, given the capital treatment that is out there.

So I would say generally as you look at line utilizations that there hasn't been much that has changed at all.

Where you are seeing the loan growth has been more funded-type loan growth, in many cases for large, high-quality companies that are making acquisitions.

A couple that we would have seen this quarter would have been Verizon Wireless as well as Amgen.

Overall, Mike, the loan utilization rates, they haven't moved around a lot but they are at low levels historically across the board, whether it is our business banking segment, the middle-market segment.

And the large corporates don't really use their lines other than as Bruce described, when they are doing something inorganic.

But they are very low, which gives you two things.

One, it indicates that they have got lots of cash and have lots of room for investments.

But secondly, as the economy picks up, moving back the 1,000 basis points or so we are from more normal levels, for lack of a better term, there is a lot of loan growth within the -- without new customer relationships or any more work.

I understand you are picking and choosing your spots more.

So would you say that demand really hasn't changed a whole lot over the past year or two?

Or is it picking up in certain areas?

I think demand has picked up over the last couple years.

I think that if a company had a line of credit in their dynamics, they are using it at a lower level than they did, not necessarily two years ago but during the normal economic times.

And that is the second point.

The demand has been picking up across consumer demand and things like that; but it is still not as strong as it would be because it's a 2% growth rate economy out there.

All right, thank you.

Guy Moszkowski, Autonomous Research.

Good morning.

I just have a few cleanup questions.

With respect to the long-term debt footprint then, have you talked about how much of the $40 billion that is coming due that you would expect to refi?

Or are you going to let it all just go?

It won't all just go, but I think it is safe to assume that less than half of it will be refinanced.

Okay, thanks.

That's helpful.

On the last question you were asked about the litigation reserve, which understandably you don't want to go there.

But do you have an estimate of what your reasonable and possible beyond the litigation reserve will be this quarter?

Yes, I believe, Guy, that at the end of the second quarter, I believe that we had said that the range of possible loss with respect to litigation was in the high $2 billions; and we will obviously need to freshen that up as we get the third quarter Q out.

But I wouldn't expect to see anything significant one way or the other.

Got it.

The $1.1 billion litigation expense and I guess reserve build this quarter, can you give us a sense of how it breaks down by business unit?

Because it didn't seem like it all goes to All Other.

Yes, if you look at by business unit, I referenced that as you float through that you had -- you can see it in the Commercial Real Estate Service area, there was over $300 million of it there.

There was roughly $300 million of it between banking and markets.

And then the majority of the rest of it was in All Other.

Great.

That's helpful.

You mentioned that you had accelerated some marketing initiatives from the fourth quarter to the third.

I was just wondering if you could give us a little color on specifically what they were, since everybody is looking for growth.

Yes, I think the only two things is that you have obviously seen a little bit more brand that is out there.

And then with CCB there was the acceleration of what we do from a charitable perspective from the fourth to the third.

Those were the two items.

Got it.

Then the very final question is, you had a meaningful improvement in your Basel 3 capital above and beyond the earnings, and it looks like it is a pretty meaningful reduction in the threshold and other deductions.

I was wondering if you could just give us a little more granularity on what was going on there.

Well, no, is a great question.

Really two things going on.

Keep in mind, as we have said, because we have a decent chunk of disallowed DTA from a Basel perspective, that ballpark we will accrete capital on a pretax basis generally speaking as opposed to a post-tax basis for a decent number of quarters going forward.

So, when you look at that, think pretax not so much post-tax.

And then the second benefit that you had, which was an earlier question, was the benefit of OCI during the quarter of roughly $1 billion after-tax or $1.5 billion pretax.

And that was the combination of pension to the positive; and then to the negative CCB coming out, as well as some of the debt securities gains.

Got it.

Okay, that's great.

Thanks so much for taking my questions.

Okay.

I think that's all the questions that we have, so thanks for joining us this morning.

This does conclude today's program.

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