Good day, everyone, and welcome to the Bank of America First Quarter Earnings Review. At this time, all participants are in a listen only mode and later you'll have the opportunity to ask questions during the question and answer session. I will be standing by should you need any assistance. And it is now my pleasure to turn the conference over to Mr. Kevin Stitt.
Please go ahead, sir.
Good morning. Before Brian Moynihan and Chuck Noske begin their comments, let me remind you that this presentation does contain some forward looking statements regarding both our financial condition and financial
current
competitive pressures within the financial services industry and legislative or regulatory requirements that may affect our businesses. For additional factors, please see our press release and SEC documents. And also joining us this morning, as he did last 3 months ago, will be Neil Coddy, our Chief Officer. And with that, let me turn it over to Brian.
Good morning, everyone. Before we get started this morning, I wanted to spend a couple of minutes on the announcements that occurred this morning other than earnings. Obviously, we will cover in this call the announcement with the FSA Assured on the monoline. But on the leadership side, I just wanted to talk through a due to an illness of a close family member in California, where he has lived, due to an illness of a close family member in California where he has lived, it was going to be clear that he may not be able to move and we decided to continue to talk about the situation. He had made a commitment to move at the end of the school year, obviously, because he had a daughter who was a senior in high school.
But with that, it became clear as we moved through this quarter that Chuck could not move. So, I asked Chuck to take another leadership position that could help us work on some client matters in the mortgage company and help with the transition to new CFO. CFO. So what we announced this morning was to have Bruce Thompson take over for Chuck as CFO effective, and that Q2. And Chuck will continue as a great judge and perspective to help Bruce continue to learn the tasks.
Chuck has served as the CFO at a time when we've had tremendous transformation in our financials. He's been a great partner and we're glad that we came up with something that worked for everybody. Bruce, many of you know, he's been a Chief Risk Officer. He's done a great job for us since last year doing that. He ran our capital markets business for Tom and ran leverage finance and many other things with the company over his 15 year career here.
As Chief Risk Officer, he managed us through a difficult situation, including, as you'll see in some of the pages later, a great reposition of the balance sheet. In addition to those two changes, we also announced that Gary Lynch will join us as Global Head of Legal, Compliance and Regulatory Relations. My judgment was that we wanted to continue to add to the quality and capabilities of our management team. As Gary became available, his reputation on street and legal circles and regulators is well known. He's also been the Head of of the SEC.
And the relationships he has around the world he spent the last couple of years in London will help us outside the United States. He'll join us when his garden leaves expires later this year. So with the management changes behind us, let's shift to quarterly results. With that, I'll start on Slide 4. Rather than get into some of the detail on the page, let me just give you the themes for this quarter, which are similar to those related to in early March.
The franchise that we've built over the last 2 30 years in this company continues to deliver, and you can see that in numbers and the statistics this morning. Obviously, the mortgage business is still in need of continued repositioning and we continue to work on that. But what you've seen is solid customer activity across the board. Our focus on changing the strategy in the consumer deposits business has led to the Q1 of net checking account growth, a return to profit in that business, improved customer satisfaction across the board, the best retention of customers in that business in many quarters. In other areas, we have more we continue to grow our FA headcount.
We've had strong referrals in the businesses to each other. The deposit growth through the whole franchise has gone over $1,000,000,000,000 in total deposits. And as the economy has improved a bit, we're starting to see some loan growth on a core basis in the middle market business with David Darnell. And we'll touch on some of that later, but the key theme is the franchise continues to deliver. As you back up to the second point, revenue rose from last quarter.
Expenses were flat on a gross basis, the 20 dollars 1,000,000,000 including goodwill and I'll cover it a little later, up $500,000,000 more on the core business. But the absolute levels are elevated and I'm going to talk about what we're doing about that in a few minutes. Overall, earnings improved to $2,000,000,000 or $0.17 but we're still impacted by charges as we continue to pull out through the financial crisis. We had $5,000,000,000 in charges this quarter we absorbed and we also had $3,000,000,000 between reserve releases and higher private equities to the good side. When we talked to you at Investor Day, we said we were shooting for pre tax pre provision profits out in the out as we normalize to $45,000,000,000 to $50,000,000,000 This quarter Chuck will walk you through the one time items, but if you adjust for those you'll get to a number of approximately $10,000,000,000 which is up from last quarter and I think puts us in a position that we can see clearly how we build the bridge to the $45,000,000,000 to $50,000,000,000 level as we normalize.
