Good day, everyone. Welcome to today's program. At this time, all participants are in listen- only mode. Later, you'll 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 McEntire. 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 Bruce Thompson, let me just say that we may make some forward-looking statements. For details on those, I'll refer you to page 24 and 25 in our earnings deck material, either the website or our SEC filings. With that, I'll turn it over to Brian.
Thank you, Lee. Good morning, everyone. Thank you for joining us to review the first quarter 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. 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. First, I wanted to spend a couple of minutes looking at the progress we continue to make across the customer groups that we serve.
In particular, we added some slides to the appendix on pages 17 and 18, which highlight multi-year 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 to affluent and 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 in response to customer behavior changes. Banking centers and basic teller transactions continue to decline as customers move their business to mobile and online transactions. Yet we still have many millions of visits each week to our branches. 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 first quarter. It allows us to continue to invest in other areas to further improve customer satisfaction and grow sales. On the preferred client 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 with these clients as well.
The end result when you put all the customer business together for this segment is organic deposit growth of $23 billion from last year to a total of $535 billion in deposits. On the investment side of this general consumer client base, our Merrill Edge assets grew 21% from last year. When we put the segment together, the earnings in our Consumer and Business Banking business improved 15% year-over-year to nearly $1.7 billion this quarter. As we move to the wealthy part of our consumer client base in our wealth management business with U.S. Trust and Merrill Lynch, client balances again grew this quarter and now total over $2.4 trillion. This has driven record asset management fees in this segment. We are seeing growing demand from these customers for other banking products as loans and deposits continue to increase.
This business made over $700 million after tax this quarter and had a pre-tax margin of more than 25% for the fifth consecutive quarter. When we move to our company side of our house, our commercial and corporate client base, we continue to retain a leadership position in investment banking fees with $1.5 billion in fees received this quarter. We also saw loan and deposit flows this quarter 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 investing clients, we earned $1.3 billion after tax as our top-tier sales and trading platforms generated over $4 billion in revenue this quarter. 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 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 say each quarter, we 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 results.
Thanks, Brian, and good morning, everyone. I'm going to start on slide two and work through the first quarter results. We did record a loss of $276 million or $0.05 per diluted share this quarter. Driving the loss during the quarter was litigation expense of $6 billion, which cost us roughly $0.40 a share during the quarter. We recorded $3.6 billion in litigation expense for the previously announced FHFA settlement, and we recorded another $2.4 billion primarily associated with the increase in reserves for previously disclosed legacy mortgage-related matters. Revenue during the quarter on an FTE basis was $22.8 billion, which was $1.1 billion higher than the fourth quarter of 2013, but below the $23.4 billion we saw in the first quarter of 2013.
On a linked-quarter basis, our revenues benefited from improved sales and trading results in 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 $22.2 billion, but did include $6 billion of litigation expense, as well as $1 billion of retirement-eligible incentive costs that we recognized during the first quarter of each year. If we exclude these items from both the first quarter periods for comparability of the underlying trends that we saw within the company, expenses did improve by $1.2 billion, 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 fourth quarter of 2013, the slight increase in non-interest expense reflects increased revenue-related compensation in our Markets business and was partially offset by the decline that we saw in our LAS non-litigation expense reductions. Provision for credit losses was $1 billion during the quarter, an increase $673 million versus the fourth quarter of 2013. In the first quarter of this year, we released $379 million from our loan loss reserves, and that compares to a release of $1.2 billion in the fourth quarter of 2013.
Before we move off of this slide, let me mention that we had a few other items in the quarter that in the aggregate benefited EPS by about $0.04 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 FVL and DVA. This quarter and moving forward, we report the net impact of these two items as one net DVA valuation number for our derivatives and structured liabilities within our Global Markets business. On slide three, 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 billion, led by lower residential mortgages, principally within our discretionary loan portfolio, as well as seasonal declines in credit cards. Loans were up in our Global Banking segment, which I'll cover in a bit. Period-end deposits were up $14 billion from the fourth quarter and are up year-over-year by more than $38 billion. 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 million shares for $1.4 billion, which completed our share repurchase program that we established at this time last year. Following our CCAR result, we announced the new $4 billion share repurchase plan, as well as the intention to increase the quarterly common dividend to $0.05 a share in the second quarter of 2014.
If we move to slide four, we look at our capital ratios under Basel III. Recall, this is the first period reporting under Basel III transition, which became effective January 1 of this year. Under the transition rules, our common equity Tier 1 capital was $151.6 billion, while our risk-weighted assets were $1.28 trillion, which resulted in a ratio of 11.8%. While there are no comparative reporting periods, we did provide pro forma fourth quarter of 2013 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. If we move to supplementary leverage ratios, we estimate at the end of the first quarter 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, BANA and FIA, 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 $2.9 billion in the second quarter of 2014 if we receive shareholder approval to amend our Series TT preferred stock.
One last item I want to note regarding capital in the first quarter of 2014. 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 billion to $5 billion at the end of the first quarter of 2014. If we move to slide five, funding and liquidity.
