Good day, everyone, and welcome to today's program. At this time, all participants are in a listen-only mode. Later, you have the opportunity to ask questions during the question-and-answer session. You may register to ask a question at any time by pressing the star and one on your touch-tone phone. You may withdraw yourself from the queue by pressing the pound key. Please note, today's call is being recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Mr. Lee McEntire. Please go ahead, sir.
Good morning. Thanks, everybody on the phone, as well as the webcast, for joining us this morning for our second quarter results. Before I turn the call over to Brian and Bruce, let me just remind you, we may make some forward-looking statements today. For further information on those, please refer to either our earnings release documents, our website, or the other SEC filings. With that, I'll turn it over to Brian Moynihan, our CEO, for some opening comments before he goes to Bruce.
Thanks, Lee. Good morning, everyone, and thank you for joining us. As you look at our results, you can see the storyline for this quarter is much the same as it was for last quarter. You can see that the revenue is showing stability in most of the core businesses. You can see the good core expense control, continued credit improvement, and solid business activity throughout the franchise. You can also see, obviously, the litigation expense from our legacy mortgage issues continue to affect our earnings this quarter. You can also see they've continued to build our strong balance sheet position in capital and liquidity. In a minute, Bruce will take you through the details of results.
I thought it'd be good if we spent a couple of minutes at the outset here talking about what our customer and client data is telling us about the economy and what we see in our franchise. As we all know, the economy is off to a little bit of a slow start this year, but growth has picked up recently. The most recent jobs data shows nearly 1.4 million jobs were created in the first half of this year. As we have strong positions, leadership positions across consumer and commercial companies in America, we have a view into the key indicators of an improving economy, which show signs everywhere of improvement. Even in advance of the short-term interest rates changing, which would help our deposit-rich consumer and business banking segment, our consumer business had another good quarter.
It performed well, growing earnings 29% from last year, included solid origination activities across the various products. In addition, as we look at our underlying consumers, they've increased their spending. We can see in our data that the retail volumes on debit and credit cards were up 4% from last year's second quarter, but more importantly, up 8% from the first quarter this year, showing increased momentum in spending among our card customers. Consumers are growing card balances also. They're borrowing a little bit more, and they continue to add to their deposit balances. As you know, home sales continue to improve across the industry, and we can see that in our own results as our originations in mortgages increase from first to second quarter. Importantly, our purchase mortgage origination continue to grow. Our home equity originations also were up almost 30% for the quarter.
When you look at the underlying transactional activity and volume activity in our stores, seven to eight million visitors come in each week, showing continued strong activity. We could also see that in our online activity, where 30 million online customers continue to grow their overall volumes. Importantly, in our mobile activity, where our 15.5 million mobile customers continue to increase the use of technology, including depositing 10% of all the retail checks in our company through their mobile phones and other devices. The health of the consumer is also evident in our asset quality. Delinquencies continue to improve. Our consumer card loss rates ended the quarter at less than 3%. We see on the wealth management side, the market's growth has added to consumer wealth.
We have nearly $2.5 trillion in client balances in our Global Wealth & Investment Management business, including $100 billion in the brokerage assets with our retail and preferred customer base in our consumer business. We also see encouraging signs throughout our commercial customers. Commercial construction has improved and manufacturing activity in our clients has accelerated. The borrowing of our commercial customers remains healthy across the industry, and credit quality is very strong. Encouraging is that middle market utilization rates are moving forward again this quarter, ever so slightly. Industry sales and trading activity among our trading counterparties has been low, as many of our peers have talked about in this low volatility environment. However, our underlying business performed well. Tom Montag and his team, head our Global Markets business, posted $1.1 billion in earnings for the quarter. Our investment banking pipeline remains strong, and the back half of 2014 looks healthy.
While the economy still faces challenges, progress is being made throughout the economy, but also throughout our company. We're seeing good business activity, and it's strengthening as we go through 2014. We're seeing improved financial health for our consumers, our customers, and our corporate customers. The most important thing to think about is the signs of a gradually improving economy is how our business is continuing to be positioned to take advantage of the activity and deliver for you, our shareholders. With that, I'll turn it over to Bruce.
Great. Thanks, Brian, and good morning, everyone. Let's start on slide two and work through the second quarter results. We reported earnings of $2.3 billion, or $0.19 per diluted share this quarter, which included pre-tax litigation expense of $4 billion, which equated to roughly $0.22 a share after tax. $3.8 billion of the litigation expense is associated with the build in reserves for previously disclosed legacy mortgage-related matters, which also included the AIG settlement that we announced this morning. We are very pleased to have reached a definitive agreement with AIG, which resolves all outstanding RMBS litigation between the parties for a settlement amount of $650 million. This agreement is important for two primary reasons. First, we have now resolved 95% of the unpaid balance of all RMBS as to which securities litigation has either been filed or threatened for all Bank of America-related entities.
It also includes AIG's agreement to withdraw as an objector to The Bank of New York Mellon private label securities settlement, referred to as the Article 77 proceeding. Revenues this quarter on an FTE basis were $22 billion. Relative to the second quarter of 2013, revenue was down $990 million, driven by lower net interest income and mortgage banking income. Relative to the first quarter of 2014, it was approximately $800 million lower as higher investment banking fees, higher mortgage banking revenue was more than offset by seasonally lower sales and trading revenue, as well as lower equity investment income. Total non-interest expense for the quarter was $18.5 billion, but included $4 billion of litigation expense.
If we back out that litigation expense and compare it to Q2 2013 expenses improved by $1 billion, or 6%, which was driven by lower LAS non-litigation expenses, and to a lesser extent, our New BAC savings. If we back out the $1 billion of retirement-eligible incentive comp from our first quarter results as well, you can see expenses declined roughly $700 million from the first quarter as a result of lower revenue-related compensation within our Global Markets business, lower LAS expenses ex litigation, and to a lesser degree, our New BAC savings. Provision for credit losses was $411 million, with net charge-offs of $1.1 billion and a reserve release of $662 million during the quarter. Our results from the quarter also benefited from the sale of $2.1 billion in non-performing residential loans.
The income statement benefit from that sale was approximately $350 million pre-tax, or $0.02 a share after tax, and you saw roughly $150 million of that benefit flow through other income, and the balance through the recovery of net charge-offs. Lastly, the aggregate amount of a few other items, including debt securities gains, equity investment income, net DVA, as well as FAS 91, resulted in a benefit to EPS of approximately $0.04 a share. If we move to slide three and look at our balance sheet highlights, you can see the balance sheet increased $21 billion from the first quarter of 2014. Our debt securities increased as a result of valuations and increases to highly liquid securities in our primary banking subsidiary. Our repo match book increased as well.
If we look at ending loans, they were down $4.3 billion, primarily due to lower residential mortgages, principally within our discretionary portfolios. That also included the $2.1 billion bulk sale that I just mentioned. If we exclude residential mortgage loans, our consumer loans rose slightly as our U.S. card balances grew $1.3 billion. Our securities-based lending with our wealth management clients increased $1.8 billion. This was partially offset by pay-downs within our home equity book. If we move to the commercial side, commercial loans were up modestly as C&I growth was mostly offset by a few sizable loan pay-downs, as well as a focus on overall relationship returns. Period-end deposits were over $1.1 trillion and reached record levels. Our tangible common equity ratio improved 14 basis points from the first quarter of 2014 to 7.14%.
Tangible book value per share was $14.24, a 3% improvement from the first quarter. Was driven by both our earnings during the quarter, as well as a $2.3 billion increase in the value of our debt securities, which you saw flow through OCI. Lastly, to further enhance our Tier 1 capital structure, during the second quarter, we received shareholder approval and amended the Series T preferred shares, which increased our Tier 1 capital by $2.9 billion. We issued $1.5 billion in preferred stock during the quarter at a favorable rate. On slide four, we show our capital ratios under Basel III. Under the transition rules, our CET1 capital was $153.6 billion, risk-weighted assets $1.28 trillion. That resulted in a ratio of 12%.
If we look at our Basel III regulatory capital ratios on a fully phased-in basis, we saw a very strong improvement from the first quarter of 2014. Our CET1 capital improved $7 billion, driven by earnings, OCI improvement, as well as lower threshold deductions. The numbers in the chart reflect risk-weighted assets under the standardized approach, with our CET1 ratio improving from 9%-9.5%, well above our 8.5% 2019 proposed minimum requirement. Under the advanced approach, our CET1 ratio improved from 9.6% at the end of the first quarter of 2014 to 9.9%. That was driven by the improvement in our capital, partially offset by an increase in risk-weighted assets. If we turn to the supplementary leverage ratios, we estimate that at the end of the second quarter of 2014, we exceeded the updated U.S. rules that are applicable beginning in 2018.