That normalization requires the interest rate environment to change more fundamentally to a more normalized environment. We've got to take the cost down across the board as the economy continues to plug away, we'll continue to make progress in other revenue sources. In addition, one of the things we talked about at Investor Day was the need to continue to drive down the legacy assets and risk in the company. During this quarter, we took care of 1 of the monoline exposures. We absorbed the home price fall off and we also continue to have our loan portfolio run off across all categories of portfolio we identified for you a couple of quarters ago.
This quarter that portfolio ran down by about $6,000,000,000 excluding the government insured loans, which we show you in the appendix. The cost of that to the P and L was about $1,900,000,000 pretax this quarter. Again, Tom and his team did a good job reducing legacy trading assets and we continue to make progress in that area. When you look at the balance sheet, we continue to position the balance sheet. Our reserves even after the lease remained strong, 4.3% to loans, 1.63 times trailing charge offs.
We made progress improving the capital ratios, lowering our risk weighted assets again, growing liquidity and reducing long term debt. All those are important metrics we identified for you a few months ago. We also continue to move forward take advantage of the opportunities we identified for you. We have a great opportunity as a company in the affluent and mass affluent segments and between Joe Price and Krotzick and the team they continue to see good growth there. We continue to have opportunities on our international capabilities and I'll describe the work we've done there over the last quarter.
And we continue to have opportunities in the business that will rebound as the economy continues to move forward in the investment management and capital markets areas and we had solid quarters there. And again, this quarter, we continue to have to simplify the franchise. This quarter, we made progress. We sold a European small business card portfolio. We have Balbo under contract that flows late this quarter, early next.
In addition, we continue to reduce our private equity positions across the board and we continue to sell some other small pieces to continue to fine tune this franchise. When we get to the broader economy this quarter, what we saw is that the customers' health continues to move forward. Delinquencies were down across all portfolios. Consumer spending continued to increase this quarter over last in 2011 over 2010. In March, it increased 7%, to give you an example.
About 1.5% of that would have been gas price increases, the rest is sort of fundamental customer purchases moving forward. We see loan demand in select areas and loan stability across the board absent the runoff book. Our affluent clients continue to take more risk in the market and we've seen growth in the area there and the capital markets remain robust. So with that, let's drop to page 5 and get into some of the specific results for the quarter. On Slide 5, you can see that we can start with the capital ratios.
We told you at the conference to return model requires us to focus on building our balance sheet with a strong reserve position, driving optimization of risk weighted asset position, and building quarter reflects the continued progress. The tangible common equity ratio increased to 6.1%, above the level we believe that of the risk inherent to run the company. The focus that we also shared with you is driving tangible book value per share. We moved that to $13.21 this quarter as you can see in the upper right hand corner of the slide. Our regulatory cap ratios continue to improve.
We had a fairly sizable change in the DTA allowance period for regulatory capital treatment that caused 27 basis points decline before we got the quarter started. But even with that, we still made progress. The Tier 1 common ratio was up basis points or 31 basis points, not taking into account the adjustment, and the Tier 1 was up 8 basis points growth. On the lower right, you can see we made progress by continuing to produce RWA. And as we've talked to you, we have significant mitigation coming later in the year and volatile calculations after planned implementation of technology, risk models and other risk management opportunities we've been working on for the last couple of years.
All this is critical in our ability to meet the Tier 1 Basel III common ratio goal of 8% at year end 20 12 as if Basel III was fully implemented and to move forward on capital management later this year and next year. Now let me go to page 6 and then just step back and think about the progress Q1 of 2010 versus 2011 in the core balance sheet of this company. As you can see on this page, overall assets down 3%, our RWA is down 6%, our deposits are up 4% or $44,000,000,000 Our long term debt has been reduced $77,000,000,000 which is significant and has a significant benefit in our margin. Importantly, you can see our tangible common shareholders' equity is up $16,000,000,000 our Tier 1 common equity is up $8,000,000,000 and you can see the rest of the statistics on this page. So in the year's timeframe, we've been able to significantly lower the risk, increase the capital and increase the statistics on reserve coverage, while at the same time managing the customer franchise.
