Welcome to today's program. At this time, all participants are in listen-only mode. You may register to ask a question by pressing the star and one on your touch-tone phone. We'll take questions in turn during our Q&A session. Please note today's call is being recorded. It is now my pleasure to introduce Kevin Stitt. Please begin, sir.
Good morning. Before Bruce Thompson and Brian Moynihan begin their comments, let me remind you that this presentation does contain some forward-looking statements regarding both our financial condition and financial results, and that these statements involve certain risks that may cause actual results in the future to be different from our current expectations. Please see our press release and SEC documents for more reference. With that, let me turn it over to Bruce.
Great. Thanks, Kevin, and good morning, everyone. I'm going to start on slide four as we work through the presentation. We earned $0.20 per fully diluted share during the first quarter, or $2.6 billion, up significantly from both the first and fourth quarters of last year. The one item we want to highlight up front, since it only happens once a year, is approximately $900 million of expense related to retirement-eligible stock-based compensation awards that we have had in the first quarter for the past several years. We believe first quarter results demonstrate significant progress towards the goals we have discussed over the past several quarters. Global Markets client activity drove improved sales and trading results versus the fourth quarter of 2012, while investment banking performance remained strong. Global Wealth and Investment Management reported record earnings post the Merrill Lynch merger.
Expenses in most of our businesses continue to decline, although they are partially offset by higher revenue-related incentive compensation and the impact of expense related to annual retirement-eligible stock-based compensation awards. Capital and liquidity both continued to strengthen and are at record levels by most metrics. The interest rate environment continues to be challenging. Moderate loan growth and reduced average long-term debt helped stabilize net interest income versus the fourth quarter. Credit quality improved in almost all products, and both consumer and commercial loss rates were the lowest in several years. We continue to make strides in resolving legacy issues as we just recently reached an agreement to settle three class action lawsuits involving Countrywide-issued RMBS.
On slide five, if we look at the balance sheet, you can see the total balance sheet was down from both the fourth quarter of last year as well as the year-ago period, although total loans are up slightly. If we look at commercial loans and leases, they're up 3% relative to the fourth quarter of 2012 and up 17% compared to the year-ago period. If we move down to deposits were down slightly from the fourth quarter of 2012 to the first quarter of 2013, although up approximately $54 billion or 5% from the first quarter of 2012. Tangible common equity ratio was up 20 basis points from the fourth quarter to 6.94%, and tangible book value was up about $0.10 to $13.46 at the end of the first quarter. As you know, we started reporting under Basel I, incorporating the market risk final rule this quarter.
The change added approximately $87 billion to risk-weighted assets. As you can see on slide six, at the end of March, our Tier 1 common capital ratio under Basel I, incorporating this change, was approximately 10.6%, up from what we would have reported had we incorporated the change at the end of last year. Under Basel III, on a fully phased-in basis, Tier 1 common capital was estimated to be $131 billion or 9.4%, versus the fourth quarter estimated calculation of $129 billion and 9.25%, respectively. I do want to bring to your attention that effective January 1st of this year, on a prospective basis, we adjusted the amount of capital being allocated to the business segments. The adjustment reflects an enhancement to prior year methodology and now considers the effect of regulatory capital requirements in addition to our internal risk-based economic capital models.
On slide 22 in the appendix, we summarize the adjusted allocations for you. If we turn to slide seven, our global excess liquidity sources remain very strong at $372 billion. Ending long-term debt did increase $4.1 billion from the fourth quarter of 2012 as we funded the January payment for the Fannie Mae settlement and opportunistically accelerated our 2013 issuance plans. While we issued $11.5 billion of vanilla parent company debt during the quarter, we still expect our long-term debt to decline over the remainder of 2013 as well as during 2014. Our parent company liquidity remains strong at $100 billion, and time to required funding was 30 months. We would expect to continue to remain over two years of coverage. If you turn to slide eight, net interest income.
Our net interest income increased from $10.6 billion, or a net interest yield of 2.35% in the fourth quarter, to $10.9 billion or 2.43% in the first quarter of 2013. If we adjust these numbers for FAS 91 and hedge ineffectiveness, on the upper right-hand chart, you can see that net interest income was effectively flat at $10.6 billion or 2.37% during the first quarter of 2013. As we look at these results, we benefited obviously from the market-related premium amortization expense. In addition, we also benefited from higher commercial loan balances, as well as the reduction in the average long-term debt, as well as the deposit rates paid. Those benefits were partially offset by lower consumer loan balances and yields, as well as two fewer days during the period. Let's move to Slide 9 and look at expenses.
Total expenses were down from both the first quarter a year ago and the fourth quarter as we delivered on expense reductions in LAS, as well as ongoing cost savings in our other businesses from Project New BAC. LAS expenses, excluding litigation in the IFR acceleration agreement, were down approximately $500 million from the fourth quarter to $2.6 billion during the first quarter. This decrease marks the first quarter where the correlation between expenses and lower delinquent loan levels is visible. Delinquent loan levels started to drop during the middle of last year, but as we have previously said, there is a lag of 1 to 2 quarters before you see the associated expenses decrease. LAS headcount for March was down approximately 3,000 from December, while headcount excluding LAS was down approximately 1,000.
We've said previously, we believe that LAS expenses ex litigation will be at $2.1 billion or lower in the fourth quarter of this year, and we feel like the progress that we made during the first quarter in getting to that goal was quite strong. Excluding LAS expenses, litigation, and annual retirement eligible costs, expenses in the quarter or in the red box on the slide were $13.8 billion, an increase of $558 million from the fourth quarter of 2012 and down $920 million or 6% from the first quarter a year ago. The increase from the fourth quarter was due to higher revenue-related incentive compensation, approximately $800 million, which more than offset the impact of cost savings. We continue to believe that we will achieve 75% of Project New BAC cost saves, or $1.5 billion per quarter, by the fourth quarter of this year.
The effective tax rate for the quarter was 28%, with nothing noteworthy to point out. We would expect a slightly higher effective tax rate for the rest of the year, plus or minus any unusual items like another U.K. tax rate reduction. This year's expected U.K. rate reduction of 3%, up from the previous assumption of 2%, should be enacted in the third quarter and will result in a charge of approximately $1.2 billion to write down our U.K. DTA in that quarter. If we turn to Slide 10, you can see that credit quality continues to improve. Net charge-offs declined 19% to $2.5 billion during the first quarter, which is the lowest level in several years.
The consumer loss rate dropped 34 basis points to 1.7%, the lowest since the beginning of 2008, while the commercial loss rate declined five basis points to 25 basis points, the lowest since 2006. Provision expense of $1.7 billion includes a reserve reduction of approximately $800 million, reflecting the improved trends. NPLs and reservable criticized balances also continue to decrease. In addition, 28%, or $6.4 billion of our NPAs are current consumer loans that were modified and are now current after successful trial periods or are loans classified as NPAs due to regulatory guidance that was issued in the second half of 2012. Our allowance coverage to annualized charge-offs increased from 1.96 times in the fourth quarter of 2012 to 2.2 times in the first quarter of 2013. If we turn to Slide 11, we highlight the results of Consumer & Business Banking.