Our bank holding company exceeds the 5% minimum. Our primary bank subsidiaries, BANA and FIA, are both in excess of the 6% minimum. We turn to slide five on funding and liquidity. Our long-term debt of $257 billion was up modestly during the quarter as our debt issuances were larger than maturities during the period. As we look forward at our debt issuance during the balance of the year, we'll continue to be opportunistic. We do expect our parent issuance to be below the $13 billion of contractual maturities in the second half of 2014. We're also likely to continue to issue term debt out of our primary bank subsidiaries. Our second quarter 2014 long-term debt yields improved 12 basis points from the first quarter of 2014 to 2.29%.
We've realized significant improvement, given only two years ago, this yield was over 3%, and our average debt balances were nearly $75 billion higher. Our total global excess liquidity sources during the quarter increased to a record $431 billion as bank liquidity continued to grow in the second quarter, and our time to required funding remained strong at 38 months. If we turn to slide six, our net interest income on a reported FTE basis was $10.2 billion, consistent with the first quarter of 2014, as a less negative impact from market-related adjustments was offset by an anticipated decline in the core net interest income. Negatively impacting our reported net interest income during the quarter were market-related adjustments of $175 million, and that compares to negative $273 million in the first quarter of 2014. As you all know, long-term rates declined again during the quarter.
Our net interest income, if we exclude the market-related adjustments, declined as previously expected and communicated due to seasonally lower average consumer loan balances and yields, offset by an extra day of interest, and all of that resulted in net interest income of $10.4 billion. As a result of the increased liquidity in the first half of the year, as well as lower loan balances and loan yields, the net interest yield, excluding market-related adjustments, declined 10 basis points to 2.26%. We continue to thoughtfully manage our OCI sensitivity and are very mindful of the liquidity and leverage rules, as this quarter, we invested more into shorter duration Treasury securities. We continue to remain positioned to benefit if interest rates move higher, particularly from the shorter end of the curve.
As we head into the back half of 2014, we still expect modest improvement off of the second quarter of 2014 level of net interest income, which was $10.4 billion, excluding market-related adjustments. Non-interest expense on slide seven was $18.5 billion during the second quarter and once again included $4 billion of litigation expense. As we mentioned, $3.8 billion of the litigation expense relates to a build in reserves associated with previously disclosed legacy mortgage-related matters, including the AIG agreement. If we exclude litigation, total expenses were $14.6 billion this quarter. If we compare those to the first quarter of 2014 and exclude retirement-eligible costs that we saw during the first quarter of 2014, our expenses declined $700 million on lower incentives related to sales and trading revenue, reduced LAS non-litigation expense, and to a lesser extent, New BAC savings.
Our legacy assets and servicing expenses during the quarter, ex litigation, were $1.4 billion and declined approximately $150 million from the first quarter of 2014. As we look forward with respect to our two expense programs, New BAC, as well as our LAS expenses, ex litigation, we have modified our expectations slightly. Our New BAC expense program is ahead of schedule, and we now expect to reach a quarterly level of $2 billion in expense savings in the fourth quarter of 2014 as opposed to mid-2015. This means on an annualized basis, we will have fully achieved the $8 billion target that we announced in 2011. In the second quarter of 2014, our quarterly savings rate that was achieved on New BAC was $1.8 billion-plus.
Moving to our LAS expenses ex litigation, we continue to make very good progress, but our compliance with applicable mortgage programs as well as governance guidelines may delay the expected timing of achieving our $1.1 billion goal by one quarter. If we turn to asset quality on slide eight, you can see credit quality once again improved on all fronts. Net charge-offs declined $315 million from the first quarter of 2014 to $1.1 billion or a 48-basis point net loss ratio. As I mentioned earlier, this quarter did include a $2.1 billion sale of bulk non-performing loans, which included recoveries of $185 million on previously recorded net charge-offs. If we exclude the effect of the bulk sale net charge-offs, they declined $130 million or 9%, and the net loss ratio would have been at 56 basis points. These are decade-level lows.
Delinquencies, a leading indicator of net charge-offs, also showed improvement during the second quarter. Provision expense during the quarter was $411 million. We released $662 million of reserves. We would expect net charge-offs going forward to continue to show modest improvement from the second quarter of 2014 levels of $1.3 billion, which excludes the recoveries that we received on the non-performing loan sales. We would also expect reserve releases to decline modestly through the balance of 2014. Let's walk through the business segment results now starting on slide nine with Consumer and Business Banking. We continue to make solid progress on the strategy in this business through deepening relationships and reducing our costs by optimizing the delivery network.
We're simplifying the product set as we reduce the number of offerings and focus the smaller product set on customer feedback and offer greater rewards to customers who bring us more of their relationships. Some of the more significant operational activity during the quarter included the rollout of an advanced platform for mobile banking that had added functionality, rolling out the SafeBalance checking account, as well as an enhanced Preferred Rewards program that we launched after a successful pilot program. We're pleased with the results again this quarter, as our earnings of $1.8 billion grew 29% from the second quarter of 2013. We're up 7% from the first quarter of 2014. This business generated a 24% return on allocated capital during the quarter. Our revenue was relatively stable across the periods as lower net interest income was partially offset by higher service charges.
Our expenses are down 4% from the second quarter of 2013 on lower operating, litigation, and personnel costs. Our network delivery optimization benefits continued as we reduced another 72 banking centers through both sales as well as consolidations. Our credit quality remains strong as net charge-offs decline versus both periods. Our U.S. credit card business exited the quarter with less than a 3% loss rate in June. Second quarter provision expense was $534 million. Our net charge-offs improved $313 million from the second quarter of 2013 and $36 million from the first quarter of 2014. We released $120 million more in reserves this quarter than the second quarter of 2013 and $242 million more than the first quarter of 2014.
From a customer activity perspective this quarter, we saw continued growth in our mobile banking customers, which reached $15.5 million customers, and our customer deposit transactions using mobile devices represented 10% of all transactions. Our average deposits of $544 billion are up organically almost $11 billion or 2% compared to the first quarter of 2014 and up 5% or nearly $25 billion compared to the second quarter of 2013. We did that as our rates paid on our deposits reached a new low of six basis points. Our brokerage assets surpassed $105 billion and are up 26% year-over-year based on both improved market valuation as well as customer flows. Our card issuance remains strong at 1.1 million new accounts in the second quarter of 2014, with approximately two-thirds of those cards going to existing customers.
We saw growth in ending U.S. credit card balances this period, with ending balances up $1.3 billion relative to the first quarter of 2014, and our risk-adjusted margin remains strong at approximately 9%. If you move to Consumer Real Estate Services, the loss in the quarter was driven by $3.8 billion of litigation expense. Overall, we saw higher originations, improved mortgage banking revenue, and lower cost in both the fulfillment as well as the servicing sides of the business. Let's focus first on the reported sub-segment of home loans, where we record the origination of Consumer Real Estate. Our home loans saw better leverage versus the first quarter of 2014, as both revenue and expenses improved. Our first mortgage retail originations were $11.1 billion, we're up 25% from the first quarter of 2014, leading to higher core production revenue.
As Brian mentioned, our mix of originations continues to shift to purchase, as we're now at 47% purchase versus 17% in the year-ago quarter. At the end of the quarter, our origination pipeline was up 15% from the first quarter of 2014, our applications per day are slowing a bit. Our home equity originations were $2.6 billion, an increase 31% from the first quarter of 2014. We continued to reduce production staffing levels, the savings from several quarters of these reductions are beginning to show in our expense levels. If we move to the Legacy Assets and Servicing sub-segment, the driver here was the aforementioned litigation cost.
From a cost to servicing perspective, our LAS expenses ex litigation did decline $141 million to $1.4 billion, our number of 60-plus day delinquent loans dropped 14,000 units to 263,000 units, or down 5% from the end of the first quarter of 2014. The primary revenue component in our LAS sub-segment, servicing fees, declined $40 million versus the first quarter as the size of our servicing portfolio declined. This was offset by a better net hedge performance on our MSR. During the quarter, we did benefit from lower rep and warrant provision, which was $87 million, or down nearly $100 million from the first quarter of 2014. If we turn to slide 11, Global Wealth and Investment Management. This business turned in another record revenue quarter. Our pre-tax margins remained strong, north of 25% for the sixth consecutive quarter.