As we move to the businesses, I just want to reflect quickly on those and then I'll let Chuck take you through the detail on the numbers. On Slide 7, you can see the overall picture and it's a pretty simple picture. You can see all the businesses have moved back to profitability except our mortgage business and we'll talk in some detail about that later on. As you go into each of the businesses, let's first take our deposit businesses starting on page 8. The deposits team produced earnings this quarter at $355,000,000 and that was versus loss in the 4th quarter.
They had higher revenue and lower litigation expense compared to the Q4. Remember that in this business, the 4th quarter was kind of low point because the regulatory items affecting deposits business, I. E. The overdraft are fully in this business. Our Durbin charges will go into our cards segment later this year if it becomes effective.
The return on tangible equity for deposits business this quarter was 25%, which is above the rate of our hurdle rates obviously, but we expect to go higher as the business continues to recover. Average deposit balances were up $5,000,000,000 or 4% annualized. Cost of retail deposits, both in this business and in our wealth management business combined, were down 4 basis points to 33 basis points. Importantly, new accounts reflect continued focus on quality relationships and retention. As a matter of fact, we're seeing the lowest attrition in accounts we've seen in 3 years or more.
In this quarter, we saw the 1st net account growth based on the change in strategy that Joe Price and his team are accomplishing in 5 quarters. Account closures are down and our customer focus continues to work. Results in our pilots to reposition our franchise based on all the regulatory changes and customer driven analysis are still in early rollout but are exceeding our expectations. And adding a preferred customer solutions group or platinum privilege operating, as we call it, has worked well. On the expense side, the team is working.
Branches are down 200 over the last 5 quarters. Our cost to deposits ratio that we showed you at our in early March is went down from 2 64 basis points. That's all the cost of operating the franchise over the deposits to 260, which shows continued growth. Our active online accounts exceeded 30,000,000, a record for this company. Our mobile users are up 55% Q1 10 to 1st quarter 11 to 6,800,000 mobile users.
As we switch to card services, that business earned $1,700,000,000 in the quarter on improved credit quality. Its revenue as the portfolio keeps repositioning as we continue to run down the books of the loans we don't want in that business and the lower yields due to the seasonal decline in retail volume. The unit did benefit by reserve release, but the earnings are normalizing and we'll see that happen over the next few quarters. The retail volumes are down from the Q4, but as I said earlier, customer usage of cards has gone up year over year by the 5%, 6%, 7% range depending on a month. Our net loss rates broke another level here as we fell below 8% for the first time in a while and from the peak of nearly 14% on card losses in the U.
S. Credit card book. New accounts in our U. S. Credit card book were up 26% in the 4th quarter and the highest level in 6 quarters.
And credit quality of this noted origination is very strong. So as you think about our core consumer businesses, we've returned to profit and deposits and we expect to keep driving that forward and our card business continues to improve and both have upside as the interest rate environment economy continues to stabilize. We move to the next page, Slide 9, on our Wealth Management businesses. The Global Wealth Management team turned in $531,000,000 after tax, up 69% from solid 4th quarter results, driven by an 8% increase in revenue and lower provision for credit margin in this business showing the value of the integrated model across all those various products was reaching nearly 19% and the return on economic equity was 30%. The growth in margin, as I said, is reflective of the loan and deposits growth, which grew 5 percent in the quarter and it demonstrates that customers want to integrate their finances with us and that loan and deposit growth led to NII growing 10% from the Q4 of 2010.
Now many times people ask if that money is just money sitting on the sidelines. But during this quarter, we've also seen the activity related to the investment side of the house grow nicely. Client balances grew 2% and that's on a $2,000,000,000,000 base to give you a sense. So it's $45,000,000,000 in growth from clients. And new product flows of about $14,000,000,000 in long term assets under management were all good performance by this unit.
