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. 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.
Thank you. Good morning. Thanks for joining us on the web as well as the phone this morning. Before I turn the call over to CEO, Brian Moynihan and CFO, Brian Thompson,
let me
just say that we may make some forward looking statements. For details on those, I'll refer you to our Page 2425 in our earnings deck material, either the website or our SEC filings. And with that, I'll turn it over to Brian.
Thank you, Lee. Good morning, everyone, and thank you for joining us to review the Q1 results. As you can see from our numbers, we report a loss this quarter. That loss reflects the cost of resolving more of our legacy mortgage issues as well as adding reserves primarily for previously disclosed legacy mortgage related matters. As disappointed as we are in the bottom line results, we're pleased to report that the businesses reported earnings at a level that allow us to substantially offset these losses.
And also at the same time, we're able to still grow and improve our Basel III standardized regulatory capital ratio during the quarter. Bruce will take you through the particulars of our results. But first I want to spend a couple of minutes looking to progress we continue to make across the customer groups that we serve. In particular, we added some slides to the appendix on pages 1718, which highlight multiyear trends across our customer groups. Let me just touch on a few of those and connect them to our results.
When you think about our broad consumer franchise for mass market consumers that affluent wealthy consumers, as we think about the mass market group, the strategy in our retail segment has been to lower the cost of service while we improve our customer experience. We do that by continuing to optimize our delivery networks of all types to mobile and online transaction. Yet we still have many millions of visits each week to our branches. But in the aggregate our self-service channels of ATM online and mobile transactions continue to grow. This quarter more than 10% of all the deposit transactions that consumers make in our company are now done through mobile devices as people effectively carry a branch in their pocket.
This coupled with other measures allowed us to reduce our costs in our consumer banking business 4% from last year's Q1. It allows us to continue to invest in other areas to further improve customer satisfaction and grow sales. On the preferred side of our consumer business where we serve mass affluent clients, we continue to invest in this group by adding sales specialists. We now have more than 6,500 sales specialists concentrated in the top banking centers. We also increased service associates to drive satisfaction to these clients as well.
The end result when you put all the customer business together to this segment is organic deposit growth of $23,000,000,000 from last year to a total of $535,000,000,000 in deposits. On the investment side of general consumer client base, our Merrill Edge assets grew 21% from last year. And when we put the segment together, the earnings in our consumer and business banking business improved 15% year over year to nearly $1,700,000,000 this quarter. As we move to the wealthy part of our consumer client base and our wealth management business with U. S.
Trust and Merrill Lynch, client balances again grew this quarter and now total over $2,400,000,000,000 This has driven record asset management fees in this segment and we are seeing growing demand from these customers for other banking products as loans and deposits continue to increase. This business made over $700,000,000 after tax this quarter and had a pre tax margin of more than 25% for the 5th consecutive quarter. We moved to our company's side of our house, our commercial and corporate client base. Continue to retain a leadership position in investment banking fees with $1,500,000,000 in fees received this quarter. We also saw a solid loan and deposit flows this quarter in these from our commercial customers.
These activities drove a 6% increase in revenue in our Global Banking business from last year. In our Global Markets business, which serves investment clients, we earned $1,300,000,000 after tax as our top tier sales and trading platforms generate over $4,000,000,000 in revenue this quarter. So when we put it all together, we have leadership positions that we continue to work on in each area and continue to see good momentum across the year quarter. We're pleased also to be in a position to return capital to shareholders as we increase dividends in addition to our newly authorized share repurchase program. As usual, as we see each quarter remain focused on executing the strategy that connects the capabilities of this company with its customers and shareholders for your benefit.
With that, I want to turn it over to Bruce to cover the earnings
quarter results. We did record a loss of $276,000,000 or $0.05 per diluted share this quarter. Driving the loss during the quarter was litigation expense of $6,000,000,000 which cost us roughly $0.40 a share during the quarter. We recorded $3,600,000,000 in litigation expense for the previously announced FAFSA settlement and we recorded another $2,400,000,000 primarily associated with the increase in reserves for previously disclosed legacy mortgage related matters. Revenue during the quarter on an FTE basis was $22,800,000,000 which was $1,100,000,000 higher than the Q4 of 2013, but below the 23,400,000,000 we saw in the Q1 of 2013.
On a linked quarter basis, our revenues benefited from improved sales and trading results and asset management fees and were offset by lower net interest income as well as lower mortgage banking revenue. Compared to the prior year period, revenue was down slightly on lower net interest income, mortgage revenue and sales and trading, but did benefit from higher asset management fees. Total non interest expense during the quarter was $22,200,000,000 but did include $6,000,000,000 of litigation expense as well as of retirement eligible incentive costs that we recognized during the Q1 of each year. If we exclude these items from both the Q1 periods for comparability of the underlying trends that we saw within the company, expenses did improve by $1,200,000,000 or 7% and were driven by lower LAS non litigation costs as well as some of the new BAC improvements that we saw. Versus the Q4 of 2013, the slight increase in non interest expense increase $673,000,000 versus the Q4 of 2013.
2013. In the
Q1 of this year, we released $379,000,000 from our loan loss reserves and that compares to a release of 1 $200,000,000 in the Q4 of 2013. Before we move off to this slide, let me mention that we had a few other items in the quarter that in the aggregate benefited EPS by about 0 point 0 $4 a share as higher equity and debt security gains, net DVA and the resolution of tax matters were positives and they were offset in part by the cost of retirement eligible incentives as well as the negative market related impacts on our net interest income. One last point on FDO and DBA. This quarter and moving forward, we report the net impact of these two items as one net DBA valuation number for our derivatives and structured liabilities within our Global Markets business. On Slide 3, you can see our period end balance sheet increased from the end of 2013 as we grew both cash and securities in light of increasing liquidity requirements in our primary banking subsidiary.
Ending loans declined $12,000,000,000 led by lower residential mortgages, principally within our Global Banking segment, which I'll cover in a bit. Period end deposits were up $14,000,000,000 from the 4th quarter and are up year over year by more than $38,000,000,000 Our tangible common equity ratio declined to 7% due to the increase in liquidity that I mentioned earlier. Tangible book value did increase slightly during the quarter and we repurchased 87,000,000 shares for $1,400,000,000 which completed our share repurchase program that we established at this time last year. And following our CCAR results, we announced the new $4,000,000,000 share repurchase plan as well as the intention to increase the quarterly common dividend to a nickel a share in the Q2 of 2014. We move to Slide 4, we look at our capital ratios under Basel III.
Recall this is the 1st period reporting under Basel III transition, which became effective January 1 this year. Under the transition rules, our common equity Tier 1 capital was $151,600,000,000 while our risk weighted assets were $1,280,000,000,000 which resulted in a ratio of 11.8%. While there are no comparative reporting periods, we did provide pro form a Q4 of 20 13 numbers to allow you to see the slight movement up in the ratio during the quarter. We do continue to provide our Basel III numbers on a fully phased in basis as we have done in prior periods. The numbers in the chart reflect risk weighted assets under the standardized approach with the common equity Tier 1 ratio improving to 9.3% and remaining above our 8.5% proposed minimum requirement in 2019.
If we move to the advanced method, our CET1 ratio was 9.9% and was impacted by an increased level of risk weighted assets related to operational risk, which were largely offset by reductions in other risk weighted assets as well as the increase in capital. We move to supplementary leverage ratios. We estimate at the end of the Q1 of 2014, we exceed the recently updated U. S. Rules that apply in 2018.
