Good day, everyone, and welcome to today's program. 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 McIntyre. Please go ahead, sir.
Good morning. Thanks everybody on the phone as well as the webcast for joining us this morning for our Q2 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. So with that, I'll turn
it over to Brian Moynihan, our CEO for some opening comments before he goes to Bruce. Thanks, Lee. And 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. And you can also see they have continued to build our strong balance sheet position in capital and liquidity. So in a minute, Bruce will take you through the details of results. But I thought it'd be good for if we spend 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 1,400,000 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 rate is changing, which would help our rich consumer our deposit rich consumer and business banking segment, our consumer business had another good quarter. They 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 Q2, but more importantly up 8% from the Q1 this year showing increased momentum in spending among our card customers. Consumers are growing card balances also, the 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 increased from 1st to 2nd quarter, but importantly our purchase mortgage originations 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, 7000000 to 8000000 visitors come in each week showing continued strong activity. We can also see that in our online activity where 30,000,000 online customers continue to grow their overall volumes and importantly in our mobile activity where our 15,500,000 mobile customers continue to increase the use of technology including depositing 10% of all the checks, 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 rate ended the quarter of less than 3%.
We see on the wealth management side, the consumer the market's growth is added to consumer wealth. We have nearly 2,500,000,000,000 dollars in client balances in our Global Wealth Investment Management business, including $100,000,000,000 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 the manufacturing activity in our clients has accelerated. The borrowing of our commercial customers remains healthy across the industry and quota 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 business underlying business performed well. Tom Montag and his team had our global markets business posted $1,100,000,000 in earnings for the quarter. Our investment banking pipeline remains strong and the back half of twenty fourteen 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. But the most important thing to think about is a signs of the gradually improving economy is how our businesses continue 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 2 and work through the 2nd quarter results. We reported earnings of $2,300,000 or $0.19 per diluted share this quarter, which included pre tax litigation expense of $4,000,000,000 which equated to roughly $0.22 a share after tax.
$3,800,000,000 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're very pleased to have reached the definitive agreement with AIG which resolves all outstanding RMBS litigation between the parties for a settlement amount of $650,000,000 This agreement is important for 2 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 $22,000,000,000 relative to the Q2 of 20 13 revenue was down $990,000,000 driven by lower net interest income and mortgage banking income.
Relative to the Q1 of 2014, it was approximately $800,000,000 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 $18,500,000,000 but included $4,000,000,000 of litigation expense. If we back out that litigation expense and compare it to Q2, 20 13 expenses, expenses improved by $1,000,000,000 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 1,000,000,000 dollars of retirement eligible incentive comp from our Q1 results as well, you can see expenses declined roughly $700,000,000 from the Q1 as a result of lower revenue related compensation within our Global Markets business, lower $11,000,000 with net charge offs of $1,100,000,000 and a reserve release of $662,000,000 during the quarter. Our results from the quarter also benefited from the sale of $2,100,000,000 in non performing residential loans.
The income statement benefit from that sale was approximately $350,000,000 pretax or $0.02 a share after tax and you saw roughly $150,000,000 of that benefit flow through other income in the balance through the recovery of net charge offs. And lastly, the aggregate amount of a few other items including debt securities gains, equity investment income, net DBA as well as FAS 91 resulted in a benefit to EPS of approximately $0.04 a share. We move to Slide 3 and look at our balance sheet highlights. You can see the balance sheet increased $21,000,000,000 from the Q1 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 $4,300,000,000 primarily due to lower residential mortgages principally within our discretionary portfolios and that also included the $2,100,000,000 bulk sale that I just mentioned. If we exclude residential mortgage loans, our consumer loans rose slightly as our U. S. Card balances grew $1,300,000,000 and our securities based lending with our wealth management clients increased $1,800,000,000 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 and 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 $1,100,000,000,000 and reached record levels. Our tangible common equity ratio improved 14 basis points from the Q1 of 2014 to 7.14%. Tangible book value per share was $14.24 a 3% improvement from the first quarter and was driven by both our earnings during the quarter as well as a $2,300,000,000 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 $2,900,000,000 and we issued $1,500,000,000 in preferred stock during the quarter at a favorable rate.
On Slide 4, we show our capital ratios under Basel III. Under the transition rules, our CET1 capital was 100 and 53,600,000,000 risk weighted assets 1,280,000,000,000 and 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 Q1 of '14. Our CET1 capital improved $7,000,000,000 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% to 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 Q1 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 Q2 of 'fourteen, we exceeded the updated U. S. Rules that are applicable beginning in 2018.
Our bank holding company exceeds the 5% minimum and our primary bank subsidiaries Vana and FIA are both in excess of the 6% minimum. We turn to Slide 5 on funding and liquidity. Our long term debt of $257,000,000,000 was up modestly during the quarter 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, but we do expect our parent issuance to be below the $13,000,000,000 contractual maturities in the second half of twenty fourteen. We're also likely to continue to issue term debt out of our primary bank subsidiaries.