The growth in financial advisors continue to be steady, 184 new financial advisor added. We've had we continue to have record low attrition in our advisor force. And referrals by this unit, which is sort of a Lynch Pandora referral strategy, continue to be strong and remain healthy with the other businesses. On Slide 9, we move to 1 of the at the bottom of Slide 9, we talk about one of the core businesses we have, which is middle market small business lending, which turned in another quarter of $923,000,000 of earnings. They're down slightly as they went from a release of provision to actually having provision this quarter.
The return on tangible equity for this
business is 18% for this quarter. Average C and I balances were up 2% and that's concentrated in the middle market space and offsets declines in the commercial real estate business and dealer financial services business in this. Average deposits also grew 2%. The asset quality of this business very strong through the cycle and continues to improve. One of the things that you often ask about that we saw here, which is we saw revolver utilization of our companies move from 32% in the 4th quarter to 35%, which shows that companies are using credit ever so slightly.
Remember that normalized to that level, that's probably in the mid-40s, so we've got work to go ahead of us there still. We move to slide 10, moving to our large corporate and capital markets and sales and trading team Global Banking and Markets. They earned $2,100,000,000 for the 4th quarter. Returns on tangible capital of business were 28%. The revenue was up 44% in the 4th quarter, driven by increases in sales and trading, a robust quarter in Investment Banking and steady corporate banking revenue driven by treasury management growth of about 5%.
Corporate loans were up $3,000,000,000 for the quarter, about 12% annualized driven by growth in our international lending business. Now one of the interesting things here is our international market share in some of our businesses is now stronger than our U. S. Market share, which shows the effort the team has made to grow across the world with its global clients. In Equity Capital Markets and Advisory, we actually had higher shares outside the U.
S. This quarter than we did inside the U. S, which shows good progress on our international strategy. And now we move to the business that we continue to have to do a lot of work on and that's our consumer real estate services business. As you know, we split this business in 2 parts to focus the executives in the business to concentrate on 2 pieces, our team to concentrate on the front end business and Terry Laughlin and the team to concentrate on the legacy asset business and running down.
In the business, the legacy asset business obviously had a significant loss and the go forward business had a slight profit and Chuck will talk to you through that later. Our production levels in mortgage banking fell to $56,000,000,000 but we maintained our market share. To deal with the fall off, we've announced today and have been reducing headcount by approximately 3,000 500 people. About 2,000 of those contractors in that business and about 1500 are teammates. This is all on the good side of the house and Barber side of the business.
On the legacy side, we continue to deploy resources to get through the backlogs and modifications and foreclosures. During the quarter, we modified 64,000 loans, bringing us to over 840,000 loans modified in the last few years. On a legacy side, as you saw in our press release, we settled the exposures one of the major model line insurers and Chuck will cover that later. Again, and after the review of the regulators conducted late last fall and our self assessment, we have made significant progress implementing the changes to the solution on short sales, deeds in lieu and foreclosures and we completed about 70,000 of those in this quarter. The cost of delay in foreclosures and assessments related to that is reflected in the P and L this quarter as is increased servicing costs in our MSR valuation.
As we move to the subject of costs, which is something that we focused on, you can see on Slide 12 that you can see that we've laid out for you for the Q4 and the Q1 in terms of the overall cost. There's about $20,000,000,000 in reported cost, but on a core basis, we had about a 500 dollars increase from quarter to quarter. We know that we need to do more on costs and we'll continue to work on those. If you look at the base run rate, it's approximately $17,000,000,000 and this is the run rate we've been facing consistent with what Chuck told you at the Investor Day about a $70,000,000,000 number. So, we've been managing costs to try to run it flat as the incremental one time costs continue to hit us on a given quarter.
But the way we manage that is we've been managing head count. Overall head count grew on a point to point basis from December 31 to March 31 to about 0.3%. That's 0.3% or 2,700 people across our 288,000 people with the mortgage business on the legacy side adding 2,700 people and the rest of the company going down by 2,000. That 2,000 reduction is even with the investments we're making in small business bankers in international capabilities, financial advisors and many other areas. Our efficiency ratio is at 70 5%.
It's down from 92% in the Q4, but that is not the progress we'd like to see. We expect that to continue to recover as the legacy assets and some of the charges go down in the low-50s, low-60s, which is where we were earlier in 2010. But we need to do more to ensure we can hold expenses flat or reduce them as revenue rises to deliver the returns in this business and the company we need to do. To do that, as we told you at Investor Day, we continue to finish off at all the integrations and that will give us the time, the so called peace dividend and the effort to continue to drive this company forward. We told you we could get back to the 55% efficiency ratio.