Once again, that would mean our bank holding company is above the 5% minimum and our primary bank subsidiaries BAN and FEA are both in excess of their 6% minimums. I also want to remind you that our Tier 1 capital and supplemental leverage ratios will benefit by approximately $2,900,000,000 in the Q2 of '14 if we receive shareholder approval to amend our Series T preferred stock. One last item I want to note regarding capital. In the Q1 of 'fourteen, it includes the adjustment to capital allocations it includes the adjustments to capital allocations across our business lines. We included a slide in the appendix that notes that the new allocation.
As you look at that, you'll see that the primary adjustments were allocating more capital to our Global Banking business given the loan growth we've seen in that segment and to a lesser extent increases in both our global markets as well as our global wealth management business. As a result of these changes, the amount of unallocated capital that's held at the parent declined from 16,000,000,000 and liquidity. Our global excess liquidity sources increased more than $50,000,000,000 to a record level of $427,000,000,000 as a result of seasonally strong deposit flows as well as some of the bank debt issuance that we did earlier in the quarter. Our total long term debt of $255,000,000,000 was $5,000,000,000 higher than the Q4 of 2013. These figures do not include the $7,600,000,000 of debt issuance that settled on April 1 and was executed at more favorable spread than our existing debt footprint.
That issuance has enabled us to maintain our strong excess liquidity position at the parent despite the cash flows required by both scheduled debt maturities as well as recent litigation settlement. Our time to required funding remained very strong at 35 months with parent company liquidity unchanged at $95,000,000,000 Moving forward and as we consider the settlement, we would expect parent issuance to be below maturities as the focus evolves towards continued yield improvement following the past several years of sizable balance reductions within our debt footprint. We move to Slide 6 on net interest income. Net interest income on a reported FTE basis was $10,300,000,000 which was a decline of $700,000,000 from the Q4 of 2013. That decline was driven by a swing of roughly $500,000,000 associated with our market related adjustments or FAS 91.
FAS 91 was approximately $300,000,000 negative in the Q1 of '14 compared to the $200,000,000 benefit that we saw in the Q4 of 'thirteen. The balance of the decline was largely due to 2 less interest accrual days in the Q1 of 'fourteen relative to the Q4 of '13. Our net interest income, if we exclude those market related adjustments, was $10,600,000,000 once again down a little over $200,000,000 from the Q4 of 2013. Other drivers in the quarter were lower average consumer balances and yields, which were largely offset by a reduction in long term debt costs, as well as continued declines in our deposit pricing. As a result of these net interest income impacts as well as the higher earning assets, the net interest yield once again adjusting for FAS 91 declined 3 basis points to 2.36 percent in the Q1 of 'fourteen.
As it relates to asset sensitivity in the balance sheet, we continue to remain poised to benefit from higher rates, particularly when the short end of the curve moves up. As we continue to manage our OCI sensitivity, we're also mindful of both liquidity and leverage rules. Our Q1 20 14 increase in securities included shorter duration treasury securities instead of mortgage backed securities. These treasury securities are much more LCR and OCI friendly, but do have lower yields. Given the continued growth that we've seen in our cash balances at Central Banks as we increase liquidity, we have adjusted our net interest yields to reflect the impact of adding these low yielding cash deposits once again at central banks into earning assets.
This had no impact on net interest income, but prior period net interest yields have been adjusted to reflect the change. Given the added liquidity during the quarter, coupled with the average balance impact of seasonally lower consumer balances, we expect net interest income in the Q2 of 2014 may be slightly lower compared to this quarter's $10,600,000,000 level excluding market related adjustments before moving up modestly throughout the second half of twenty fourteen. We move to our expense highlights on Slide 7. Non interest expense was $22,200,000,000 in the Q1 of 2014 and once again included a $6,000,000,000 charge for litigation expense and a $1,000,000,000 cost for our retirement eligible incentives. As previously mentioned, the $6,000,000,000 litigation expense did include the cost of the FAFSA settlement as well as $2,400,000,000 to increase reserves associated with our previously disclosed legacy mortgage related matters.
If we exclude the litigation and retirement eligible incentive costs, our total expenses were $15,200,000,000 and declined $1,200,000,000 from the Q1 of 2013 driven by lower LIS costs, but were up roughly $200,000,000 from the Q4 of 2013 on incentives related to improved sales and trading revenue. Legacy assets and servicing costs ex litigation
of $1,600,000,000
declined more than $250,000,000 from the Q4 of 2013. As you look at that $1,600,000,000 number, the savings we generated during the quarter were 40% of our targeted quarterly reductions that we've communicated to you previously. We continue to make progress on cost savings and as a result, our expense program targets for both new BAC as well as LAS remain unchanged. Turning to Slide 8, you can see our credit quality continued to improve again. Net charge offs declined $194,000,000 to $1,400,000,000 or a 62 basis point net loss ratio.
Delinquencies, a leading indicator of charge offs, showed improvement again as well. In our Q1 of 'fourteen, provision expense was $1,000,000,000 and we released approximately $400,000,000 of reserves during the quarter. Looking forward, we would expect provision expense for the balance of the year to reflect both modest reductions in net charge offs as well as reserve releases. Let's move to Slide 9 and go through the different business segments, starting with Consumer and Business Banking. Net income of nearly $1,700,000,000 in the Q1 of 2014 was up 15% from the Q1 of 2013.
Lower expenses, higher service charges, Return on allocated capital within the segment remains very strong at 23% this quarter. As we reflect on customer activity during the quarter, mobile banking customers grew 19% from the Q1 of 2013 to 15,000,000 customers and customer deposit transactions using these devices now represent 10% of all transactions. Average deposits of 530 $5,000,000,000 are up organically $23,000,000,000 or 5% compared to the Q1 of 2013 and our rates paid were reduced nearly in half to 7 basis points. Our brokerage assets surpassed $100,000,000,000 in the quarter and are up 21% year over year with the growth split fairly evenly between both increases in inflows as well as valuations within the market. Our card issuance remained strong at a 1,000,000 new accounts in the Q1 of 2014, but our end of period balances are down seasonally from the Q4 of 2013.
Importantly, our risk adjusted margin remained above 9%. Overall, our credit quality within this segment remains strong as our net charge offs declined versus both the linked quarter period as well as the year ago period. Provision expense was $812,000,000 during the quarter. Net charge offs improved $360,000,000 from the year ago quarter and we released $69,000,000 in reserves this quarter, which is $220,000,000 less than the Q1 of last year and down $426,000,000 from the Q4 of 'thirteen. One litigation item to note before we move off the consumer results is the resolution we reached last week with the CFPB and the OCC on issues related to the marketing, sale and billing of credit card debt cancellation, ID theft protection products.
This settlement included cash payments to both regulators and provides for redress to customers and was covered by reserves that had been established in prior periods. We move to Slide 10, Consumer Real Estate Services. The higher loss in the quarter was driven by 5 $800,000,000 of litigation within the segment. Let's first focus on the reported sub segment of home loans where we record the origination of consumer real estate. Our first mortgage retail originations of $8,900,000,000 were down 24% from the Q4 of 2013 in line with overall market demand and drove a 32% reduction in core production revenue as margins held relatively steady compared to the Q4 of 2013.
We continue to reduce production staffing levels in the quarter consistent with the volumes that we're seeing, but those expenses don't flow through the P and L immediately. Home equity originations of $2,000,000,000 were up
from the Q4 of 13 level.
We moved to legacy assets and servicing subsegment. Once again, the driver here is the previously mentioned litigation costs. On litigation costs, you saw the press release on March 26 regarding our settlement with BAPA, which identified the $6,300,000,000 payment and led to the $3,600,000,000 litigation charge this quarter. We're obviously pleased to have this matter put behind us. Within our earnings release, we also included information regarding a settlement with FIDIC and related parties on involved securitization trust, which resolves out all outstanding litigation and rep and warrant claims on second lien loans for approximately $9,000,000 to $950,000,000 depending on the final outcome of 2 of the remaining trust 2 of the 9 remaining trusts, excuse me.