Our revenue of $4.6 billion was up 2% from the second quarter of 2013 and 1% over the first quarter of 2014. Record asset management fees offset the softness in transactional activity. Net income, $724 million, was slightly lower than both comparative periods, driven by increased expenses. Our expense levels versus the second quarter of 2013 reflect higher revenue-related incentive comp, other volume-related costs, as well as continued investment in technology and other areas to support the growth that we're seeing within the business. Relative to the first quarter of 2014, expenses were driven by higher revenue-related costs, litigation-related expenses, as well as marketing. Our return on allocated capital during the quarter was 24%. The momentum we're seeing in flows continued and was quite strong during the quarter. Client balances were up $72 billion from the end of the first quarter of 2014 to a record $2.5 trillion.
Long-term AUM flows were nearly $12 billion for the quarter, marking the fifth straight year of positive quarterly AUM flows. Our ending client loan balances were up $3.9 billion to a record $123 billion, which is up 3% from the first quarter of 2014 as we saw growth in both our securities-based lending as well as our residential mortgage lending. From a referral perspective, we continue to see coordinated efforts across wealth management and the banking groups as our referrals resulted in the funding of more than 250 institutional retirement plans worth more than $2.4 billion in assets this quarter, and that compares to 156 wins in the year-ago quarter for $600 million in assets. If we turn to slide 12, our Global Banking earnings for the quarter were $1.4 billion, up 4% from the second quarter of 2013 and up 9% over the first quarter of 2014.
Our return on allocated capital was very strong at 18%. Compared to the second quarter of 2013, our revenue showed modest improvement while expenses increased and credit costs declined. Within the revenue category, our investment banking fees company-wide this quarter were $1.6 billion, up 5% from the second quarter of 2013 and up 6% on a linked-quarter basis. We maintained a solid leadership position in investment banking fees, and we had particularly strong equity underwriting results during the quarter. Our provision was $132 million during the quarter and included a $156 million reserve build. Our provision costs were favorable to both comparative periods, as we added less reserves in the first quarter of 2014 and had less charge-offs compared to the second quarter of 2013.
Expenses increased $50 million versus the second quarter of 2013 on higher litigation, but improved $129 million from the first quarter of 2014 on lower personnel and back-office support costs. If we look at the balance sheet, average loans were $271 billion during the quarter, up 6% compared to the second quarter of 2013, but flattish compared to the first quarter of 2014. Our loan balances relative to the first quarter of 2014 bear, I think, several comments that I'd like to make. The first is we saw sizable paydowns during the quarter as our customers accessed the capital markets. We had approximately $2 billion of such paydowns where our customers chose to access the markets and refinance existing bank loans. Within commercial real estate, we continued to optimize the mix with several small portfolio sales that took those balances down a little over $2 billion.
We are being sensitive with respect to pricing of commercial loans, as we're not going to chase loans at the expense of overall client relationship profitability goals. Lastly, within the Global Banking segment, deposit flows remained solid and were stronger at the end of the quarter. If we move to Global Markets on slide 13, we earned $1.1 billion in the second quarter of 2014. That's up 14% from the year-ago period and down seasonally 16% from the seasonally strong period of the first quarter. Net DVA during the quarter was a gain of $69 million, versus gains of $49 million in the second quarter of 2013 and $112 million in the first quarter of 2014. Despite the slowdown in FICC across the industry group, we were pleased with the results this quarter.
Our revenue was up 9% from the second quarter of 2013, down 9% from the seasonally high first quarter of 2014. Our second quarter of 2014 revenue did include an equity gain of roughly $240 million on the monetization of an equity investment. That is not reflected as part of our sales and trading revenue. Our sales and trading revenue, net of DVA, was $3.4 billion, which was 1% lower than the second quarter of 2013 and 17% lower than the first quarter of 2014. Our FICC sales and trading revenue during the quarter increased 5% compared to the second quarter of 2013 and was down 20% from the seasonally higher first quarter of 2014 levels. Driving the year-over-year improvement within FICC were results in both our mortgage business, our munis business, as trading conditions and our performance improved in both areas.
Those improvements were partially offset by weaker financial performance in foreign exchange as well as commodities. On the equity sales and trading side, we were down 14% from the second quarter of 2013 and 11% from the first quarter of 2014, as lower market volatility depressed overall secondary market client activity. Expenses were up from the second quarter of 2013 on higher technology and staff support investments and, to a lesser degree, incentives, down from the first quarter of 2014 in line with the seasonal revenue decline that we saw. Trading-related assets, on average, increased to $23 billion to $460 billion during the quarter, and our return on allocated capital was 13% during the second quarter. On slide 14, we show all other.
Revenue was down $463 million from the first quarter of 2014 on lower equity investment gains of $618 million, which were partially offset by lower negative market-related adjustments to net interest income during the quarter. Our second quarter 2014 expense in all other is down $1.3 billion from the first quarter, as it included retirement-eligible incentive costs and some litigation expense. The second quarter of 2014 provision benefit of $246 million was $111 million better than the first quarter of 2014, and $67 million better than the second quarter of 2013. Net charge-offs of $11 million improved to $195 million from the first quarter of 2014, driven by the recoveries that I had mentioned associated with our bulk NPL sales. During the quarter, our effective tax rate was relatively low, primarily as a result of the impact of tax preference items on a lower earnings base.
For the back half of 2014, we would expect to see an effective tax rate of approximately 31%, ex any unusual items. I'm going to wrap up before we take questions with a couple closing comments. We feel like we made very strong progress during the quarter. We saw good business activity across the customer base. We experienced year-over-year revenue growth in our Global Banking, Global Markets, and Global Wealth & Investment Management businesses. Our consumer business profitability grew 29% from last year. In the mortgage business, we're taking costs out of the fulfillment side, as well as the cost to service our delinquent loans. We reported $0.19 of earnings in absorbed cost, allowing us to resolve all outstanding RMBS issues with AIG and build substantial reserves for our remaining legacy mortgage issues.
We did this while adding to our already strong Basel III capital ratios and improving our liquidity measures to record levels. Our asset quality improved to decade-low loss ratios. With that, we'll go ahead and open it up for questions.
At this time, if you'd like to ask a question, please press the star and one on your touch-tone phone. You can remove yourself from the queue by pressing the pound key. Again, it's star and one if you have a question. We'll take our first question from Betsy Graseck with Morgan Stanley. Please go ahead.
Hey, thanks. Good morning.
Morning.
Hey, a couple of questions. One, you had some call-outs on some nice gains. I know a couple of other banks reporting here this cycle have done the same thing. I'm wondering how much more in your pipeline do you think you have to extract some value from the mortgage-related portfolio here that you're in the process of selling down this quarter?
Yeah. We took, Betsy, a piece of our non-performing loans out. As non-performing loans, and as you know, to the extent that you receive income, you write down the basis of those loans. We took those loans out and saw healthy gains. We continue to look at the sale of non-performing loans. I would not expect anything near the magnitude from the sale of non-performing loans that we saw this quarter.
Okay. Separately, on just litigation-related stuff, you highlighted the AIG agreement. That looks like a great win for you guys. I guess the question is, does them pulling out as a dissenter do anything to speed up the timing on that Article 77 case?
I think the timing is going to progress on the schedule that it otherwise would have. I think you all know that from an objector perspective, that they were probably the strongest and most vocal objector with respect to the case. We'll just have to see as we move forward what the impact from them dropping their objection to the case is. I think the other thing that's important is as it relates to holdings of the securities, or at least a basis to object, they were the largest holder that was out there from holding securities as part of the settlement. I think they noted that in their release this morning.
Yep. Thanks. Okay. Just lastly, been a lot of debate recently about how the Fed could potentially start to exit. Obviously, in the first few minutes, they talked about that. It's been on some of the calls recently about how people are thinking about rate betas. I know from the Q, you have a relatively positive outlook for what rising rates does to your earnings stream. Could you just remind us what percentage of your deposits are consumer and how you're thinking about rate betas in a rate rise environment relative to asset betas?