Our 2nd quarter yields improved 12 basis points from the Q1 of 'fourteen to 2.29%. We've realized significant improvement given only 2 years ago this yield was over 3% and our average debt balances were nearly $75,000,000,000 higher. Our total global excess liquidity sources during the quarter increased to a record $431,000,000,000 as bank liquidity continued to grow in the second quarter our time to required funding remains strong at 38 months. We turn to Slide 6, our net interest income on a reported FTE basis was $10,200,000,000 consistent with the Q1 of 2014 is 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 $175,000,000 and that compares to $273,000,000 negative in the Q1 of 'fourteen.
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 $10,400,000,000 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 percent. 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. And as we head into the back half of twenty fourteen, we still expect modest improvement off of the Q2 of 'fourteen level of net interest income which was $10,400,000,000 excluding market related adjustments.
Non interest expense on Slide 7 was $18,500,000,000 during the 2nd quarter and once again included $4,000,000,000 of litigation expense. As we mentioned, dollars 3,800,000,000 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 $14,600,000,000 this quarter. If we compare those to the Q1 of 2014 and exclude retirement eligible costs that we saw during the Q1 of 'fourteen, our expenses declined $700,000,000 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 $1,400,000,000 and declined approximately $150,000,000 from the Q1 of 'fourteen.
As we look forward with respect to our 2 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 $2,000,000,000 in expense savings in the Q4 of we will have fully achieved the $8,000,000,000 target that we announced in 20 11. In the Q2 of 'fourteen, our quarterly savings rate that was achieved on new BAC was $1,800,000,000 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 $1,100,000,000 goal by 1 quarter. If we turn to asset quality on Slide 8, you can see credit quality once again approved on all fronts.
Net charge offs declined $315,000,000 from the Q1 of 2014 to $1,100,000,000 or a 48 basis point net loss ratio. As I mentioned earlier, this quarter did include a $2,100,000 sale of bulk non performing loans, which included recoveries of 185,000,000 dollars on previously recorded net charge offs. If we exclude the effect of the bulk sale net charge offs, they declined $130,000,000 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 2nd quarter.
Provision expense during the quarter was $411,000,000 and we released $662,000,000 of reserves. We would expect net charge offs going forward to continue to show modest improvement from the Q2 of 14 levels of $1,300,000,000 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 9 with Consumer and Business Banking. We continue to make solid progress on the strategy in this business through deepening relationships and reducing our optimizing the delivery network.
We're simplifying the product set as we reduce the number of offers 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 safe balance checking account as well as an enhanced preferred rewards program that we launched after a successful pilot program. We're pleased with results again this quarter as our earnings of 1.8 $1,000,000,000 grew 29% from the Q2 of 2013 and were up 7% from the Q1 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 Q2 of 2013 on lower operating, litigation and personnel cost. Network well as consolidations. Our credit quality remains strong as net charge offs declined versus both periods. Our U. S.
Credit card business exited the quarter with less than a 3% loss rate in June. 2nd quarter provision expense was $534,000,000 Our net charge offs improved excuse me, improved $313,000,000 dollars from the Q2 of 'thirteen and $36,000,000 from the Q1 of 'fourteen. We released $120,000,000 more in reserves this quarter than the Q2 of 2013, and $242,000,000 more than the Q1 of 2014. From a customer activity perspective this quarter, we saw continued growth in our mobile banking customers, which reached 15,500,000 customers and our customer deposit transactions using mobile devices represented 10% of all transactions. Our average deposits of $544,000,000,000 are up organically almost $11,000,000,000 or 2% compared to the Q1 of 2014 and up 5% or nearly $25,000,000,000 compared to the Q2 of 2013 and we did that our rates paid on our deposits reached a new low of 6 basis points.
Our brokerage assets surpassed $105,000,000,000 and are up 26% year over year based on both improved market valuation as well as customer flows. Our card issuance remained strong at 1,100,000 new accounts in the Q2 of 'fourteen with approximately 2 thirds of those cards going to existing customers. We saw growth in ending U. S. Credit card balances this period with ending balances up $1,300,000,000 relative to the Q1 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 $3,800,000,000 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 Q1 of 2014 as both revenue and expenses improved. Our 1st mortgage retail originations were $11,100,000,000 and were up 25% from the Q1 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 Q1 of 2014, but our applications per day are slowing a bit. Our home equity originations were 2 point $6,000,000,000 and increased 31% from the Q1 of 2014. We continue to reduce production staffing levels and the savings from several quarters of these reductions are beginning to show in our expense levels. We move to the legacy assets and servicing sub segment, the driver here was the aforementioned litigation cost.
From a cost of servicing perspective, our LAS expenses ex litigation did decline $141,000,000 to 1,400,000,000 dollars and our number of 60 plus day delinquent loans dropped 14,000 units to 200 and 63,000 units or down 5% from the end of the Q1 of 'fourteen. The primary revenue component in our LAS sub segment servicing fees declined $40,000,000 versus the Q1 as the size of our servicing portfolio declined. This was offset by a better net hedge performance on our MSR. Also during the quarter, we did benefit from lower rep and warrant provision, which was $87,000,000 or down nearly $100,000,000 from the Q1 of 2014. 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 6th consecutive quarter. Our revenue of $4,600,000,000 was up 2% from the Q2 of 2013 and 1% over the Q1 of 2014. Record asset management fees offset the softness in transactional activity. Net income $724,000,000 was slightly lower than both comparative periods driven by increased expenses.