Starting this quarter, we've combined business banking and deposits for reporting purposes. Pre-tax earnings for Consumer & Business Banking increased 4% versus the fourth quarter, driven by improved credit costs as well as lower expenses. However, net income was relatively flat due to a higher tax rate. Average deposit balances increased 4%, or $18 billion, compared to the fourth quarter, driven by $11 billion of organic growth and $7 billion related to transfers from Global Wealth and Investment Management. As you know, we periodically move customers across business segments after an evaluation of how they can be best served by us. Rates paid on deposits during the quarter declined three basis points due to pricing discipline and a mix shift in our deposits. Brokerage assets increased $6.7 billion from the fourth quarter, or 9%, due to market appreciation and increased customer flows.
We reduced banking centers during the first quarter as we continue to optimize the delivery network. Our mobile banking customer base reached 12.6 million, which is up 5% from the fourth quarter and 30% from a year ago. U.S. consumer credit card retail spend per average active account increased 7% from first quarter a year ago. Average loans did decline $1.6 billion from the fourth quarter due to seasonality and continued non-core portfolio runoff. As I mentioned earlier, credit quality continued to improve with some of our credit quality indicators at historic lows. If we turn to slide 12, we address one of the two businesses within our Consumer Real Estate Services area, home loans.
As you know, the home loans business is responsible for first lien in home equity originations within Consumer Real Estate Services. First mortgage retail originations of approximately $24 billion were up 11% from the fourth quarter and were up 57% compared with retail originations from a year ago. We believe these increases are reflective of improvements in our retail market share. Consequently, we are adding employees to improve our sales and fulfillment capacity, which is the driver behind higher expenses in home loans during the quarter. However, given lower margins realized during the first quarter, core production income decreased from the fourth quarter. If we turn to slide 13, legacy assets and servicing had a loss of $1.4 billion in the quarter, a significant improvement from the fourth quarter that was impacted by our settlements with Fannie Mae.
The provision for reps and warranties in CRES was $250 million during the quarter. The MSR asset ended the quarter at $5.8 billion, up slightly from the end of the fourth quarter. Although we announced the sale of mortgage servicing rights in January, the accounting sale will be recorded throughout the year as the servicing asset is transferred. MSR results, including hedges, were positive for the quarter. The capitalized MSR rate ended the period at 61 basis points, versus 55 basis points at the end of the year and 58 basis points a year ago. Results did include approximately $700 million of litigation during the first quarter of 2013, as well as a similar amount during the fourth quarter of 2012.
As you can see from our press release this morning, as well as on slide 24 in the slide presentation, we did reach an agreement in principle to settle for $500 million, three class action lawsuits involving Countrywide-issued RMBS. We feel very good about resolving these exposures, which addressed original principal balance RMBS that exceeded $350 billion, or what we believe represents approximately 70% of the unpaid principal balance of all MBS as to which securities disclosure claims have been filed or threatened as to all Bank of America-related entities. Servicing income decreased 17%, or $182 million compared to the fourth quarter. 47% of this decrease was related to the legal sale of MSRs in connection with the sales that we announced in January, together with other smaller MSR sales.
The balance reflected payoffs that exceeded originations in the portfolio, due mainly to our exit from the correspondent channel in late 2011, combined with the seasonality and the timing of mortgage payments. The number of loans in our servicing portfolio totaled approximately 6.5 million at the end of March, down 866,000 from the end of the year due to actual transfers of approximately 570,000, and the rest due to payoffs. 60-plus day delinquent loans dropped from 773,000 units at the end of December to 667,000 units at the end of March, of which a third of the decrease is associated with transferred servicing. We continue to believe that our 60-plus day delinquent loans at the end of this year will be at 400,000 units or below. If we turn to slide 14, Global Wealth and Investment Management had a very strong quarter.
Earnings increased 25% to $720 million from the fourth quarter and continue to set post-merger records in several metrics. The pre-tax margin of approximately 26% was impacted by low credit cost and a higher contribution from corporate ALM activities, some of which we would not expect to continue. Overall client activity in the wealth management business in the quarter was strong across all categories. Client balances were up $82 billion, or 3.8% from the fourth quarter, due to higher market levels and net positive flows, offset somewhat by the net migration of deposits to Consumer & Business Banking. Period-end deposits dropped to $26 billion, driven by $19 billion of net migration, once again to Consumer & Business Banking. The rest of the decrease reflected year-end seasonality, heightened by the fiscal cliff and client investment activity, including long-term assets under management activity.
Ending loan balances were at record levels, and long-term AUM flows were a record $20 billion, the highest quarterly amount since the Merrill merger and the 15th consecutive positive quarter. Net income in Global Banking, slide 15, was $1.3 billion versus $1.4 billion in the fourth quarter and down from the first quarter of last year, primarily due to higher provision expense due to loan growth and asset quality stabilization. Revenue increased 2% from the fourth quarter, reflecting increased business lending revenue. Asset quality continues to improve. Net charge-offs declined to $117 million or 51%. Reservable utilized criticized exposure declined 6%, and NPAs dropped 20% to $1.7 billion. On slide 16, you can see corporate-wide investment banking fees increased 26% from a year ago, but were down slightly from a record-setting fourth quarter in debt issuance.
Per Dealogic, Bank of America Merrill Lynch gained market share compared to the fourth quarter of 2012, and based on our reported peer results, we believe at $1.5 billion in investment banking fees during the first quarter of 2013, we were a very strong number two. Average loans increased to almost $12 billion from the fourth quarter, driven by growth in C&I as well as within commercial real estate. Ending loan balances continue to be higher than average balances, reflecting the momentum that we saw throughout the quarter. Average deposit balances at $221 billion for the first quarter declined approximately $21 billion compared to the fourth quarter, partially impacted by the expiration of TAG. If we switch to Global Markets and flip to slide 17, net income of $1.4 billion increased approximately $1 billion, excluding DVA from the fourth quarter, reflecting increased sales and trading activity.
We did record DVA losses of $55 million in the first quarter of this year versus losses of $276 million in the fourth quarter and losses of $1.4 billion a year ago. Total revenue ex-DVA was up $1.9 billion or 58% from the fourth quarter and was down 11% from the first quarter a year ago. Sales and trading revenue, ex-DVA, increased $1.9 billion from the fourth quarter, driven by our FICC business due to improved market sentiment. FICC revenue ex-DVA was up 85% from the fourth quarter due to improved customer activity across all product categories. Versus a year ago, FICC revenue was down 20% ex-DVA as market-making opportunities and credit products were reduced due to spread tightening being much more significant a year ago than what we experienced in the first quarter of this year.
