Good day, everyone, and welcome to today's program. At this time, all participants are in a listen only mode. Later, you will have the opportunity to ask questions during the question and answer session. Please note this call may be recorded. I'll be standing by if you should need any assistance.
It is now my pleasure to turn the conference over to Lee McIntyre.
Good morning, everybody on the phone as well as the webcast. Thanks for joining us this morning. Before I turn the call over to Brian and Bruce, let me just remind you we may make forward looking statements today. And for further information on those, please refer to the website our SEC filings about our forward looking statement information. So without further ado, let me turn it over to Brian, our CEO.
Thanks, Lee, and good morning to all of you and thank you for joining us to review our 4th quarter results. As we over the last several quarters, we've been on a journey of simplifying our company and we talked to you about some consistent areas of focus: capital generation reducing our cost managing the risk down addressing the legacy issues and driving business growth overall. Each quarter, you've seen the progress our teammates have made and the momentum is becoming more evident. On the first page, slide 2 of the deck, you can see the annual comparisons that will show you the progress over the last couple of years. First, we've improved the balance sheet.
Our Tier 1 common capital has grown 16% this year. Liquidity and time to required funding have further strengthened. This strength in capital and liquidity allowed us to begin returning capital through share buybacks to shareholders in 20 13. Another area of our early focus has been rightsizing our expense base. We have been meeting the goals of our cost programs each year.
While we make progress on those each quarter, there's still significant progress when you look across the last couple of years. After reporting expenses, excluding goodwill impairment of $77,000,000,000 in 20.11, we've worked that number down to $69,000,000,000 in 20.13. As we've been clear with you, we expect additional cost savings in 2014 as we continue our legacy mortgage issues and although we still have work to do, we have made progress. On our credit costs and our provision costs, we've seen tremendous results as net loss rates in our portfolios are at levels not seen in nearly a decade. As a result of all this work, earnings have improved significantly, but we still have not approached true earnings potential of Bank of America.
So as we move to slide 2, let's talk about recent results in the business on a business by business basis. We've been delivering solid growth in activity and relationships across all the groups of our customers and clients we serve. Let me highlight a few of those for you. Deposit levels continue to reach records each quarter. While this growth has been occurring in balances, the rate paid has been declined to what we believe is low against our peers, that 8 basis points in our consumer business.
Our operating costs, which we focus on heavily, of our deposit business has declined to just 200 basis points now. Driving this improvement is the work we've done to optimize our delivery network, our stores in response to customer behavior changes across time. Banking center over the counter transactions continue to go down, but ATM online and mobile transactions continue to grow. We understand this and we observe this in our customers and we're working with them to capitalize on arguably the largest and best positioned branch network in banking. However, branches do remain a critical component of everything we do.
We have about 8,000,000 customers visits a week, the kind of traffic that most we really appreciate and most retailers will get the right arm for. Meanwhile, as that traffic comes in, the customer behavior continues to shift to ATMs online and mobile and that's given us the opportunity to be more efficient at the same time continue to deliver innovative products to our customers. When you move to our mass affluent customer base, we've seen deepening across the customer relationships. Merrill Edge brokerage assets continue their strong growth. We've invested heavily in the sales force for what we call our specialist sales force and that's grown to 6,700 people in 2013.
Looking at what that sales force has been able to do, this year we opened 350,000 new Merrill Edge accounts, 125,000 new small business deposit and card accounts as well during 2013. As we moved our industry leading Global Wealth Investment Management business, we continue to break records on top line and profitability. We just recorded the best year in the company's history for wealth management results. We have more customers and clients doing more business with us and now we manage client assets of over $2,400,000,000,000 In our Global Banking business, loan flows have been very strong, now growing for 6 consecutive quarters. Investment Banking is coming off a very strong year and a very strong 4th quarter.
We once again maintained our number 2 position overall and fees overall and grew market share year over year. As we look at our trading business, our global markets business, we've been really pleased with success we've had in equities over the past year and that's helped offset some of the industry challenges facing the larger FICC business that we have. Now both remain very important customer facing businesses for us. They faced some tough regulatory changes as the rules have changed about what the scope of activities is over the past couple of years, but a team under Tom Montag has been managing those changes well. Importantly, we ranked for the 3rd year as a top global research firm.
All in all, we believe if you think back 2013 was a significant year for the progress this company has made against all the focus areas I mentioned earlier. As we look to 2014, we are well positioned as a company to meet our customers' needs by delivering the whole company to every client and every customer and winning in the marketplace. With that brief introduction, I'd like to turn it over to Bruce to cover the numbers for the quarter. Bruce?
Great. Thanks, Brian, and good morning, everyone. I'm going to start going and go through the Q4 results starting on slide number 4. We earned $3,400,000,000 or $0.29 per diluted share this quarter. Total revenues in the quarter on an FTE basis were in line with the Q3 of 2013 at $21,700,000,000 and were $22,300,000,000 if we exclude the negative impact of FBO and DVA as a result of the significant credit spread tightening we saw in our credit spreads during the quarter.
Our revenues benefited from increased net interest income, strong investment banking and wealth management fees during the quarter and were partially offset by lower equity investment gains. Total non interest expense of $17,300,000,000 increased from the Q3 of 20 13 as a result of increased litigation costs, which were $2,300,000,000 during the quarter. We back those litigation costs out and back out $1,400,000,000 of the foreclosure look back expense that we saw in the Q4 of 2012. Our expenses during the quarter declined $300,000,000 from the Q3 of 2013 $1,400,000,000 from the Q4 of 2012. Asset quality continued its improvement and resulted in provision expense of only $336,000,000 I would also mention 2 additional items that impacted results during the quarter.
As I mentioned FBO and DVA $618,000,000 and we also recorded discrete tax benefits of approximately $500,000,000 during the quarter were driven by tax items that were related to non U. S. Operations as well as the resolution of certain global tax matters. On slide 5, you can see that our period end balance sheet came in at $2,100,000,000,000 below the prior quarter on lower trading assets versus that Q3 of 2013. Ending loans declined $6,000,000,000 due to the decline in residential loans in our discretionary portfolio.
Outside of residential mortgages, client and customer lending reflected good commercial and seasonal credit card growth that was offset by expected declines that we have within our runoff portfolios. Period end deposits grew $9,000,000,000 from the record levels that we saw during the Q3 of 2013. Moving down the page, tangible book value improved to $13.79 as the full benefit of earnings was partially offset by a negative move in AOCI as a result of higher rates. Tangible common equity increased to 7.2% during the quarter. And during the quarter, we repurchased 92,000,000 common shares for roughly $1,400,000,000 The last thing that I would mention on this slide is despite the earnings of $3,400,000,000 our return on tangible common equity at 8.6% remains lower than we would like it to be, but we continue to make very good progress on this front.
On slide 6, you can see our Basel I Tier 1 common ratio of 11.19 percent increased from the Q3 of 2013. If we look at Basel III on a fully phased in basis, we remain above our 8.5% 2019 minimum requirement under both the standardized as well as the advanced approaches. Let's first look at the advanced approach. Under that approach, Tier 1 common capital increased from the Q3 of 2013 to more than $132,000,000,000 Our Basel III risk weighted assets remained steady at 1 point $3,000,000,000,000 and our common ratio improved slightly from the Q3 of 2013 to 9.96%. Under the standardized approach, our estimate of Basel III Tier 1 common ratio improved a touch from the Q3 of 2013 and remained slightly above 9%.
We turn to the supplementary leverage ratios. Based on the proposed U. S. Requirements that are expected to take effect in 2018, as of the end of 2013, our bank holding company leverage ratio improved from the Q3 of 2013 and continues to exceed the proposed minimum of 5%. Looking at our primary bank subsidiaries, BAN and PHEAA, they also continue to both be in excess of the 6% proposed minimums.
The last point I would make on this topic, the BCBS published final supplementary leverage rules over the weekend. And while we do note some improvements from the original proposal, we're still evaluating the exact impact to us. If we turn to Slide 7, funding and liquidity. Our long term debt ended the quarter $6,000,000,000 lower, which further improved our funding cost. Global excess liquidity sources during the quarter increased $17,000,000,000 to $376,000,000,000 and was driven by our strong deposit flows.
The time to required funding at the parent company increased to 38 months. And as we look at 2014, we have $31,000,000,000 of parent company maturities during the year. And once again, we would expect the issuances to be below that number as we both reduce as well as smooth the maturity profile of that debt footprint. The other thing I would mention is that we do expect to see some additional issuance within our banks this year, given the applicability of the new liquidity rules and how they apply to the bank's subsidiaries. If we turn to Slide 8, net interest income.
Our net interest income on an FTE basis was $11,000,000,000 which was $520,000,000 over the Q3 of 2013. The Q4 of 2013 did include $210,000,000 of positive benefits in market related adjustments driven by lower premium amortization from slower prepay assumptions on mortgage backed securities as long term rates rose 30 basis points from the end of 2013 to the end of 2014. Our net interest income excluding those adjustments was $10,800,000,000 representing a $241,000,000 increase from the Q3 of 20 13. Roughly 2 thirds of that improvement was driven by trading related net income and the balance once again excluding market related adjustments was driven by lower long term debt levels and to a lesser degree higher deposit levels and lower rates paid. Net interest income in those benefits was partially offset by lower consumer loan balances and lower yields.