Our expense levels versus the Q2 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 Q1 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 $72,000,000,000 from the end of the Q1 of 'fourteen to a record $2,500,000,000,000 Long term AUM flows were nearly $12,000,000,000 for the quarter marking the 5th straight year of positive quarterly AUM flows.
Our ending client loan balances were up $3,900,000,000 to a record $123,000,000,000 which is up 3% from the Q1 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 $2,400,000,000 in assets this quarter and that compares to 156 wins in the year ago quarter for $600,000,000 in assets. We turn to Slide 12, Our Global Banking earnings for the quarter were $1,400,000,000 up 4% from the Q2 of 'thirteen and up 9% over the Q1 of 2014. Our return on allocated capital was very strong at 18%. Compared to the Q2 of 2013, our revenue showed modest improvement while expenses increased and credit costs declined.
Within the revenue category, our investment banking fees companywide this quarter were 1.6 $1,000,000,000 up 5% from the Q2 of 'thirteen and up 6% on a linked quarter basis. We maintained a solid leadership position in investment banking fees and we had and we had particularly strong equity underwriting results during the quarter. Our provision was $132,000,000 during the quarter and included $156,000,000 reserve build. Our provision costs were favorable to both comparative periods as we added less reserves in the Q1 of '14 and had less charge offs compared to the Q2 of 'thirteen. Expenses increased $50,000,000 versus the Q2 of 13 on higher litigation, but improved $129,000,000 from the Q1 of 2014 on lower personnel and back office support quarter, up 6% compared to the 2nd quarter of 2013, but flattish compared to the Q1 of 2014.
Our loan balances relative to the first quarter of 'fourteen, bear I think several comments that I'd like to make. The first is, we saw sizable pay downs during the quarter as our customers access the capital markets. We had approximately $2,000,000,000 of such pay downs where our customers chose to access the markets and refinance existing bank loans. Within commercial real estate, we continue to optimize the mix with several small portfolio sales that took those balances down a little over $2,000,000,000 And 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. And lastly, within the Global Banking segment, deposit flows remain solid and were stronger at the end of the quarter.
If we move to Global Markets on Slide 13, We earned $1,100,000,000 in the Q2 of 2014 that's up 14% from the year ago period and down seasonally 16% from the seasonally strong period of the Q1. Net DBA during the quarter was a gain of $69,000,000 versus gains of $49,000,000 in the Q2 of 'thirteen and $112,000,000 in the Q1 of 'fourteen. Despite the slowdown in FIC across the industry group, we were pleased with the results this quarter. Our revenue was up 9% from the Q2 of 'thirteen, but down 9% from the seasonally high Q1 of 'fourteen. Our Q2 of 2014 revenue did include an equity gain of roughly $240,000,000 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 $3,400,000,000 which was 1% lower than the Q2 of 17% lower than the Q1 of 2014. Our fixed sales and trading revenue during the quarter increased 5% compared to the Q2 of 2013 and was down 20% from the seasonally higher Q1 of 2014 levels. Driving the year over year improvement within FICC will result 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 Q2 of 2013 and 11% from the Q1 of 2014 as lower market volatility depressed overall secondary market client activity.
Expenses were up from the Q2 of 2013 on higher technology and staff support investments and to a lesser degree incentives, but down from the Q1 of 2014 in line with the seasonal revenue decline that we saw. Trading related assets on average increased $23,000,000,000 to $460,000,000,000 during the quarter and our return on allocated capital was 13% during the Q2. On Slide 14, we show all other. Revenue was down $463,000,000 from the Q1 of 'fourteen on lower equity investment gains of $618,000,000 which were partially offset by lower negative market related adjustments to net interest income during the quarter. Our 2nd quarter 20 14 expense in all other is down $1,300,000,000 from the Q1 as it included retirement eligible incentive costs and some litigation expense.
The Q2 of 2014 provision benefit of $246,000,000 was $111,000,000 better than the Q1 of 2014 $67,000,000 better than the Q2 of 2013. Net charge offs of $11,000,000 improved $195,000,000 from the Q1 of 20 14 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 twenty fourteen, 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 of closing comments.
We feel like we made 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 Management businesses. Our consumer business profitability grew 29% from last year and in the mortgage business we're taking cost out of the fulfillment side as well as the cost to service our delinquent loans. We reported $0.19 of earnings and 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 and our asset quality improved to decade low loss ratios. And with that, we'll go ahead and open it up for questions.
And we'll take our first question from Betsy Graseck with Morgan Stanley. Please go ahead.
Hey, thanks. Good morning. Good morning. Hey, couple of questions. One, you had some callouts on some nice gains and 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 your cost of selling down for?