Our global excess liquidity sources increased more than $50 billion to a record level of $427 billion 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 billion was $5 billion higher than the fourth quarter of 2013. These figures do not include the $7.6 billion of debt issuance that settled on April 1st and was executed at more favorable spreads 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 settlements. Our time required funding remained very strong at 35 months, with parent company liquidity unchanged at $95 billion.
Moving forward, as we consider the FHFA settlement, we would expect parent issuance to be below maturity as the focus evolves towards continued yield improvement following the past several years of sizable balance reductions within our debt footprint. If we move to slide six on net interest income. Net interest income on a reported FTE basis was $10.3 billion, which was a decline of $700 million from the fourth quarter of 2013. That decline was driven by a swing of roughly $500 million associated with our market-related adjustments for FAS 91. FAS 91 was approximately $300 million negative in the first quarter of 2014 compared to the $200 million benefit that we saw in the fourth quarter of 2013. The balance of the decline was largely due to two less interest accrual days in the first quarter of 2014 relative to the fourth quarter of 2013.
Our net interest income, if we exclude those market-related adjustments, was $10.6 billion, once again, down a little over $200 million from the fourth quarter 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 three basis points, 2.36% in the first quarter of 2014. 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 are also mindful of both liquidity and leverage rules.
Our first quarter of 2014 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 have 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. 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 second quarter of 2014 may be slightly lower compared to this quarter's $10.6 billion level, excluding market-related adjustments, before moving up modestly throughout the second half of 2014.
If we move to our expense highlights on slide seven. Non-interest expense was $22.2 billion in the first quarter of 2014, once again included a $6 billion charge for litigation expense and a billion-dollar cost for our retirement-eligible incentives. As previously mentioned, the $6 billion litigation expense did include the cost of the FACA settlement as well as $2.4 billion 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 $15.2 billion and declined $1.2 billion from the first quarter of 2013, driven by lower LAS costs, but were up roughly $200 million from the fourth quarter of 2013 on incentives related to improved sales and trading revenue. Legacy Assets and Servicing costs, ex litigation of $1.6 billion, declined more than $250 million from the fourth quarter of 2013.
As you look at that $1.6 billion 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 eight, you can see our credit quality continued to improve again. Net charge-offs declined to $194 million to $1.4 billion or a 62-basis point net loss ratio. Delinquencies, a leading indicator of charge-offs, showed improvement again as well. In our first quarter of 2014, provision expense was $1.0 billion, and we released approximately $400 million 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 nine and go through the different business segments, starting with Consumer and Business Banking. Net income of nearly $1.7 billion in the first quarter of 2014 was up 15% from the first quarter of 2013. Lower expenses, higher service charges, a portfolio divestiture gain, and lower credit costs all drove that improvement from the first quarter of 2013. 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 first quarter of 2013 to 15 million customers. Customer deposit transactions using these devices now represent 10% of all transactions. Average deposits of $535 billion are up organically $23 billion or 5% compared to the first quarter of 2013, and our rates paid were reduced nearly in half to seven basis points.
Our brokerage assets surpassed $100 billion in the quarter and are up 21% year-over-year with the growth split fairly evenly between both increases in flows as well as valuations within the market. Our card issuance remains strong at 1 million new accounts in the first quarter of 2014, but our end-of-period balances are down seasonally from the fourth quarter of 2013. Importantly, our risk-adjusted margin remained above 9%. Overall, our credit quality within the segment remains strong as our net charge-offs decline versus both the linked quarter period as well as the year-ago period. Provision expense was $812 million during the quarter. Net charge-offs improved $360 million from the year-ago quarter, and we released $69 million in reserves this quarter, which is $220 million less than the first quarter of last year and down $426 million from the fourth quarter of 2013.
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. If we move to slide 10, consumer real estate services. The higher loss in the quarter was driven by $5.8 million 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 $8.9 billion were down 24% from the fourth quarter 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 fourth quarter of 2013. We continued 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&L immediately. Home equity originations is $2 billion. We're up from the fourth quarter of 2013 level. If we move to legacy assets and servicing sub-segment, once again, the driver here is the previously mentioned litigation costs. On litigation costs, you saw the press release on March 26th regarding our settlement with FHFA, which identified the $6.3 billion payment and led to the $3.6 billion 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 FGIC and related parties on involved securitization trust, which resolves all outstanding litigation and rep and warrant claims on second lien loans for approximately $900 million-$950 million, depending on the final outcome of two of the remaining trusts. Two of the nine remaining trusts, excuse me. This settlement was covered by reserves that we had established in previous periods. The primary revenue component within the LAS sub-segment servicing revenue declined $205 million versus the fourth quarter as the size of our servicing portfolio continues to decline as it aligns with our market share of production. 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 million, which increased by roughly $100 million from the fourth quarter of 2013, given the settlement during the quarter with FHFA. From a cost of servicing perspective, our 60-plus day delinquent loans were reduced by 15% to 277,000 units at the end of the first quarter of 2014. Once again, our LAS expense ex litigation declined $262 million to $1.6 billion. We move to slide 11, Global Wealth and Investment Management. During the quarter, we achieved record revenue of $4.5 billion, which was up 3% from the first quarter of 2013 and 2% from the fourth quarter of 2013. The improvement was driven by record asset management fees during the quarter.