We have launched an effort this week using outside teammates who've worked at other companies in a significant amount of internal team called new BAC, which will continue to work to take all the work in this company, examine it and see the work that doesn't add value to our customers, our teammates and move it out of this company. We'll work on this effort for the next several months. It takes 2 phases and leads us all the way into 2012. The first phase completes late this fall and we'll continue to implement immediately thereafter to get the expense savings and keep the run rate down as the revenue and the economy recovers. With that general overview, let me turn it over to Chuck to take you
through the quarter. Chuck? Thanks, Brian. I appreciate your kind words and I'm looking forward to continuing to work with you and the senior management team in my new role as Vice Chairman. I think Bruce will do a great job as the Chief Financial Officer.
And also Gary Lynch, who will be joining us later in the year, will be a terrific addition to Bank of America. As some of you may know, I worked with Gary during the 5 years I served on the Board of Directors of Morgan Stanley, and I found him to be a 1st rate executive. With that, let's turn to the slides and begin on Slide 13. For the quarter, as Brian said, we reported $2,000,000,000 of net income or $0.17 a share after preferred dividends. There were several significant items during the quarter, which are detailed on Slide 14.
Representations and warranties provision in the first half was $1,000,000,000 of which slightly more than half was associated with the GSEs and the remainder was related primarily to recent experience with Imoneline. The provision related to the GSEs was driven by higher estimated repurchase rates along with the further deterioration in the home pricing index, what we call HPI in the quarter. If you recall, when we announced agreement with the GSEs earlier this year and adjusted the liability for future losses, I noted that there could be further refinements from a number of factors. A major factor in our estimate of liability for future losses is the performance of HBI, which declined this quarter and impacted the severity of losses in our rents and warranties liability. The credit mark on structured liabilities under the fair value option resulted in a negative adjustment of $586,000,000 reflecting a tightening of our credit spreads compared to a negative adjustment of $1,200,000,000 in the 4th quarter and as reported in other income.
Equity gains during the quarter included a $1,100,000,000 gain from an investment in connection with the related IPO in the Q1 and reflected both the sale of shares as well as the fair value mark on the remaining shares we still hold. We have 546,000,000 dollars in gains on the sale of securities during the quarter. Trading related income included a negative DVA impact of 3.50 $7,000,000 due to wider debt spreads. Excluding fees paid to external legal service providers, litigation expense this quarter was $940,000,000 principally associated with mortgage related matters. During the quarter, there were various mortgage assessments and waivers accrued for several areas of exposure driven by the foreclosure delays, which totaled $874,000,000 including 5 $48,000,000 for compensatory fees that we expect to be assessed by the GSEs as well as costs incurred during the foreclosure process that we do not expect to recover.
Also included in the Q1, as Brian mentioned, was approximately $1,000,000,000 of expense related to retirement eligible stock based compensation awards, so called FAS 123R that we have every year at this time. And merger related and restructuring charges were 202,000,000 $1,000,000,000 in the 4th quarter. The current period reserve number included $1,600,000,000 of reserve increases related
to the purchase credit impaired portfolio.
One item not on this slide, but which I want to highlight for you is our effective tax rate that this quarter was 26.3 percent. At this time, we would expect the rate for the rest of the year to be around 30%, plus or minus unusual items like a charge for the UK rate reductions expected later this year or more valuation allowance release benefits like we've seen during the last couple of years. You may recall that we wrote down a portion of our deferred tax asset last year in Q3 due to the 1% UK tax rate reduction, resulting in a charge after tax of nearly $400,000,000 It looks like the UK is considering 2 more 1% tax rate reductions, which could impact the Q3 of this year. So we are expecting a charge income tax expense of nearly $800,000,000 upon enactment of dollars charge would not affect our regulatory capital levels. Dollars charge would not affect our regulatory capital levels.