Yes. We took Betsy a piece of our non performing loans out and as non performing loans and as you know when you receive it to the extent that you receive income you write down the basis to those loans. And we took those loans out and saw healthy gains. We continue to look at the sale of non performing loans, but 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 that AEIG agreement that looks like 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. And we'll just have to see as we move forward what the impact from them dropping their objection to the case is. And 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 debate recently about how the
Fed could potentially start to exit. Recently about how the Fed could potentially start to exit. Obviously, in the FOMC minutes, they talked about that. And 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 of things. If you look at asset sensitivity, you will see that the exposure to a 100 basis point parallel shift in rates that the benefit increased this quarter from about $3,200,000,000 in the Q1 to $3,400,000,000 As you look at the deposit base, a couple of 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. And if you look at the reason that they're holding those deposits with us, is 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. So as we move forward, there's obviously a level of uncertainty to the extent of a Fed withdrawal. But 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 $25,000,000,000 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. So I think there's a round numbers of $10,000,000,000 reduction in CDs over that time period. And we've also obviously sold some deposits, not a huge amount. So that growth is over top of all that and net.
And so we feel good about the consumer franchise ability to continue to grow deposits even while being very disciplined on price. And as rates rise, that value we recognize and we expect that 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.
And we'll go next to Jim Mitchell with Buckingham Research. Please go ahead.
Yes. Hey, good morning.
Yes, I just wanted to follow-up quickly up on that deposit question. I noticed that non interest bearing was up 11%, interest bearing only 1%. So 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 the just on the consumer business, the year over year growth was $25,000,000,000 and the linked quarter growth was $10,000,000,000 So 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. And so the growth rate of 2% was nominal in a quarter which would be annualized 8% about high 5% to 6% year over year. So it's accelerating still by the good core activity.
Right. Okay, great. And then on loan growth, you still have of underlying demand that you're seeing in your customer group?
Sure. Let's go it's a very good question, Jim. And 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 with of loans that are held within our investment portfolio. And so if you look at the consumer business, I think there are a couple of key things that I would note. The first is on a linked quarter basis, this is the Q1 in some time where we actually saw ending card balances within our domestic card balance increase and those were up as we mentioned roughly $1,300,000,000 from the Q1 to the Q2.
So we saw growth there. And then 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. And once again, on the home equity front, the progress that we're making on the origination front where we saw about $2,600,000,000 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 $3,000,000,000 to $4,000,000,000 a quarter. So within the consumer businesses, if you look at kind of the core front end, we are seeing some consumer loan growth that just gets masked by the runoff of some of the consumer real estate. On the overall commercial and corporate side, I did reference that the couple of payoffs.
As we look at, 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. So we are starting to see some greater activity on the revolver space within our commercial banking customers. And overall activity with the corporate customers continues to be good, but 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. Did you maybe I missed it. Did you disclose where you are on that front?
We did not. At the parent at this point, we are above 100% at the parent. So we're good from a 2017 compliance there. If we look at the combined Banafeea LCR ratio, those 2 companies will or 2 banks will be put together October 1. That LCR number is in the high 80s at this point and we'll continue to build the LCR ratio at the banks to be at least a year ahead of where we need to be.
Will that put any further pressure on NIM if you're building more liquidity
It should not. There is as we look at there's been a significant build at this point. And 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 Q1 and Q2, at this point, I'd say we've eaten that expense and we now need to get after it and optimize it to get the expense knocked back down.
Okay, great. Thanks.
And we'll go next to Matt O'Connor with Deutsche Bank. Please go ahead.
Good morning.
Good morning,
Matt. 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. So just wondering, is there kind of another new BAC or just going 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 pro loan basis and also keep reducing the number of delinquent loans. So that's the real expense leverage. And what Bruce talked about earlier is we've got to make sure we do it the right way and especially in connection with sort of finishing up some the regulatory work there. So that's the real large dollar amount. You're pointing out exactly the situation on sort of the core.
You're running about $13,000,000,000 a quarter in core expenses, not a bad number if you annualize it and sort of think that through. But the real question is how do you hold it there and keep investing in the businesses. And so 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 and now
we're reaching that. And so what we're challenged our teams to is how to maintain a good operating leverage going forward. And so we're more about simplifying the company and continue to take out expenses, but a lot of that will offset the 1,000 people we've added in the branches to be sell more products that you're seeing the benefits of, the continued adds we make in the wealth management business and training programs. We hired a 30% or 40% more people out of schools this year because we got a kid replenishing our talent base, commercial bankers, etcetera. So as you look forward, the inflationary type things that go on, merit raises and healthcare expenses and stuff like that and investing in the business including the $3,000,000,000 plus we put in technology development every year will need to be offset by hard expense work.
And so that's the plan we have and we're putting this we keep driving those plans in place. There will be less bottom line reduction on a core expense base and more how you hold there in a relatively slow growth environment.
Okay. So just to try and summarize even if there's some modest revenue growth you would hope to keep that 13 $1,000,000,000 relatively stable on a net basis then?
Yes. And with one exception, when markets kicks up you're going to have more comp related to that or wealth management comp which is good. So 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. But on the like if you think about what David Darnell and the team done in retail business, they are still rationalizing the branch structure which will offset putting more people in the branches that are more personal bankers and FSAs 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 Enterprises 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.