Net income of $729 million was slightly higher than the first quarter of 2013, but was down modestly from the fourth quarter of 2013, 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 in technology. Notwithstanding those increases, our pre-tax margin remained strong, north of 25% for the fifth consecutive quarter. Our return on allocated capital was 25%, but declined from prior periods as the relative earnings stability was coupled with the increased capital allocations that I mentioned previously. Client engagement remained strong in the markets providing an additional tailwind as our client balances increased $30 billion from the year-end 2013 to $2.4 trillion. Long-term AUM flows of $17.4 billion for the quarter were the second highest in our company's history.
Pending client loan balances of $120 billion 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 $2.4 billion in client assets during the quarter. On slide 12, Global Banking. Earnings during the quarter were $1.24 billion. Earnings compared to the first quarter of 2013 show a 6% improvement in revenue that were offset by higher expense. Investment banking fees for the quarter were $1.54 billion, consistent with what we saw during the first quarter of 2013, but 11% lower than the record level that we saw during the fourth quarter of 2013. We do believe for the second 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 you. Provision was up $116 million from the first quarter of 2013, driven by additions to our loan loss reserves. The first quarter of 2014 included a build of $282 million versus builds of $81 million in the first quarter of 2013 and $434 million in the fourth quarter of 2013. The expense increase in the quarter of $186 million 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 are up $27.4 billion, or 11% compared to the first quarter of 2013, and are up $2.6 billion compared to the fourth quarter 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 a 35% increase in allocated capital. We switch to Global Markets on slide 13. Excluding net DVA, we earned $1.24 billion in the first quarter, which is in line with the first quarter of 2013, and up $893 million from the fourth quarter of 2013.
Ex DVA, sales and trading revenue was $4.1 billion, 1% lower than the first quarter of 2013, but 37% higher than the fourth quarter of 2013. Our FICC sales and trading revenue was down 2% compared to the first quarter of 2013. We would note it would be down 15% after adjusting for a monoline write-down that we incurred in the first quarter of 2013. 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 fourth quarter of 2013. Equity sales and trading, flat with the first quarter of 2013 and up 28% from the fourth quarter of 2013. Expenses were stable compared to the first quarter of 2013.
When we compare expenses to the fourth quarter of 2013, they increased $453 million on higher revenue related expenses after excluding litigation of $655 million that we recorded in the fourth quarter of 2013 within this segment. Our trading related assets, on average, remained flat at $440 billion on a linked-quarter basis. Our return on allocated capital during the quarter was 16%, even after we consider a 13% increase in allocated capital. On slide 14, we show All Other. Revenue was down $193 million from the fourth quarter 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.
First quarter 2014 expense includes the retirement eligible incentive costs, which are in line with last year, but still drive the expense variance compared to the fourth quarter of 2013 and was partially offset by lower litigation costs. Provision benefit in the quarter was relatively flat to the fourth quarter of 2013. It did improve $385 million from the first quarter of 2013. Net charge-off of $206 million improved $88 million from the fourth quarter of 2013, and $279 million from the first quarter of 2013. Our first quarter 2014 results in this segment included a $341 million reserve release compared to a release of $482 million in the fourth quarter and $235 million in the first quarter of 2013. During the quarter, our effective tax rate was impacted by our loss position.
For the rest of 2014, we would expect an effective tax rate of approximately 31% absent any unusual items. Let me make a few comments before we open it up for questions. We obviously don't like to report a loss to shareholders. This quarter, we achieved resolution or rulings around significant legacy matters. FHFA, FDIC, CFPB, and OCC, as well as 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 rules.
Our liquidity is at record levels. We're well-positioned to meet the new LCR requirements. Asset quality is strong and improving. Our expense programs show good progress. Most importantly, four of our five operating segments reported revenue and earnings that were essentially flat or higher than the prior year. In our fifth segment, Legacy Assets and Servicing, we made progress on legacy issues. We drove down 60-day plus delinquent loans, and our costs, excluding litigation, declined $1 billion from last year's first quarter. As we move into the second quarter of this year, we feel that we're better positioned than we were coming into 2014. With that, we'll go ahead and open it up for questions.
At this time, if you would like to ask a question, please press the star and one on your touchtone phone. You can remove yourself from the queue by pressing the pound key. Again, it's star and one if you have a question. We're going to go first to Betsy Graseck with Morgan Stanley. Please go ahead.
Hi, good morning.
Good morning.
A couple of questions. One on the litigation reserve build that you did in the quarter. You mentioned that the FGIC and the trust settlement were fully reserved for. That means that none of the $2.4 billion increase in reserves in 1Q that you called out was for that settlement?
That's correct, Betsy. As we said, substantially all of the $2.4 billion related to a build in our litigation reserves for matters that we've disclosed previously.
I guess I'm just wondering if you could give us a sense or color as to what you're referring to there. It doesn't look like it went to the monolines or the PLS. Is it something that's broadly mortgage related or is it something else?