Sure. Couple things. If you look at asset sensitivity, you'll see that the exposure to 100 basis point parallel shift in rates, that the benefit increased this quarter from about $3.2 billion in the first quarter to $3.4 billion. As you look at the deposit base, a couple things of note. The first is north of 70% of the overall deposits that we have throughout the company are within our consumer and wealth management business. As it relates to, I'd say, overall asset betas, that through history, given the branch network and the relationships, those tend to be very stable. I think you get a sense for that as you look at the continued deposit growth that we've seen, while at the same time taking rates paid down pretty significantly.
If you move to the institutional side and look at where we are, roughly 75% of the deposits that we have within the institutional business are domiciled here in the U.S., and the predominant mix of that is with our core corporate and commercial customers. If you look at the reason that they're holding those deposits with us, it's because we tend to be their core relationship bank. We do their cash management, we do their treasury service revenue, and have relationships that are beyond just a place for them to put their deposits. As we move forward, there's obviously a level of uncertainty to the extent of a Fed withdrawal. As we look at the overall deposit base, the stability of it, and our outlook going forward, we feel like that we're very well-positioned.
I'd add on the consumer side also, as you look at year-over-year dynamics in terms of deposit growth of $25 billion, also look at that we are still running off a CD portfolio that was more of a funding portfolio for some of the companies that we acquired. I think there's, round numbers, a $10 billion reduction in CDs over that time period. We've also obviously sold some deposits, not a huge amount. That growth is over top all that and net. We feel good about the consumer franchise ability to continue to grow deposits even while being very disciplined on price. As rates rise, that value will be recognized, and we expect those deposits now are much more core. The average checking account deposits year-over-year, I think, are up 25%, 30% in terms of average balance.
Okay. Thanks a lot.
We'll go next to Jim Mitchell with Buckingham Research. Please go ahead.
Yeah. Hey, good morning. Yeah, I just wanted to follow quickly up on that deposit question. I noticed that non-interest bearing was up 11%, interest bearing up only 1%. That speaks to your efforts. Do you think there's more to go there? Or should we start to see deposit growth more in line with your peers at this point?
I think if you look at just on a consumer business, the year-over-year growth was $25 billion, and the linked quarter growth was $10 billion. Obviously, we're growing at a faster rate in the current environment at the spot, so to speak, Jim, than we have been year-over-year. The growth rate of 2% was nominal in a quarter, which would be annualized 8%, about high 5%-6% year-over-year. It's accelerating still by the good core activity.
Right. Okay, great. On loan growth, you still have, as you mentioned, a couple of asset sales, still some legacy asset runoff. When do we start to see the inflection point in your view? Maybe if you can give us a sense of underlying demand that you're seeing in your customer group.
Sure. It's a very good question, Jim. I think we need to break out and discuss. If you look at the declines that we saw in the residential mortgage area, those are largely due to whole loan repayments of loans that are held within our investment portfolio. If you look at the consumer business, I think there are a couple key things that I would note. The first is, on a linked quarter basis, this is the first quarter in some time where we actually saw ending card balances within our domestic card balance increase, and those were up, as we mentioned, roughly $1.3 billion from the first quarter to the second quarter. We saw growth there.
If you move to what we saw within the wealth management area, as I mentioned, we saw very strong growth both in securities-based lending as well as within mortgage originations there. Once again, on the home equity front, the progress that we're making on the origination front, where we saw about $2.6 billion, is really being masked by the runoff and the amortization of the home equity book that we had that runs off to the extent of $3 billion to $4 billion a quarter. Within the consumer businesses, if you look at the core front end, we are seeing some consumer loan growth. It just gets masked by the runoff of some of the Consumer Real Estate. On the overall commercial and corporate side, I did reference the couple payoffs.
One of the benchmarks that we look at is the revolver draws that we have within our commercial banking business. That number, which had gotten as low as in the low 30s, was up almost 100 basis points this quarter and is now in the high 30s. We are starting to see some greater activity on the revolver space within our commercial banking customers. Overall activity with the corporate customers continues to be good. We are seeing, as I referenced, customers taking advantage of favorable debt capital markets, which we obviously benefit from a debt underwriting perspective.
Right. That's fair. Just one last question on the LCR. Maybe I missed it. Did you disclose where you are on that front?
We did not. At this point, we are above 100% at the parent. We're good from a 2017 compliance there. If we look at the combined BANA-FIA LCR ratio, those two companies or two banks will be put together October 1. That LCR number's in the high 80s at this point, and we'll continue to build the LCR ratio at the banks to be at least one year ahead of where we need to be.
Will that put any further pressure on NIM if you're building more liquidity there?
It should not. As we look at, there's been a significant build at this point. As we look at the funding and the balance of that between both core consumer deposit growth as well as where we are, that should not have an effect. If you look at the build that we talked about in the first quarter and second quarter, at this point, I'd say we've eaten that expense. We now need to get after it and optimize it to get the expense knocked back down.
Okay, great. Thanks.
We'll go next to Matthew O'Connor with Deutsche Bank. Please go ahead.
Good morning.
Morning.
Morning.
On expenses, it seems like most of the new BAC savings are in the run rate here. We still read about kind of various expense initiatives that you have underway in terms of branch rationalization and simplification and things like that. Just wondering, is there kind of another new BAC or just ongoing efforts to bring down costs and how meaningful those might be?
I think in the near term, Matt, the number one thing about cost is continuing to work down the LAS legacy cost down to a more normalized level on a per loan basis and also keep reducing the number of delinquent loans. That's the real expense leverage. What Bruce talked about earlier is we got to make sure we do it the right way, especially in connection with sort of finishing up some of the regulatory work there. That's the real large dollar amount. You're pointing out exactly the situation on sort of the core. You're running about $13 billion a quarter in core expenses. Not a bad number if you annualize it and sort of think that through. The real question is how do you hold it there and keep investing in the businesses?
When we started with New BAC, we never gave a target that said we're going to save all this money, but we're going to reinvest it. We gave you sort of a net target, now we're reaching that. What we challenge our teams to is how to maintain a good operating leverage going forward. We're more about simplifying the company and continuing to take out expenses. A lot of that will offset the 1,000 people we've added in the branches to sell more products that you're seeing the benefits of. The continued ads we make in the wealth management business and training programs. We hired at 30% or 40% more people out of schools this year because we got to keep replenishing our talent base, commercial bankers, et cetera.
As you look forward, the inflationary type things that go on, merit raises and healthcare expenses, stuff like that, and investing in the business, including the $3 billion plus we put in technology development every year, will need to be offset by hard expense work. That's the plan we have, and we keep driving those plans in place. There'll be less bottom-line reduction on a core expense base and more how you hold it there in a relatively slow-growth environment.
Okay. Just to try and summarize, even if there's some modest revenue growth, you would hope to keep that $13 billion relatively stable on a net basis then?
With one exception. When markets kick up, you're going to have more comp related to that or wealth management comp, which is good. You got to be careful because those things kind of come and go, and you can see that just in the last couple of quarters. If you think about what David Darnell and the team have done in retail business, they are still rationalizing the branch structure, which will offset putting more people into branches that are more personal bankers and FSA, and they've done a pretty good job at offsetting that. In addition, we're repatriating some jobs to help on a customer delight scores and stuff from places that legacy entities has had in other places and bringing them in, and that rationalization is going on. That's adding to our job count in the near term, but we'll rationalize back out.
On the LAS costs, obviously making good progress there, and I'm not sure there's too much concern if it gets pushed out one quarter. Is there still the goal of getting down to $500 million or below $500 million per quarter?
Obviously, that's going to trail and move with as we drive down the 60-plus day delinquent loans. Clearly, the $1.1 billion that we'll either have in the fourth quarter or the first quarter of next year is still way too high given the number of 60-plus day delinquent loans that we have as well as the size of the servicing portfolio.
Just lastly, if I can squeeze in on the CCAR capital resubmission process. Just remind us when you expect to get an update on that.
Sure. We submitted our materials to the Fed on May 27th. They have up to 75 days to respond. I believe the 75th day is August 10th. We continue to see where they come out.
Okay. Thank you.
We'll go next to Glenn Schorr with ISI. Please go ahead.
Thank you. Quick question on the match book was up, or at least the Fed funds sold and repurchased on the asset side was up 6.5% quarter-on-quarter. It's the opposite of what we're seeing at a lot of banks and trends in the market. I'm just curious, is there an opportunity to get closer to clients? Is this a function of the fact that your SLR is in great shape, so why not use it when you can? I'm just curious on what's underlying that trend.