Okay. And then on the LAS costs, obviously making good progress there. And I'm not sure there's too much concern if it gets pushed out 1 quarter. But is there still the goal of getting down to $500,000,000 or below $500,000,000 per quarter?
Yes. And obviously that's going to trail and move with as we drive down the 60 plus day delinquent loans. But clearly the $1,100,000,000 that we'll either have in the Q4 or the Q1 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.
Okay. And 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 27. They have up to 75th day is August 10th and we continue to see where they come out.
Okay. Thank you. And we'll go next to Glyn 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. So 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?
Yes. 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, again to the Q1 of 2014 than you'd normally see. So 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 Q1 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 change 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 provided. So I'm not sure you're seeing any meaningful movement in what you're able to charge from a matchbook perspective.
I get that. Yes. Okay. 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 expense 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? In other words, 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 of things. The first is as you look at the expense growth during the quarter and you look at the buckets roughly half of it relates to incentive related comps that is a result of increased revenues. We did we do have a couple of initiatives that you'd expect to roll off over the next couple of quarters within the wealth management business. We obviously had the rollout of Merrell 1 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. And so 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. So, at the same time as we look forward, you need to see positive operating leverage not negative operating leverage. And that's what we'll look to work for as we go through the next couple of quarters of
the year. You point out, I mean, it's an obvious point and we the team is 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. But it is something that we've got to monitor closely and we think it will come back down and more in line with what you'd expect.
I appreciate that. Last one is Slide what's driving that? And if 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, there are 2 different types of claims that come in. There is 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 could 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. And what's important when you look at what we saw during the Q2 of 2014, we saw roughly $1,900,000,000 of original unpaid balance on the loans not loss growth of that amount, the amount of bulk claims where no file reviews have been done was $1,900,000,000 So, I would not read too much into that number because it's not for loan files where there's been any work done.
And 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 and 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.
And we'll go next to John McDonald with Sanford Bernstein. Please go ahead.
Hi, good morning. Bruce, the increase in Tier 1 comment of $7,000,000,000 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. So 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. And so as you look at the results, we had roughly $3,000,000,000 of pretax income. We had roughly $3,500,000,000 of pretax OCI that gets you to about $6,500,000,000 And then as you look at threshold deductions of roughly 10%, take 10% of that $6,500,000,000 it gets you roughly $700,000,000 that gets you to roughly 7.2 of capital build. You back out the common dividends of $100,000,000 and that gets you to your $7,100,000,000 build.
Okay. And that building at a pretax 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 2 to 4 quarters and it will be a function of the exact earnings. But for the near term that's correct.
Okay. And could you give us the numbers on what the excluded DTA is today and what it changed in during the quarter?
Yes. I believe that the excluded DTA was roughly $15,000,000,000 and it was down over a little over $1,000,000,000
Okay. On RWA, are there risks that the continued legal settlements would drive up your operational risk metrics? Or is there a forward looking component to the op risk calc that already anticipates more settlements coming?
Yes. We're mindful of the fact of settlements. There's obviously a lot of discussion in dialogue around op risk RWA. If you look at and 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% to 27% of our total risk weighted assets number and is in line with our largest peer.
Okay. On capital, on the last C core, your binding constraint was the leverage ratio more than the risk based Tier 1 minimum. I assume the recent preferred issuance and the Buffet 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 re performing loans that we did, those are the types of assets that in the CCAR at least we believe we don't have access to the Federal Reserve's models, but those are the types of assets that tend to get hard. So 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. And then you're exactly right with respect to the leverage ratio that there's a benefit that preferred stock gives.
We're north of $4,000,000,000 this quarter that we generated. We'll continue to look to see if more preferred makes sense. And then lastly, we'll continue to look at 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 is 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? And any sense of what drove that? And have you seen any follow through on that?
Yes. The our activity levels and if you saw a P and 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. And if we look out at the Q3, typically with the summer, the 3rd quarter is a little bit seasonally slower than the Q2. If you look at our results last year, you see that. And as we come into the Q3, there is nothing unusual in our Q3 numbers of last year.
And how we compare to those numbers is going to be a function of how well we performed quarter and that's obviously up to us.
John, if you look at Page 19, you can see the Q2, Q2, Q2 across the last 3 years and it's remarkably stable in terms of markets revenue lower part of that page. And so what Tom and the team did a few years ago was actually reduce the headcount almost 5,000 people And that's allowed us to make $1,000,000,000 in this kind of environment as we did this quarter. So this web and flow and as you and I talked about in various occasions, it is a core part of what we do. But we show you the separate P and L that show that in the Q1 I have a good quarter this quarter had $1,000,000,000 and it may come down activity moves around for clients, but it's a relatively stable revenue base we can make money on because of the expense adjustments we made last year in the last several years.
Okay. And 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 servicing book from sales that are ongoing that would impact the servicing fees?
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. But beyond that one transfer this quarter, we're largely at the end of servicing sales and what 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.
And 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 $100,000,000 this quarter. You're going to always have that as you go forward, but 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.
And we'll go next to Guy Moskowiak with Autonomous. Please go ahead.