Also contributing to the decline was a gain in credit products in the first quarter of last year that did not repeat and a decline in commodities revenue. In equities, excluding DVA, results increased 61% from the fourth quarter, due primarily to improved trading performance and increased volumes in cash markets driving higher commissions. Versus a year ago, equity results were up 8% due to increased client financing balances. Average VaR of $81 million in the quarter is down from $100 million in the fourth quarter and effectively flat with the year-ago period. On slide 18, we show you the results of All Other, which to remind you, includes our Global Principal Investments business, the non-U.S. consumer card business, our discretionary portfolio associated with interest rate risk management, insurance, and the discontinued real estate portfolio, as well as the International Wealth Management business.
The loss of $867 million was driven mainly by first-quarter annual retirement eligible costs. The $1.7 billion decline in net income versus the prior quarter was driven by the annual retirement eligible costs and the absence of tax benefits that were recognized in the fourth quarter of last year. With that, let me turn it over to Brian.
Thanks, Bruce. Before we take questions, I thought I'd leave you with a few thoughts about the quarter. As you can see on slide 19, we continue to work to stabilize the revenue streams and begin to build the strength to drive in the future. At the same time, we continue to work on the cost structure, both reducing costs, at the same time, investing in businesses. Bruce talked to you earlier about the 4,000 people we put to help drive our mortgage production or the 1,000 more loan officers are examples. That, in turn, will help increase our profitability now and in the future. We continue to see continued momentum and driving balance growth across all our customer groups.
When you look in the consumer side, this quarter, we were pleased with the growth in deposits, the continued stabilization and profitability of credit card business, and the ability to continue to drive the mortgage activity, the production activity the way we want to, up 50% plus year-over-year. As you can see in our Global Wealth Management businesses, we have had a record level of assets under management come in from our industry-leading business, and they had strong performance, including operating margins. As you think about the commercial lending business, you can see both year-over-year and linked quarter, we've had strong commercial loan growth as those businesses continue to produce strong profits for our company. We remain strong in our investment banking revenues. Bruce said a number 2 positioning, and we continue to drive our positioning in that business.
When you look at our capital markets business, as you can see, we continue to show good profitability and a strong increase from the fourth quarter. We continue to maintain a low risk that in the methodology we run that business, driven by the customers we serve, and making sure that we balance risk and reward at any turn. We still have a lot of work ahead of us as a company. We feel good about where we are and the progress we made this quarter. We'll continue to drive the earnings forward to deliver the results that you expect of us and we expect of ourselves. Let's open it up for Q&A.
Thank you, sir. To ask a question, please press the star and one on your touch-tone phone. If your question has been answered, you may remove yourself from the queue by pressing the pound key. Again, to ask a question, please press the star and one keys at this time. With that, we'll first go to the line of Glenn Schorr from Nomura. Your line is open.
Hi, thank you. Good loan growth on the C&I and commercial real estate side. Just curious on what kind of yields is that bringing, being brought on? From what I understand, there's pretty reasonable competition for those new loans. Just curious on how you balance the growth and margin oppression in the markets.
Good morning, Glenn. It's interesting. If we look at the commercial loan balances across the platform, the spread on the new originations was actually up slightly relative to both the fourth quarter of last year, as well as relative to the first quarter of last year. It's interesting in that the loans that came on, not only were the spreads wider, but based on our internal risk ratings, the credit quality of what was being brought on was also stronger. We feel like the loans that we're bringing on, we're doing in a prudent way. You can see that as you look in the supplements, that a decent chunk of the loans that are being brought on are international. Not any real concentrations, but both international, domestic, and really across all products.
Oh, that's great. I appreciate that. I want to get on your thoughts on the expenses from slide nine. I wanted to make sure that I understood. Being that the retirement eligible is a first quarter phenomena, is the starting point the $18.12 less than $900 or so as we think about second quarter and then folding in the new BAC incremental efficiencies?
Yes. I think, Glenn, that's exactly right that $18.2 included the $900 from the retirement eligible employees. That only happens once a year. You're right. As you go to the second quarter, the starting point should be $17.3 million. The two other things that I would point out, once again, is that if you look at the compensation expense in the first quarter relative to the last couple quarters of last year, it was elevated by about $800 million based on the revenues that we saw within the sales and trading, the Global Banking, and to a lesser extent, the wealth management business. We hope those repeat, but I would just highlight that that's a delta relative to the last several quarters of last year.
Obviously, from that starting point, we would look to continue to drive down expenses based on the work that we've spoken about with Project New BAC that we would expect to achieve throughout the year.
Perfect. I appreciate that. You also mentioned your long-term debt's down $75 billion year-over-year, and you expect more maturities in 2013 and 2014 in the 20s. I guess that's perfectly straightforward. Does that include any adjustments for what's coming down the pipe with OLA, or do you have to just take a wait-and-see attitude on what those rules are?
I think we obviously are paying close attention to the different OLA proposals. I think if you look at the mix between the Merrill debt as well as the BAC debt, and you compare those dollar amounts relative to risk-weighted assets, and you compare us relative to our peers, at least all the work that we've done suggests that we're at the very high end of the amount of debt in related instruments that we have relative to risk-weighted assets. The rules obviously are not clear at this point. We feel like we're positioned very well based on what we understand the different proposals are that are out there, realizing it still is moving around. As we go throughout the year, we would expect, as I said, to continue to drive that footprint down
Not only in 2013 but throughout 2014, we continue to be very focused on that, Glenn.
Glenn, I'd add that there's also rationalization of the footprint. Remember, this was put on by various companies, not by one company, that we've been restructuring. Even if there's an amount outstanding, the cost can come down because you can string it out. The rates paid are fairly high because they're different environments than we bid in and expect to be in the next couple of years. There's even value, even if you said the notional wouldn't move as far based on some interpretation of the rules to get the debt footprint more rational and more spread across time than it is today.
All right. Thank you both. Appreciate it.
We'll go next to the line of Matthew O'Connor with Deutsche Bank. Your line is open.
Good morning.
Good morning.
To follow up a little bit on the fixed income trading results. Obviously, it can be lumpy quarter-to-quarter, but it was down a little bit more than we saw elsewhere. You talked about some of the mortgage areas. Was there a particular gain last year that was unusual, or is it just activity?
No. As I said, we referenced three things. The first was that there was a gain that as you look at that decline, that was in the area of $250 million that I would categorize more, quite frankly, as a recovery than a gain that we had highlighted during the quarter last year. A decent chunk of that was a gain that did not recur. I think it's important, if you go and look at during the quarter what we saw, the financial spreads, which tend to be a fairly significant part of any FICC trading business, tightened significantly in the first quarter of last year. During the first quarter this year, start to finish, actually widened. That was the second piece of it.
The third piece, as we referenced, is that commodities had a particularly strong quarter last year and did not have as strong a quarter this year. It was those three general things. I would say flows generally continued to be very strong. As you look at where we were relative to the fourth quarter last year, I actually think we continue to make good progress. It was a little lumpy in the first quarter of last year.