This settlement was covered by reserves that we had established in previous periods. The primary revenue component within the LAS revenue declined $205,000,000 versus the 4th quarter as the size of our servicing portfolio continues to decline as it aligns with our market share of production and we also had less favorable MSR net hedge performance during the quarter. Also impacting revenue during the quarter was rep and warrant expense of $178,000,000 which increased by roughly $100,000,000 from the Q4 of 2013 given the settlement during the quarter with Baja. From a cost of servicing perspective, our 60 plus day delinquent loans were reduced by 15 percent to 277,000 units at the end of the Q1 of 2014. And once again, our LIS expense ex litigation declined $262,000,000 to 1 point $6,000,000,000 We move to Slide 11, Global Wealth and Investment Management.
During the quarter, we achieved record revenue of $4,500,000,000 which was up 3% from the Q1 of 2013 2%
from the Q4 of 2013.
The improvement was driven by record asset management fees during the quarter. Net income of $729,000,000 was slightly higher than the Q1 of 'thirteen, but was down modestly from the Q4 of 'thirteen as expense was 3% higher than both periods. Expense increased compared to both periods on higher revenue related incentives, increased volume related costs as well as certain investments consecutive quarter. Our return on allocated capital was 25% but declined from prior period as the relative earnings stability was coupled with the increased capital allocations that I mentioned previously. Client engagement remains strong and the markets providing an additional tailwind Long term AUM flows of $17,400,000,000 for the quarter were the 2nd highest in our company's history.
Pending client loan balances of $120,000,000,000 reached record levels and are up 9% year over year. One other highlight I'd like to mention is the coordinated referral efforts that we're seeing across Wealth Management and the Banking Groups as we funded more than 300 institutional retirement plans worth more than $2,400,000,000 in client assets during the quarter. On Slide 12, Global Banking. Earnings during the quarter were $1,240,000,000 Earnings compared to the Q1 of 2013 show a 6% improvement in revenue that were offset by higher expense. Investment banking fees for the quarter were $1,540,000,000 consistent with what we saw during the Q1 of 2013, but 11% lower than the record level that we saw during the Q4 of 2013.
We do believe for the 2nd consecutive quarter, this would rank us as a global leader in Investment Banking fees. The remaining revenue drivers in this business, treasury services and business lending, show very positive trends year over year across both our commercial as well as our corporate client base. You can see some of these metrics on Page 26 of the supplemental information that we provide to Provision was up $116,000,000 from the Q1 of 20 13, driven by additions to our loan loss reserves. The Q1 of 2014 included a build of $282,000,000 versus the build of $81,000,000 in the Q1 of 2013 and 430 $4,000,000 in the Q4 of 2013.
The
expense increase in the quarter of 180 $1,000,000 on a year over year basis relates to investments in technology for our global treasury services and lending platforms, additional client facing personnel and to a lesser degree some litigation that we saw during the quarter within this segment. If we look at the balance sheet, average loans were up $27,400,000,000 or 11% compared to the Q1 of 2013 and are up $2,600,000,000 compared to the Q4 of 2013. The overall pace of growth that we're seeing has slowed from the past few quarters as pricing for loans is quite competitive and we've chosen returns over growth in certain cases. Return on allocated capital was 16% and is down from prior periods reflecting stable earnings that were more than offset by 35% increase in allocated capital. We switched to global markets on Slide 13.
Excluding net DBA, we earned $1,240,000,000 in the first quarter, which is in line with the Q1 of 2013 and up $893,000,000 from the Q4 of 2013. Ex CVA, sales and trading revenue was $4,100,000,000 1% lower than the Q1 of 2013, but 37% higher than the Q4 of 'thirteen. Our fixed sales and trading revenue was down 2% compared to the Q1 of 2013, but we would note it would be down 15% after adjusting for a monoline write downs that we incurred in the first quarter of 'thirteen. Our rates and currencies experienced declines from market volumes and lower volatility during the quarter. I would note that our FICC business did increase 42% over the Q4 of 2013.
Equity sales and trading, flat with the Q1 of 2013 and up 28% from the Q4 of 2013. Expenses were stable compared to the Q1 of 2013. And when we compare expenses to the Q4 of 13, they increased $453,000,000 on higher revenue related expenses after excluding litigation of $655,000,000 that we recorded in the Q4 of Our trading related assets on average remained flat at $440,000,000,000 on a linked quarter basis. Our return on allocated
capital.
On Slide 14, we show all other. Revenue was down $193,000,000 from the Q4 of 2013 on lower net interest income, which was driven by the swing in market related adjustments that I discussed earlier and was partially offset by higher equity investment gains, which were driven by the final monetization of an investment. Q1 2014 expense includes the retirement eligible incentive costs, which are in line with last year, but still drive the expense variance compared to the Q4 of 2013 and was partially offset by lower litigation costs. Provision benefit in the quarter was relatively flat to the Q4 of 2013, but did improve $385,000,000 from the first quarter of 'thirteen. Net charge off of $206,000,000 improved $88,000,000 from the Q4 of 'thirteen and $279,000,000 from the Q1 of 2013.
Our Q1 of 2014 results in this segment included $341,000,000 reserve release compared to a release of $482,000,000 in the 4th quarter $235,000,000 in the Q1 of 2013. During the quarter, our effective tax rate was impacted by our loss position. For the rest of We obviously don't like to report a loss to shareholders, but this quarter we achieved resolution or rulings around significant legacy matters. The positive court ruling on Bank of New York Mellon Private Label Securities Matters, which is under appeal just to name a few. We established additional reserves to help address previously disclosed mortgage related issues and we did that and still built our already strong Basel III standardized capital ratio.
Our supplemental leverage ratios at both parent and banks are compliant well in advance of their 2018 implementation dates under the more stringent new rule. Our liquidity is at record levels and we're well positioned to meet the new LCR requirements. Asset quality is strong and improving. Our expense programs show good progress and most importantly, 4 of our 5 operating segments reported revenue and earnings that were essentially flat or higher than the prior year. In our 5th segment, legacy assets and servicing, we made progress on legacy issues.
We drove down 60 day quarter. So as we move into the Q2 of this year, we feel that we're better positioned than we were coming into 2014. And with that, we'll go ahead and open it up for questions.
And we'll go first to Betsy Graseck with Morgan Stanley. Please go ahead.
Hi, good morning. Good morning. A couple of questions. 1 on the litigation reserve bill that you did in the quarter. You mentioned that the Fidgic and the trust settlement were fully reserved for.
So that means that none of the $2,400,000,000 increase in reserves in 1Q that you called out was for that settlement?
That's correct. That's the as we said, substantially all of the $2,400,000,000 related to a build in our litigation reserves for matters that we've disclosed previously.
So I guess I'm just wondering if you could give us a sense or color as to what you're referring to there. It given that it's such a large reserve bill, does it suggest that there's another settlement on the near term?
You bring up a good point. It does not relate to the previously announced Article 77. It does not relate to the remaining monoline exposure given that we the Fidgets exposure within the context of our reserve level. So it relates to other mortgage related matters outside of those that we have disclosed previously.
Okay.
And I wouldn't interpret or necessarily assume
that the
build in the reserves suggest that a settlement is limited.
Okay. Just moving to capital on Basel III, you gave us some great information on the transitional to the fully phased in walk there in the appendix. I guess I'm just wondering, you did narrow the gap between standardized and advanced by 30 bps. Could you run through how you did that in the quarter? Sure.