Thanks. Good morning. First question
I had was just a follow-up on Crest. 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 sales, there was a piece of it that was that we serviced and there was also a piece that other service. So in the context of the number of 60 plus day delinquent loans, it was not meaningful relative to the total.
Got it. So 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 1 more sale this quarter and then just normal run
off? That's correct.
Got it. Question for you while we're on the topic of mortgage stuff. Obviously, you had the $4,000,000,000 litigation reserve build essentially this quarter. It appears based on what you gave as an after tax impact that you take a full tax benefit against that. Of course, what we find with a lot of these things, especially with like 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. But if you go back, Guy, and look at the Q1, we look at and try to understand what the tax treatment is for the different settlements. There was a piece of it in the Q1 that we would have assumed was not tax deductible. And you're right, the piece that in the reserve that we took this quarter, there was a presumption that it was tax deductible.
And the short answer is until you get to the end, you don't know the exact mix. But so we've tried to be thoughtful with that. And just say as it relates to the total number, as we said last quarter, there was $2,400,000,000 of litigation expense over and above what was for settlements. In this quarter, you've got in the high 3s. And I think it gives you a sense as to the magnitude of the reserves that have been built over the
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 and Investment Bank that tend to be for the larger companies. And 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. And as we look out at in the marketplace, given that those loans that are broad 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 1, 2 or 3 bank deals. And we have seen that area continues to be pretty competitive and we're just being disciplined with how we approach that market and given the footprint that we have, we do have the flexibility to not chase things within some of these regional markets.
And just to follow-up
on that, when you say banks competing for that business, are you using the word bank in a 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, I would for the core commercial customer that's going to be the traditional banking customer as you think of it.
Okay. And then just a housekeeping question just to make sure I understand what you were saying. You said there were maybe $250,000,000 of gains in global markets, I guess, probably not to put words in your mouth, but things like market. And you but I think you said that you did not include those numbers in the core equities or fixed income segment revenues. Is that right?
Yes, but that's correct. So 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. But we did not think it was appropriate to include that in the core FICC and Equity Sales and Trading. So 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.
And 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 $250,000,000,000 of kind of residential real estate loans and $90,000,000,000 of home equity. How much do you think those decline before those stabilize? Because I think you sort of tried to talk about it in terms of the overall loan growth, but that's really those are really the categories that are shrinking.
I mean, do you have a sense as to where those categories will level out?
Well, 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. And so the 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. And as it relates to the Whole Loans piece that we have, I would expect that over time that that will continue to run down. We continue to look as we've talked about before on the home loans business to put into origination mortgages for customers where we want to hold those loans.
During the quarter, we put about $6,000,000,000 of home loans that were originated for our customers on our balance sheet, roughly 75% to 80% of those would have been of the jumbo variety. But I think to be realistic over the next probably couple of years, you're likely to see a little bit more runoff of that than you'll see new loans coming on. And we obviously have the decision at that point of do you want to reinvest those proceeds and other whole loans that you can buy out in the market or invest those in securities. And 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 whole 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 kind of in reserves in total or maybe address as to how you kind of came up with that number, given the fact that I think if I'm reading the footnotes correctly that you're kind of possible but not accrued losses kind of have stayed flat from the Q1?
Yes. Couple of things. The range of possible loss that you quoted of being flat from the Q1 to the Q2 relates to our representation and warranty reserve not our litigation RPL. So 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 filed the 10 Q.
As it relates to overall litigation reserves, we did not put out an exact or 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. And I think you can see and people are aware of what the most significant of those matters are. And 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. And just a quick follow-up to the first one. You had mentioned kind of investing kind of some of the runoff in from the mortgage and home equity portfolio in securities. Is that in the context of keeping those balances kind of stable or would you actually kind of increase that portfolio?
Yes. What we 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 and 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.
And we'll go next to Stephen Chuman with Nomura. Please go ahead.
Hi, good morning.
Good morning.
So the first question I had pertains to capital and RWA specifically. So over the last five quarters, we've actually seen the RWAs on a flat to upward trajectory. And effectively the growth has mirrored the balance sheet growth that we've seen over that same period. And 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?
Yes. 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. And we would expect as we've talked about throughout the call that you will continue to see a runoff there. And 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.
So if you look at over the last 5 quarters with the I think in 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. And I'd just say, as I mentioned going forward, on average, it will probably be a little bit lower mix coming on that's in 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. And the under the advanced approach that the recent increases you've seen have largely been attributable to operational risk as opposed to what we're seeing with then the kind of the core loan categories.
Okay, thanks. No, that's really helpful. And switching over to Glyn for a moment, actually taking a longer term view on the earnings power within the segment. As 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%. And 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 leverage in the business that people often overlook is a lever towards rising rates because in the business itself the amount of total deposits and loans are significant $250,000,000,000 of deposits and loans. And I think we said on last call and have said many times, we can see this margin moving towards 30% in that dynamic in that environment. But I think when you get to there you start to top out a little bit if you just understand the broad base of revenue and the amount that goes through the grid and things like that that become a governor and what you can do beyond that. But as 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 us leverage to the upside as you described.
Okay, great. And 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. But 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 that through the cycle charge off rate at that time that was implied was somewhere in the neighborhood of 120 bps.