As a result of these different factors, our net interest yield excluding market related adjustments improved from 2.44% in the Q3 of 2013 to 2.51% in the Q4 of 2013. As we move into 2014, I do want to remind you that the Q1 includes 2 less interest accrual days. So the Q4 'thirteen base of just below $10,800,000,000 excluding the market related adjustments, all else being equal would start at roughly $10,600,000,000 for the Q1 of 2014. Our asset sensitivity position remains positioned to benefit from higher rates, particularly from the short end of the curve. We move to expenses.
As I mentioned earlier, non interest expense was $17,300,000,000 in the Q4 of 2013 and included a $2,300,000,000 charge for litigation expense. Litigation expenses increased $1,200,000,000 from the Q3 of 2013 as we continue to evaluate our legacy exposures, largely RMBS litigation, which led to additional reserves. Excluding litigation, total expenses $15,000,000,000 during the quarter, which compares favorably to the $15,300,000,000 in the prior quarter $16,400,000,000 in the Q4 of 2012. Our legacy assets and servicing costs, once again excluding litigation, declined nearly $400,000,000 from the Q3 of 2013 and were below $2,000,000,000 this quarter as we previously guided. This drove the $300,000,000 improvement in expenses adjusted for litigation in the quarter.
As we continue to reduce the delinquent loan serviced over the course of 2014 and reduce operating cost, we expect the Q4 of 2014 LAS cost excluding litigation to be roughly $1,100,000,000 Move for a moment to new BAC. The benefits from new BAC in the most recent quarter were offset by a small seasonal uptick in costs when comparing to the Q3 of 2013. And when comparing to the Q4 of 2012, our new BAC savings are partially offset by roughly $300,000,000 of increases from revenue related costs on higher Global Banking and Markets and GWIM revenues. We remain on track to achieve the expected $2,000,000,000 of new BAC cost savings in mid-fifteen as these initiatives wind down near the end of 2014. If we move to the number of full time equipment employees, we ended quarter at 242,000 employees, a decline of more than 5,000 or 2 point 3% from the Q3 of 2013 and that was split pretty evenly between staff reductions in LAS in the production side of the mortgage business as volumes decline and to a lesser extent we reduce staff associated with our branch optimization.
Before I leave expenses, I do want to remind you all that the Q1 typically includes the annual cost of incentives for retirement eligible associates. And once again, we expect in the Q1 of 2014 that number to be approximately $900,000,000 which is consistent with what we saw in each of the first quarters of 20 122013. If we move to Slide 10, on asset quality, you can see that credit quality once again improved nicely. Net charge offs declined to a reported $1,600,000,000 or a net loss ratio of 68 basis points. The quarter did include $144,000,000 of charge offs related to clarification of regulatory guidance on accounting for TDRs in the home loans portfolios.
If we exclude that change, net charge offs were approximately 1,400,000,000 dollars or 62 basis point net loss ratio and improved $250,000,000 or 15% from the Q3 of 2013. Delinquencies, which are obviously a leading indicator of net charge offs declined again as well. Our 4th quarter provision expense was $336,000,000 on the back of this steadily improving consumer data, resulting in a reserve release of $1,100,000,000 excluding the regulatory guidance change. As we move into 2014, we continue to see credit quality improve. Let's now move into a discussion of the businesses and I'm going to start on Slide 11 with Consumer and Business Banking.
Within this segment, we delivered improved earnings from both the previous quarter as well as the prior year's quarter. Net income of nearly $2,000,000,000 in the Q4 of 2013 is up 11% from the prior quarter, 36% from the Q4 of 2012. Stability in revenues, lower credit costs as well as expense reductions driven by network optimization drove the improvement in both periods. If we take a step back and review customer activity during the quarter, we saw our average deposits grow steadily and rates paid down to 8 basis points. Our brokerage assets increased 7% from the Q3 of 2013 and are up 26% year over year on both improved strong issuance with 1,000,000 cards issued during the quarter.
I would note that our 4th quarter of 2013 balances reflect the reclassification of roughly $1,000,000,000 of an affinity portfolio that was moved to loans held for sale. And we would expect seasonality to move these balances lower in the Q1 of 2014. Our risk adjusted margin on credit cards is now back above 9%, driven by seasonal spending and improved credit quality as net charge offs and delinquencies continue to improve. Expense levels during the quarter do include approximately $112,000,000 of litigation costs and that masked the benefit of our delivery network optimization as mobile banking usage continues to increase and we continue to consolidate banking centers. Let's move to Slide 12, Consumer Real Estate Services, which as you all know represents only 8% of the company's revenues.
In our supplemental information, we report 2 separate components of this segment, 1 focused on loan origination and the other focused on servicing and legacy issues. As we signaled last quarter, our 1st mortgage retail originations of $11,600,000,000 were down 49 9% from the 3rd quarter as the amount and level of refinancing opportunities slowed given the rising rate environment. Our production staffing levels to be consistent with these lower volumes that we're experiencing. Our rough and warrant expense was $70,000,000 during the quarter and declined by roughly $250,000,000 from the Q3 of 2013, which benefited mortgage banking income. One item I do want to mention from the appendix of our slide deck is on page 20 regarding rep and warrant exposure.
We did receive increased levels of private label claims, but it's important to note that the vast majority showed no evidence that the claimant reviewed the individual loan file ahead of the submission and that obviously impacts the overall claim quality and therefore the process for claims resolution. The other primary revenue component in this segment, servicing revenue declined $54,000,000 from the Q3 of 2013 as a result of our smaller servicing portfolio. From a cost of servicing perspective, our number of 60 plus day delinquent loans dropped 73,000 to 325,000 units at the end of 2013. And as a result of this, once again, our expense ex litigation declined nearly $400,000,000 during the quarter to $1,800,000,000 Global Wealth and Investment Management on Slide 13. This represents 21% of our company's revenue and our Wealth Management business achieved records for net income in both the quarter as well as for full year 2013.
Within this segment, both Merrill Lynch as well as U. S. Trust maintained their strong leadership positions, managing a total of $2,400,000,000,000 in client balances. Revenue approached $4,500,000,000 in the quarter, increasing 7% year over year and 2% on a linked quarter basis. And I would also note it's the 4th consecutive quarter in which the pre tax margin was above 25%.
Our asset management fees once again achieved a new record during the quarter driving the revenue improvement from the Q3 of 2013. Our client engagement remains strong and market levels are providing an additional tailwind. Our long term AUM flows for the quarter were $9,400,000,000 $48,000,000,000 for the year, nearly doubling the 2012 production level. Ending deposits also grew nicely again and our ending client loan balances of almost $119,000,000,000 reached record levels as we continue to see very good activity in both consumer real estate as well as our security space lending. Turning to slide 14, Global Banking.
Our 4th quarter earnings of $1,300,000,000 show good growth over the Q3 of 2013 with strong Investment Banking results, but are down from the Q4 of 2012 due to higher provision expense. Provision in the year ago quarter with the commercial loan growth that we've seen. While we're on credit quality, I would note that our net charge offs within the Banking segment for the quarter were only $7,000,000 versus $132,000,000 in the Q4 of 'twelve and $35,000,000 in the Q3 of 'thirteen. Our expenses reflect effective cost control, but also reflect increases related to revenue related compensation for Investment Banking. Our Investment Banking fees this quarter across the company were a record $1,740,000,000 up 9% from the Q4 of 2012 and 34% from the Q3 of 2013.
Based on Dealogic, we did maintain our number 2 position in fees with an 8% market share. And in addition, during the quarter, we ranked number 1 in America's Investment Banking fees with a 10.7% market share. During 2013, we advised on 10 of the top 20 announced M and A deals. And average loans increased $8,800,000,000 from the 3rd quarter with solid C and I growth particularly in large corporate and healthcare along with growth in Commercial Real Estate. Our average growth did outstrip our $2,300,000,000 end of period growth as we funded several deals near the end of the Q3 of 2013, which benefited the overall average balances.
We see solid customer demand for loans as we head into 2014, but would note that competition is particularly aggressive for middle market loans. Lastly, on banking, our average deposits increased almost $20,000,000,000 from the Q3 of 2013 as our customers continue to show strong liquidity. We switched to Global Markets on Slide 15. Ex DVA, we earned 341,000,000 dollars in the Q4 of 2013 consistent with the Q4 of 2012, but down $190,000,000 compared to the Q3 of 13 after we exclude the UK tax charge. Higher revenue in both comparisons was offset by litigation costs, mostly associated with RMBS securities litigation.
Our sales and trading revenue, once again ex DVA was $3,000,000,000 19% above the Q4 of 2012 and in line with what we saw in the Q3 of 2013. Our fixed sales and trading revenue were up roughly $300,000,000 or 16% compared to the 4th quarters of 2012 as the strength we saw in our credit and mortgage businesses more than offset slowness in both rates and commodities. Our Q4 of 2013 did include roughly a $200,000,000 benefit from recoveries on certain legacy positions within the FICC business. Our Equity Sales and Trading area finished a very strong year. Revenues, although down 7% from the Q3 of 2013, were up 27% over the Q4 of 2012 as we continue to benefit from the repositioning of this business over the past 18 months.