I think if you obviously the numerator in both is the same and we saw during the quarter, we saw improvements in OCI in the numerator and we saw some significant improvements in our threshold deductions. That numerator applies to both standardized as well as the advanced approaches. If you look at the standardized risk weighted assets, there's a big driver down there related to the reductions in our consumer real estate, both first mortgage as well as home equity as those portfolios reduce from longer dated assets. In addition, you had the seasonal decline within the card portfolio that helped and that was moderated a little bit by the growth that we saw in commercial loans. So I think as you look at that exposure.
There wasn't anything related to models or assumptions that factored into that. If you move over to the advanced approach where we reported at 9 0.9%, which was down a touch. The biggest change and we continue to work with and look to refine and take guidance that we're getting with respect to operational risk. The operational risk weighted assets during the quarter as we continue to refine that were up about $50,000,000,000 and now represent almost 25% of our overall Basel III advanced risk weighted assets. And I think as you look at relative to our peers brings us and puts us in line with where our peers are with that and we'll continue to refine and work through that in the future.
Okay, that's great. Thanks for that color. Just lastly on expenses, you did show a nice reduction in core expenses. Could you speak to some of the things that have been hitting the headlines recently, cuts in global markets 5%, is this accurate, is it part of new BAC Or is it more normal course expense management? And then the branches are down 10% over the last 2 years.
How much more optimization is there?
I'm sorry, Betsy, I missed the first part of your question.
On the global market, the trimming that we did was announced as sort of the annual trimming that goes on. Remember, we always are adding and we had frankly record hiring from schools this year coming in. So we always are sort of adjusting the headcount to keep the expenses in line based on we're going to have a lot of new people join us here as we get to the summer that we've already made offers to and it's kind of the general vetting. So I wouldn't put that as anything other than just sort of day to day expense management and also just a natural turnover in the business. The second part, Bruce?
Yes. On branch optimization, as we look at that, I think you really get a sense for the progress within branch optimization when you flip to the Consumer and Business Banking segment. A chunk of that relates to new BAC. And you can see over the course of 12 months, as we've taken the branches down by about 300 units that's contributed to on a year over year basis the $180,000,000 of expenses that we saw during
the quarter. Betsy, so this is a long term strategy. So whether it's new BAC or not, we'll continue to optimize the platform. And what we show you back in the appendix slide is the mobile banking growth is pretty strong. So at the end of the day, if you look at across the last 5 or 6 years, we have more customers, a lot more deposits and a lot less cost structure as we reposition to meet the customers changing usage of first computers then phones and the enhanced effect of the ATM.
So you should expect that those techniques to continue. But be that as it may, we also have still have 7,000,000, 7,500,000 people in our branches every week. So there's great opportunities to engage with customers that we also continue to see strong foot traffic. So we are demanding this to meet those needs from both the people coming to the branch and the people who use the automated technique and that is the challenge as we go forward. I think we've done a pretty good job of bringing them down and keeping the expenses kind of moving with the customer flow.
Right. So from here, this branch level you think holds or you still have more work to do on pulling it down?
We will adjust. Every month they keep looking at it and making adjustments as they look over multiple years in the future. But if you remember originally we said we'd get around 5,000 out of new BAC. That was kind of number we gave you and we're there. But also remember that what you define as a branch will change.
We have this express branch format where there's sales plus what we call ATAs which are ATM machines that you can actually pull up work with tellers directly allows you cash checks to penny authenticate without your card to stick in the machine, the same things you do with a regular teller. And so it's all important to us. So I think focusing on the numbers as opposed to the overall cost of the structure, all the parts is and then that's what I focus on. If you look at that, we continue to drive that down, taking all the cost of the whole infrastructure relative to the deposit base. It's down from it's down near 200 basis points.
Got it. Thanks.
And we'll go next to Clint Choehr with ISI. Please go ahead.
Thanks very much. Looking for a quick comment on the overall loan picture, there's always a lot of puts and takes. So the commercial side grew by 8% year over year, the consumer shrunk by 4.7%. A lot of that's runoff. So can you just give a general comment on how you're feeling about loan growth and then weave in there your commentary on the mortgage origination pipeline being up 24 up 23 percent in the Q1?
Thank you.
Sure. The first is, why don't we start if you start within the Global Banking segment, we saw loans relative to year end up about $2,500,000,000 and up more significantly than that on a year over year basis. We'd say that we continue to see good loan demand within the commercial space. It's across both C and I as well as real estate. So we feel good about that.
But as I did note that during the quarter, there were certain opportunities and things that we looked at that we did not do and that we very much have a focus not just on growing the loans, but the return that's generated from those loans. And I think going forward, you should expect to see us grow loans, but we're going
to be prudent and it needs to be
returns that make sense and for those customers that we have good relationships with. If you move to the consumer side, as I did note, and you can see it when you look within the CSPB segment, that the majority of the loan reduction we saw in consumer was really 3 things. It was the payoff of 1st mortgage loans that were held for investment purpose within the investment portfolio. It was the continued reduction within the home equity business where we have about $3,500,000,000 of home equity loans that repay each quarter. But those tend to be older vintages and I'll get back to home equities that we're doing when I finish.
And then the third was the overall card balances were down about $4,000,000,000 which on a seasonal basis is what we would expect and we would look to see those card balances stabilize as we go throughout 2014. As it relates to new activity, we did note that the pipeline is up about 23%. What we saw was not materially different than others in the 1st month, 2 months of the quarter. Applications and volume were down with some of the weather, but we did see a pickup in that activity which led to obviously off of a low base a 23% increase in the pipeline as we go into the Q2. The other thing I would reference is and if you look back you can see that we have been able to increase and move up what we're doing on the home equity front where we had $2,000,000,000 of originations during the quarter.
And I would just note from a credit quality perspective and what we're seeing there, those loan to value tend to be in the 60s with FICO scores deep into the 700. So that area is providing an opportunity for us as well.
Summing it all up, I just I don't want to put words in your mouth, but if you look at the net of up just 50 basis points for total loans year on year. It sounds like it's better than that just because the runoff, I just want
to make sure that I get that specific comment.
Yes. Especially in the consumer business, the runoff the overall numbers.
Okay.
Because remember, we still got the portfolios that we inherited from acquisitions that they're still running through the system.
Right. Follow-up on the legal, you mentioned the first two were fully reserved for the 2.4 adds to the reserve. Where are we now in terms of the estimated losses above and beyond what you reserve for? In other words, I would think it could go down as you continue to add for the reserve?
Are you referring to the range of possible loss
that we disclosed when we put the Q out? Correct.
Yes. I think we're working through and refining that. We don't put that out with earnings. We put out when we filed the 10 Q. But to your point, I don't think there's we obviously made progress with getting FAFSA put behind us as well as FIDGIC and some other related matters.
And we're working through where exactly that range of possible loss comes out, but hear your point.
Okay. Appreciate it. And then last one on slide, I think it's 14. Just curious, the equity investment income, what's driving that? It seems to have a nice steady and upward trending slope.
Yes. As we noted in the script that we did complete the final monetization of an investment that was a decent chunk of that. So I would not expect to see those revenues at those levels going forward.
Okay. That's good for me. Thank you.
And we'll go next to Jonathan McDonald with Sanford Bernstein. Please go ahead.
Hi. Bruce, hi. I was wondering if I I just want to understand the dynamic of the net interest income outlook, I guess, in the second quarter. It's the increase in lower yielding liquidity on an average basis and that's going to push the NII down a little bit that overwhelms the day count. Is that what's happening in the second quarter?