On Slide 15, you can see that average loans were down $1,600,000,000 from the 4th quarter, while average deposits increased more than $15,000,000,000 Deposits remains a good story of growth consumer balances grew, wealth management clients continue to do more business with us and commercial customers continue to prefer to hold rather than invest cash. In line with our comments over the past few months, ending long term debt dropped $14,000,000,000 and we expect that decline to continue. As you can see on Slide 16, As you can see on Slide 16, loans at the end of the quarter excluding net charge offs and runoff activity were up $2,900,000,000 Consumer loans were relatively flat. Commercial loans ex real estate were up $3,500,000,000 or 1.4 percent driven primarily by growth in Asia and EMEA and commercial real estate loans declined $2,000,000,000 or 4.1 percent as reductions in higher risk assets continue to offset new originations. Net interest income on Slide 17.
Net interest income on an FTE basis was $12,400,000,000 down 3 $12,000,000 from the 4th quarter. The impact of lower hedge income, lower consumer loan balances and yields and fewer days in the quarter were offset partially by a reduction in long term debt and other items. Our average earning assets for the quarter were down $14,000,000,000 mainly due to reduced customer financing activity in the repo area. Average consumer loans were down as additional runoff in the card and home equity portfolios more than offset retained mortgage originations. Average commercial loans were relatively flat as decreases in real estate and U.
S. Commercial were partially offset by increases in both core loan and trade finance activity in our non U. S. S. Corporate banking business reflecting our growing international footprint.
As we've said for the past few quarters, we expect net interest income to be down long term debt footprint by 15% to 20% by the end of 2011 relative to Q3 2010 levels. Turning to Slide 18, card was down almost $300,000,000 from the 4th quarter results due mainly to the seasonal decline in interchange. Decreases in retail spending were 6% versus the prior quarter, but versus the prior year reflected an increase of 6%. Card revenue was down 7% from a year ago due to the impact of the Card Act as the provisions became effective throughout 2020. On Slide 19, we show service charges were flat with the 4th quarter, but down 21% from a year ago due to overdraft policy changes, which as you know, were fully embedded in our results as of the 4th quarter of last year.
Let me say a couple of things that you should note before we move away from retail banking driven revenue. Consumer spending is up, account closures are down, quality sales remain strong, deposits grew and employment levels are higher, which all point to improving performance in our retail businesses in future periods. Mortgage banking income on Slide 20 improved by $2,000,000,000 from the 4th quarter as lower reps and warranties provision was partially offset by lower production volumes and margin as well as less favorable net MSR hedge results. Production volume in 1st mortgage of $57,000,000,000 was down 33%, in line with the drop in the overall market size from the 4th quarter, while lock volumes were down 45%. MSR performance net of hedges was negligible this quarter versus a positive 2 $57,000,000 last quarter.
The capitalization rate for the consumer mortgage MSR asset ended the quarter at 95 basis points versus 92 basis points in the 4th quarter. Given the level of interest rates and our lower lock pipeline, we forecast production levels will be lower over the near term. Turning to Slide 21, you can see the total reps and warranties provision in the quarter was $1,000,000,000 down from $4,100,000,000 from the prior quarter. Much of the decrease was due to the impact of our agreements with the GSEs in the Q4. The $1,000,000,000 provision in the Q1 dealt principally with the GSEs and recent experience with the Monoline.
On that note, as Brian made reference to this morning, we announced an agreement with Assured Guaranty to resolve all of the Monoline's outstanding and potential repurchase claims related to alleged reps and warranties breaches involving certain 1st and second lien residential mortgage backed securitization trusts where Assured provided financial guarantee insurance. The agreement covers original collateral exposure of approximately $35,800,000,000 with a combined principal at risk of approximately 10 point $9,000,000,000 The agreement includes a cash payment of approximately $1,100,000,000 to Assured as well as a loss sharing reinsurance arrangement that has a current estimated fair market value of approximately $500,000,000 Approximately $1,100,000,000 of that was reserved for these potential repurchase claims at the end of December with remaining liability recognized in the Q1. The settlement gets behind us a sizable piece of home equity exposure along with some first lien exposure. We currently estimate end of the possible loss range related to non JSEs to remain at around $7,000,000,000 to $10,000,000,000 over existing accruals. Any reduction in our previously disclosed estimated range resulting from reserve accruals in this quarter were largely offset by the impact of HPI deterioration during the Q1.