Yeah. Matt, I'd add that as you think about how we're running the Global Markets business, if you look at our VaR and our risk-taking, we're keeping it balanced relative to the rest of the company. There'll be times when people do better than we are and times when we'll do better than them, but we're keeping it balanced. The second thing that Tom Montag and team worked on is the expense side. You can see the operating leverage when you look across the first quarter last year to this year, and importantly, the fourth quarter of last year to this year. You can see that with a little bit of revenue, you generate a lot more profit.
The idea is we're keeping this business so that we can make some money at a $3 billion trading revenue level in the aggregate in the business, and a lot of money at a $5 billion level, and you're seeing that play out. If you think about it, we made money, I think, every trading day of the quarter. The VaR was down. I think we should be careful to think that we may not roar as much as other people might because this is one of the many businesses we have, and we drive it for the benefit of the investing customers and also the issuing customers.
Okay. Thanks. That's helpful. Just separately, in terms of your capital actions, I think many were positively surprised by the CCAR Fed approval for buybacks of both common and preferred. Just any commentary in terms of the pace of the common share repurchase and on the preferred side, the timing of that, and do you have to issue any to replace what you're calling?
Yeah. Two things on that. The first is you probably saw, I believe, on April 1st, we actually went ahead and issued the redemption notices for the $5.5 billion of preferreds that are outstanding. It's just under $500 million of preferred dividend savings that we'll have on that. There was no requirement to issue to replace that. As you look at that redemption, that's a good redemption where you can look at those savings. As it relates to the common, we'd expect to be balanced and work through the share repurchase throughout the year, and really don't have much more to comment on than that.
Okay. Thank you very much.
We'll move next to the line of Chris Mutascio with KBW. Your line is open.
Thank you, Bruce and Brian, for taking my call.
Thanks.
Thanks.
Bruce, quick question. In the release, we've gone through expenses in terms of the stock compensation, if you will, in the quarter, and also higher first quarter compensation related to revenues. You can back that out and see what the run rate is for second quarter. You also mentioned that you expect to achieve $1.5 billion in cost saves per quarter by fourth quarter of 2013 related to Project New BAC. How do I account for that third piece of the pie? I know the stock compensation in the quarter, I know the overall compensation being high because of revenues. How do I account for New BAC and getting to a run rate of second quarter?
Sure. It is a good question. We have said that at the end of 2012, on a quarterly basis, we had achieved $900 million per quarter of Project New BAC cost saves at the end of or in the fourth quarter of 2012. As you look to adjust your models, we will take that $900 million a quarter that we would have had in the fourth quarter, and that will grow to $1.5 billion by the fourth quarter of 2013. Some of that we achieved during the first quarter, and we would expect to continue to achieve that throughout the year. The second piece, outside of the more one-timers that we talked about in the first quarter, were the LAS expenses, where we have said we will get that number below $2.1 billion by the end of 2013. We obviously got that from 3.1 in the fourth quarter down to 2.6.
In addition to those compensation-related items, we have got those two levers to continue to drive expenses down during the balance of the year.
Just to be clear, the $1.5 billion Project New BAC by fourth quarter 2013, what are the cost saves running in this quarter on Project New BAC? The delta I can kind of gauge.
We have not given an exact number. I think what you should do is if you go back to slide nine and look at the red bar, we have said that there was 800 of increased incentives in that 13.8. That gets the number down to 13. You should assume that part of the benefit between 13.3 and 13 related to Project New BAC, but we have not given an exact number.
That's great. Thanks so much for the color.
We'll go next to the line of Meredith Whitney with Meredith Whitney Advisory Group. Your line is open.
Hi, good morning. I just wanted some commentary on sequencing of litigation reserves and what's already been factored in in terms of the bulk of litigation settlements, then what's on the horizon. Thanks.
Sure. It's a good question. One of the things, I'm going to walk through the different pieces, as it relates to overall litigation as well as the rep and warrant. I'd ask you to flip back to slide 23, where we lay this out. I think one of the things, Meredith, that we feel very good about the progress during the quarter is if you walk through what we've laid out at the bottom of page 23. If we start with the reps and warrants, between the settlements at the beginning of 2011 as well as the Fannie settlement that we had at year-end, you can see that as we lay out here, we're generally through the GSE exposure as it relates to rep and warrant. You then go down to the monolines. There are three significant monolines that we did business with, five in total.
We obviously have had previous settlements with two of those three monolines. The one that obviously gets a lot of press is MBIA, that continues to be out there. You then go down to private label rep and warrant, and obviously the most significant piece of that is the Gibbs & Bruns settlement that continues to work through the court process, and we would expect the outcome of that to be during the third quarter of this year. As you look at reps and warrants, we're through a significant portion of that.
If you then flip to the securities litigation, which is the other significant piece of the litigation expense, one of the reasons that we think the settlement that we announced today was significant is, as I referenced, if we look at the original unpaid balance company-wide of all of the securities that were underwritten, this settlement today relates to company-wide about 70% of that. I don't think anyone's going to ever, at this point, declare complete victory. We do think that between the Fannie and related settlements in the look back in the fourth quarter as well as the settlement that we've announced today, that we're moving through in a pretty meaningful way, this pipeline of items.
Got it. Thanks. That seems to be the big question for investors. Thanks so much.
Sure. Thank you.
We'll move next to the line of John McDonald with Sanford C. Bernstein. Your line is open.
Hi, thanks. Bruce, just following up on that. You have on that same page the range of possible loss above additional accruals of up to $4 billion. There was some concerns that some of the recent legal decisions in the monoline cases, particularly around the causation issue, might have impacted your estimates there, and doesn't look like it did. Can you tell us why that hasn't changed any of your outlook on that RPL number?
Sure. Once again, the RPL that we have within the rep and warrant will continue to be up to $4 billion. As we've said before, we cover at this point, given we don't have repurchase history with the monolines, the monolines are covered within our litigation reserves, and we have both litigation reserves as well as range of possible loss for litigation. You should assume that there was some additional monies during the quarter in litigation expense that was set aside for the monolines.
Okay. You noted that the settlement that you announced today covers 70% of issuance on which claims have been made. Is that what you said?
That's correct.
Okay.
Not only claims or threatened claims, John.
Got it. What does that leave some of the higher profile government suits like FHFA and some of the things that we know about?
The two most significant that are out there on the securities litigation that have been more public would be FHFA as well as AIG.
Okay. On the Gibbs and Bruns, the final hearing is in late May. I guess the deliberations could extend for a few months after that. Do you have any idea? I guess you said third quarter. You hope to get the final resolution in the third quarter?
That's our best sense. Far be it from us to forecast that process, our best estimate, to your point, would be the third quarter.
Okay. Switching gears on the net interest income, Bruce, do you expect to maybe do better than the core $10.6 billion now that you have a little bit of loan growth in the day count or do you expect to kind of stay around that level?
I think at this point, where we've guided is we've said that with the work that we've done, that ex any market related impacts, that $10.5 billion is a good starting point. That number can bounce around, I would continue to look at that $10.5 billion in the near term as the right starting point.