Yeah. I would say, Glenn, probably more than anything, if you go back and look at both the notional size of the balance sheet as well as the match book, we were probably a little bit lower at the end of 2014. Excuse me, at the end of the first quarter of 2014 than you'd normally see. That number will bounce around, but I wouldn't read anything into the fact that it was up because it was much lower at both the end of 2013 as well as the first quarter of 2014.
Anything different on the client usage front? It is bucking a trend that I hear your comments on the year-end. It's just with the changes in SLR, it's changing pricing theoretically. I just don't know if it's more theoretical than actual.
I think the pricing is probably more theoretical because I think if you look across the industry, we continue to see both the banks in Europe as well as the banks in Asia provide it. I'm not sure you're seeing any meaningful movement in what you're able to charge from a match book perspective.
I get that. Yeah. Switching gears. In Wealth Management, obviously everything's doing pretty darn good in Wealth Management, but I'll pick a little bit and I'll just ask. Negative operating leverage in a quarter when the markets are doing well, meaning revenues are up or expenses are up more. I heard and saw your comments on the additional investments in technology. Is it comp or is it that additional investment technology? When markets are growing and flows are great, you would expect margins to hold their ground, not give it up. Maybe a little more color on what investments to help that business grow would be helpful.
Sure. Well, you've got a couple things. The first is you look at the expense growth during the quarter, and you look at the buckets. Roughly half of it relates to incentive-related comp that is a result of increased revenues. We do have a couple of initiatives that you'd expect to roll off over the next couple quarters within the wealth management business. We obviously had the rollout of Merrill One over the last couple quarters where you saw some expense there. There's been some additional money spent as we invest in systems related to retirement systems and retirement programs as we continue to see growth there. You do have some of that activity as well as just making sure that
The right investments within the various control and support functions are appropriate. At the same time, as we look forward, you need to see positive operating leverage, not negative operating leverage. That's what we'll look to work for as we go through the next couple quarters of the year.
You point out, it's an obvious point, and the team's focused on it, but we have made some near-term investments, including training programs and hiring people into the business, working in the branches and stuff to help. It is something that we've got to monitor closely, and we think it'll come back down and more in line with what you'd expect.
I appreciate that. Last one is, slide 20 shows that the private label outstanding claims keep going up every quarter. Anything new there? I'm not sure what's driving that, and I know that we have most of this stuff accounted for in the settlements, but just curious.
Sure. I think that the notable thing that I would call out is that when we get private label claims that come in.
There are 2 different types of claims that come in. There's the first that are claims where people have had the ability to look at loan files and submit a claim based on a loan file not being what they thought it to be. The second is that you can have people that, at points in time, do what we call or throw in what we would characterize as a bulk claim, where they're just throwing it in without having done any work whatsoever on the loan file. What's important when you look at what we saw during the second quarter of 2014, we saw roughly $1.9 billion of original unpaid balance on the loans, not loss, growth of that amount. The amount of bulk claims where no file reviews had been done was $1.9 billion.
I would not read too much into that number because it's not for loan files where there's been any work done. I would just say, generally, if you look at what we've seen regarding some of the recent decisions where there seems to be some stickiness at this point on different statutes of limitation, as well as a recent ruling that came out of California with respect to RMBS litigation, that we do feel like we're moving forward. Getting AIG behind us is significant in regards to putting the rest of this behind us.
Okay. I appreciate it. That's it for me. Thanks.
We'll go next to John McDonald with Sanford C. Bernstein. Please go ahead.
Hi, good morning. Bruce, the increase in Tier 1 common of $7 billion was impressive relative to the net income in the quarter. Any more color on the drivers there? You mentioned AOCI. What were the threshold deductions that helped drive that capital expansion so much more than the net income?
Sure. As we've said, given where we are from a disallowed DTA position, that we're at a point where, broadly speaking, we accrete capital on a pre-tax as opposed to an after-tax basis. As you look at the results, we had roughly $3 billion of pre-tax income. We had roughly $3.5 billion of pre-tax OCI. That gets you to about $6.5 billion. Then as you look at threshold deductions of roughly 10%, take 10% of that $6.5 billion, it gets you roughly $700 million. That gets you to roughly $7.2 of capital build. You back out the common dividends of $100 million, that gets you to your $7.1 billion build.
Okay. That building at a pre-tax due to the DTA, that's something that should continue on a steady pace, right?
Clearly, at least over the next, I would say probably two to four quarters, and it will be a function of the exact earnings. For the near term, that is correct.
Okay. Could you give us the numbers on what the excluded DTA is today and what it changed in during the quarter?
Yeah, I believe that the excluded DTA was roughly $15 billion, and it was down a little over a billion dollars.
Okay. On RWA, are there risks that the continued legal settlements would drive up your operational risk metrics? Is there a forward-looking component to the op risk calc that already anticipates more settlements coming?
Yeah. We're mindful of the fact of settlements. There's obviously a lot of discussion and dialogue around op risk RWA. If you look at when we noted that the reason risk-weighted assets went up during the quarter under the advanced approach, it was for doing exactly what you referenced was reflecting an increased amount of operational risk RWA. We don't give the exact number, but you should assume that that amount is in the 26%-27% of our total risk-weighted assets number, and is in line with our largest peer.
Okay. On capital, on the last CCAR, your binding constraint was the leverage ratio more than the risk-based Tier 1 minimum. I assume the recent preferred issuance and the Buffett conversions will help close that gap and kind of position you better for next year's CCAR minimum. Can you comment on that, or are there more things you can do to close the gap and have a quantitative cushion that's bigger to that leverage ratio next year as well?
Sure. Well, the first, John, is just to manage the notional size of the balance sheet, which we continue to do. The second thing that I would note is when you look at the sale of the reperforming loans that we did. Those are the types of assets that in CCAR, at least we believe, we don't have access to the Federal Reserve's models. Those are the types of assets that tend to get hard. We continue to look hard and look to drive down the non-performing Consumer Real Estate piece of what we have, and this quarter was a good example of it. You're exactly right with respect to the leverage ratio that there's a benefit that preferred stock gives. We're north of $4 billion this quarter that we generated. We'll continue to look to see if more preferred makes sense.
Lastly, we'll continue to look at and see if sub-debt makes sense from a total capital perspective as well. The incremental cost of those is very low, and we just want to make sure the balance sheet's optimized for those different buckets.
Okay. Thanks. On sales and trading, just in terms of the dynamics of the quarter, did you see a pickup in June as the other banks did? Any sense of what drove that? Have you seen any follow-through on that?
Yeah. Our activity levels, if you saw a P&L throughout the quarter, while June was marginally better, I would characterize the activity that we saw within the sales and trading business during the second quarter to be fairly consistent. As we look out at the third quarter, typically with the summer, the third quarter's a little bit seasonally slower than the second quarter. If you look at our results last year, you see that. As we come into the third quarter, there's nothing unusual in our third quarter numbers of last year. How we compare to those numbers is going to be a function of how well we perform this quarter, and that's obviously up to us.
John, if you look at page 19, you can see that the second quarter across the last three years, it's remarkably stable in terms of markets revenue, lower part of that page. What Tom and the team did a few years ago was actually reduced the headcount almost by 1,000 people, that's allowed us to make $1 billion in this kind of environment as we did this quarter. This will ebb and flow, as you and I have talked about on various occasions it is a core part of what we do. We show you the separate P&L to show that in the first quarter, have a good quarter. This quarter had $1 billion, it may come down if activity moves around for clients.
It's a relatively stable revenue base that we can make money on because of the expense adjustments we made last year, in the last several years.
Okay. Last thing for me, Bruce, on the CRES page. In terms of mortgage servicing revenues, is this quarter's core mortgage servicing revenue a stable base as you see it or is there further shrinkage in the size of the servicing book from sales that are ongoing that would impact the servicing fees?
Yeah. We've got one more sale that we'll look to wrap up this quarter that's got fairly high content of 60-plus day delinquent loans. Beyond that one transfer this quarter, we're largely at the end of servicing sales, and we're at a base of what you see should be what we have going forward with the pluses and minuses being what runs off versus what we put on.
Okay. You're still taking rep and warranty provisions. What are those for? Is that for current originations or is it still catch up from past stuff?
As you look at it, I think rep and warrant was less than $100 million this quarter. You're going to always have that as you go forward. We're not seeing much rep and warrant at all on recent originations. It's going to be more legacy related.
Okay. Thank you.
Thank you, John.
We'll go next to Guy Moszkowski with Autonomous. Please go ahead.