As a reminder, this estimated range does not represent our estimate of a probable loss and is based on current assumptions that are necessary subject to change. The liability for RUPS and warranties ended the quarter at $6,200,000,000 compared to $5,400,000,000 in the prior quarter.
Our
in On Slide 22, we've outlined the On Slide 22, we've outlined in more detail the organizational changes we announced in the last quarter for our former home loans and insurance business. And on Slide 23, we split out for you what we now call consumer real estate services into 3 pieces to provide a way to better understand the financial results and track our progress in those activities. Home Loans and Insurance, as you can see, made $130,000,000 this quarter and includes loan production the legacy asset servicing portfolio. Insurance earnings drove the results given the low levels of customer mortgage application activity in the quarter and we incurred to fulfill the outstanding pipeline left over from the 4th quarter's low rate environment. Legacy asset servicing lost $2,500,000,000 and is responsible for servicing delinquent loans and managing the runoff and exposures related to selected residential mortgage, home equity and discontinued product loan portfolios.
The LAS results represent the net cost of legacy exposures including reps and warranties provision, litigation costs, financial results of the home equity loan portfolios allocated to legacy asset servicing and financial results of the legacy asset servicing portfolio service for others. The LAS portfolios include both current and delinquent loans that met standards defined for inclusion in legacy asset servicing. The other column is essentially the results of management of the MSR and includes the change in the value of the MSRs, net of hedges. We will continue to refine how we present this information going forward. Slide 24.
Our activity with Wealth Management clients is producing revenue that achieved post merger highs, which is where we generate bulk of investment and brokerage revenues. Investment in brokerage revenue was up $222,000,000 or 8% from the 4th quarter due to higher market levels, long term assets under management and higher transactional activity. Asset managed fees were a record $1,500,000,000 up 6% from the 4th quarter and brokerage fees were also a record approximately $1,600,000,000 up 9% from the 4th quarter. Total client balances including Merrill Edge grew $47,000,000,000 to $2,300,000,000,000 during the quarter as a result of market activity and strong flows into long term asset management products. Sales and trading revenue on Slide 25 of $4,900,000,000 which includes both net percent from last year's record quarterly results.
FIC results more than doubled from the 4th quarter, led by credit products and rates and currencies. Equity revenue was up 60% to $1,200,000,000 from the 4th quarter, driven by increases in all major lines of business. An improved trading environment and client activity help Average bar in the period increased 17% from the 4th quarter to $184,000,000 versus a drop of 33% from a year ago. Investment Banking results on Slide 26 were relatively flat with the 4th quarter, but compared to a year ago, revenue increased 27%. Our overall fee ranking remained at number 2 globally.
Results versus a year ago were driven increases across all major product categories, particularly M and A and Equities. We were involved in numerous high profile transactions during the quarter, several of which were outside the U. S. Turning to expense levels on Slide 27. Total expenses excluding the goodwill impairment charge increased $1,400,000 from the 4th quarter.
As I discussed earlier, dollars 874,000,000 of the increase was due to several areas of exposure driven the foreclosure delays. Personnel expense compared to the 4th quarter is up approximately $1,400,000,000 reflecting again the impact of retirement eligible stock based comp awards along with higher performance based incentives and GBAM related to stronger results. Higher levels of headcount and expense in consumer real estate services were related to default management staff and other loss mitigation activities in that business. And as we mentioned earlier, litigation costs of $940,000,000 in the quarter dropped from 1,500,000,000 dollars in the 4th quarter. As we told you last month at our investor conference, we expect our expense levels for 2011 to remain elevated as we work through these issues and continue to invest in franchise.
Highlighting what Brian said earlier, we have launched a comprehensive initiative focused on improving our financial performance by reducing expense levels and producing higher revenue. Moving to asset quality trends on Slide 28. As I did through most of last year, delinquencies excluding government insured FHA loans, net charge offs criticized balances and non performing assets continue to improve. On On $755,000,000 compared to the 4th quarter. Consumer net charge offs were down $509,000,000 reflecting improvement in most products.