How about on credit costs? You had a nice move down this quarter. Do you still have capacity to take the reserves down further? Do you expect the provision to make further progress below the $1.7 billion that you did this quarter?
Yeah. It's a good question, John. I think as we look at the charge-offs and the move in charge-offs, to have almost a 20% decline in charge-offs, I think speaks to the quality of the portfolio and the work that we had said had been done back in late 2008 and early 2009 as it relates to consumer underwriting. We've previously said that as we look at provision, charge-offs will come down about the time that the releases also come down to get you to a level between 1.8 and 2.2. If you look at what we experienced this quarter and with what we're seeing at the trends, it clearly feels like we'll be at the low end of that going forward.
Yeah. This quarter you were below the range, right?
Yes.
Are we setting a new range or you still think we should think about that range of 1.8-2.2?
I would think about it at the bottom of the range at this point.
Okay.
John, as it's clear, it's all about home finance side now. You see the credit card business continues to make some incremental improvement, but it's made a dramatic improvement from the high points going back several quarters. It's really about mortgages and everything you hear about in the market that we're witnessing in our portfolios in terms of house price improvement, activity levels will bear well on that as we look forward, obviously.
Okay. One more thing on, Bruce, on the revenue side. The mortgage servicing revenues seem to take a step down from the MSR sale. What should the cadence of that be going forward? Is part of the decline kind of built in from the phased-in sale?
Yeah. I think what we said is that roughly $90 to $100 million of the decline in servicing revenue was a result of the sales. We've said that we think as we get to the end of the year, the sales will ultimately lead to a reduction in revenues of about $200 million related to the MSR sales. We obviously had a fair bit of that given that a decent chunk of the performing sales had an effective close date on January 31st. We've clearly taken a piece of that, and there's probably another $100 million a quarter to come relating to those sales by the end of this year. Obviously, as you look at, and we tend not to just look at the revenue number, but we look at the contribution from a pre-tax perspective.
Obviously, as you see the work that we're doing within legacy assets and servicing, we continue to think that the opportunities there are significant.
One more follow-up. How do you guys think about the ultimate target of MSR size and maintaining a balance between origination and servicing in the mortgage business for when rates eventually rise?
Yeah, I think as we look at this point, the MSR balance was roughly $5.8 billion at the end of the first quarter. If we were to pro forma those sales throughout the year, assuming rates stay where they are, it gets you down to about a $5 billion number. From an overall capital perspective, plus or minus, that feels about right. Obviously, any change from that's going to be a function of the opportunities to originate things that make sense versus any type of accelerated prepayments that may or may not happen. I think $5 billion from an MSR balance perspective's not a bad number to be looking at.
Okay.
John, from the origination side, the first order of business after we got out of the correspondent business was to kind of get the business on an upward trajectory. If you go back and look, starting in the fourth quarter 2011, we've basically grown retail originations quarter after quarter after quarter. This quarter, again, we had another 59% off the fourth quarter last year. If you actually look at the headcount you see on the pages, remember that we got 1,000-plus loan officers working this quarter that weren't here last year. They're trained and getting up to speed in the closing rate. The next order of business is how to overcome the hard refinancing levels which we have in a portfolio and sort of get to core run rates. There's no cap on us in terms of retail origination.
We'll do as much as we can do for our clients. You've seen us drive it forward every quarter. Now we have more people, more trained, more up to speed, 4,000 more people in the fulfillment area, and we don't see the pipeline slowing down.
Okay, thank you.
We'll move next to the line of Brennan Hawken with UBS. Your line is open.
Good morning, guys.
Good morning.
In wealth management, just hoping to dig in. You guys highlighted a couple things that helped the margins get a bit higher, which it seems you don't think are going to repeat. About how much of a tailwind were those items? If we were looking ex, how much of seems as though maybe we might have enough draft anyway because we were looking at like a 500 basis points increase year-over-year and quarter-over-quarter.
Yeah. A couple things that if you look at we talked about credit costs. Credit costs, I think within the business, there was roughly a $30 million reserve release during the quarter that we wouldn't assume is necessarily going to continue. I think if you look at overall pre-tax margin, we've been at kind of in the 20%-21% area. This quarter was 26%. I think the assumption going forward is that we'll clearly be north of the 21%, but I wouldn't expect that in the near term, we run at 26% either.
Sure. I think you also highlighted the ALM as a tailwind too. Is there any way to quantify that? Can you forgive the potentially ignorant question, can you help me understand the mechanics of how ALM will run through GWIM?
Yeah, I would say, I think the easiest way to look at it is if you look at deltas, we had some of the market-based benefits that we quoted that were roughly $300 million during the quarter. A portion of that gets allocated to GWIM, and if you look at the GWIM business, you can see that the net interest income was up about $100 million. I'll give you those pieces of data, we're not going to quote exact numbers as to how we allocate that out. It's a piece of that.
Okay. That helps. Thanks, guys. Last one, sorry, it's a little bit technical, on the NPAs, I guess you guys had said that 20% were from mods or regulatory requirements, we've run through the regulatory requirements before. Just hoping to understand on the mods. It was my understanding that after about six months of payments, the TDRs are reclassified as current. Do you guys account for TDRs differently than that? Can you help me maybe understand how that works?
No, you're exactly right that once a borrower goes through the trial mod period and gets to a permanent mod, they need to be current for six months before we would look to bring those back in. When you consider that number, realize that coming out of the National Mortgage Settlement, there was heightened modification activity during the third and fourth quarters, in particular, of last year. We clearly would expect some of those to cross the six-month period during the second quarter. Realize, if you go back to, I believe it was the third quarter when we adopted the regulatory guidance, of that $6-plus billion, north of four of that is the regulatory guidance that was given. That's going to be the bigger piece of the two things.
Okay, thanks. That helps.
Thank you.
We'll move next to the line of Betsy Graseck with Morgan Stanley. Your line is open.
Hey, good morning.
Good morning.
Couple questions. One on mortgage. You indicated in the past that you were interested in increasing the mortgage origination share, and you've done that. I'm just wondering how close you are to where you want to be, or are you still in the process of building out what capacity you want to have there?
As you can see, Betsy, on the page, you can see that the mortgage loan officers are up about 1,000 year-over-year. We are still adding as we speak. The success of putting them into the branch environments where you have the mortgage loan officer and FSA personal bankers is multiples of the success in other branch environments. We're just driving at that. The pipeline is still strong as it's ever been. We had thousands of people to get them closed on time, and we're still working our tail off to get mortgage loans closed on time. I don't think there's any, honestly, cap on where this could go. We still have tremendous opportunity with our client base that are unserved, that our clients go elsewhere to get their mortgages.
You've seen it drive up 50% plus year-over-year, another $3 billion increase in quarterly production, fourth quarter, first quarter. I challenge the team. They got to outrun the HARP at some point because that'll die off, although it's been extended. I wouldn't tell you there's any sort of cap. I think we should be able to drive it up to more of our natural share in things like deposits and stuff, which is more than 10% level over time.