And clearly, it's going to be lower than that going forward, but I was hoping you could give us an update, maybe some updated guidance on where you think that through this cycle and 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 $1,300,000,000 if you move the recoveries, but some range, you got to look at the card business and what changed since that time is we have changed our position in the card business fairly dramatically with the sales and even how we've approached the U. S. Just based on the dynamics of the car business. The good news is the car business is starting to grow in terms of balances. And 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 1,001,000 new cards, people are using the card more and the balance is growing.
And so I think that if you just think about that, that number is going to be the it is today and will be the dominant part of the charge off question. And you should think that that ninety $1,000,000,000 ish billion 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 positioning balance sheet because we need to keep that book balanced because it has higher charge offs and period of unemployment levels. So I'd say if you went back and look at that and that is the biggest core adjustment between the two items. And then the core the counter to that is if you look at the appendix pages you see the charge offs on the mortgage business.
In the 1st mortgage business you had recoveries. But if you look at home equity side you still have a charge off rate which based on the underwriting criteria the stuff going on would be much higher. And so we had a couple of $100,000,000 in quarterly charge offs that you can see on Page 21. So we expect to see improvement in that from where we are. But I'd say the card business is kind of about as good as it's getting very strong.
You obviously a little bit of help in home equities. You could have a reversal from the recoveries on the 1st mortgage loans. 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.
And we'll go next to Paul Miller with FBR. Please go ahead. Yes.
Thank you very much. Going back to your LAS costs excluding litigation where you mentioned that it's probably to get to that $1,100,000,000 target is going to take another quarter or 2. What should we be watching? And how long do you think that LAS expenses are going to move to become nonmaterial, I guess is another way to say. Can you give us things what we should be tracking?
Sure. The first thing I want to be clear Paul that the getting to the $1,100,000,000 is moved back maybe moved back 1 quarter not 2. So we're looking at 1 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. So, as you go forward, we have full implementation of the National Mortgage Settlement effective September 30.
That will be a big benchmark. 60 plus day delinquent loans trend down. And as those trend down, you need less people as well as a variety of other expenses. So that's the key metric to watch. And 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 day delinquents until probably the end of 2015 or the 1st part of 2016.
So 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.
And Paul, we've got work to do in a sense. If you go back, I think if you look at the Q4 of 2012, it was about $3,100,000,000 The Q4 of 2013, I think it was $2,100,000,000 Bruce. And then we said $1,100,000,000 Originally we said higher than we brought it down to $1,100,000,000 And now I think that it's somewhere a little higher than that. But that's the broad move. And the question is how do you keep going on that?
And that is really going to be as Bruce said the number 60 plus delinquent loans which largely release people. But we're also getting a condition that we now got the place stabilized enough behind us and we can start to invest in technology will add a level of improvement that we haven't been able to invest in while we just had to get the work done. And so we expect new systems deployment in that 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. So there's still a lot of work ahead of the team.
But if you put in the context of $2,000,000,000 ish per quarter and expense reduction across 8 quarters, a lot of work's been done too.
And just a follow-up, you talked about you do have another MSR sale. I don't know how material that is. But 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. Is that can that interfere with the sale or you think you can sell the MSR without the headline risk of loss key?
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. So 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 Binance Sports. Please go ahead.
Thanks. I want to ask you a couple of questions. First off, you've been harvesting about $400,000,000 worth of gains out of the debt portfolio. Is that in the sense of trying minimize your AOCI risk when rates do go up as you're shortening the portfolio? Or just want to think about your strategy because that's been a pretty consistent flow through over the last year?
As we look at 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. And so over the last year even as the securities portfolio has grown, we've managed to keep the OCI risk from an absolute dollar perspective relatively flat. And as you see markets move up and down, obviously selling longer duration securities as you have growth in the securities portfolio as part of that strategy.
So I just want to
make sure that the gains are just kind of an outflow of that overall strategy that you had talked about?
Yes. You're exactly correct.
Okay.
When you look at the kind of the Consumer and Business Bank, you have considered about more in deposits than you really have in loans, which these 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 to because you should be able to penetrate that customer base with more lending?
Yes. And I think yes, we should be able to penetrate more lending. So that's if you look on Page 17 it is you can see that 18 excuse me you can see that the growth in card originations, the growth in home equity originations which go on the balance sheet that as Bruce talked about early we're putting about I'd say half broadly stated of the originations and mortgages are going on the balance sheet. And in the Business Banking segment which is a small part of our Commercial Banking segment geared to the $50,000,000 under revenue companies we're actually starting to see net loan growth. It's the first time in a lot of times as we ran off some non core portfolios.
And so that's the core opportunity in the franchise is to continue to originate credit to the core customer base and 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. So in every company's retail business, it's an excess deposit generator just by the very nature of it. And not only is it fund the loan to the consumer customers, but also provides the funding for franchise. So 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 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 and all other. So you should you can't assume that those deposits that you see within page 9, a lot of the loans that they do for our customers are reflected in the all other segment.