Yes. I
mean, keep in mind, you only pick up one day Q1 to Q2. But I think you have a couple of things as I mentioned. You've got relative to Q1, you do have lower card balances given the seasonal bump that you see at year end that you carry a fair bit of during the Q1. We did build up throughout the Q1 a significant amount of liquidity in anticipation of those rules. That will contribute a little bit to the decline in the second quarter.
And then as we solve for that, you'd expect to see that move up. So nothing structural. We do have some seasonal stuff in the markets business that we do that depresses things that touch in the Q2. So as we said, it's obviously early in the quarter, but we were expecting a slight decline but then we'd expect the trajectory to get back to the levels that we've previously talked about.
Okay. And what's helping it grind higher beyond the Q2 versus as a reminder what helps it grow in the kind of 3rd Q4 and beyond?
Sure. I think as you look at it, one of the things that we continue to work through is that the debt footprint will come down although more modestly. But what we are seeing is as we look at the levels at which we raise debt going forward, the cost of that has come down significantly. So you have some pickup there. You obviously have some pickup with some of the loan growth that we're seeing within the commercial space.
And we continue to take deposit pricing down as well, although we're down to levels that are harder to get much lower. And I do just want to remind you, John, and I know you know this that as we give this guidance, it backs out and it excludes market related impacts that out of FAS91.
Okay. Then on litigation expense, Bruce, with the big reserve build and the settlements this quarter, what's the outlook there? I know it's tough to forecast, but should we assume that a few $100,000,000 of litigation expense will persist for the next several quarters?
Yes. I think John, I think you have to split between we've continued and I'd just remind you as you look at the litigation pipeline and you look at where we are, we've obviously gotten through the base rep and work with respect to the GSEs. We were able to get through and reach an agreement with FIDGIC, which is the 4th monoline settlement that we have. And then we're working through in the Article 77 case is going through the judicial process. So as we continue to reduce the number of outstanding litigation items that we have that should obviously bode well for what I would characterize as the kind of base litigation expense.
That being said, I think we need to be realistic and you saw this quarter that as it relates to the remaining couple of matters that we've disclosed, it can be lumpy and that it's just very hard to predict. But as we talked about in the presentation during the quarter we did have a pretty significant build as we continue to evaluate those positions as well as the discussions that we have that are parties to the litigation.
John, I think it's simple. If you think about things that litigation matters that sort of arrived after 2,008, 2,009, the cost of those in the P and L is very modest. Anything sort of new is this these all the costs really relate to the stuff before the crisis and the bond of cleanup. So your point about what would be the ongoing litigation cost to be much, much lower, but the question is the luckiness Bruce refers to the transition we got left on a few of these matters.
Okay. And then Bruce just to clarify the provision commentary that you made, your outlook is for net charge offs to kind of grind lower modestly, but and reserve release to continue but probably at a smaller level than the 3.80 we saw this quarter?
Yes. I think that's fair John. I think it can bounce around in any one quarter, but I think the provision number broadly speaking is in line with what we'd expect over the next couple
of quarters. So John one of the ways, if you look at the supplemental material in the pages on the charge offs by product, You got to remember that there's if you look at like the credit card charge offs in U. S. And domestic, they're down in the this quarter was $700,000,000 and a 3 point 2 5 percent charge off rate. You're kind of hitting a place where the business is geared to have some amount of charge offs and it's the way the business works as far as the cost of doing business is the credit cost.
If you look outside that number that is 80 card charge offs like 80% of charge offs or 60%, 70% of charge offs. And so they're going to be hard to get down a lot more. So there's work to do on mortgage charge offs, home equity charge offs. But if you look across the rest of the board, they're in pretty good shape.
Okay. And last thing for me. Just wondering if trading and fixed income in particular, did it have any notable sequential trends in the quarter? Did trading get better in March early April as rate volatility started to pick up a little bit or anything like that?
I wouldn't highlight any real seasonality of note as it relates to drastic ups or downs throughout the quarter. The one piece that I would say that I think generally rates and foreign exchange given where the market was and the fact that there was not a lot of volatility in the quarter was clearly negatively affected. And on the positive side, I would say that the overall credit trading businesses, whether it be loans, high grade bond trading or high yield bond trading given market activity levels as well as our position from an underwriting perspective, we're very strong during the quarter.
Okay. Thank you. And we'll go next to Paul Zillow with FBR. Please go ahead. Good morning.
This is actually Thomas LaTurne on behalf of Paul. Another sort of expense theme question, there's obviously been an increased amount of regulatory scrutiny on MSR transfers. Can you stress for me a little bit whether if those transactions got delayed or pushed out, if it would impact your ability to meet expense targets or just a little color there?
Yes. I think it's a very good question. What I would point out is and if you go back to the Q4 of 2012 that was when we announced our significant MSR transfers. And so as you look at where we are as it relates to just pure MSR transfers we're through the significant majority of what we would expect. We've got some clean up and far smaller ones during the second, third and fourth quarters.
We don't have any reason to believe given they're small and who they're going to that there'll be a problem with the transfer. So we feel and as it relates to getting to the expense targets with what's left to go that will not be an issue for us.
Okay, that's very helpful. Thank you very much.
Thank you.
We'll go next to Ken Usdin with Jefferies. Please go ahead.
Thanks. Good morning. I wanted to ask you about just operating leverage and again expense progress. So year over year revenues plus or minus were down $1,000,000,000 And if I'm looking at Slide 7 and looking at the core expenses were down a few $100,000,000 and that's net of all the new BAC benefits. So can you talk to us about just the push and pull between the net BofA, the new BofA, new BAC reductions and then what cost inflation you're seeing if any underneath the core?
And then as you look forward, just how we should expect that core line to reject the 13.6% excluding the retirement eligible?
Sure. Let me answer the last part of your question first, which is we would expect the core trajectory to trend down as we go throughout 2014. When you look at the and if you're looking on Slide 7 and we compare the 13.8% to the 13.6%, let me just consider and give you a couple of numbers that affected that core. During the Q1 of 'fourteen as we continue to reduce headcount, we incurred over $100,000,000 of severance spend on both an absolute basis as well as a year over year basis within those numbers. So you had $100,000,000 to the negative there.
The second thing is and as we disclosed, we have been investing within corporate banking, cash management, sales people to a lesser extent, capital markets people and some of the technology that goes along with that. And we think as we look going forward we're through a lot of that investment, but as I referenced in my comments, I would ask you to flip back up to page 26 because we are seeing the benefit from revenue growth from those investments and we'd obviously expect those to moderate going forward. The other couple of things that I would note there is if you look at within the wealth management business, you need to consider within that area that we did have a $200,000,000 plus increase in revenue from asset management fees. So there's obviously compensation that goes out with that as well as some of the technology dollars that were spent for our Merrell 1 project that we've rolled out within the wealth management area. So I would just say as you look at that 200, the benefit from new BAC was clearly on a year over year much more significant from that.
But we are investing in the areas where we think and where we're seeing revenue growth and we would obviously expect those investments given that they've been made and generating the revenues that you'd expect those to moderate going forward.
Thanks Bruce. And as just a follow-up to that then, we're going to continue to improve it to get to that $2,000,000,000 new BAC level by mid next year. Given what you anticipate on the revenue side, do you feel that that's enough to get you where you want to go in terms of profitability improvement? Or is there anything you can contemplate or need to contemplate as far as finding other incremental ways to fund those investments or drive more to the bottom line?
Obviously, we continue to look at that and we continue to we started after this as you know in 2011. And so if you go back I think we had $80 odd,000,000,000 of expenses when we started this thing. And so we've been driving it down year after year after year. But that doesn't mean it stops with the BAC. It's just the challenge inherent in this low growth environment is how to manage the relative investment rate expense growth rate versus revenue growth rate and so that's something we as management continue to focus on.