Right. Okay. Go from 4% a couple quarters ago up to 10%-12%.
Yeah, it's going to take time. We're talking about if we've done about 0.2% increase in market share each quarter. This is a lot of activity. $24 billion on retail production, and we're in the top couple there, top two or three. Our view is we ought to be able to push that forward.
Two follow-ups on that. One is on HARP you mentioned. How much of the production right now is HARP, and how much HARP is in your footprint, your client base that you haven't done yet?
Yeah. If we look at both combined MHA and HARP, that's just under 50% of the total for the quarter.
Okay. What's left in your client base to do that you haven't done yet? How many more quarters of this do you think you have?
Yeah. I think I would say generally there was more of it this quarter than we probably would have thought coming into the year. We're hesitant to give an exact number, but as Brian referenced, I would say overall pipeline and activity as we went through the first quarter continued to be very strong.
I'd expect that component, though, is probably at a strong point right now, will come down over the next three or four quarters just because frankly, as we sell some of the servicing, that some of that opportunity goes away. That was part of the transaction value that we got. The key is if you look at the non-HARP type production on it, Making Home Affordable production, you're seeing that grow at a faster rate.
Okay. You're just HARPing your current portfolio set. You're not going after other people's. You have enough to do with your own portfolio.
We've got enough to do with our own portfolio.
Right. Okay. Just separately, in page six, you go through the regulatory capital. Could you just remind us what your expectation is for RWAs going forward, passive mitigation, active mitigation?
Sure. I'd say generally, throughout the quarter with some of the growth that we've seen. I assume you're referring to Basel III, Betsy?
Correct.
I think we continue as we go through over the next couple of quarters, we'd just say what we've continued to say, which is that with where we are from a DTA perspective as we go forward, pre-tax should be the way that generally we're creating capital. I think as it relates to different mitigation opportunities, the biggest thing that we see out there is that as home prices continue to move up and we continue to see the home equity portfolio amortized, which has been about $3.5 billion a quarter, that there's a fairly significant tailwind as it relates to reductions in risk-weighted assets there. As we go forward, the runoff of the structured credit portfolio that we have, we would expect to accelerate as we go into 2014, 2015, and 2016. That will obviously be gone by the end of 2017. That's an opportunity.
The third thing I would say is that we continue to work through. You can see we made progress on the private equity portfolio this quarter, we'll continue to wrap that up. The biggest item as we go forward is just going to be the pre-tax income line. I do think that there will continue to be other opportunities to drive that as well.
The runoff of the structured credit, how much is that right now?
We've not given an exact number that we would expect that to run off, but you should assume it's north of $20 billion of risk-weighted assets.
Today in 1Q?
That's correct.
Okay, the last question is on how you get to the $5 billion ask that you had for CCAR that got approved. Because with a 9.4% common share ratio in 1Q 2013 and these RWA mitigation opportunities coming going forward, clearly you must have known going into it that you were going to be well above the 8.5% [FFB minimum] that's out there, and that you'd be approaching the 10%, that kind of high end of the range scenario that people in business models like yourselves have targeted. Just wondering how you got to $5 billion and how we think about capital asks going forward.
Sure. I think, Betsy, as we've spoken, I think there are three different metrics and ways that you get to looking at capital allocation and capital return. The first is obviously where your ratios are after stress through the CCAR process. As you look at the results that we had, we ended up just above 6% after our ask, which relative to our peers, we think positioned us well. The second item, which as you referenced, you move to Basel III, and we feel like we've done a very good job on Basel III, and to your point, are above the minimums, above buffers, and feel like we've done a good job there. The third, which is what you've heard us talking a lot about, is just driving the core earnings as the third component. We balanced all of those three.
I guess, the other thing I'd say is you look at the ask that obviously we've got $5 billion that will get returned to the shareholders based on our plans. I don't think you should also minimize, though, the other $5.5 billion that will go to redeem preferred stock because that preferred stock had coupons between 8% and 8.5%. It's not tax-deductible, and we're not replacing it with other preferred stock.
Okay, thanks.
We'll move next to the line of Nancy Bush with NAB Research, LLC. Your line is open.
Good morning, guys. How are you?
Morning.
A couple questions for you on retail. You've closed, I think, 262 branches if I'm looking at the numbers correctly over the past year. Can you tell me how that number looks for the coming year and if there is some "optimal" number of branches that you want to maintain?
I think, Betsy, we were clear that a few quarters ago, we said we do the 750, Excuse me, Nancy. We're 750, and I think you can see that that number is close to 5,000. Think about that as 5,400 odd getting down to 5,000. The point was, at the time, we did an optimization thought process, looked at it, looked at customer behavior, and got that number, and we're busily doing that in a very thoughtful way so that we retain a lot of the customers, especially on the consolidation side. Also, obviously, as you know, Nancy, we have exited some of the markets and sold to community banks where they can get the leverage in the operations that we can't get in some of those markets.
The question of what happens next, I think, is probably a question that we take up as we get into 2014 and think about what the customer behavior change has been because we're seeing a fairly strong change in the behavior of the customers evidenced by the mobile volumes. Not only we have a number of mobile customers goes up about 10,000 a day and is at 12.6. It's also what they do. 100,000 checks a day get deposited by people taking pictures of them type of numbers. That behavioral change, we got to keep monitoring. At the same time, we're building the centers to be these more destination with the FSAs, which are brokers and branch and mortgage loan officers. That configuration, I think we're still testing.
I don't know the exact answer because the near term is to get the other 400 change that we're talking about through. If you step back from it, look year-over-year, the branches are down, the customer satisfaction is up, and the deposits are up strongly which is a nice combination.
What I hear you saying is that as you go into 2014, this 5,000 branch number is not written in stone. Is that correct?
We'll keep monitoring. Think of us as a retailer looking at what the best way to get the most out of the market and serve our customers the best. That'll always be a subject we'll talk about. We're making massive investments in other ATM architecture, the virtual ATMs, and the mobile space to make sure that we're right with our customers.
My second part to the question would be, Brian, in addressing all these changes in consumer behavior, et cetera, has part of this program also been to address some of the service issues that you guys had encountered over the past few years as other stuff took more attention?
Absolutely. Part of it is continuing to upgrade the system. If you look at our company between 2009 and 2015, we've rewritten all the systems, we'll bring systems which were more standalone product systems into systems which are consistent with a customer approach, Nancy. The kinds of inquiries you get where we can see a person in one system, not another system, those are going away. Frankly, getting out of the multiple deposit systems helps. Our complaints are down a lot. Our attrition's way down. We're seeing the benefits of this as we go through it. Absolutely, this is all geared at maintaining a customer posture, customer satisfaction posture, which is up year-over-year, driving it to places we haven't driven before, honestly, based on all the tools we have.
Okay. One final question for Bruce. Bruce, the stock is down roughly about 3% in the market right now, there was some disappointment with the headline number, all the ingredients of the quarter look pretty good. Was it your sense that the $900 million in seasonal costs was built into most estimates, or was this a point of variance, do you think?