Yes.
Given that it's such a large reserve build, does it suggest that there's another settlement on the near term?
No. 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 settled the FGIC exposure within the context of our reserve levels. It relates to other mortgage-related matters outside of those that we have disclosed previously.
Okay.
I wouldn't interpret or necessarily assume that the build in the reserves suggests that a settlement is imminent.
Okay. Just moving to capital. On Basel III, you give 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 basis points. Could you run through how you did that in the quarter?
Sure. Obviously, the numerator in both is the same. 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, the big driver down there related to the reductions in our consumer real estate, both first mortgage as well as home equity as those portfolios reduced 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. I think as you look at that Basel III standardized ratio, what was driving risk-weighted assets were actual reductions in exposure. There wasn't anything related to the models or assumptions that factored into that.
If you move over to the advanced approach, where we reported at 9.9%, which was down a touch, the biggest change, 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 billion and now represent almost 25% of our overall Basel III advanced risk-weighted assets. 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? Then the branches are down 10% over the last two years. How much more optimization is there?
I'm sorry, Betsy, I missed the first part of your question on-
On the Global Markets, the trimming that we did, it was announced as sort of the annual trimming that goes on. You remember we always are adding, we had, frankly, record hiring from schools this year coming in. 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, it's kind of the general vetting. I wouldn't put that as anything other than just sort of day-to-day expense management and also just the natural turnover in the business. The second part, Bruce.
Yeah. On branch optimization, as we look at that, and 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 million of expenses that we saw during the quarter.
Betsy, this is a long-term strategy. Whether it's New BAC or not, we'll continue to optimize the platform. What we show you back in the appendix slide is the mobile banking growth is pretty strong. At the end of the day, if you look at across the last five or six 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 effectiveness of ATMs. You should expect that
Those techniques to continue. Be that as it may, we also still have seven and a half million people come in our branches every week. There's great opportunities to engage with customers that we also continue to see strong foot traffic. We are manning this to meet those needs for both the people coming to the branch and the people who use the automated technique. 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. From here, this branch level you think holds or you still have more work to do on pulling it down?
Every month they keep looking at it and making adjustments as they look over multiple years in the future. If you remember originally we said we'd get around 5,000 out of New BAC. That was kind of the number we gave you, and we're there. Also remember that what you define as a branch will change. We have these express branch formats where there's salespeople plus what we call ATMs, which are ATM machines that you can actually work with tellers directly. It allows you to cash checks, depending, authenticate without your card. Just stick in the machine the same things you do with a regular teller. It's all important to us. I think focusing on the numbers as opposed to the overall cost of the structure, all the parts, and 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 near 200 basis points now.
Got it. Thanks.
We'll go next to Glenn Schorr 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. The commercial side grew by 8% year over year. The consumer shrunk by 4.7%. A lot of that's runoff. 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 23% in the first quarter? Thank you.
Sure. The first is, why don't we start within the Global Banking segment. We saw loans relative to year end up about $2.5 billion and up more significantly than that on a year over year basis. I would say that we continue to see good loan demand within the commercial space. It's across both C&I as well as real estate. We feel good about that. 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.
I think going forward you should expect to see us grow loans, we're going to be prudent and it needs to be at 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 CBB segment, that the majority of the loan reduction we saw in consumer was really three things. It was the payoff of first 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 $3.5 billion of home equity loans that repay each quarter. Those tend to be older vintages. I'll get back to the home equities that we're doing when I finish.
The third was the overall card balances were down about $4 billion, 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%. I think what we saw was not materially different than others in that the first month, two months of the quarter applications and volume were down with some of the weather. 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 second quarter.
The other thing I would reference is, 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 billion of originations during the quarter. I would just note from a credit quality perspective and what we're seeing there, those loan to values tend to be in the sixties with FICO scores deep into the 700s. That area is providing an opportunity for us as well.
Summing it all up, I don't want to put words in your mouth, 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.
Especially in the consumer business, the runoff affects the overall numbers.
Okay.
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 reserved 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.
Yeah, I think we're working through and refining that. We don't put that out with earnings. We put it out when we file the 10-Q. To your point, we obviously made progress with getting FHFA put behind us as well as FGIC and some other related matters. We're working through where exactly that range of possible loss comes out. I hear your point.
Okay. Appreciate it. 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.
Yeah. As we noted in the script that we did complete the final monetization of an investment that was a decent chunk of that. I would not expect to see those revenues at those levels going forward.
Okay. That's good for me. Thank you.
We'll go next to John McDonald with Sanford Bernstein. Please go ahead.
Hi. Bruce, hi. 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?
I mean, keep in mind, you only pick up one day, Q1 to Q2. I think you have a couple of things. As I mentioned. Relative to the first quarter, 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 first quarter. We did build up throughout the first quarter a significant amount of liquidity in anticipation of those rules. That will contribute a little bit to the decline in the second quarter. As we solve for that, you'd expect to see that move up. Nothing structural. We do have some seasonal stuff in the markets business that we do that suppresses things a touch in the second quarter. As we said, it's obviously early in the quarter, but we're expecting a slight decline.