But if you think about the 13.6% and think about continue to make some improvement against it, sort of annualize that add back whatever the $1,000,000,000 to the one time retirement cost and then some litigation, you start to get into levels that we think are consistent with the earnings sort of restoring the normalized earnings pool. The question is and you're right is that we got to make sure that the investments we make are yielding the revenue benefits and we got to keep the total expenses overall and that's what we're up to. And I think the way to think about that is look at 3,500 more employees headcount reduction this quarter and you'll continue to see that work its way down. That is a leading indicator of what's going to happen next quarter because those employees that's a spot to spot number went out during the quarter, but they're still in the payroll for the quarter.
Got it. And one last one, just card income and service charges, a lot of other banks have been seeing weakness there, partially weather, partially regulatory, partial pricing changes. Anything that you guys are seeing or anticipate seeing on any of those fronts looking ahead?
If you think about the longer term trend there, we had a big change in terms of fee structures in the consumer business broadly going back a few years ago and you kind of came through all that and that affected. What's happened now is if you just look at our card activity, our purchases on our cards were up by 5% or so quarter to last year or this quarter Q1 last year, Q4 this year. So we continue to see better than market growth in the activity levels of general spending levels and things like that, which helps on interchange once we got off sort of the reductions that were due to the changes in interchange rules. And so I think it will keep grinding forward based on just general activity, but we most of the real downdraft came out in 2011, 2012 early 2013 timeframe.
Yes. And I think the other point is if you look at within the consumer business, we actually saw service charges during the quarter were up about 3 percent on a year over year basis. So some of the card income tends to be seasonally higher in the Q4. It dropped in the Q1 then builds back up. But within the consumer space, we were pleased with what we saw on the service charge line during the quarter.
So if you go back and look at 2017, we've been producing from a sort of 700,000 to 800,000 run rate new cards to 1,000,000 plus and those cards are being used as a core card by the customers. And that's driving up the pay rate still high. So the balances aren't moving much, but the activity underneath it is moving. And we're still replacing some affinity portfolios that we have we've sold and things like that. So our view is that the transactional behavior of our customers continues to grow and will benefit some of the fee lines too.
Thanks very much.
We'll go next to Mike Mayo with CLF. Please go ahead. Good morning.
Good morning. First, just a couple of follow ups. So how much of the new BAC savings were achieved by the end of the quarter?
You should look at relative to the $2,000,000,000 a quarter we're in the $1,700,000,000 area.
All right. So you have $300,000,000 left per quarter to be achieved by mid-twenty 15?
That's correct.
Okay. And then the LAS savings, you have another $500,000,000 a quarter to be achieved by the end of the year?
That's correct.
All right. So $800,000,000 total quarterly expense savings we should expect over the next year or so. So should we expect all that to hit the bottom line?
You should expect it to hit the bottom line with just the one caveat that to the extent that there are revenue related things that have cost attached to them that could moderate that reduction, but ultimately that would be a positive to the pretax income line.
Okay. And do you have an efficiency target for the firm? I'm just looking at Page 3 of the supplement and the efficiency ratio is kind of thrown off by the charges and it's been in the 70s the last few quarters and 97 point 6 8%. I don't think you consider that your core efficiency ratio. But so what do you consider your core efficiency ratio and where should it be and where do you hope to get when do you hope to get there?
Yes. I think if you go back and look at what we talked about in the Q4 where we talked about where we'd like to get to from an ROA return on tangible common equity. And we talked about once rates started to move up that as we looked out, if we look out at a couple of years that efficiency ratio should be in the high 50s.
Okay. So do you have a specific time frame for that or just when rates go up?
I think as we look at it, it's at the point in time that rates are roughly 100 basis points across the curve. And obviously to the extent that we don't see rates move up, we're going to need to run harder on expenses to try to get it to the extent that the rate environment doesn't move up.
Shifting gears, the
60%.
I'm sorry, the tax rate. You said the tax rate going ahead will be 31%. I'm just trying to figure out what was the core tax rate for this quarter excluding the
charge? It would be I mean the core tax rate we project out and look at over the years. So the core would have been 31, but you always have a little bit of noise when you and obviously it was a pre tax loss, but the discrete items always kind of overwhelm things in a low period. But the base rate from which you're starting from is 31% and it was just a little bit skewed given what we saw from a pre tax loss perspective.
Okay.
You had record wealth management for the quarter and one of the online brokers recently said that the big brokerage firms are doing better. How much do you attribute the record wealth management to the environment versus what you're doing versus it's better to be a big broker?
I'm not sure I could I'm not sure that what the context is Mike, but the net flows the wealth management business were around $11,000,000,000 $12,000,000,000 this quarter, which was 16% or nearly 17% to 18% due to long term flows and $6,000,000,000 of short term liquidity flows out for a net of around 12%. If you look in the Merrill Edge platform, which is more akin to the sort of the online type of thing, I think we had 80 plus 1,000 new accounts this quarter. The assets continue to grow, top to 100,000,000,000 daily average trade DARTs are up, I think, 25% to 30% year over year. And so it continues to progress and we continue to see good asset flows there too. So big, small, large, traditional, all that sort of blended together, we operate as a core consolidated franchise, you're seeing good momentum on both sides.
You're allocating more capital to GWIM as well as Global Banking and Global Markets. Is that increased capital allocation due to regulatory capital changes or a deliberate move by you guys to invest more for growth in those segments?
Well, let me just start that the allocation of capital is how we take the capital that we have the company and push it out to the businesses. I think you need to go segment by segment within that, Mike. I think the first is that as you look at the Global Banking segment and look at the allocation and what we've done, the first is on a year over year basis, you had average loans up about $30,000,000,000 So there were more loan balances against which you need to allocate capital. The second thing that I would say is as you look at that segment and you consider Basel III standardized risk ratios, they tend to risk weight almost all commercial loans at 100% regardless of what the models would suggest they should be risk weighted at. So I think the combination of the loan growth along with some of the impacts from regulatory capital led us to increase what we did with respect to Global Banking.
Within Global Wealth Management, as you go back and refine operational loss models and assign operational risk capital, that was topped up as well as reflecting the fact within the wealth management business that we've seen loan growth within that segment. So there was additional money allocated there. And then as we look at and just continue to refine and look at both comparables as well as And as I said in my comments, when you consider it in the aggregate and we look at GrowApp relative to peers, we've got virtually all of our capital at this point pushed out to the different which is the way it should be.
No, I agree. So it sounds like it's partly business growth and partly regulatory related and partly a desire simply to have less unallocated capital.
I think the last one is what you got to keep focused on.
Okay. And then lastly, the Bank of New York ruling was good. I did not expect that. But you still had a $6,000,000,000 charge this quarter and another $2,400,000,000 extra charge in the last 15 workdays since the FHFA amount was announced. And I know you've had several questions on the call, but what's left as far as potential legal charges?
Because it seems just so lumpy and if in just a few weeks you can have another $2,400,000,000 charge seemingly out of the blue for some of us, what's left?
I think when you look at it, as I commented that the I think we give fairly fulsome disclosure in the 10 ks as it relates to the matters that are out there. And when you look at the matters and compare where we are now to what's out there that obviously from the case that FAFSA was resolved and that was the $3,600,000,000 number we mentioned. You've seen resolutions during the quarter from an Allstate RMBS perspective. You saw a resolution of force placed insurance. You saw CFPB OCC and you saw the deal that we completed and announced with Fidgets today.
So as you work through and look at those matters, it largely with what's disclosed leaves you with respect to 1 monoline and then the in addition to the monoline, the other remaining legacy mortgage related matters that we put out in our disclosure.