I think there are probably two things. I think that the $900 built into the estimates, which we have every period as we look out there, I think it was in some, not in others. I don't think there was uniformity on that across. I think the other item that was out there is we look at a lot of the analysts, that as they look at core, they don't include any litigation number. Obviously, there was a $900 million litigation number. We obviously need that to come down. When I mentioned to Meredith's question, I think getting this class action and shrinking the tail risk with respect to our mortgage-backed security litigation tail risk was a significant item for us, and we were able to get through that this quarter being generally in line with what you all had expected.
Okay. Thank you.
We'll go next to the line of Eric Wasserstrom with SunTrust Robinson. Your line is open.
Thanks. I just want to circle back to the litigation issues for a moment. Could you just help me understand what precisely at the upcoming hearing on the 30th is being debated? Is it simply the amount of the settlement, or is it more the actual legitimacy of the process by which the settlement was derived?
It's hard for us to predict what's going to happen on the 30th. I think as we've spoken to, that the process, and we're obviously not a part of this. This is Bank of New York Mellon in their capacity as trustee. Obviously, the standard and what needs to be worked through is that did they go through, and were they prudent, and did they follow a process to getting to the point to say that this settlement made sense for investors? That will be the general topic. We're not going to predict what exactly happens on the 30th besides that we obviously wouldn't have entered into the settlement if we didn't think that there was a basis for it.
Right. Correct. No, I'm certainly not asking you to anticipate an outcome. I just want to make sure it's not as narrow as the monetary settlement. It's the broader issue of whether BONY followed the appropriate procedures in terms of determining a settlement. Is that correct?
That's correct.
Okay. Great. Thanks very much.
We'll go next to the line of David Hilder with Drexel Hamilton. Your line is open.
Thanks very much. Just another litigation question. Is it fair to assume that the Countrywide RMBS that were included in the settlement that you announced this morning are all included in the securities that were the subject of the settlement of the Gibbs & Bruns and Bank of New York as trustee process?
There is clearly a significant overlap. I think as you look at the people that were part of the settlement today tended to be people that would have been original purchasers of the securities. With respect to Gibbs & Bruns, they could have either been original purchasers or subsequent purchasers, but there is overlap. As we've said in the release, that the people that were part of the settlement today, to the extent that Gibbs & Bruns gets approved, they will receive whatever they would have otherwise received as part of Gibbs & Bruns.
Okay. Looked at from the perspective of the Countrywide securities issues. Again, would all of the ones in today's settlement be included in the other, in the Bank of New York as trustee settlement?
Yes. Because as we said in the release, this covers 80% of the Countrywide securities, of which Gibbs & Bruns was obviously a very significant piece. You're absolutely correct in that.
Okay. Then I don't know if there's anything you can say on this, any
Perspective statement about the settlement or possible timing of resolution for the various alphabet soup of remaining litigation, MBIA, FHFA, and AIG?
No, there's really nothing that we would say there. I think I would just reiterate, though, that as you look at the component of what we settled today from a securities litigation perspective as it relates to current outstanding amount as well as what was originally underwritten, it's obviously a significant piece of that. We continue to want to resolve it and get these legacy issues put behind us. At the same time, between the capital that we've built and the number of them that we've put behind us, it has to make sense for the shareholders.
Great. Thanks very much.
We'll go next to the line of Moshe Orenbuch with Credit Suisse. Your line is open.
Great. Just like on the trusts that were outside of The Bank of New York, you did provide on a similar basis. Is there anything you could say about the other lawsuits as to whether there's a provision that's been in there for them, based upon some of the experience on the other cases?
I'm not sure what you're talking about.
Well, I mean, you just
I'm not sure I got the question.
Right. Well, you've had experience with some of the monolines. I don't know if it's like a fact and circumstances, when you think about MBIA. How do you think about whether there's been a provision there or same thing for the FHFA lawsuits. Are there other elements of some of the others that cause you to have had some degree of provisioning for them? Would that only happen once those get advanced?
They're all in the litigation reserves, which are not on that page. Those are just the rep and warranty reserves. The monolines, the FHFA, and those are in litigation reserves because FHFA and AIG are RMBS cases.
Right. I mean, the question is, should we think about there having been a component of them or is that all going to be pending?
I want to make sure I understand the question. Within the-- as you go through the litigation reserves, we have reserves for those litigation items that we have the basis to reserve. To the extent that we don't have the basis to reserve, we have a range of possible loss. As it relates to these items, those are the two ways that we work through the reserves. In the litigation reserves, as we've said before, are where we house reserves for litigation matters as well as I said, the monolines reside within that litigation bucket as well because we're in litigation with them. Obviously, as you move to the rep and warrant reserves, we've got the actual reserves, and then we've also disclosed the range of possible loss for those items that we don't have the basis to reserve.
Okay, thanks. I'll take that offline. Just a second question with respect to the mortgage business and the gain on sale. The primary-secondary spread did end the quarter lower than where it was on average. Talk a little bit about how you see that gain on sale trending into Q2 and as we go forward.
I think that there's-- as we look, I would say that if we look at where we ended the quarter relative to where we started, I would say that it feels at this point that the spreads, at this point, have somewhat settled out. Obviously, those spreads are going to be a function of activity versus capacity. We'll have to see how that unfolds over the quarter. We've obviously built up, and as Brian referenced, built up the capacity to do what we need to do for our customers. We'll just need to see where those margins go throughout the quarter. At this point, there was obviously a step down in margins during the first quarter. It feels to some extent as if that's leveled out, but we'll have to see how it plays out over the second quarter.
Okay. Thank you.
We'll go next to the line of Matthew Burnell with Wells Fargo. Your line is open.
Thanks for taking my question. Most of my questions have been asked and answered already. Just a quick question in terms of the deposit cost. You've got your domestic deposit cost down to sub 20 basis points. You've got somewhat higher costs outside the U.S., although obviously much smaller balances. How are you thinking about being able to reduce the non-U.S. deposit costs, particularly in the time deposit categories over the next 6 to 12 months?
Yeah. I mean, you're right. The international component is obviously a very small component. Those are large. They're almost exclusively either wholesale deposits that are out there. I'm not sure you're going to see much movement in that. I think to your earlier question, where the majority of the deposits are and where the majority of the cost of the deposits are those housed in the U.S. You can see that as we build up the core deposits, the amount of time deposits that we have here in the U.S., we would expect those to continue to come down. As those come down, all other things being equal, you'd expect deposits here domestically, the cost of those continue to move down.
Okay. Now a bigger picture question on OLA. You've got about $134 billion of long-term debt at Bank of America Corporation as of the end of the year, an additional $90 billion of Merrill Lynch debt. When you're thinking about OLA, do you think about potentially explicitly agreeing to support the Merrill Lynch debt? Does that help you at all under OLA, or are you planning on just maintaining the status quo on that basis?