Thanks. Good morning. First question I had was just a follow-up on CRES. Is there any sort of immediate benefit in terms of the ability to accelerate LAS legacy servicing cost reductions now because of the bulk sale?
From a number of units perspective, as you look at the bulk sale, there was a piece of it that we serviced, and there was also a piece that others serviced. In the context of the number of 60-plus day delinquent loans, it was not meaningful relative to the total.
Got it. What we're really looking at is more what you were talking about in response to John's question a minute ago, which is the potential for one more sale this quarter and then just normal runoff.
That's correct.
Got it. Question for you while we're on the topic of mortgage stuff. Obviously, you had the $4 billion litigation reserve build essentially this quarter. It appears based on what you gave as an after-tax impact, like you take a full tax benefit against that. Of course, what we find with a lot of these things, especially with the DOJ settlements, is that a large amount is not deductible. Do you have any flexibility with respect to being able to use a lower tax rate?
A couple of things. We don't give the exact numbers, if you go back, Guy, and look at the first quarter, we look at and try to understand what the tax treatment is for the different settlements. There was a piece of it in the first quarter that we would have assumed was not tax-deductible. You're right, the piece in the reserve that we took this quarter, there was a presumption that it was tax-deductible. The short answer is until you get to the end, you don't know the exact mix. We've tried to be thoughtful with that. Just say, as it relates to the total number, as we said last quarter, there was $2.4 billion of litigation expense over and above what was for settlements.
In this quarter, you've got in the high threes, and I think it gives you a sense as to the magnitude of the reserves that have been built over the last two quarters.
Got it. Switching topics, you did talk about pricing on commercial loans in the context of not seeing a meaningful increase in commercial loan balances this quarter, and I guess alluded to some discipline that you're exercising. Can you talk a little bit about the conditions that you're seeing in the commercial loan market and where you think there's froth?
Sure. If you look at and embedded under the Global Banking segment, we've got the loans that are done within our corporate investment bank that tend to be for the larger companies. As we looked at spreads and yields on a linked quarter basis within our business, we saw relative stability in the yields in those businesses. As we look out at it in the marketplace, given that those loans that are brought for those customers tend to be broadly syndicated, and there tends to be a relationship in the yield between that and where they can access capital in the capital markets. That loan pricing over the last quarter has hung in there, and like I said, was generally flat Q1 to Q2.
I would say we tend to see a little bit more of the competitive pressure tends to be within the base commercial bank, which is for middle-market companies, where they tend to be more one, two, or three-bank deals. We have seen that area continues to be pretty competitive, and we're just being disciplined with how we approach that market. Given the footprint that we have, we do have the flexibility to not chase things within some of these regional markets.
Just to follow up on that, when you say banks competing for that business, are you using the word bank in a traditional sense, or are you actually seeing a lot of the competition for those type of mid-market loans coming from outside of what we would think of as a traditional banking sector?
No, for the core commercial customer, that's going to be the traditional banking customer as you think of it.
Okay. Just a housekeeping question, just to make sure I understand what you were saying. You said there were maybe $250 million of gains in Global Markets, I guess. Probably, not to put words in your mouth, but things like markets. I think you said that you did not include those numbers in the core equities or fixed income segment revenues. Is that right?
That's correct. We had a position that went public during the quarter. There was a gain, and it's reflected in the revenues of the Global Markets segment. We did not think it was appropriate to include that in the core FICC and equity sales and trading. If you go to the table on page 13, when you look at that FICC and equity sales and trading number ex DVA, that does not include any benefit from the gain that we saw within the overall segment during the quarter.
Got it. Perfect. Thanks for the clarification.
Sure.
We'll go next to Moshe Orenbuch with Credit Suisse. Please go ahead.
Great. Thanks. I was sort of wondering. You've got a little less than $250 billion of kind of residential real estate loans and $90 billion of home equity. How much do you think those decline before those stabilize? I think you sort of tried to talk about it in terms of the overall loan growth, but those are really the categories that are shrinking. Do you have a sense as to where those categories will level out?
If you start from a home equity perspective, I think that the repayment and runoff of those is a good thing and not a bad thing. You will continue to see, I would expect over the next couple of years, that the amortization of those is going to be greater than the new loans coming on the book. We would not expect, though, as you look at net interest income, given the yields on those versus what you can do with other things, that the runoff of that book will have a negative impact from an overall net interest income perspective. As it relates to the whole loans piece that we have, I would expect that over time, that will continue to run down.
We continue to look, as we've talked about before on the home loans business, to put and to originate mortgages for customers where we want to hold those loans. During the quarter, we put about $6 billion of home loans that were originated for our customers on our balance sheet. Roughly 75%-80% of those would have been of the jumbo variety. I think to be realistic, over the next probably couple years, you're likely to see a little bit more runoff of that than you'll see new loans coming on. We obviously have the decision at that point of do you want to reinvest those proceeds in other home loans that you can buy out in the market or invest those in securities? I would say at this point with LCR as well as what we're focused on from a customer perspective.
They're much more likely to be invested in securities than new home loans that are not for our customers.
Got it. Secondly, the reserve build for legal. I guess, could you talk about how much you have in reserves in total? Or maybe address as to how you came up with that number, given the fact that I think, if I'm reading the footnotes correctly, that your possible but not accrued losses have stayed flat from the first quarter.
Yeah. A couple things. The range of possible loss that you quoted of being flat from the first quarter to the second quarter relates to our representation and warranty reserve, not our litigation RPL. You're correct that the rep and warrant piece was flat quarter-over-quarter. We do not update and provide our range of possible loss on litigation expense until we file the 10-Q. As it relates to overall litigation reserves, we do not put out a level of our litigation reserve. What I do think is notable and probably most relevant is the information that I gave you as it relates to the litigation reserve that's been built over the last two quarters that relates to legacy mortgage-related matters. I think you can see, and people are aware of what the most significant of those matters are.
Obviously, each quarter as it relates to the reserving, we go through each quarter and assess where we are and what we think is appropriate from a reserving perspective, and we did that again in this quarter just like we do in any quarter.
Okay, great. Just a quick follow-up to the first one. You had mentioned investing some of the runoff from the mortgage and home equity portfolio in securities. Is that in the context of keeping those balances stable, or would you actually increase that portfolio?
Yeah. The first goal is obviously, as we've talked about, is to find and invest in loans that are for our core customers across the platform. That's priority 1. To the extent that there is residual or excess, which there has been, given the deposit growth that we've seen, the money does get invested, and it's been invested primarily in the most recent several quarters in securities. I mentioned OCI risk. The notable thing is if you look at the OCI risk that we have as a company, even though the securities book has increased significantly over the course of the last 12 months, the overall level of OCI risk based on the different metrics that we look at has not changed, and that's a result of us shortening the portfolio, investing in shorter duration Treasury securities.
Okay, thanks.
We'll go next to Steven Chubak with Nomura. Please go ahead.
Hi. Good morning.
Morning.
The first question I had pertains to capital and RWA specifically. Over the last five quarters, we've actually seen the RWAs on a flat to upward trajectory. Effectively, the growth has mirrored the balance sheet growth that we've seen over that same period. I just wanted to get a sense as to whether there were any additional mitigation levers that you guys could potentially pull or whether those types of opportunities have been largely exhausted, and thus the growth going forward will likely continue to mirror the balance sheet.
I think as it relates to the risk-weighted assets, I think you need to bifurcate risk-weighted assets under Basel III standardized versus those under Basel III advanced. As you look at the Basel III standardized ratios, the benefits that we have there tend to come from the roll-off of the different consumer loan portfolios, both in first mortgage as well as in home equity. We would expect, as we've talked about throughout the call, that you will continue to see a runoff there. Given that a lot of the stuff that's running off is higher loan to value than the new stuff that's coming on, that there's incremental benefit there. If you look at over the last five quarters, I think the way that the standardized metric is set up, the standardized metric is going to tend to mirror the overall loan growth that you have.
I would just say, as I mentioned going forward, on average, it'll probably be a little bit lower mix coming on than what rolls off. On the advanced approach at this point, as we look forward, there will continue to be opportunities on stuff that's advanced that tends to be heavier risk-weighted that rolls off between now and 2017. It's not going to be anywhere near as material as what we've seen. Under the advanced approach, the recent increases you've seen have largely been attributable to operational risk as opposed to what we're seeing within the core loan categories.