All right. Thank you.
And we'll go next to Guy Lampe with Autonomous Research. Please go ahead. Thanks very much. Good morning. Let me just start out by saying on the litigation front, I actually thought it was very, very good that you've provided now for a bunch of the issues that are actually still pretty visible out there.
So that's just a thank you for having done that. I have a question for you on the control environment costs. Some of your competitors, JPMorgan and Citi have spoken to $1,000,000,000 type numbers for increased control environment costs in the wake of CCAR issues over the last few years and obviously all of the heightened scrutiny. And I was wondering if you could give us a sense for what your control cost increase has been over the last year or 2?
I didn't give you a number. Let me give you a way to think about it. In our environment coming out of the 3 issues in 2008 and 2009, we built a lot of personnel and headcount to get access to stuff and we're still finishing up the cleanup. And so if you look in the expense base, a lot of that's been in the expense base for a couple of years. And then and so if you think about something like our audit team, we doubled the size of our audit team in probably 10 in 2010.
And it's been held pretty constant against that. Against the backdrop where we probably divested tens of businesses and the rest of the headcount in the company has come down fairly dramatically from a high of around $305,000 I think. So the amount of control environment relative to the total cost structure has gone up, but the raw numbers haven't gone up as dramatically because frankly we put them back a lot of men in the 10, 11 timeframe. So it is our duty to get it right. It's our duty to keep working on it and make sure that we get these things rest on the ground.
But one of the key ways that we're doing this is by focusing the scope of the company. So the 4th place excuse me, the add on products settled this quarter, we could offer those products a while ago. It just took a while with the OCC and the Consumer Bureau to finish up the negotiations and finish up the rebate. We've been sending money back to customers, but we quit offering the products as an example. And so the idea of narrowing the product set, narrowing the geographic scope of the company, making the company a lot less complex will always be big, but make ourselves less complex.
But against that, a growing a strong growth in the control costs in the 9, 10, 11 timeframe and then the flattening of that, but relative to smaller companies is actually an increase.
Thanks. That's helpful color certainly in terms of thinking about the timing. You did allude to some increase in technology investment in a sense for what this I think you alluded to Mero One?
Well, Mero One is a new product they bought out and it's been successful.
And like anything else, you put the product out
there, you spend all the money to put the product together and then the assets come on. And so we are feeling good about that tens of 1,000,000,000 of dollars of assets have moved to the platform. It is a good platform for customers and to the advisors. I think more broadly, I talked about technology. If you looked at the expenses we had going back sort of after the crisis, we saw the Merrill transition expenses and all in we're spending around $3,000,000,000 on technology development a year.
We now spend about 3.5 $1,000,000,000 and then obviously the transition expenses are out there. So everything we're spending is to better the platform, better the business, invest in the growth. And again, some of your questions about cost, that number I don't expect to change going forward because it takes that kind of technology investment to drive the product capabilities of our company Merrell 1 being one product this quarter along with a new card system, a new trading platform. Tom, Seema in the middle of putting in a new backbone for the company in terms of our general accounting systems, which is in the tailwinds of going in and across the board. So across the 4, 5 year format, timeframe we'll replace almost every system in the company, but we'd expect that to continue.
So the G win, we swung around off of last year where we did more in other businesses, cash management, started building rebuilt the first the front end mortgage process and a lot of other things. This year we swung the G WIM and it's really a decision of which business we invest in at which time and they asked more
Subsequent to that, I guess, Basel came out in March with some suggested changes to the netting on a standardized basis for third party credit. And I was wondering if you have any sense at this point what the impact on the leverage ratio would be of those changes if implemented?
Well, I I think the final supplementary leverage ratio rules that reflected that came out in April. And so the numbers that we've given you where we're above the 5% at the parent and the 6% at the bank reflects the impact of those rules with respect to netting and the other changes. So the numbers we've given you reflect that April release.
That's from the Fed, right? The April release from the Fed?
Yes, that's correct.
Right. Now what I was referring to is that Basel had come out with something in March, which one would assume that eventually the Fed will adopt for the standardized approach to counterparty credit. And I think JTM alluded on Friday to the idea that that could add depending on whether you look at the holding company or the bank unit upwards of 20 basis points to the leverage ratio because it takes into account the netting to a greater extent. And I was wondering if you had any if you had done any preliminary work on that?
No, I think I will say that our focus has been on wrapping up the work given what the April pronouncement is. And I'm not my understanding was that the Fed I think what came out in April is what we're assuming that we're going to need to operate in and if there's something else that changes where there's some benefit, that's great. But our assumption is we're going to be living with what came out on April 8.
Got it. Okay. Thanks very much. Appreciate that. We'll go next to Matt O'Connor with Deutsche Bank.
Please go ahead. Good morning.
Good morning, Matt.
If I could just follow-up on the net interest income comments and thoughts. I guess just bigger picture, it seems like the outlook is a little bit lower than what you had previously thought. And I guess I think about building liquidity tends to be dilutive to NIM, but not net interest income dollars. And some of the things you point to were seasonal. So just like big picture, I guess we think about where you had thought NetII might be a couple of quarters ago looking out, what's worse?
Is that more runoff than you thought, less loan growth because you're tightening up versus what some others are doing? Or is it just the rates haven't moved at all or some combination of all that?
I'd make a couple of points. If you go back, the guidance that we've given is that we would grind up from roughly a 10.5 $1,000,000,000 number. And as we look out to the 3rd Q4, that's what we see in our numbers. I do think there have been relative to if you go back 2, 3, 4 quarters ago, several things that have changed. The first is that as we've worked hard to get in the position that we're in from an LCR perspective, we have migrated not only LCR, but with the rate environment that we're managing the OCI risk that we have directed more of the investment portfolio to shorter dated treasuries as mortgage backed securities.
And as you go out over a couple of quarters that has a negative impact. The second thing is you look at where we are and you look at the forward curve, our assumptions on what yields are going to be that we can reinvest in outside of the switch and mix. Obviously those yields did not move to the extent that the forward curves would have suggested at that point. And I would say generally with respect to the loan portfolio, I wouldn't say there's much change. I do think the one thing to note that we've not talked about, if you look at within our Global Banking segment, this is the Q1 in a while where we've actually seen the loan pricing spread stabilize and actually in terms of the portfolios move up a touch.
So that's a positive. So I don't think there's anything to your question that's material that there are just some small things here and there and we wanted to update and share our thoughts with what we thought the Q2 would be. But longer term, I think we're still in the same place as far as the 10.5 grinding up.
Okay. And then just switching topics on the core LAS cost, so ex all the litigation, you reiterated the target for year end, I think of about $1,000,000,000 or $1,100,000,000 Still feel good about the $500,000,000 per quarter late next
year? Yes.
Okay. And is that something that we could see overshoot to the downside like we're seeing in charge offs? Obviously, like credit is getting much better than a lot of us would have thought a couple of years ago. Do you think those core LAS costs end up just being much lower than expected once you work through all the issues?
I'd just say, I'd hope so, but I wouldn't. Let's just get it down to that level and we'll out what we can do from there. I mean it's been an arduous task and there's still a lot of work in it.
Okay. And then just lastly on the SLR again, I mean just care to provide any more details in terms of how much above 5%, how much above 6% roughly?
Yes, I would say that we said we're above 5%. We've said that assuming that the Buffet preferred amendment gets done that adds roughly another 10 basis points which obviously helps move us up. And I think you can assume that the only other guidance that they said the bank ratio relative to the limit is stronger than where we are with the parent today. But once again, the Buffet amendment will help.
Okay. All right. Thank you.
Thank you.