We gained market share and improved our performance in each of the different product lines. Expenses excluding litigation showed very good cost controls and small increases in line with revenue improvement. Our average trading related assets are down $54,300,000,000 or 11% from the year ago period and are generally flat with the Q3 of 2013. On Slide 16, we show you the results of all other. Profitability this quarter compared to the Q3 of 2013 declined as the tax benefits this quarter that I described earlier were more than offset by lower revenue and less reserve release.
The revenue decline from the Q3 of 2013 was driven by lower equity investment gains. If you recall, we sold CCB shares during the Q3 of 2013 as well as more negative FBO valuations. The expense within all other includes 250,000,000 dollars of litigation in the Q4 of 2013. And lastly, I would note we expect an effective tax rate of approximately 30% in 2014, absent any unusual items. Before we open it up for questions, let me make a few comments on the quarter.
Capital and liquidity have never been stronger. On the revenue side, customer activity drove stronger core business results. Our consumer banking saw modest improvement on card income and service charges after troughing in early 2013. Our Global Wealth and Investment Management business had a record year. Our Global Banking had a record year as well with higher investment banking fees and stronger lending activity.
And our global markets business is performing well against the market opportunities that they're seeing. We kept our cost initiative work on track and credit improvement continues its track towards historic lows. We also made significant progress in 2013 in continuing to resolve legacy mortgage matters with the more significant ones being settlements with Fannie Mae and Freddie Mac on GSE rep and warranty issues, MBIA in the monoline space and the Luther Main State class action suit in the private label area of RMBS litigation. And with that, let's go ahead and open it up for Q and A.
We'll take our first question from John McDonald of Sanford Bernstein.
Hi, good morning. Bruce, I was wondering in terms of the core net interest income, you mentioned that the seasonally adjusted starting point for the Q1 would be 10.6%. But it sounds like you'd expect that to keep grinding higher with the debt paydowns and rates being a little bit higher in the long end? And is $300,000,000 that we saw this quarter, is that a good representation of the pace that Core NII could grow at?
I think as we look at I think, John, if you look at what we saw during the quarter, we had a series of benefits for the quarter. You can see that the if you look back in our tables that the margin that saw within some of the repo and other global markets lending activity was up nicely. As you mentioned, we benefited from the continued reduction in the long term debt footprint, which was clearly a positive. And we had a little bit of benefit even if you back out FAS 91 on the debt securities lines. So I think that those three things were clearly favorable.
We'll have to see with respect to the markets margins as well as just overall rates where we go in the Q1 of 2014 relative to 2013. I would be careful to assume that you're going to see $300,000,000 type improvements in the NII as we go forward on a quarter to quarter basis. But over time with the work that we're doing, we would expect that number to continue to grind upwards all other things being equal.
Okay. And any change material change in your interest rate sensitivity overall Bruce to long rates and or short rates?
I would say that whenever rates move up you tend to widen out a little bit as maturities extend in the mortgage space as rates move up. So you always have a little bit of that in a rising rate environment, although given where rates are, we think we're largely through that. And the only other thing from an asset liability management perspective I would note is that as it relates to both managing OCI risk as well as managing to LCR, you saw it a little bit in the Q4 and you'll see it a little bit more going forward that we are purchasing on the margin some additional treasuries given the treatment that they have under LCR.
Okay. And then I was wondering if you or Brian could speak at a high level about how you approach this year's CCAR. Are you looking to grow your buybacks off of the $5,000,000,000 common request from last year? And do you feel that you've improved the earnings enough and consistency here to start moving the dividend up yet?
Yes. We're not going to comment, John, on specific items with respect to the CCAR request. I think we've been pretty consistent as we came into 2013 that we were focused on increasing the core profitability of the company. And as you look at the last couple of quarters from an EPS perspective, we think we've done a good job of that. You can see the capital build that we've had and you can see the reduction in the legacy exposures that we've made.
So we feel like we did a good job of preparing ourselves for CCAR this year. And we're obviously working hard as we go through the rest of the process
hope that that goes high over time. Your ROA was 64 basis points. I guess, hope that that goes high over time. Your ROA was 64 basis points. I guess, what kind of goals do you have for ROA and ROE over the next few years?
And any thoughts on timelines that you hope to get there on?
Yes. I think as we look out at and as we look out over the 3 years, I'd say it's more of the same for us that you can see a tangible common equity ratio that's just over 7%. The 3 metrics if we assume we stay at around that 7% level, we were above it in the 4th quarter. But if we stay at that level, we're looking to get to the point where we're returning 1% on assets, which translates into a 14% return on tangible common equity. And those are the types of levels that we see ourselves looking to achieve over the course of the next 3 years.
Okay. Thanks.
We'll move next to Betsy Graseck of Morgan Stanley.
Hi, thanks. Good morning.
Good morning.
Couple of questions. 1 on the NIM discussion that we just were having. When you look at what happened with the yield and the cost of funds, it looks like you're getting a little bit more competitive on non resi consumer. And just wondering how to think about how you're looking to shift either the loan growth going forward and how you're thinking about that loan yield relative to your cost of funds in an environment where NIB probably doesn't grow as much as it had been in the past, Maybe your cost of funds is flattening out or potentially increasing a little bit?
Yes. What I would I'm not sure exactly which piece that you're looking at, but if you go back to our earnings supplement, which is back on Page 10,
I think it's
interesting that you can see from the Q3 of 2013 to the Q4 of 2013 that our yields on residential mortgages did increase about 6 basis points to 3.74%. And the other interesting thing is that we have started to see and be able to do more home equity type business with our core customers. I think it's interesting if you look at the yields on that portfolio, they were up 20 basis points to just under 4% for the quarter. So as we look at the yields and the rates that we're able to get, I think we're competitive in the market and we've been able to see some slight increases within the rates that we're able to earn.
Sure. No, it's an interesting mix shift because you've got a little bit of shrinkage going on obviously with the legacy resi still coming off, yet the yields there are increasing. And on the non resi consumer, you've got some yield
compression happening, but your loan growth at the margin inflecting
more positively. And then happening, but your loan growth at the margin inflecting more positively. And at the same time, cost funds looks like it's probably settling out here and potentially even going up a little bit. I mean NIB average balances were still up Q on Q, but end of period was down. So that's kind of the more context of the question.
Yes. I mean the thing is working you got the volume going through and either the receive or the pay on both sides of the rate question and we continue to see deposit pricing, liability pricing came down, the contribution of non interest bearing size in the balance sheet continues to go up. But just focusing on the production, what's really been happening across the last several quarters is that we're seeing stabilization in some of the balances and the runoff portfolio impact gets smaller and smaller from some of the core non core portfolios we're getting rid of. But in the Q4, for example, our direct auto, which is in 2013, our direct auto business, not our indirect, but our direct to consumer auto was it was up 55%. The home equities in the 4th quarter were up almost 100% over the prior year's Q4.
Year over year it was up 60%. The card, we had about 19% more production in the Q4 of 2013 versus 2012. So we're building the fund in the business banking, small business area, we're seeing production up. So we're building the basics that are producing the balanced growth. And the pricing spreads are holding its competitive, second middle market, things like that.
But so I think it all serves us well largely having run off of stuff that may have yielded high, but had a high credit cost content you got to remember. And we're replacing with stuff that's good and core and a great credit quality. And so we're seeing a shift a little bit from the commercial loan growth, which was really more positive to the where the consumer loan growth is starting to stabilize and come along.
And when do you think you get that inflection point in loan growth? I mean, clearly, it's a function of legacy basically not weighing on the loan growth overall. When does that inflection point happen?
If you look at the various portfolios, I think in card we've kind of seen it. We got as Bruce talked about, we've got a sale. I think at home equity, you still got a ways to go, Betsy, because remember we've got about 40% or so of our home equity is still in a non core portfolio. And then I think in the commercial side you've seen the straight growth whether it's large corporate or commercial middle market. So I think that'd be the overall summary.
So I just I think that sort of came through from the corporate activity move faster to the smaller business activity and then the consumer activity. But we're stabilizing both the portfolios and growing.
Okay. And then just turning to the mortgage for a moment. On LAS Expenses, did I hear you right that you are looking for LAS Expenses to be at about $1,000,000,000 at year end? Is that correct on a quarterly basis for Q 2014?
Yes. We quoted roughly $1,100,000,000 Betsy.
Okay. So that's an uptick right from what you had been saying before sub $1,000,000,000 by year end?
Yes, that's correct. It's about $100,000,000 higher than what we had said before. And I think the work that we're starting is that take a step back that we got through roughly $400,000,000 during this quarter, which that was a little bit better than we would have expected to do. So we felt very good about that. And if you look at the number of 60 plus day delinquent loans, it came all the way down to 325,000 loans.
So what we're going to be working on over the course of the next 90 days is a little bit of a reset of that expense base, so that we can continue to drive that number down. That $1,100,000,000 doesn't reflect that. But given the work and the activity levels, we need to go back and do some more work on that.
Okay. And then so $1,100,000,000 by year end 2014, is there still runway in 2015 to bring that down further?