We'd expect the trajectory to get back to the levels that we've previously talked about.
What's helping it grind higher beyond the second quarter? Bruce, just as a reminder, what helps it grow in the kind of third and fourth quarter and beyond?
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. What we are seeing is we look at the levels at which we raise debt going forward. The cost of that has come down significantly. You have some pickup there. You obviously have some pickup with some of the loan growth that we're seeing within the commercial space. We continue to take deposit pricing down as well, although we're down to levels that are harder to get much lower. 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 come out of FAS 91.
Okay. 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 hundred million of litigation expense will persist for the next couple quarters?
John, I think you have to split between. We've continued it, and I'd just remind, as you look at the litigation pipeline and you look at where we are, we've obviously gotten through the base rep and warrant with respect to the GSEs. We were able to get through and reach an agreement with FGIC, which is the fourth monoline settlement that we have. We're working through in the Article 77 case is going through the judicial process. 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 in your thoughts 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. As we talked about in the presentation during the quarter, we did have a pretty significant build as we continued to evaluate those positions as well as the discussions that we have that are parties to the litigation.
John, I think simply, if you think about things that litigation matters that sort of arrived after 2008, 2009, the cost of those in the P&L is very modest. Anything sort of new, these costs really relate to the stuff that was before the crisis and the bottom cleanup. Your point about what would be the ongoing litigation cost would be much, much lower. The question is the lumpiness Bruce refers to the transition we got left on a few of these matters.
Okay. Bruce, just to clarify the provision commentary that you made. Your outlook is for net charge-offs to kind of grind lower modestly, and reserve release to continue, but probably at a smaller level than the $380 we saw this quarter?
Yeah. I think that's fair, John. It can bounce around in any one quarter. I think the provision number, broadly speaking, is in line with what we'd expect over the next couple of quarters.
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 if you looked at the credit card charge-offs in U.S. and domestic, they're down. This quarter it was $700 million and a 3.25% 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 or the credit cost. If you look outside that number, card charge-offs are 60%-70% of charge-offs. They're going to be hard to get down a lot more. There's work to do on mortgage charge-offs, home equity charge-offs. If you look across the rest of the board, they're in pretty good shape.
Okay. Last thing from 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 and 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. 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, were very strong during the quarter.
Okay, thank you.
We'll go next to Paul Miller with FBR. Please go ahead.
Morning. This is actually Thomas LaTurno 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 assess 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?
Yeah. I think it's a very good question. What I would point out is, if you go back to the fourth quarter of 2012, that was when we announced our significant MSR transfers. 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. We feel 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. Year-over-year revenues ± are down $1 billion. If I'm looking at slide seven and looking at the core expenses were down a few hundred million, and that is net of all the New BAC benefits. Can you talk to us about just the push and pull between the new B of A, New BAC reductions, and then what cost inflation you are seeing, if any, underneath the core? As you look forward, just how we should expect that core line to traject 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, if you are looking on slide seven 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 first quarter of 2014, as we continue to reduce headcount, we incurred over $100 million in severance expense on both an absolute basis as well as a year-over-year basis within those numbers. You had $100 million to the negative there. The second thing is, as we disclosed, we have been investing within corporate banking, cash management salespeople, to a lesser extent, capital markets people, and some of the technology that goes along with that.
We think as we look going forward, we are through a lot of that investment. 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 would 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 million+ increase in revenue from asset management fees. There is obviously compensation that goes out with that as well as some of the technology dollars that were spent for our Merrill One project that we have rolled out within the wealth management area.
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. We are investing in the areas where we think and where we are seeing revenue growth. We would obviously expect those investments
Given that they've been made and are generating the revenues, that you'd expect those to moderate going forward.
Thanks, Bruce. As just a follow-up to that, we're going to see the continued improvements to get to that $2 billion 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? 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?
Well, obviously, we continue to look at that, we started after this, as you know, in 2011. If you go back, I think we had $80-odd billion of expenses when we started this thing. We've been driving it down year after year after year. That doesn't mean it stops with New 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. That's something we as management continue to have to focus on.
If you think about the 13 fix and think about continuing to make some improvement against it, sort of annualize that, add back whatever, $1 billion for 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've got to make sure that the investments we make are yielding the revenue benefits, we've got to keep the total expenses overall, that's what we're up to. I think the way to think about that is look at it 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 on the payroll for the quarter.
Got it. 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 businesses broadly going back a few years ago. You kind of came through all that. That affected. What's happened now is if you just look at our card activity, our purchases on our cards are up by 5% or so quarter to last year, this quarter. First quarter last year, fourth quarter this year. 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 the reductions that were due to the changes in interchange rules. I think it'll keep grinding forward based on just general activity. Most of the real downdraft came out in 2011, 2012, early 2013 timeframe.
Yeah. I think the other point, too, is if you look at within the consumer business, we actually saw service charges during the quarter were up about 3% on a year-over-year basis. Some of the card income tends to be seasonally higher in the fourth quarter. It drops in the first quarter, then builds back up. Within the consumer space, we were pleased with what we saw on the service charge line during the quarter.