And then in the mortgage segment, the RES, you're still if you take out the litigation, generating about a $700,000,000 negative loss in the sense of your just pretax pre provision between revenues and expenses. You're talking about bringing down the legacy asset servicing expenses. But what is the timetable in your mind to would be reasonable to think of closing that $700,000,000 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. So Q1 to Q2, we saw about $100,000,000 improvement on the front end of the business that's reflected in consumer real estate services. And as it relates to the $700,000,000 number that you quoted, we obviously relative to the guidance have $300,000,000 of expense to get out of that business over the next 90 days. And then 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 1st part of 2016.
And that's clearly one of the highest priorities we have within the company.
And just lastly and thanks for let me ask you a few questions. Because if you're looking at 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, so the models kind of force you to write it back down. But 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 Q1. And 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. But we do not and I want to emphasize that we look to manage the MSR risk as part of the overall strategy and are managing that to have it be a flat book.
And while from an interest rate standpoint, I understand that it just seems like the models have assumed a lot faster prepayments than we really actually experienced which eventually has to screw up?
At the end
of the day, it comes down to what the customer does. You're exactly right.
All right. Thanks.
And we'll go next to Matt Brunel with Wells Fargo. Please go ahead.
The questions have been asked and answered. Thanks very much. Thanks, Dan.
And we'll go next to Mike Mayo with CLSA. Please go ahead.
Hi. A couple of follow ups. First on the deposit beta, I appreciate you giving us the color for every 100 basis point increase would help by $3,400,000,000 You described the deposit base. But what is the actual deposit beta that you use that's come up with the $3,400,000,000 benefit?
We do not quote Mike the actual deposit data that 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.
So I think that's in the ballpark of one of your large peers, but below some others. And is the reason that would be below others is because it's a lot of branch based deposits?
You're exactly correct. And 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 $8,000,000,000 new BAC savings. I see the branches are 5,023 and I think you said you wanted to be around 5,000 branches. So if I heard you right, I think you're going from a period of rightsizing to growth. Is that a fair characterization?
Yes. I mean, we've been growing underlying activity. If you look at some of the statistics and back things route, Mike, but you're right. If you go back a couple years ago, we started new VAC, we were running $15 odd,000,000,000 in core expenses. Now we're on $13 odd,000,000,000 And so we're largely getting there.
And the question then is now how do you hold it there in an economic environment which is lower growth than traditionally expected in the United States and that's going to take constant vigilance on our part. But during that whole time period, we've invested literally thousands and thousands of people in the sales side and stuff to drive that growth and we'll continue to do that. The question is how do you balance that investment rate.
And I just Mike before the achieving the balance of the $2,000,000,000 in quarterly new BAC savings in the 4th quarter is not dependent on future branch sales. So I just want to make sure that there's not an assumed linkage there.
And 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. I mean this is done by the people run the businesses. It's just committed plans that we did. This wasn't not a huge project group to actually accomplish. It's done by whoever runs each business each function.
Okay. As it relates to loan pay downs, 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 of loans that were for acquisition related purposes that people then went out and refinance. So, there 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. But 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, but I'll have to do it again.
Sure. The middle market utilization rate was kind of 37 plus percent at the end of the Q1 and was up about almost 1% to mid-thirty 8%, which I don't think in and of itself is not material, but it does seem that people are a little bit more willing just to access the 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. So we clearly as Brian alluded to in his opening comments, we did see an economy that improved in the Q2 relative to the Q1. And on the commercial side, our loan growth is going to tend to mirror or be a little bit above what we see in the macro economy.
So do you think this is an inflection point for loan growth or is that an answer you'd rather not delve into?
We've seen 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 3rd or Q4 earnings call, that is we look out to and 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. As you get into the and you don't see that rate environment until 2016. And if you look at those metrics and back out what we've said, basis points is worth to us on a parallel shift, you get a sense for what we need to get to ex the 100 basis point move.
I'm sorry. So without the 100 basis point shift, the target for ROA and ROTCE is
what? That's going to be roughly $3,300,000,000 or $3,400,000,000 pretax and at $0.63 it's $2,000,000,000 less which on roughly $140,000,000,000 common equity is going to be about 20 basis points less on assets at that point.
Okay. And then 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. And so 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 $12,000,000,000 and the DOJ wanted $17,000,000,000 dollars And 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? I mean, on the one hand, you could argue maybe 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.
And 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. So 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 written about. I think that this quarter we were able to put away the AIG case which if you remember would back in 2011 a lot of people said was worth a lot more money for $650,000,000 So we'll continue to figure out what we can put behind us reasonable cost to our shareholders. We just can't talk about details.
All right. Well, good job with the AIG. I was one of those people who thought it was going to be more and it wasn't. But that's why I'll take any guidance I can get on the legal costs ahead. Thanks a lot.
Thank you.
And we'll take our last question from David Hilter 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.
And AIG has agreed to dismiss all its claims or its objections, I should say.
That's correct. That's correct. It's part of the settlement agreement.
Great. Thanks very much.
Great. Super. We're through all the questions. So thanks a lot for joining us and we'll look forward to talking next quarter. Thank you.
This does conclude today's conference. You may now disconnect and have a wonderful day.