Yes. We're still thinking we've
been consistent that we would expect and look to end 2015 at roughly $500,000,000 a quarter.
Okay. And then just lastly on the litigation reserving, you called out the $2,000,000,000 litigation reserve for the mortgage business highlighted that that reflects a lot of the litigation risk you think you have. The question we get from people is how many more quarters of this should we build in going forward because you do still have some lumpiness in the lawsuits that you face?
Yes. That's why it's a tough question. What I think what I'd say, Betsy, is that there was obviously a lot of new learning that we saw during the Q4 of this year. And as a result of that, we adjusted the reserves for the legacy exposures to reflect that which we learned. And as we've said that it was largely with respect to our MBS litigation.
And beyond that, it's just a number that's difficult to predict. Okay. All right. Thanks.
Bank. We're seeing some peers that came out yesterday actually increasing liquidity and long term debt levels to meet the LCR. I think you guys are starting at a higher point maybe than they were. But just give us a sense of maybe where you are for LCR with the current proposals? And as we think about kind of the net impact of long term debt running off at the holding company increasing at the bank, like how does that all shake out on a net basis this year?
I'll let Bruce talk you through that. But remember, we got to remember how we got here, which is with the legacy set of companies put together, they had debt structures that were built for their company and their industry without the core funding we have. So a little bit of we're coming down to level most of our peers were below and they may be coming up a little bit. So you got to remember that whether it was cut you out at Merrill Lynch the funding structure was so different. So we had like $400,000,000,000 of long term debt we've been bringing down.
But and the size of balance sheet shrink, I mean, we started off about 2.5 $1,000,000,000,000 and we're down to $2,100,000,000,000 So I'd be careful about comparing where they're going versus where they're going based on this just because what we had is different than what they started with. And then Bruce can
talk about what we think from where we are now going forward. As we look out, Matt, I think as the parent company, as we look at and with our understanding of the LCR ratio, we are in the 100% area as it relates to LCR. So at the parent, you can look at us being where we need to be based on 2017 levels. The one area that we will look to do more in and I highlighted is to further build take out more term financing within the bank levels to look to build that. So I think we're in great shape at the parent, we're in great shape at the banks, but you will see us doing a little bit more bank financing activity to be able to meet those requirements.
And if you look at where we finance it at the banks, there's no incremental cost for that. That's different than what we've communicated before. And the other thing I would just point out on the overall debt footprint and the cost of it is with the work that we've done on the balance sheet and with where our credit spreads are now in the market, we will be refinancing our debt at lower rates than the debt that's coming off of the books as
it matures.
And then at the parent being around 100% right now, any sense of how much cushion you want? I think some banks are running maybe like a 15% cushion. Some banks are still trying to get to where you're at.
Yes. I think to project a cushion 3 years out, I think we clearly are going to run at a cushion. We're going to run the company. So this is not an issue. But until we get out to 20 16 2017 and understand the exact composition as well as to any puts and takes that we're seeing, it's probably a little bit premature to talk about a cushion.
The focus has been to get to the 100% at the parent immediately. So it's not an issue to discuss.
Okay. And then just separately, we saw at a JPMorgan yesterday a one time valuation adjustment on certain derivatives. And just wondering is that applicable to you? Or have you been absorbing it over time or still to come?
It's obviously applicable to anyone that has an uncollateralized derivative So it is applicable to us. I think that clearly the industry view and how you account for FBA is still very much evolving. JPMorgan obviously came out today with their adoption and as a company, it's something that we continue to evaluate. I think the important thing to remember when you look at this and I'm sure you know this is just that this is a question of do you take a reserve for something that you earn back over the average life of your uncollateralized balances. So it's not something that changes the core economics of the activities that we're doing.
Okay. All right. Thank you very much.
Our next question comes from Glenn Schorr of IFI.
Hi. Thanks very much. So it's kind of weaved into some of the past questions. But on balance sheet migration over the past year, cash and equivalents up 19%, repo trading assets and derivative assets all down say 10% to 14%. Is that a function of some of the sluggish on the trading side during the year in the market and just a reaction to what's out there?
Or is this your obviously intent to get on size for SLR and LCR?
Yes. Well, I would say that as we look at and what we've said is that from an LCR and an SLR basis, given that we're at the levels at the parent and then with respect to the supplementary leverage ratio of the banks, given we're at the levels that we need to be that phase in between 2015 2019, there's not anything directly related to those given that we're in great shape with respect to those. What I would say is that, as we move forward and as we look at the bank level and some of the rules, you will see us on average and carrying a little bit more cash at those levels. And you saw that as you look at the year end numbers. And as it relates to the different repo activity and the like within the global markets business, you continue to look to manage and balance what's the size of that book, how it affects the overall size of the company and the yield that you're able to achieve.
And I think that was one
of the things as some of
these different regs come out that we feel good that if you look at the repo book, we were up 7 basis points from an average yield perspective Q3 to Q4. So those are numbers that are going to ebb and flow, but I would say directionally, we feel very good about where the balance sheet is.
Our approach has been as these rules come out to put them put ourselves in compliance or whatever the right word would be immediately and not wait so that we didn't have hang overs could you get to the LCR, could you get to the supplemental leverage. So we just said position your balance sheet. But I'd say as you look at the company's constitution in terms of business mix and balance sheet mix at the year end 2013, we're very comfortable with that. And so there will be ebbs and flows. Loans will grow here or maybe market we use a little more balance sheet on a given quarter.
But Tom and the team have done a good job to sort of bring that be able to face against the customers and maintain our strong market position in all our businesses, Investment Banking, Sales Trading, Fixed Income, Equities both, while at the same time bringing the balance sheet in year over year down. And but we're completely comfortable with it being in the size range it is now and expected to say roughly in there. So I don't think we see massive changes in how the company looks to comply with rules because we're already implied.
Okay. Appreciate that. In Global Markets, the trading in absolute numbers and relative to some peers is pretty good. The question I have is, if you look at the return on capital or the return on average assets, it's pretty low. I'm curious, A, how much litigation cost dented that?
Because I know it dented it, we just can't see exactly how much it would. And are these metrics we should be looking at on a consistent basis? I mean they're in the supplement. I'm assuming that they mean something. I just don't know if the capital allocations and asset allocations are fair things to judge on.
I think as it relates to the capital allocation that they clearly are. And one of
the things that if you look back in
the footnote that we highlighted is we will refresh those allocations in 20 14 and continue to have more capital pushed out within the businesses. As you look at the returns within the markets business, I think you need to adjust for 2 numbers when you look at those. The litigation number within markets business was north of $600,000,000 for the quarter. And then you had another couple of $100,000,000 during the quarter for DVA. So I think when you look at the returns, you need to adjust for those two numbers and realize that in the Q4, you're looking at what's seasonally the slowest quarter.
Okay. That's totally fair. Final one is in mortgage. I think there was a bit of a hiatus as you're getting that things batten down. I think you picked up about 100 basis points market share since then on the retail side.
Just curious for an update on A, how the Q4 looked and then B, your thoughts on going out in terms of intentions to continue to push that share higher?
Well, I think if you look at it, we're you calculate the statistics, but we're down. We had 2 things going on during 2013 in the second half, especially as HARP volume started to fall off because we sized our portfolio down in terms of total servicing size. So our HARP opportunity went down. And then obviously as rates went up sort of mid year out the volumes dropped. And so the Q3 the pipeline pull through helped us get $20 odd,000,000,000 and then 4th quarter down to $11,000,000 But if you look at it sort of the non HARP share, we are pleased with the progress we're making and we'll continue to grind that direct to consumer grind that forward from where we are now at about $9,000,000,000 dollars ish this past quarter.
And so I think we're fine. It's going to be a business which we shape to serve the customers and the wealth management business does a couple of days in the quarter. It's a good solid position. I would say in January with the rates moving down a little bit and stuff you saw another kick up of about 20%, 25% in application volume in our book already. Now I don't know if that holds and how much seasonality because the way Christmas and New Year fell this year and things like that as we move through the month, but it immediately kicked up over the last several days as rates moved a little bit in our favor and the purchase volume has also moved up in January.
So we don't we're looking for this business to start to grow again, but it obviously suffered a couple of different both the rate effect and also the heart effect in the Q4.
Okay. Thanks both very much.
We'll move next to the site of Chris Kotowski of Oppenheimer and Company. Your line is open.
Yes, I wanted to come back to the debt footprint discussion. And just looking on Page 11, you can see total average long term debt down $27,000,000,000 year over year. And at the same time, looking at page 7 of the presentation, the time to required funding expanded from 33 months to 38 months. So I'm just curious, is there some other liability that is extending while you're bringing down the debt footprint? And how can we gauge for the year ahead?
What I'm getting at is how much further can you get how can we triangulate on how much further room there might be in the debt reduction?