Well, I think as I said before, I think the OLA rules continue to evolve. If you look out at our annual filings that we've put out there, we've said that we're looking at does it make sense to have ML&Co merged into BAC? That's ongoing work that continues. We believe ultimately, as the Merrill debt runs off and to the extent there's reissuance, it's at the Bank of America level, so we pick up that benefit. Like I said, as we look at any ratio, and as we consider the different rules, it feels like we'll have more than enough in total parent company debt relative to risk-weighted assets.
Okay. Just one final question. You had mentioned the time to required funding has come down a little bit from the end of last year, and you intend on maintaining that at above two years. Should we think about that coming down closer to 24 months over the next six to 12 months?
Yeah
Is it too early to tell?
Two things. The first is, the one thing when you mentioned it came down in the quarter, realize that one of the reasons why it came down is that we've included the $5.5 billion of preferred redemptions in the time to required funding.
Okay.
That largely drove that. To your question, it's a good one. We would expect over time that the amount of parent company liquidity that we have would tend to come down over time. As we get through the 2013 and 2014 maturities, we still believe we can bring the parent company liquidity down, bring the cost of it down, and you're right, we will keep time to required funding at least two years. Initially, given we work through maturities, that will stay elevated in the high 20s, 30. The goal is to obviously flatten out the maturities and have that become more in the two-year area, which is consistent with what we've been saying for some time.
Right. Okay. Thanks for taking my questions.
Sure. Thank you.
We'll go next to the line of Mike Mayo with CLSA. Your line is open.
Hi. I had a question on litigation, but before we go there, just there's an article saying that, Brian, you are leading a revenue push at the company. I was wondering if this is a tweak, a strategic change? As far as a revenue push starting from the top, is that because of what Bank of America's not doing, or is it because of the weaker than expected environment or both?
We have been driving the company, there's been two basic pieces of strategy. One is to continue to push the legacy issues and costs and turn to them out of the company. At the same time, take the company and drive the underlying business metrics. That's been going on. As we clean up more of the former, then the focus of the company's on the latter. Involved in the latter, in other words, driving the core company was that we had, say, a credit card, a big book of business that we were running off at. We're getting towards the end of that, or less impact quarter to quarter, and now we've got to grow the credit card business. This quarter, I think we did 900,000-plus credit cards, which is the highest amount we've done in a quarter since 2008 or something like that.
70% of those are through the branch structure and through the preferred business, and things like that. The goal is to continue to drive this company and get the value of the combination of all the pieces of businesses through it. It's not a new push. It's just as the other issues go away, this is what the team has to be focused on. We're seeing great progress in some of the businesses. If you look at the GWIM business and look at the connectivity of the GWIM business, we literally have millions of referrals that go between businesses a year. We goal those at 30%-50% increases every year, and we see that number's being hit and is tracked in every single market, 100-plus markets, with about 20 different pieces of business flows between businesses that we track and monitor on a monthly basis.
It's all geared to just driving the value of the franchise and frankly, delivering the customer's entire franchise. It appears in all the businesses, whether it's in the commercial business, bringing our 401 platform, which is new to the Bank of America structure since Merrill came in. We just see that wins in that happening every day. It is bringing the capital markets expertise deeper in our middle market business. It's bringing the personal side of the wealth management business to our business entrepreneurs. It's all those things. So, new is probably a word that overstresses it. It is what we have to do to drive the revenue and continue to work the expenses to produce the bottom line we need.
All right. As you finish or you move further along with the cleanup, just more external focus.
Yeah. Mike, one of the tough things is we have 260,000 people in this company, and a lot of them have been focused on this, and it's their time to shine, and the rest of what Bruce and I have been working on, others, restructuring, balancing, getting the capital up, getting liquidity, legacy issues is starting to fade away.
A separate question back to the litigation. The 10-K and some 10-Qs say that if the courts disagree with the argument of loss causation, then the reserves may need to go up. That has not taken place. Your range of possible loss is about the same. I'm trying to reconcile those two thoughts because it seems as though with the Sher v. Flagstar, loss causation was shot down and there's some other comments in the courts. How do I reconcile what happened with Flagstar, some other court comments that shoot down loss causation with the comment in your 10-K?
Yeah. I think that the couple things I'd say is that the first is, I'm not going to drill into the Flagstar case, but I want to be clear. Flagstar gave a borrower fraud rep, and that was part of that case, which is not something we've done. At a high level, Mike, I'd go back to that's correct. It's in the disclosure. As I said in my earlier comments, within the litigation reserve during the quarter, we reassess those every quarter, and we did provide, within the litigation expense, some element of cost with respect to monolines during the quarter.
The big question here is, what happens if the $8.5 billion settlement doesn't go through? I asked Bank of New York that question this morning, and the answer from Bank of New York is, well, it's up to the courts to decide. What if the courts decide the $8.5 billion agreement does not go through? What would be the impact on your reserves?
Well, I think that the first thing is that the court is not opining on a number. They're either opining on approving or not approving. Obviously, if they don't approve, we have set up reserves within the Countrywide Securities, assuming that every trust gets to the 25% threshold. Obviously, if it doesn't get approved, this will revert back to going individual trust by trust and working through it. I don't think it's appropriate to comment on reserves on something that we don't know that said it's not going to happen.
You have $8.5 billion in reserves for the $8.5 billion settlement, and that may change, but you'll wait and see what happens May 30th.
That's correct. I think the other important thing is, Mike, when we set up the $8.5 billion to the Countrywide, we also used that same methodology with respect to bank-issued securitization rep and warrant to set up reserves based on the same methodology across the company.
All right. Thank you.
We'll take our final question from the line of Paul Miller from FBR. Your line is open.
Morning. This is actually [Thomas Latourneau] on behalf of Paul. I just want to make sure I heard you guys right. Did you say that 50% of your total originations were HARP? If so, would that imply that I guess what I'm asking is, do you think you can replace that with sort of normal retail volume if HARP starts to dissipate in the back half of the year?
Let me be clear. The 50% was both MHA as well as HARP.
Okay.
It was slightly less. In fact, if you think about it year-over-year, the growth rate of those activities has been as strong as the growth rate. That's the challenge going forward, is just how do we keep originating a broader product set. Right now, that is an opportunity which is here and near, and it goes away over time. The rest of the production continues to grow at a fast pace also.
Okay, great. That's helpful. One additional question real quick. Can you tell me what type of products you're actually portfolioing right now?
Within the consumer mortgage business?
Yes.
Largely non-conforming. Obviously, we're not looking to go out. What we want to do is to provide the mortgage product and balance sheet for that which there isn't another alternative, and we're pressing hard within the different businesses. The mortgage activity within the Wealth Management business this quarter was very strong, as well as within the mass affluent client space. That's largely the focus.
Okay, great. Thanks for taking my question.
Just on the underwriting of those, though, you should be rest assured that the underwriting is consistent with very strong underwriting that's going on in the industry totally right now.
Okay, great. Thanks, guys.
Okay. I think we're through the questions. Once again, thanks for joining us this morning, and we'll be talking with you next quarter.
This concludes today's program. Have a great day.