If you go back and look at 2017, we've been producing from a sort of 700,000-800,000 run rate new cards to 1 million+, those cards are being used as a core card by the customers. That's driving up the pay rates still high. The balances aren't moving much, but the activity underneath it's moving, we're still replacing some affinity portfolios that we've sold and things like that. Our view is that the transactional behavior of our customers continues to grow and will benefit some of the fee lines due to this.
Okay. Thanks very much.
We'll go next to Mike Mayo with CLSA. Please go ahead.
Good morning.
Morning.
First, just a couple follow-ups. How much of the New BAC savings were achieved by the end of the quarter?
You should look at relative to the $2 billion a quarter. We're in the $1.7 billion area.
All right. You have $300 million left per quarter to be achieved by mid-2015.
That's correct.
Okay. The LAS savings, you have another $500 million a quarter to be achieved by the end of the year?
That's correct.
All right. $800 million total quarterly expense savings we should expect over the next year or 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. Ultimately, that would be a positive to the pre-tax income line.
Okay. Do you have an efficiency target for the firm? I'm just looking at page three of the supplement, the efficiency ratio is kind of thrown off by the charges, it's been in the 70s the last few quarters 97.68%. I don't think you consider that your core efficiency ratio. What do you consider your core efficiency ratio, where should it be, when do you hope to get there?
I think if you go back and look at what we talked about in the fourth quarter, where we talked about where we'd like to get to from an ROA, return on tangible common equity, we talked about once rates started to move up, that if we look out at a couple of years, that efficiency ratio should be in the high 50s.
Okay. Do you have a specific timeframe for that or just when rates go up?
I think as we look at it's at the point in time that rates are up roughly 100 basis points across the curve. 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 tax rate excluding the mortgage charge for the first quarter was what?
I believe it was roughly, I think it was somewhere between 58% and 60%.
I'm sorry, the tax rate. You said the tax rate going ahead will be 31%.
Right.
I'm just trying to figure out what was the core tax rate for this quarter excluding the charge?
The core tax rate we project out and look at over the years. The core would've been 31%, you always have a little bit of noise when you, and obviously it was a pre-tax loss, the discrete items always kind of overwhelm things in a low period. The base rate from which you're starting from is a 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, 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 what the context is, Mike Mayo, the net flows in the wealth management business were around $11 billion-$12 billion this quarter, which was nearly $17 billion to $18 billion, due to long-term flows and $6 billion in short-term liquidity flows out for a net of around $12 billion. 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 thousand new accounts this quarter. The assets continue to grow. It's topped $100 billion. The daily average trades, DARTs, are up by, I think, 25%-30% year-over-year. It continues to progress and there continues to be good asset flows there too. 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?
Let me just start that the allocation of capital is how we take the capital that we have at the company and push it out to the businesses. I think you'd need to go segment by segment within that, Mike Mayo. 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 billion. There were more loan balances against which you need to allocate capital. The second thing that I would say is you look at that segment and you consider Basel III standardized 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.
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. There was additional monies allocated there. As we look at and just continue to refine and look at both comparables as well as asset mix, we thought it was prudent to increase modestly what we saw within Global Markets.
As I said in my comments, when you consider it in the aggregate, we look at where we're at relative to peers, we've got virtually all of our capital at this point pushed out to the different businesses, which is the way it should be.
No, yeah. I agree. It sounds like it's partly business growth and partly regulatory related, partly a desire simply to have less unallocated capital.
I think the last one is what you got to keep focused on.
Okay. Lastly, the Bank of New York ruling was good. I did not expect that. You still had a $6 billion charge this quarter and another $2.4 billion extra charge in the last 15 workdays since the FHFA amount was announced. 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 that in just a few weeks you can have another $2.4 billion charge seemingly out of the blue for some of us. What's left?
I think when you look at it as I commented that I think we give fairly fulsome disclosure in the 10K as it relates to the matters that are out there. When you look at the matters and compare where we are now to what's out there, that obviously from the case that FHFA was resolved, and that was the $3.6 billion number we mentioned. You've seen resolutions during the quarter from an Allstate RMBS perspective. You saw a resolution of Foremost Insurance Company. You saw CFPB, OCC, and you saw the deal that we completed and announced with FGIC today. As you work through and look at those matters, it largely with what's disclosed leaves you with respect to one Monoline, and then in addition to the Monoline, the other remaining legacy mortgage related matters that we've put out in our disclosure.
All right. Thank you.
We'll go next to Guy Moszkowski 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 good that you've provided now for a bunch of the issues that are actually still pretty visible out there. 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, JP Morgan and Citigroup, have spoken to billion-dollar 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. I was wondering if you could give us a sense for what your control cost increase has been over the last year or two.
I'd rather give you a number. Let me give you a way to think about it. In our environment, coming out of the stream issues, the 2008 and 2009, we built a lot of personnel and headcount to get after this stuff, and we're still finishing up the cleanup. If you look in the expense base, a lot of that's been in the expense base for a couple of years. If you think about something like our audit team, we doubled the size of our audit team in probably 2010, and it's been held pretty constant against the backdrop where we've 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.