I think the important thing and I understand your question, when you look at the time to required funding, one of the reasons why there are a couple of components that go into that there is the amount of liquidity that you have at the parent obviously and then what the debt footprint is over the course of the period of time that you're measuring it. And if you look at what we've done, we basically if you looked at our company at the end of 2012, we had $70,000,000,000 of debt maturities that we needed to work through over the course of 2013 2014. And you obviously need to carry significant amounts of liquidity to be able to basically meet your time to required funding when it's that lumpy. What we've done is between the debt that we repaid this year as well as the activity you saw us when we tendered for debt several times in 2013 for debt that was maturing in 2014 was to knock down those maturity profiles. So you're asking a very good question, which is over time what you should expect us to be able to do is continue to move the parent company funding down.
And as we flatten out those debt maturities, we'll be able to do that and not have nearly the impact on time to required funding because the maturity profile will be much flatter.
Okay. And then as a follow-up, looking at your 10 ks and 10 Q, you gave us a very nice breakdown of the debt by parent company versus Merrell versus BofA NA? And your parent company debt looks like at least between year end September like it was relatively flat and the declines in the long term debt came primarily from Merrill Lynch going from like $90,000,000,000 to 60,000,000,000 dollars Does Merrill Lynch as an entity need to continue to pay down debt? Or can that essentially be all squeezed into other subsidiaries? And does that have an impact on the cost of funds?
Well, I think a couple of things. Keep in mind is we told you when we reported the 3rd quarter earnings that the Merrill Lynch holding company that had previously issued debt before the merger of the 2 companies that has been merged into the BAC holding company. So when you look at that debt profile, realize today it's 1 and the same. So I think the important thing I would look at is on page 7. And what we do is that we do give you the actual what we consider parent company And that parent company back in previous quarters prior to ML and Co and BAC merging is a combined number.
So if you look at those red bars on the bottom on page 7, that is the combined debt footprint of the 2 companies that is now 1 and you can see it over the course of 5 quarters migrating down.
Okay. All right. I'll follow-up. Thanks. That's it for me.
Thank you.
Our next question is from Jim Mitchell of Buckingham Research.
Yes. Good morning. Just a couple of quick follow ups. On your Basel III Tier I common, the standardized versus advanced, you have, I guess, almost a 90 basis point difference. Some of your peer large bank peers are closer to a 10 basis point difference.
Can you help us think about why you have such a large gap between the standardized and advanced?
Yes. The first thing I would say is that generally, we would expect that gap to narrow over time. But as you look at the actual content of it, I think the biggest reason that you have is just given the percentage in some of our commercial loan balances that we have relative to our peers that under Basel III Advanced get impacted significantly based on the actual credit quality where when you go to standardized, it's just 100%. So I think you've got the first thing is you do have some of that activity or difference between the two metrics. And then I would say that the second thing is that we still do have some assets that under Basel III standardized do get some fairly heavy risk weightings that we will continue to work off over the next couple of years.
So there's no question relative
So on the commercial side, as credit gets better, we should see that gap close
for that reason?
No. The commercial credit getting better really isn't going to that's not going to lead to it getting tighter because under standardized a commercial loan is a commercial loan. There's no benefit of credit quality. It's going to be more the runoff of some of the different positions that we have within the company as opposed to anything specific on commercial.
Okay, got you. And then just a follow-up on your ROE eventual ROE target or a tangible ROE of 14%. When you think when you're kind of discussing that target, is that assuming some help from interest rates being higher? Or is that without that help?
As we look out at there and as we look at 2015, 2016, we don't do anything besides just look out at the forward curve. So you do get a little bit of benefit at the very end of 2015 and a little bit more so in 2016. So there is embedded some of that at the same time to the extent that we're not in an environment and an economy that's growing and where we're seeing some of that movement up in short term rates. If we're not seeing that, there are other actions that we're going to need to take within the company.
Okay, great. That's very helpful. Thanks.
Our next question comes from Steven Chubak of Nomura Securities.
Hi, good morning.
Good morning. So one thing that
we did see over the past year is a pretty robust pace of DTA consumption, which certainly helped boost your capital ratios. I know when contemplating DTA utilization, the mechanics can be quite complicated. But how should we think about the potential level of progress as we enter 2014 as your earnings profile continues to improve?
Yes. I would say on that that as we work through 2014, a fairly healthy percentage of what would show up in the tax provision line will not reduce our regulatory capital. And as we go out in 2015 and relates what we pay in taxes back in regulatory capital during 2014.
Okay, great.
And then just thinking about some of the profitability targets you highlighted, such as the 14% tangible ROE, what are you guys assuming in terms of capital return over that potential horizon?
Unfortunately, I can't answer a way around that we're not going to give any more guidance on CCAR than we've already given.
Okay. It's a good attempt though.
Fair enough. All right. That's it for me. Thank you for taking my questions.
Thank you.
Our next question comes from Paul Miller of FBR Capital Markets.
Yeah. Thank you very much. On the origination side, you did talk a little bit about that you're improving your retail side, but the refis have going down. You're down to like 4.5%. Where do you see your market share?
And where do you see you think you can take your retail market share? And also, what do you think about non QMs? I know some banks have come out and said they will start doing some non QMs. I didn't know where you stand on that.
We think that ultimately if you look at our market share and other product capabilities, given the ebbs and flows of the rate environment Paul and faster refis, slower refis whatever is going on. But if you look at the we should be able to we have a 10% or 13% deposit share we think in consumer deposits. We have higher percent in cards etcetera. Home equity is bigger. We should be pushing towards upper single digit level in mortgage.
It just will take time because we're rebuilding the process which was not geared to serving the core customers and just doing it and the team's been doing a good job of building that fairly steadily. And the purchase volume percent I think is in the 30s this quarter and so we're getting there. So that's our goal. It will just take us time and we'll drive that. But in terms of direct to consumer production, I think we're 2nd largest now and we plan to keep driving it.
On the non QM and things like that, we'll meet the needs of our customers by using our balance sheet because remember we do a lot of mortgages today through our wealth management business and stuff. And so we'll work through the rules. But for the standard products, obviously, for the general consumer and the Fannie eligible FHA type products, will be following all the rules and making sure they go through the standard process to put them off get them off the balance sheet and into the securitization process. But in terms of put stuff on the balance sheet, I think we meet the needs of customers and we've been doing it for years.
And on the jumbo loans, I mean, I know a lot of the institutions are going after the jumbo product. I don't think you break I don't see it you don't break out your jumbo product. But is that an area of focus for you guys? And if it is, what type of yields are you getting on that product?
Inherently, when you have the one of the largest wealth management business, it's a focus. So of our production about 20 odd percent comes from the wealth management business. And the yields are Bruce, I guess the yields in the product are competitive. We have to compete in the market. So it's a market driven business.
Yes. I mean, I would say that it obviously depends on the product floating versus fixed. But you're clearly saying credit spreads on a floating basis for some of those customers in the spreads of 100 basis points to 150 basis points over from a floating rate perspective.
And is there any update on the state of New York where they stand with approving the Bank of New York settlement of $8,500,000,000 Do we know when that's going to come to a conclusion?
We do not. There's no update at all besides the fact that the trial is over. And at this point you know what we know.
Okay. Hey, guys. Thank you very much.
Thank you.
Yes. Our next question comes from Oren Bok Moshe of Credit Suisse.
Great. Thanks. A couple of things. In the mortgage business, I noticed that it looked like the revenue stream from the LAS servicing actually went up from the Q3. Is that something that will remain at that level?
Or does that come down kind of with the servicing assets?
Yes. I think you need to look at within legacy assets and servicing. I know it's completely counterintuitive, but recall that the reps and warrants is a contra revenue line item. Got it. So we had the lower rep and warrant provision for the quarter was the big delta.
Got it. In terms of the card business, I mean, you talked about the 1,000,000 plus accounts and you've kind of done that both 3rd Q4. Just talk a little bit maybe more generally about the strategy there. Are there any things that you're doing to kind of maintain or increase that? And also kind of on the other side, are there other affinity portfolios that your partners are going to ask for back as we go into 2014?
I'd say on the Affinity side we identified the 1. I think we basically have repositioned that business over the last 3 or 4 years. And I think we're kind of where we are at this point. The strong affinity partners we have that done well, we continue to support them and continue to drive production there. But the real story in the card business is sort of think about the Cash 1, 2, 3 product, the Balance Rewards and the travel rewards products, the core products that we continue to drive.
And the production of those products continue to go continue to be up significantly year over year. And that's what's driving us from a couple of years ago maybe 600,000, 700,000 probably 700,000 cards a quarter up to a little $1,000,000 ish now per quarter. And so that is good because it is our core branded product with a great product to consumer and they use it. And so what you're seeing is if you look at some of the detail we give you in the supplement stuff, you'll see that the average spending is going up, the average price spending per card is going up. And so that's obviously is more efficient and is an indicator that you're becoming the primary card in the wallet for customers.
With that though, one of the drags is the spend rate. So we're in the low 20s on payment rate. In other
words, if people are paying us
off and not carrying balances because of the affluent customers. So that's a little bit of drag, but they charge enough to make it through the interchange. So we're very comfortable with the business. We took spent 3 or 4 years in positioning. But the good news is with the credit quality that we've seen from originations in 9 percent and things like that, we're getting a 9% risk adjusted margin.
So we've ended up with the right spot where we're getting production growth I. E. More cards with our direct customers with a good strong margin. And we'd like that. We just then you might say we want you to push it harder because it's returning so well.