And we'll go next to Martin Garcia with Guggenheim. Please go ahead.
Thank you. Three questions. 1 in operational risk. You talked about that now represents about 25% of your risk weighted asset. So in doing that in the past that is very sticky.
And how do you think you can manage around that amount of capital just being trapped in the fact of all these past settlements that you've had to kind of live through? Yes. Your point Marty is a good one, which is that the operational risk models are based on a fairly long time series as we look at it. And one of the things that we do continue to try to discuss and stress is that a lot of those operational risk losses are with respect to activities that we no longer engage and have no intention to engage. So there are some of that dialogue does continue, but your point which is a fair one is that the time series are fairly long and it will remain out there until the data runs out.
I wish there was more that I can say, but your point is a fair one. I mean, is the only true way is just almost disembark from mortgage because it was so much in that particular area. The only way to clean it up is to say, maybe if that's all related to those mortgage settlement mortgage related settlements, it's just not worth carrying that baggage going forward, even though it wasn't really your fault. It was the Countrywide legacy more than it was your own operations? Well, I think your point Marty is the one that we're working through.
In effect, we've done what you suggested that we done and that if you look at those activities that led to those losses, we are no longer engaged in those activities. If you look out at we are not doing business with monoline from a new wrap perspective. You look at private label securitizations that activity with relief to be had? Not the way that it works now and we'll just have to work through and deal with it. Got you.
Secondly, you called out that mortgage servicing hedging was unfavorable this quarter. But if you kind of look at the environment, it seemed like I've seen in others that it was actually a positive, not a negative. What was in particular happening in your mortgage servicing hedging? Yes. There was really nothing.
I think that comment that we made was that the question of the hedging performance this quarter relative to a year ago. So the hedging was still a positive number. It was just less so on a year over year basis. Got you. And then lastly, when you think about moving from your mortgage backed securities into agencies and treasuries that have shorter durations, that's kind of throwing you to become more asset sensitive.
Are you thinking about because the liquidity rules are making the balance sheet become more asset sensitive and pulling more interest rate swaps or off balance sheet hedging to rebalance and not become so much more asset sensitive due to these other pressures? Yes. If you go back, we've been pretty consistent that the reason for the investment portfolio is to preserve the long term value of the deposit. And as you look at that portfolio, it's very clear there are only 3 things that we do within that portfolio. There's treasury securities, there's agency securities and there's double and AAA super sovereign type activities.
And as it relates to becoming a little bit more asset sensitive, we just think given the first and you've seen a large portion of it happen that to drive and get to the point we have with LCR, the shift in the portfolio helped this quarter. It has the same benefit as I said of shrinking and reducing your OCI risk as you go through this. And we're not interested in starting to try to do things from a derivative and other perspective to somehow change that. The investment portfolio needs to work with how we set it up and we're going to be prudent with respect to how we do it. All right.
Thanks. Thank you.
And we'll go next to Nancy Bush with Nat Research LLC. Please go ahead.
Good morning, guys. Good morning, Ann. Question on the mortgage business. I think there was an article in The Wall Street Journal this morning or somewhere that the business is getting off to slower start than we would have thought given the spring bounce back that was expected from the winter weather. Has there been any rethinking, Brian, on sort of the eventual size and direction of the mortgage business there?
Look, at the end of the day, we kind of did that in 2011. We got out of all, but direct to consumer. So basically we have focused the business on really supporting the core customer base and not trying to drive standalone market share in the scheme of things. And so what has happened to that is as we sold off the non core servicing, we've gotten down to a significantly less number of loans serviced and the originations $10,000,000,000 this quarter are all direct to consumer, which is the 2nd highest total in the country to have direct to consumer mortgages. So I think we're comfortable where we are.
Now the question is with the LAS aside, the core business, what does it look like? And it will be a small business, smaller business. It will generate customers mortgages for our customers because it's a core product they need. But also that sales force quite frankly sells other products and does other things for it, refers people for other products. So I think that the days of being a 20% market share and stuff are far behind us.
The days of being 4% market share, direct to consumer and growing are there. And we'll make some money in it and we'll make some money servicing those 4 loans because the delinquency statistics and those and what we've been doing in that are far superior to even what we would have predicted and that's how we run the business. So effectively we've done what you said. It's just we're still bound by the overhang of effectively the LIS portfolio is still working through the system and the 300,000 delinquent mortgages of which only about the delinquency of the core portfolio is about 50,000, 60,000.
Also could you make sort of a similar pronouncement about the card business where you stand in terms of share and growth right now and are you where you want to be?
Yes. That's different in the sense that on the card side, we actually took it down unfortunately through charge offs and might tend more than not. But I think we've been relatively consistent on the domestic piece around $90 odd,000,000,000 of outstanding and kind of grinding up and down from there and producing more cards that are coming out of the wallet first from our customer from 700,000 we showed you 2 years ago, Q1 at 1,000,000 plus this quarter and pretty consistent. It was 1,000,000 dollars plus the 3rd quarter, almost $1,000,000 in the 4th quarter, another $1,000,000 plus this quarter. But the core we see there is usage of those cars.
They're sold 60% plus to our primary customers, but also usage of the cars because of the core 3 or 4 card product is driving it. And we have some good affinity programs. I think the card business is likewise it is where we want it, but it's a bit more of a payment stream business than it is a pure lending business as it was in some of the past. So the balance is ought to be stable and ought to grow. But with the high quality portfolio, the payment rates in the 20s now, meaning people pay us off because they're using the transaction card.
Okay. And then finally, Bruce, you'd indicated that net interest income is going to decline somewhat due to liquidity issues, etcetera. Is that saying going to be true of the NIM or is there anything in the mix change coming in the near term that can send the NIM up from or the adjusted NIM up from this 2.36 level?
Yes. I think it would be I just want to be clear that we said that we thought that the core NIIX market related impact on the book, you would expect to see that the NIM in the 2nd quarter moderate a little bit given that you've got the full quarter of the liquidity. And then obviously as it starts to grow during the latter half of the year, you'd expect that the NIM to follow that.
And Nancy, overall, now that we have a better insight as to what these rules are, we then have to go back and we've got 7% tangible common equity ratio. So we have very strong common equity ratio. We have to go back and forth to look at, Bruce and I think with the rules now in hand, you can start to go work and say, okay, how do we optimize the next round because in terms of how we create maximum liquidity per dollar balance sheet size, right?
Right. Okay. Thank you.
And we'll take our last question from Jim Mitchell with Buckingham Research. Please
Just
first on home equity net charge offs, I guess if you exclude sort of the TDR impact last quarter, they were up and so were home equity NPLs. Can you just sort of talk through what's going on there?
Sure. There were 2 things that Jim banged us up, good questions to the tune of about $50,000,000 each. There were some home equity that we just wrote off that was going to have foreclosure costs that were greater than what it was going to be worth to try to get repaid. So that happened during the quarter. And then the second thing is there was some regulatory guidance that was given as it related to 2nd lien loans that were behind 1st lien that had been modified or charged off that we saw during the quarter.
We think we got most of it in this quarter. There may be a little bit left in the Q2, but good question that those two items banged us up to the tune of about $100,000,000 and that was the reason for the change.
Okay. That's helpful. And then just on
the investment banking pipeline, any commentary?
Yes. I think what we see is that the overall market continue to be strong. The pipeline and the amount of activity and discussions from an M and A perspective year And as we look at the pipeline, they've not changed materially one way or the other at the end of the Q1 versus the end of the year. And as we said, we feel very good about the quarter with the revenue side being north of $1,500,000,000 and the highest of any firm that's reported at this point.
Okay, that's great. That's it for me. Thanks.
Super. Thank you, Mike.