Okay, thanks. No, that's really helpful. Switching over to GWIM for a moment. Actually taking a longer-term view on the earnings power within the segment. I guess one area where we struggled from a modeling perspective is trying to contemplate exactly how high the operating margin can get in a rising rate scenario. Because the operating leverage improvement can be fairly dramatic, but presumably there is that peak margin level where competition is going to intensify to such a degree that Effectively, there's going to be no more room for improvement beyond, I don't know, let's call it 30%. I didn't know if that was something which you guys had evaluated, at least in the context of a rising rate scenario.
I think you've got one of the levers in the business that people often overlook is the lever towards rising rates because in the business itself, the amount of total deposits and loans are significant, $250 billion of deposits and significant loans. I think we said on last call, and I've said many times, we can see this margin moving towards 30% in that dynamic, in that environment. I think when you get to there, you start to top out a little bit if you just understand the broad base of the revenue amount that goes through the grid and things like that become a governor on what you can do beyond that.
At the mix of our business of wealth management with the private banking business and the loans and deposits from the general client base and what we've seen there, that gives leverage to the upside as you described.
Okay, great. One final one on credit. At your Analyst Day, a number of years ago, you had given some guidance on through-the-cycle charge-off rates. Clearly, since that update, your loan mix has changed fairly dramatically, and at the same time, underwriting standards have tightened meaningfully. From what I recall, I believe the through-the-cycle charge-off rate at that time that was implied was somewhere in the neighborhood of 120 basis points. Clearly, it's going to be lower than that going forward, but I was hoping you could give us maybe some updated guidance on where you think that through-the-cycle on that charge-off rate will likely end up.
I think if you look at the charge-offs, the key is that when you really think about the broad constitution of $1.3 billion if you remove the recoveries, you got to look at the card business. What changed since that time is we've changed our position in the card business fairly dramatically with the sales from international portfolios and even how we've approached the U.S. is based on the dynamics of the card business. The good news is the card business is starting to grow in terms of balances. Going back to an earlier question, we got rid of the non-core aspects, and now you're seeing the core start to come through 1,000,001 new cards. People are using the card more, and the balance are growing.
I think that if you just think about that number is today and will be the dominant part of the charge-off question. You should think that that $90 billion-$100 billion-ish in balances, as you look forward, you'd expect that to grow, but not to change itself dramatically. It's not for us to change it dramatically in terms of position or balance sheet because we need to keep that book balanced because it has higher charge-offs than period of unemployment levels. I'd say if you went back and looked at that, and that is the biggest core adjustment between the two items. The counter to that is if you look at the appendix pages, you see the charge-offs on the mortgage business.
In the first mortgage business, you had recoveries, but if you look at the home equity side, you still have a charge-off rate, which based on the underwriting criteria, the stuff going on would be much higher. We had $200 million in quarterly charge-offs that you can see on page 21. We'd expect to see improvement in that from where we are. I'd say the card business is kind of about as good as it's getting very strong. You ought to see a little bit of help in home equity. You could have a reversal from the recoveries on the first mortgage loans, but it is a fundamentally different level because we've mixed the balance sheet differently on purpose.
Okay, that's great. Thank you for taking my questions.
We'll go next to Paul Miller with FBR. Please go ahead.
Yeah, thank you very much. Going back to your LAS costs, excluding litigation, where you mentioned that it's probably to get to that $1.1 billion target is going to take another quarter or two. What should we be watching, and how long do you think that LAS expenses are going to move to become non-material, I guess, is another way to say it. Can you give us things what we should be tracking?
Sure. The first thing I want to be clear, Paul, that getting to the $1.1 billion is maybe moved back one quarter, not two.
I'm sorry.
We're looking at one quarter. The second, though, the biggest item that really relates to the trajectory of LAS expenses is your number of 60-plus day delinquent loans because the cost to service that is many multiples what the cost of servicing a current loan is. As you go forward, we have full implementation of the National Mortgage Settlement effective September 30th. That will be a big benchmark. Then as you go beyond then on a, as we've always said, a one to two-quarter lag, you will see expenses trend down as your number of 60-plus day delinquent loans trend down. As those trend down, you need less people as well as a variety of other expenses. That's the key metric to watch.
As it relates to just how long that's going to continue, I would not expect that we get down to the level of what should be a recurring number of 60-plus day delinquents until probably the end of 2015 or the first part of 2016. As it relates to continued expense leverage, we would expect to see upside in that business probably all the way through the end of 2016 as it relates to driving expense down.
Paul, we've got work to do in a sense. You go back, I think if you looked at, I think it was the fourth quarter of 2012, it was about $3.1 billion. Fourth quarter of 2013, I think it was $2.1 billion, Bruce. Originally we said higher, then we brought it down to $1.1, and now think that it's somewhere a little higher than that. That's the broad move. The question is, how do you keep going on that? That is really going to be, as Bruce said, the number 60-plus delinquent loans, which allows you to release people.
We're also getting conditioned that we now have got the place stabilized enough behind us that we can start to invest in technology at a level of improvement that we haven't been able to invest in while we just had to get the work done. We expect new systems deployment in that business as we move in the middle of 2015 into 2016, and we expect consolidations of physical plants and things like that, which will add to the expense leverage, but we haven't been able to do that as much yet, just because of just the massive amount of work that had to take place. There's still a lot of work ahead of the team, but if you put in the context of $2 billion-ish per quarter in expense reduction across eight quarters, a lot of work's been done, too.
Just to follow up, you talked about you do have another MSR sale. I don't know how material that is. Right now, there has not been a lot of transfer of MSRs due to various, well, Lawsky up in New York questioning a lot of the stuff that other companies are doing. Can that interfere with the sale, or you think you can sell the MSR without the headline risk of Lawsky?
The MSR sale that I referenced that will happen in the second half of the year, in the context of what we've done is relatively small. It's just that the delinquency content associated with that sale is high. It's material from that perspective, but from an overall size perspective, it's not material.
Okay, guys. Thank you very much.
Thank you.
We'll go next to Marty Mosby with Vining Sparks. Please go ahead.
Thanks. I want to ask you a couple questions. First off, you've been harvesting about $400 million worth of gains out of the debt portfolio. Is that in the sense of trying to minimize your AOCI risk when rates do go up as you're shortening the portfolio? Just wanted to think about your strategy, because that's been a pretty consistent flow-through over the last year.
As you look at those gains, we are committed to not, as we continue to see liquidity build, not taking incremental OCI risk, as I referenced. Over the last year, even as the securities portfolio has grown, we've managed to keep the OCI risk from an absolute $ perspective, relatively flat. As you see markets move up and down, obviously selling longer duration securities as you have growth in the securities portfolio is part of that strategy.
I just want to make sure that the gains are just an outflow of that overall strategy that you had talked about.
Yeah, you're exactly correct.
Okay. When you look at the consumer and business bank, you have considerable more in deposits than you really have in loans, which maybe seems a little bit more skewed than what you would normally expect. How do you strategically think you can utilize that balance sheet funding over time? Or what are some of the initiatives that you're doing because you should be able to penetrate that customer base with more lending.
Yes, we should be able to penetrate even more lending. If you look on page 17, or 18, excuse me. You can see the growth in card originations, the growth in home equity originations, which go on the balance sheet. As Bruce talked about earlier, we're putting about, I'd say, half broadly stated of the originations and mortgages are going on the balance sheet. In the business banking segment, which is a small part of our commercial banking segment geared to the $50 million under revenue companies, we're actually starting to see loan growth the first time in a lot of times as we ran off some non-core portfolios. That's the core opportunity in the franchise is to continue to originate credit to the core customer base.
There's lots of opportunity there, but you can see us making progress against each quarter. I think on a broader context, you got to think about these businesses and how they mix together. In every company's retail business, it's an excess deposit generator just by the very nature of it. Not only is it fund a loan for the consumer customers, but also provides the funding for the rest of the franchise. I think you have to keep that broader context, and that's why we invest, going to your first question, in mortgages and securities to, for lack of a better term, get the value out of those deposits for the shareholder.
The other point that I just want to mention is that historically, if you look at the front-end lending in Consumer Real Estate that we've done from a segment perspective, that Consumer Real Estate lending on a first mortgage basis, it shows up in the balance sheet in all other. You can assume that those deposits that you see within page nine, a lot of the loans that they do for our customers are reflected in the all other segment.