The issue is to do that you have to go to places where I think it's not our core strength. And so you should expect us just to grind forward on that.
Got you. Following up on the DTA question, how do you think about and how does kind of how do you believe the Fed thinks about that DTA consumption kind of as part of the CCAR submission?
Well, I think the interesting thing is that as you move forward into as we move forward and you look to test under Basel III, NOLs are not eligible as capital under Basel III. So there's good news and there's bad news. The bad news is you don't get to count it. The good news is that it eliminates the likelihood that you have a difference relative to the way somebody else looks at your deferred tax position. So it's given that CCAR is based on the way regulatory capital works, that's how the deferred tax asset flows through.
And once again under Basel III, you don't get to count NOLs. So you're saying though they do consider the capital generation as opposed
to just your earnings then?
I can't comment on the way that the Federal Reserve looks at that, but our belief is that's correct.
Okay. Thanks, Bruce.
The point would be this year you're sort of in transition. But as you go forward and the expectation is you move Pure to Basel III, this becomes sort of a non element and that it's out of the calculation already. Great. Thanks.
We'll take our next question from Guy Moskowsky, Autonomous Research.
Good morning.
Good morning, Guy.
Question on how we should think about the fact that last year your capital return really included not just the buyback authorization of shares, but also the redemption of the preferreds. So you could add the two numbers together and say $10,500,000,000 out of last year's CCAR. Is there some conversion factor that we should think of for the preferreds in terms of saying what the 2013 baseline really was?
I think, Guy, as you look at the preferreds that we redeemed, the yields on those preferreds were between 8% 9%. And our belief and once again, I'm not going to speak for the Federal Reserve, but I think most people looked at that and said, at least the way we looked at it was that we look at the heavy content of Tier Common that we have and you look at preferred that's 8% to 9% after tax. And I think most people would look at that and say it makes good corporate finance sense and it's a good thing for Bank of America to retire those. Given the work that we've done on the balance sheet, you can see that the majority of what we have left from a preferred stock perspective is priced at competitive rates. So I would be very careful to thinking of and including that preferred stock redemption and assuming that it was evaluated as common stock.
Right. But I mean is there a factor that you use in thinking about what it would convert into in terms of the capital return?
No, because it was straight preferred stock, it had no conversion features whatsoever.
Okay. Fair enough.
I've had a
number of clients ask me the question this morning about the significant increase in the yield on the securities portfolio just from the Q3 to the 4th and obviously long rates are up a lot. But is it just that or is can you link that to the couple of $100,000,000
to Q4, the increase was only 2 basis points.
Got it. That helps. And I know you said that on the SLR with the Fossil add ons, you're still evaluating that. But JPMorgan was out saying yesterday that their estimate was that it probably only increased above or beyond the NPR, increased their sorry, decreased their leverage ratio by about 10 basis points. Are you thinking similar order of magnitude?
Or are you really not in a position to comment at all at this point?
Yes. I think that the I'd make a couple of comments on that, Guy, and that we've got teams, as you can imagine, calling data and spending a lot of time with it. The couple of comments I would make is that the changes that were made from prior BCBS rules to the new rules when it as it relates to both the credit conversion factor as well as the netting for securities financing transactions, clearly are less punitive than what the original BCBS proposals were. I would say on a very preliminary basis, as we look at it, I would say that we think the negative or the impact to us is a little bit more than what JPMorgan quoted. That being said, with our ratios above 5% at the parent and above 6% at each of the banks coming into this, we feel like we're in very good shape with respect to compliance with the supplementary leverage ratio.
Fair enough. That's very helpful. And then, I guess the final question that I'd have for you and it's along the lines of some of the ones you've been asked about further reductions in the long term debt footprint. Obviously, there's been some speechifying by members of the Fed about not seeing banks reduce their long term debt levels much below where they are now. Is there some rule of thumb that you guys are using in the absence of any defined orderly liquidation or bail in capital definition yet as to what you would want your total sort of long term debt plus Tier 1 capital to look like as a percentage of risk weighted assets that you're using as a guidepost to help you figure out how much long term debt to bring down?
I'll let Bruce sort of give you sort of the thoughts on that from his perspective. But before we get there, you got to remember that what I said earlier is we are our company has shrunk and our equity has gone up. So when you think about that, if you struck the company about $300,000,000,000 to $400,000,000,000 in size across the last 3, 4 years and your equity balance has gone up and your deposit balance has gone up. The only thing to do to keep to balance the balance sheet is take the long term debt footprint down. That is because we fundamentally got rid of businesses and assets and things that weren't necessary to do what we do today.
So there's just a difference between us and someone our peers who have been more organic and how they came together in the last few years. So I just be careful that obviously we work with the Fed and all these redemptions. It's not like we can make the capital plans and as you said liquidation authority and structure. But a lot of our reductions come by just shrinking the scope of the company and to $2,100,000,000,000 from $2,400,000,000,000 to 5 $1,000,000,000,000 And that's going to allow us to sort of reshape the thing and then get rid of assets that were non core and not yielding. So I'll let Bruce answer sort of the rules.
But remember we started from different place because as someone said earlier Merrill had a lot of debt because they were they didn't have the deposit funding we did. So Bruce? Yes.
I think Guy that we hear the same thing that you do where we hear the numbers quoted of very high teens that you need to be at from a common plus your debt footprint that's greater than a year. If we look at where we are today from that metric, we're in the low 20s today, which as we compare ourselves to our peers is higher than where our peers are. I think what you're going to see we go forward and I referenced this earlier that this is the last year of big debt maturities where we've got north of $30,000,000,000 at the parent that comes due. So I think what you'll see for us going forward is you'll see us issue less today at the parent than what the impact in 2015 and beyond, assuming we continue to do what we should with the balance sheet, the impact in 2015 and beyond is going to be more about the cost at which we're raising debt relative to the debt that we're retiring, whereas we do have one more year, which is this year of shrinking the actual total amount.
Got it. That's really helpful perspective. Thanks so much for taking my questions.
We'll move next to Matthew Burnell of Wells Fargo.
Good morning. First, I guess a bigger picture question then just a couple of administrative questions. You've mentioned a couple of times your view about cards and the progress you're making not only in getting cards in the hands of your customers, but also the use that your customers are taking with the card in terms of charging more. I guess, I'm just curious as to what your outlook is for actual balance growth over the course of 2014, presuming that we are in a somewhat better economic environment this year versus the last couple of years?
If you look at the couple of things that would drive that. If you look at the last 3 or 4 quarters, you can see that we kind of flattened out. We had the season remember, around the holidays, you always you get a seasonal bump and it comes out. So Bruce said earlier that you should expect that the card balances come down in the Q1 just because of that. But if you look at it, it's been $90 odd,000,000,000 sort of in the U.
S. Business consistently. What we did see in the latter part of last year is more uses on the credit side, which from a general economy perspective is actually good news and that people were using the credits versus debit. And we look at our usage of the cards and what they're used for in a given quarter, so the credit spending was up better among all the customer bases leading in October, November and in December. So I'd say we're set up because we've gotten rid of the balances of the cards that we're running off and that's really a very low percentage now to have the things stabilized.
I don't think it will have large balance growth because it will kind of work with our it will work with our customers and what they're doing and we have a substantial part of the people who pay us off. But the good news is underlying you have seen a little more credit usage in the last fundamentally in the last couple of quarters.
Okay. And then Bruce, I think you mentioned a couple of quarters ago that you were targeting a branch count for the company, round numbers around 5,000. You're basically there at the end of this year. Is there potentially a push to get that number materially below $5,000 Or at this point do you think you are where you want to be?
I think, I'd say the when I referenced the 5,000 that was in the context of starting at just under 6,000 branches and the work that we were doing with respect to new BAC. I'd say that we continue to track towards that 5,000 number. What's probably a little bit different from what we saw in new BAC is that we've been able to actually sell some of those branches that are for us out of market to local banks as they look to build up their local presence, which I think is a good thing for everyone. And what I would say, as we look forward, I think there'll be a continued evaluation that we have at this point as to the opportunity and the cost versus the benefit of the branches. But I would directionally think of us being $5,000 maybe a few less than that by the end of 2014 and there'll be a continued evaluation that we have beyond that.
I think we'd always focus people on the branch count. It was a fairly objective way to show how we're trying to do it. The reality now is as you look at the different formats, we are always putting new branches in the market, as leases run off, repositioning the branch, consolidating branches and adding these express formats that we're testing and stuff. So the definition of a branch is changing in terms of from what we traditionally think. And so after the period, which Bruce talked about, you're really going to be where the customer is leading.
But the branches are critically important and you always use examples. In one market, we are able to take 4 branches and put them in 1 larger one, have Merrill teammates, US Trust teammates, Commercial Banking teammates and the core personal bankers and teammates in the branch. And we so we don't know exactly where this goes because it will be dependent upon customer behavior. But what we do know is we have to dominate the physical side and the e commerce online mobile side at the same time and that's where we're investing heavily in both platforms. So we have a fairly stated probably $500,000,000 we put in the online mobile platform across the last 3 or 4 years and we'll continue to invest at that rate.