The amount of control environment relative to 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 2010, 2011 timeframe. 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 wrestled to the ground. One of the key ways that we're doing this is by focusing the scope of the company. The fourth place, or excuse me, the add-on product settled this quarter, we quit offering 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 product as an example.
The idea of narrowing the product set, narrowing the geographic scope of the company, making the company a lot less complex. We'll always be big, but we make ourselves less complex. Against that, a strong growth in the control cost in the 2009, 2010, 2011 timeframe, then a flattening of that, but relative to a smaller company 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 GWIM, and obviously, the margin there contracted a little bit. Maybe you can give us a little bit of a sense for what this, I think you alluded to Merrill One?
Well, Merrill One is a new product they bought out that's been successful. Like anything else, you put the product out there, you spend all the money to put the product together, then the assets come on it. We are feeling good about that. Tens of billions of dollars of assets have moved to the platform. It is a good platform for the customers and for the advisors. I think more broadly, I talk about technology. If you looked at the expenses we had going back sort of after the crisis, we still had the Merrill transition expenses, and all in, we were spending around $3 billion on technology development a year. We now spend about $3.5 billion, and obviously, the transition expenses are out of there. Everything we're spending is to better the platform, better the business, invest in the growth.
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. Merrill One being one product this quarter, along with a new card system, a new trading platform Tom and his team are in the middle of putting in a new backbone for the company in terms of our general accounting systems, which is in the tail ends of going in and across the board. Across a 4 or 5-year format timeframe, we'll replace almost every system in the company, but we'd expect that to continue. In GWIM, we swung around off of last year where we did more in other businesses, cash management, started building, rebuilt the front-end mortgage process, and a lot of other things.
This year we swung more to GWIM. It's really a decision of which business we invest in at which time. They asked for more investment this year.
Thanks. Final one for me. You gave the leverage ratios being above the 5% and the 6% requirements based on the most recent NPR. Subsequent to that, I guess Basel came out in March with some suggested changes to the netting on a standardized basis for counterparty credit. 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 think the final supplementary leverage ratio rules that reflected that came out in April. 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. The numbers we've given you reflect that April release.
That's from the Fed, right? The April release from the Fed.
Yeah, that's correct.
Right. No, 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. I think JPM alluded on Friday to the idea that that could add, depending on whether you look at the holding company or the bank units, upwards of 20 basis points to the leverage ratio because it takes into account the netting to a greater extent. I was wondering 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. 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. If there's something else that changes where there's some benefit, that's great. Our assumption is we're going to be living with what came out on April 8th.
Got it. Okay. Thanks very much. Appreciate that.
We'll go next to Matt O'Connor with Deutsche Bank. Please go ahead.
Good morning.
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. 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. Just big picture, I guess we think about where you had thought net II might be a couple of quarters ago looking out, what's worse? Is it 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 points. If you go back, the guidance that we'd given is that we would grind up from roughly a $10.5 billion number. As we look out to the third and fourth quarter, that's what we see in our numbers. I do think there've been relative to if you go back two to three, four 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, and not only LCR, but with the rate environment that we're in managing the OCI risk, that we have directed more of the investment portfolio to shorter dated treasuries and some mortgage-backed securities. As you go out over a couple of quarters, that has a negative impact.
The second thing, as 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 have not moved to the extent that the forward curves would have suggested at that point. 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 first quarter in a while where we've actually seen the loan pricing spread stabilize and actually in certain of the portfolios move up a touch. That's a positive. I don't think there's anything, to your question, that's material.
There are just some small things here and there, and we wanted to update and share our thoughts with what we thought the second quarter would be. Longer term, I think we're still in the same place as far as the 10.5 grinding up.
Okay. Just switching topics on the core LAS costs. Ex all the litigation, you reiterated the target for year-end, I think of about $1 billion or $1.1 billion. Still feel good about the $500 million per quarter late next year?
Yes.
Okay. Is that something that we could see overshoot to the downside like we're seeing in charge-offs? Obviously, 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 hope so, but let's just get it down to that level, and we'll figure out what we can do from there. It's been an arduous task, and there's still a lot of work in it.
Okay. 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?
I would say that we've said we're above 5%. We've said that assuming that the Buffett preferred amendment gets done, that adds roughly another 10 basis points, which obviously helps move us up. I think you can assume that the only other guidance I'd say is that the bank ratio relative to the limit is stronger than where we are with the parent today. Once again, the Buffett amendment will help.
Okay. All right. Thank you.
Thank you.
We'll go next to Marty Mosby with Guggenheim Securities. Please go ahead.
Thank you. Three questions. One in operational risk that you talked about that now represents about 25% of your risk-weighted asset. In doing that in the past, that is very sticky. How do you think you can manage around that amount of capital just being trapped in effect of all these past settlements that you've had to kind of live through?
Your point, Marty, is a good one, which is that the operational risk model Are based on a fairly long time series as we look at it. 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. 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.