In the mortgage segment, the RES, you're still, if you take out the litigation, generating about a $700 million negative loss in the sense of your just pre-tax, pre-provision between the revenues and expenses. You're talking about bringing down the legacy asset servicing expenses, but what is the timetable in your mind would be reasonable to think of closing that $700 million gap?
A couple of things. The first is within Consumer Real Estate Services, if we look at the home loans business on the front end, we talked about how we saw during the quarter that we increased both front-end originations as well as took down expense. Q1 to Q2, we saw about $100 million improvement on the front end of the business that's reflected in Consumer Real Estate Services. As it relates to the $700 million number that you quoted, we obviously, relative to the guidance, have $300 million of expense to get out of that business over the next 90 days. As we've talked about earlier on the call, we've got work to do to continue to drive that down significantly in both 2015 and the first part of 2016. That's clearly one of the highest priorities we have within the company.
Just lastly, and thanks for letting me ask you a few questions, because if you're looking at the valuation of your servicing portfolio, it dropped off to 82 basis points this quarter, which seems relatively low as the duration of that portfolio is extending. I know interest rates came back, the models kind of force you to write it back down. When you're looking at the prepayment speeds and the refinancing kind of behavior, it seems like eventually that there's some value as that portfolio lasts a lot longer than the model assumes at this point.
I think your point, the value and the fact that on a basis point basis it came down was reflective of the lower rates that we saw at the end of the second quarter relative to the end of the first quarter. You're right, at a point in time when rates start to move out, you would expect that MSR to extend and for there to be value there. We do not, and I want to emphasize, we look to manage the MSR risk as part of the overall strategy, and are managing that to have it be a flat book.
While from an interest rate standpoint, I understand that, it just seems like the models have assumed a lot faster prepayments than we've really actually experienced, which eventually has to true up.
At the end of the day, it comes down to what the customer does. You're exactly right.
All right. Thanks.
We'll go next to Matthew Burnell with Wells Fargo. Please go ahead.
My questions have been asked and answered. Thanks very much.
Thanks, Matt.
We'll go next to Mike Mayo with CLSA. Please go ahead.
Hi. A couple follow-ups. First, on the deposit data. I appreciate you giving us the color for every 100-basis point increase would help by $3.4 billion. You described the deposit base. What is the actual deposit data that you use to come up with the $3.4 billion benefit?
We do not quote, Mike, the actual deposit data. We obviously go back and look at historical data. Our assumption is as it relates to pass-through rates as far as how much of the first 100 basis points that has to get passed along, we're in the 40% area with respect to that.
Okay. 40% for the first 100.
Correct.
All right. I think that's in the ballpark of one of your large peers, but below some others. Is the reason that would be below others is because it's a lot of branch-based deposits?
You're exactly correct. If we go back and look at what it's been throughout time at points where arguably we don't have the competitive position now, we look at a lot of historical data to come up with that number.
As it relates to expenses, you've achieved 90% of the $8 billion New BAC savings. I see the branches are 5,023, I think you said you wanted to be around 5,000 branches. If I heard you right, I think you're going from a period of right sizing to growth. Is that a fair characterization?
We've been growing underlying activity. If you look at some of the statistics on the back of things, Mike, you're right. If you go back a couple years ago, we started New BAC. We were running $15.5 billion in core expenses. Now we're running $13.5 billion. We're largely getting there. The question then is, now how do you hold it there in an economic environment which is lower growth than traditionally expected in the U.S.? That's going to take constant vigilance on our part. During that whole time period, we've invested literally thousands and thousands of people into the sales side and stuff to drive that growth. We'll continue to do that. The question is, how do you balance that investment rate?
Mike, before you, achieving the balance of the $2 billion in quarterly New BAC savings in the fourth quarter is not dependent on future branch sales. I just want to make sure that there's not an assumed linkage there.
Are you reallocating some of the people assigned to New BAC to other areas? It seems like you could dismantle that project group, so to speak.
It's not a big project. This is done by the people who run the businesses. It's just committed plans that we did. It's not a huge project group to actually accomplish. It's done by whoever runs each business, each function.
Okay. As it relates to loan paydowns, Bruce, you mentioned that some bank loans declined as customers went to the capital markets. In a way, a type of disintermediation from the bank. Can you elaborate on that? Are you still seeing that this quarter? Do you think that was a one-off event, or is that something we should watch out for?
Our sense is from what we saw during the quarter, it was more a one-off event. There were a couple loans that were for acquisition-related purposes that people then went out and refinanced. It was just a little bit of an anomaly that we saw in the second quarter, and if you look at just the attractiveness that the capital markets have been, you would expect that to largely be over. Every now and then, when you deal with large multinational companies where some of the loan holds are a little bit higher, you can have those one-time events where that happens, and we had a little bit of that in the second quarter. It's not something we would expect to recur.
What I'm getting to is do you guys think this is an inflection point for loan growth? I can find one of your large peers who implied that it is, and I can find a large regional bank who says it's not. Where do you fall out on the spectrum? You said, Brian, that middle market utilization was up ever so slightly. Can you just give us that utilization number and where you stand?
Sure.
Bruce gave it to you earlier. I'll have to do it again.
Sure. The middle market utilization rate was kind of 37+% at the end of the first quarter and was up about almost a percent to mid-38%, which I don't think in and of itself is not material. It does seem that people are a little bit more willing to access their revolving credits. At the same time, practically speaking, you're not going to tend to see loan growth that's dramatically higher than the rate at which the overall economy is growing. We clearly, as Brian alluded to in his opening comments, we did see an economy that improved in the second quarter relative to the first quarter. On the commercial side, our loan growth is going to tend to mirror or be a little bit above what we see in the macroeconomy.
Do you think this is an inflection point for loan growth, or is that an answer you'd rather not delve into?
We're seeing signs of improvement. I'm not sure I'd go as far as saying it's an inflection point.
Okay. At the annual meeting, the clock ran out on me before I could ask one question. Very simple. What are your financial targets with and without higher interest rates?
We've been pretty consistent. If we go back, I believe, Mike, to the third or fourth quarter earnings call, that as we look at and embed in our models 100-basis-point parallel shift in the yield curve, that we're looking at that point with a tangible common equity ratio of 7%, a return on asset of 1% to be at a 14% return on tangible common equity. You don't see that rate environment until 2016. If you look at those metrics and back out what we've said 100 basis points is worth to us on a parallel shift, you get a sense for what we need to get to x the 100-basis-point move.
I'm sorry. Without the 100-basis-point shift, the target for ROA and ROTCE is what?
That's going to be roughly $3.3 billion or $3.4 billion.
Pre-tax
Pre-tax, at $0.63, it's $2 billion less, which on roughly $140 billion of tangible common equity is going to be about 20 basis points less on assets at that point.
Okay. Last question. As it relates to Citigroup's settlement with the DOJ for MBS securitizations and CDOs, you had quite a bit more in MBS securitizations and CDO structuring. How can we think about this number and the amount of reserves that you have? I read one press article that you were willing to offer $12 billion and the DOJ wanted $17 billion. I know you can't go into too much detail on this, but can you just give us a framework for how you view resolving this? On the one hand, you could argue maybe you shouldn't pay hardly anything because you bought a lot of these entities that created these deals, and you're just punishing the new shareholders.
On the other hand, if you say that you had 10 times the level of some of this MBS activity, it could be a huge number. How should we think about that?
As you said, Mike, I think we can't discuss that, and you get a rendition of all the different criteria that people have written about. I think that this quarter we were able to put away the AIG case, which, if you remember, back in 2011, a lot of people said was worth a lot more money for $650 million. We'll continue to figure out what we can put behind us at reasonable cost to our shareholders. We just can't talk about details on that.
All right. Good job with the AIG. I was one of those people who thought it was going to be more, and it wasn't. That's why I'll take any guidance I can get on the legal costs ahead. Thanks a lot.
Thank you.
We'll take our last question from David Hilder with Drexel Hamilton. Please go ahead.
Thanks. Most of my questions have been answered. Just on the AIG settlement, I actually thought AIG was the only remaining objector. Are there others?
There are several other objectors that have not been as vocal, and as I said, we'll have to see where it goes with them dropping out.
AIG has agreed to dismiss all its claims? Or its objections, I should say.
That's correct.
Okay, great.
That's correct. It's part of the settlement agreement.
Great. Thanks very much.
Great. Super. I think we're through all the questions, so thanks a lot for joining us, and we look forward to talking next quarter.
Thank you.
This does conclude today's conference. You may now disconnect and have a wonderful day.