And you can see the feature functionality return and the usage of that platform has grown tremendously. For example, in the Q4 of 2013, 9% of all the checks deposited by consumers went through the iPads and mobile phones. That was up from 7% the quarter before and didn't exist until basically the Q3 of 2012. And so that's what we're driving because customer convenience and usage. At the same time, we have 8,000,000 customers coming to branch and engagement rate for those customers is going up.
And so the team is less about what number of branches and more about how the distribution process works between Spaulding and ATMs and mobile and branches and express branches, ATAs which are tellers through the branch. And then we're deploying more people to sell in all those regards. And that's what we're trying to do.
So presumably over the next 2 to 3 years, you could see the square footage of the total branch base come down potentially fairly dramatically given all the electronic delivery mechanisms that you just mentioned?
Yes. Dedicated to transactions, but the square footage dedicated to sales could increase.
Fair enough. And then just finally, what was your percentage of the origin of mortgage volume this quarter that was dedicated to purchase? And how does that compare to the 3rd quarter?
32% was purchased this quarter. I think it was 21% in the previous period.
Okay. That's it for me. Thank you very much.
We'll move next to Nancy Bush, NAB Research LLC.
I think we all appreciate the tremendous progress you've made on increasing profitability at company and getting things turned around. But there is a perception out there that you're going to have a gap up in profitability when short rates start to go up. Can you just give me your thoughts about that? Is that indeed a correct view?
We look at in each quarter look at our asset sensitivity on the balance sheet. And as we look out at and our constant a 100 basis points do to our net interest income And obviously that flows directly to the bottom line. And at the end of the year, 100 basis point move up was worth between $3,000,000,000 $3,100,000,000 to us from a net interest income perspective. So we clearly will benefit from short term rates. That we obviously don't control that.
And so I think the important thing, Nancy, is that what as we look at near term benefits that we have, we continue to have a lot of work to do on expenses in both 2014 2015 because we've got another $500,000,000 a quarter of new BAC savings that will get implemented between end of 2013 and end of 2014. And then with the guidance that we gave today, another $700,000,000 a quarter to get out going into 2014 to where we end 2014. So we do look forward to those days of higher rates. But in the meantime, we've got a nice chunk of expenses to get out that we do not believe will impact the revenue generating ability of the company.
And just kind of to add on to that, I mean, do you have a sense at this point and this is sort of goes back to the previous question. When rates do start up, how much will the profitability of given everything you've done in the deposit gathering network, how profitable will that be in the next cycle as opposed to, let's say, I don't know, 3 or 4 years ago?
Nancy, if you look at Page 11 where we give the profitability of the consumer business banking and that's obviously the one that benefits the most by the short term rate rise because they have a huge as if the constitution of deposits is non interest bearing and it picks it up. And you can look at the returns in there and then supplement. You can see we're up to about $2,000,000,000 in after tax income and the returns clearly exceed the cost of capital. And it will benefit. But in the meantime, what we'll be doing is driving the cost structure down from on the deposit franchise for almost 300 basis points of cost to run the deposit franchise as a percentage of deposits down to 200 and opening that up.
So it will absolutely help that business. But meanwhile, we're doing $2,000,000,000 this quarter, which is not a bad after tax, which is not bad either.
Okay. Thank you.
We'll move next to Eric Wasserstrom of SunTrust Robinson.
Thanks very much. Most of my questions have been answered, but just one small question also on the mortgage business. Doing the simple gain on sale mathematics, it looks like you had a rebound in your gain on sale sequentially, which is pretty consistent with what we've seen from others. But the magnitude looked much greater. It looked as if your gain on sale in the period was back to more or less year ago levels, which doesn't seem intuitively right.
So I just wanted to get your view on that.
Yes. There was one piece internally between the LAS or excuse me, the home loan space within LAS and what we have in all others. So if you adjusted that out, you're not seeing material changes in the gain on sale. The core production margins that has come down and stayed pretty flat at
the levels. Don't read into that as something we're doing something different.
Got it. So just sequentially, you would characterize the margins as largely flat. Is that right?
Yes. Yes. 3rd to 4th.
Great. Thank you very much.
Thank you.
We'll move next to Mike Mayo of CLSA.
Hi. You said the banking backlog was up. Was that versus the Q3 or year over year? And can you quantify that?
I think I characterize the backlog as strong at this point. And I would say it's strong both relative to the Q3 as well as to the year ago period.
And which areas in particular?
The interesting thing that we've seen coming into this is that the M and A business and if you look at activity levels and just what's been announced over the course of the last week, that it does feel like that some of the M and A deals are being talked about are going to happen. Obviously, there are a number of them that are still being negotiated and may or may not happen. But I'd say M and A activity clearly feels like it's beginning to pick up and ramp up from what we've seen. You saw within the overall debt businesses, very good growth both year over year as well as linked quarter. And I would say that that business as well as the market conditions continue to be quite strong.
And you then move to the equity side, the Q4 was obviously a very good quarter from an IPO perspective. And we typically coming into the year, you have a little bit less visibility on that because a lot of that tends to happen after people seeing, we're optimistic on the equity side as well. So I think that there's not one piece that we look at within those pipelines that don't feel pretty good. And I would just the only thing I'd say is a brief cautionary note is that you are comping against the the period that's the highest investment banking revenue period we've ever seen in the history of the company.
And then switching gears, the wealth management margin 26.6 percent. Can you give that to us excluding U. S. Trust? It just helps with apples to apples comparisons with peers.
I mean U. S. Trust adds maybe 150, 200 basis points to it. Okay. And so Mike, so that gives you a sense of it.
But to be careful what drives our margins what I said before is the holistic nature of the Merrill Lynch Wealth Management business because in there they have the wonderful classic investment business, but also they have a good deposit base and a good loan base and all the work the team does there under John Steele. So it's but it adds about 100 basis points to 200 basis points to give a sense.
Okay. And loan utilization in commercial and wholesale, where does that stand?
Within commercial, it continues to be in the very low 30s.
So no change?
No change. The only thing that we are saying that's a little bit of a change and we've talked about it before is the if you look at the amount of funded commercial and corporate loans relative to our total commitments, that's been very much a focus of what Tom's looked at and we've seen that migrate up to where it's just under 50%. So while we're not seeing line utilization as much, we are seeing across our commercial and corporate books that the funded commitments relative to total commitments has increased.
And I wasn't sure what is your net interest margin outlook for the next quarter or 2? And if you could you mentioned FAS 91 for the debt security yield. To what degree if the yield curve has flattened a little bit here recently, do you give some of that back with the net interest margin?
I think that the we talked about that which drove the margin in the Q4. I would say that across the board that the margin was very strong in the Q4. So you've seen numbers in the low 240s, you've seen it at 251. I would think about that being generally range bound at this point in time with what we see.
And with regard to new BAC, can you just repeat how much do you have left and how much do you think hits the bottom line this quarter? You spent a little bit more money for revenues, which I guess makes sense if you have the opportunity, but I just want to size that again.
Yes, we've said that we've got $500,000,000 to get through over the course of the next four quarters. And I would say that's going to generally be earned over time. So I wouldn't think of it being any more than $100,000,000 $125,000,000 is generally the way that you'll see it phase in.
I'm sorry, like $100,000,000 to $125,000,000 per quarter then and that should hit the bottom line or you might look at reinvesting those gains?
Well, we've committed to saying that our new BAC savings have to be net savings to the company with the caveat that to the extent that businesses are doing more revenues from where we started that will pay out. And that's what we did see during the Q4 from both the Global Banking side as well as Wealth Management. Keep in mind, and I think this is important as you look at the Q1 is that we've got 2 things that happen or generally happen in the Q1. 1 that we know does and one historically the trend would suggest it does. I mentioned the FAS 123 that you have in the Q1.
We know that's going to be an incremental $900,000,000 The other thing that historically has been true is that the sales and trading business, the Q1 historically tends or historically is the most significant quarter within that business. So the incentive compensation given that we accrue based on revenues tends to be seasonally highest in the Q1 and you add that plus the 900 I mentioned and it's not an insignificant number. So we once again feel very good. We'll get the net new BAC savings on a net basis over the course of 2014. Just realize that the Q1 has those two components.
And then lastly, you mentioned a goal for an ROA of 1% over 3 years. And I just want to understand what you mean by that. Do you mean at the end of 2016 going into 2017, you look to have an ROA of 1% or do you mean the average over these 3 years?
No, it should be what we're referencing is at the end of as we look out over 3 years, at the end of the 3rd year, that's where we would look to get to, which given our current leverage profile is around 14% on tangible common.
Okay. So at the end of 2016, you look to have an ROA of 1% with the forward curve the way it stands. And with that with those assumptions, what sort of change do you expect with the certificates of deposits or CDs, which are historically low for you and others? Do you have money moving out of CDs at that point or not yet? I mean, around 15% of deposits.
Historically, it's around 35%.
I think I would say the general expectation should be that that number is going to be at or probably move down a touch from where we are today as the core deposit given the performance of the core deposit franchise.
And then in your page 49 of the proxy, it mentioned some PRSUs and they kick in with an ROA of only 0.5% whereas you seem to be shooting for an ROA of 1%. How will your kind of new expectations here for the next 3 years translate into kind of more formalized metrics or compensation? Or is it more than simply a general target? How does it kind of sink into the organization?