Is the only true way is just almost to 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-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've suggested that we've done, in that if you look at those activities that led to those losses, we are no longer engaged in those activities. We are not doing business with monolines from a new wrap perspective. If you look at private label securitizations, that activity with rep and warrant is not continuing. We think we've largely done that. I think the question just going forward is, if you've proven and you clearly are outside of the activity, is there any relief to be had? Not the way that it works now. We'll just have to work through and deal with it.
Gotcha. Secondly, you called out that mortgage servicing hedging was unfavorable this quarter. However, if you 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?
Yeah. There was really nothing. I think that the comment that we made was that it was a question of the hedging performance this quarter relative to a year ago.
Okay.
The hedging was still a positive number. It was just less so on a year-over-year basis.
Got you. Lastly, when you think about moving from your mortgage-backed securities into agencies and treasuries that have shorter duration, 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, employing more interest rate swaps or off-balance sheet hedging to rebalance and not become so much more asset sensitive due to these other pressures?
Yeah. 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. As you look at that portfolio, it's very clear there are only three things that we do within that portfolio. There's Treasury securities, there's agency securities, and there's double and triple A super sovereign type activities. As it relates to becoming a little bit more asset sensitive, we just think given 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. We're not interested in starting to try to do things from a derivative, another perspective to somehow change that.
The investment portfolio needs to work with how we set it up. We're going to be prudent with respect to how we do it.
All right. Thanks.
Thank you.
We'll go next to Nancy Bush with NAB Research, LLC. Please go ahead.
Good morning, guys.
Good morning.
Morning.
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 a slower start than we would've 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?
Nancy, we kind of did that in 2011 when we got out of all but direct to consumer. Basically, we focused the business on really supporting the core customer base and not trying to drive standalone market share in the schema thing. What has happened to that is as we sold off the non-core service thing, we've gotten down to a significantly less number of loans serviced and your originations, $10 billion this quarter are all direct to consumer, which is the second highest total in the country of direct to consumer mortgages. I think we're comfortable where we are. Now the question is, with the LAS aside, the core business, what does it look like? It'll be a small business, smaller business. It'll generate mortgages for our customers because it's a core product they need.
Also that sales force, quite frankly, sells other products and does other things for us, refers people for other products. 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. We'll make some money in it, and we'll make some money servicing those core loans because the delinquency statistics in those and what we've been doing in that are far superior to even what we would've predicted. That's how we'll run the business. Effectively, we've done what you said. It's just we're still sort of bound by the overhang of effectively
The LAS portfolio is still working through the system in the 300,000 length of mortgages, of which only about the delinquency of the core portfolio is about 50,000, 60,000 of them.
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?
Yeah, that's different in the sense that on the card side, we actually took it down unfortunately through charge-offs in Q1 2010 more than not. I think we've been relatively consistent on the domestic piece, around $90-odd billion of outstandings and kind of grinding up and down from there. Producing more cards that are coming out of the wall at first from our customer from 700,000 we showed you two years ago first quarter, to 1 million plus this quarter. Pretty consistently was 1 million plus the third quarter, almost 1 million the fourth quarter, another 1 million plus this quarter. The core, what we see there is actually usage of those cards. They're sold 60% plus to our primary customers, but also the usage of the cards because of the core three or four card product is driving it. 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. The balances ought to be stable and ought to grow. With the high quality portfolio, the payment rate's in the 20s now. Meaning people pay us off because they're using the transaction card.
Okay. Just finally, Bruce, you've indicated that net interest income is going to decline somewhat due to liquidity issues, et cetera. Is that same 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 236 level?
I think I just want to be clear that we said that we thought that the core NII ex market related impact would be down slightly in the second quarter and then build modestly through the rest of the year. What you will see in the second quarter, given that you have the full quarter of the liquidity that's on the book, you would expect to see that the NIM in the second quarter moderate a little bit given that you've got the full quarter of the liquidity. Then obviously, as it starts to grow during the latter half of the year, you'd expect the NIM to follow that.
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, we have very strong common equity ratio. We have to go back and put a look at, Bruce and I have to, with the rules now in hand, you can start to go work and say, "Okay, how do we optimize next round?" In terms of how we create maximum liquidity per dollar of balance sheet size, right?
Right. Okay. Thank you.
We'll take our last question from Jim Mitchell with Buckingham Research. Please go ahead.
Morning, Jim.
Hey, good morning. Hope I'll keep these two quick. 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 two things that, Jim, banged us up. Good question. To the tune of about $50 million each. There was some home equity stuff 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. That happened during the quarter. The second thing is there was some regulatory guidance that was given as it related to second lien loans that were behind first liens 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 second quarter, but it's a good question that those two items banged us up to the tune of about $100 million, that was the reason for the change.
Okay, that's helpful. Just on the investment banking pipeline, any commentary?
I think what we'd say is the overall markets continue to be strong. The pipelines and the amount of activity and discussions from an M&A perspective is encouraging. I would say as we go forward that we talked about we felt the pipeline was strong at the end of the year. As we look at the pipelines, they've not changed materially one way or the other at the end of the first quarter versus the end of the year. As we said, we feel very good about the quarter with the revenue side being north of a billion and a half 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 much.