I mean, I think the targets that we have for performance, we'll put out in the proxy this year when the Board goes through the process over the next several weeks here, Mike. But I think in the past, it's been based on getting us back to a level of profitability in the company and that's what is reflected.
Okay. And in very simple terms, if you look for a 1% ROA on $2,000,000,000,000 of assets, you hope to be at a kind of a $2 annual run rate in the later 2016?
Yes. The one piece and once again we're not going to give it is that if you're just doing that simple math, you've not made any assumption with respect to the change in shares. Once again, given that we're in the middle of CCAR, we're not going to comment on that. But you do have some benefit over time through share count.
All right. Thank you.
Thank you, Mike.
We'll move next to the site of Derik De Vries of UBS.
Thanks. Good morning, guys. I just have two questions. First, I think in the December conference you mentioned there's been a 70% increase in referrals to wealth management from other parts of BAC. Just wondering if you could elaborate on that a little bit.
Is that environment driven? Or have you implemented some specific programs? And then maybe just give us a sense of how
meaningful those referrals have
been at the net income level?
Very very stringent program that's driven in each market by our market present teammates where we count the referrals that go in, we count the close rate and who participates and all that and then markets are stack ranked and when we monitor monthly to see how they're doing and reward the people doing well. And we set aggressive goals in this year. For 2013, they hit all the goals Every market was in good shape. And so it is a fundamental way that our teams operate in the markets together. When you get specifically the things that work well for Wealth Management, you have the connectivity when there are liquidity events so called business sales, IPOs and things like that where we bring in business.
We'll get through November and we haven't I haven't seen the final count yet. We had about 675, 401 but the retirement plan closed sales in 2013. We had about 200 and some in 20 12. And that is driven through the Merrell Retirement Plan Business at Andy Segan and John Theale drive and delivered for between national teams and the financial advisors in the market. So that gives you a kind of sense how this works.
The dollars of that I think is in the $5,000,000,000 $6,000,000,000 range if I remember exactly. So it's all those types of flows. And then several tens of thousands of customers come from the consumer bank into the wealth management platform referred from the preferred teams. And that goes on and those customers that come into the branch to have asset bases that are consistent with Merrill Lynch and U. S.
Trust service models, we move them in. So it's a whole bunch of things, but it's tracked literally person by person to make sure it happens. But frankly, the teams like to work together win in the market. And that's what you see when you go into our markets and talk to the teams that do it.
Okay. And then switching gears entirely, just talk about the leverage finance business. I think when you look at the industry, you're seeing like record covenant light issuance and you're seeing some pretty favorable pricing for issuers. How do you think about this business over the next few years both from a revenue perspective, but also from a risk management perspective?
Yes. I would say it's the Leveraged Finance business is a very good business for us. If you look at historically, we are number 1 or 2 in that business. And if you look at on an overall basis, if you look at our debt origination, both investment grade as well as non investment grade, it tends to be an $800,000,000 to $1,000,000,000 a quarter type revenue stream. As it relates to the risk and we believe particularly given some of the new capital guidelines in the competitive landscape that we are doing better in that business than we have.
From the risk management perspective of it, you've got 2 different components of it. You have the underwrite to distribute component to it, which one of the most notable changes I think has been over the last couple of years is the risk gets distributed from the underwriter to the investor generally much quicker even in the context of deals that have a lag time from the time that they're committed to where they're distributed. So that's a positive from a risk management perspective. And then with respect to the hold pieces, we continue to be very disciplined with respect to the hold levels that we have on those deals. And the other thing I'd say is, if you just look at mix of business now relative to what you saw over 12 months ago, a lot more of the leverage finance business tends to be coming from corporate customers that are either privately held or public.
And as valuations have gone up, less of it tends to come from the private equity firm. So it's a business that we think that we're very good at. Our team has done a very good job of being mindful of the risk that's associated with it over the last couple of years and it's a business that we're optimistic of.
Okay. Maybe just to follow-up. So if just to paraphrase what you said, you're very comfortable on the risk management side and you've taken market share it sounds like. But I don't think you gave an answer in terms of where you think the revenue outlook is for this business over the next couple
of years. The revenue outlook, I think, in many respects, as we look out at the profitability, we feel very good about the outlook. And this is probably the business that most benefits from increased M and A activity, particularly on the corporate side. So to the extent that corporate M and A picks up, you would look to see this business continue to have favorable trends. The word of caution would just be is that it is a market dependent business.
And as you all know that periodically there are gaps in time where the new issue market particularly on the high yield side does slow down sometimes materially. But on balance, we feel very good about the business going forward.
Great. Thank you very much.
And our final question comes from Andrew Marquardt of Evercore Partners.
Good morning, guys. Just wanted to go back to the retail branch banking strategy shift. And Brian, you've been clear about this evolution of everyone having a branch in their pocket. And so not totally surprised about targeting maybe shrinkage in branch count in 2014, 2015. But to frame it out a little bit more, does that provide additional expense leverage beyond what you've kind of long been talking about on UBAC and LAS?
Or is there an investment spend component that we need to be mindful as well?
Yes. I wouldn't the relative amount obviously is you're getting more and more of the core franchise, the relative amount of movement we could make. And remember, couple that with we're investing in people and we're investing in technology to make it all work. And so I'd be careful about assuming we're always going to be working this. That's our job.
But I'd be careful about assuming beyond the new VAC costs that Bruce talked about that there'll be a lot net after that only because we are investing so heavily in the electronics space, which is still building in front of us. So, but the theme is right, it's really how do you keep driving down the overall operating cost of all the platform relative to the revenue stream and the deposit base, obviously, because that drives a lot of revenue stream in the business. And so I wouldn't pull at the bottom line, but you should assume that we're going to be diligent in terms of managing that change of transition to help provide more investments frankly if we can.
And where do you think you are in terms of that investment cycle for mobile banking other deliverables?
We've got a great product and we just I think at sort of a steady state. We spend just overall we decide which business about $3,000,000,000 and change in annual technology development this development. And we expect that number to stay constant over time here. And as we take
On an annual basis?
On an annual basis, yes. Because it's just so in the we're rebuilding systems. So I think that but that's all built into the dialogue we had about new BAC and stuff.
Got it. That's helpful. And then separate but sort of related on expenses. So with new BAC that's left to realize in LAS, I mean, how much of that should we have kind of a step function down on kind of the absolute level of expenses off kind the core 4Q run rate of call it 15.5 type level. Should we see by the end of 2014, I guess heading into 2015, should we take out $1,500,000,000 or are there other kind of costs related to maybe investment spend elsewhere that we need to be mindful of?
I think if you look at the chart we gave you, we try to isolate on the cost on page the bar chart on page 9, you can see that the red bars are sort of the core to take out the litigation in LAS. So you have to put some back because there will always be litigation. You have to put some back for just running the servicing portfolio. But we're shooting the drive into numbers that take those numbers and then you have to grow them and be careful of the FAS 123 type of thing in which quarter you're looking at. But our job is to keep driving towards that core expense base.
And then it should grow if we're growing revenues at the economy growth rate 100 basis points above that we'll grow expenses probably half of that. And that takes a lot of work to keep that expense down because the people content reaches 50%, 60% of our expense base and our people do a great job and we'll pay them.
And I would just add to that Andrew. On the LIS piece, we guided to roughly $1,100,000,000
at the end of
the year. So with respect to the gray bar on Page 9 that Brian referenced, I would look at and think about $1,800,000,000 to 1 happening generally pro rata over the course of the year.
And we still got a lot of claims there. If you look at our if you look at one of our peers announced yesterday, you can see that they're probably doing their mortgage servicing expenses maybe 30% to 40% of ours and that's because we just are still getting through the higher delinquency content portfolio and it lags a little bit getting the stuff done.
Got it. That's helpful. And then Bruce you had said in I think some of your prepared remarks that credit quality continues to improve into this year. Should we read into that that there's still meaningful credit leverage left to be realized in terms of reserve releases? Or are we closer to the end here in magnitude?
I think you're closer to the end on magnitude from a reserve release perspective. It's always a little bit hard to predict obviously because the reserve releases are a function of what's happening in the underlying credit. But generally, Andrew, I would say that you would expect to see charge offs continue to decline and you're obviously going to see the reserve releases given the magnitude that they've been. You're going to see those slow down as well with the one delta just being what's the overall loan growth that you're seeing.
Got it. Thanks. And then
just lastly, just to wrap
up some of the Q and A on the CCAR capital deployment. Just to be clear, it seems like one should not use kind of the $10,000,000,000 combined kind of preferred and common last year as a base. It really needs to be kind of a $5,000,000,000 as the baseline on common that you got approved for last year. And hopefully, we'll make our own assumption, but it seems like it's fair to assume you could move upward in terms of deployment this year off that kind of basis. Is that fair kind of summarization?
We agree with your characterization of the $10,000,000,000 number.
You're trying to creatively ask the same question. You're doing a good job.
Okay. Thanks guys.
Great. That was our last question. So once again, thanks everyone for joining. Thank you.
This concludes our conference call for today. You may now