Commercial asset quality also improved as net charge offs dropped $246,000,000 or 26% from the prior quarter, with the biggest drivers being U. S. C and I, including a legal settlement recovery and commercial real estate. The increase in net charge offs in non U. S.
Commercial was due to a couple of large legacy credits. And even with the decline in reserve levels, the ratio of allowance for loan losses to annualized net charge offs was essentially flat compared to the Q4 at roughly 1.6x. And thinking about credit costs for the rest of 20 11, we think provision expense should continue to hedge down through the year as charge offs continue to move lower primarily in the consumer businesses. We expect loan loss reserve reductions will continue as long as portfolio performance in the economy continue to improve and other credit metrics warrant lower reserves. Moving to Slide 30, our purchase credit impaired consumer loan book, which is comprised of discontinued real estate, residential mortgages and home equity was $28,000,000,000 including the allowance.
We increased the reserve by $1,600,000,000 to reflect a more negative outlook for home prices. Turning to Slide 31, let me add before closing that we recognize that there are a number of items in the quarter that make your analysis a bit time consuming. From our view, the positive underlying trends are improvements in credit, capital, deposits and progress on redesigning our franchise to best serve our customer base. We believe the interest rate environment will remain challenging and don't expect the mortgage picture to improve significantly for several quarters. However, as you heard at our investor conference, we have articulated our strategy and we are executing against it.
So with that, let's now open it up for questions.
We'll go first to the side of Glenn Schorr with Nomura. Your line is open. Please go ahead.
Hi, thanks very much. Maybe if we could just take a minute to expand a little bit. You've just mentioned and you have it in slide 27 that the program to increase revenues and take out costs to drive profitability. And I think later on you said something about material benefits in the second half of twenty twelve on the expense side. Can we talk maybe a little bit about the largest contributors or the largest buckets that we'll see that expense savings over the 2 years?
If you think about it, think about 2 different things going on, Glenn. First, the largest improvement you're going to see over the next 24 months will be as we crest over the go over the crest on the mortgage servicing side for the delinquent assets and start to take those costs out. And likewise, other places in the company, those similar costs exist. So that if you remember what we showed you is we showed you we had 70,000 human beings dedicated in the mortgage business, including the contractors, 50,000 full time employees. We've gone from about 5000 to 8000 people who have serviced 6 days and out loans to a total of 30,000 over the last several quarters.
And again, 2,500, 2,600 again this quarter, 2,700 this quarter. So, one of the things you'll see as we continue to get through the bubble of foreclosures as delinquencies come down, you really have a body of work to get through. We had to stop the foreclosure. We restarted them. As we get through that, that will come down over the next several quarters.
But we're talking about we knew we were going to get that. And so that we have identified. That's why we isolated it and get that out. What we also need to do is just to continue to look, we sold 19 or 20 different pieces of the company off. We have built up a lot of stuff for businesses that are no longer here.
We have built processes and stuff when the company was a different company. We brought a lot of new enterprises. Our 6 Sigma capabilities that we have put in because we brought in over 100,000 different associates who are new to all that. We had said we had to step back and take a look at every aspect of work in the company. Work that doesn't benefit the customers or associates has to go out to have to be taken out.
That process is a process many companies use and I've used it early in my career, but the process is in 2 phases. The phase finishes late this fall. The second phase finishes early in the spring. And so we'll begin implementing this as we have ideas. That'll take a little longer as we go through.
That is not stopping us from also doing things like in the branch team that I talked about. We are down 200 branches, down 50 this quarter, around numbers. The cost of deposits ratio that we showed you at Investor Day dropped to 260 basis points, which we think leads industry by a lot. That includes the FDIC expense, the whole 9 yards in there. So as you think about, we're continuing on the core aspects we do on cost.
The other benefits will come through a little slower as the bad assets get better and the work gets done in the program.
So I very much appreciate that, Brian. On the mortgage servicing side, it's a whole lot of people and I think we get that. But in general, I think we saw by through JPMorgan's results and I'm expecting through others, in general, the cost of servicing mortgages is still going to the moon on a run rate basis. Is that thought process included in your cost saves in the second half of twenty twelve? And does that have anything to do with the MSR
on where you mark the MSR? Yes. In the valuation of the MSR for the last couple of quarters has been a charge to increase servicing costs, which decrease your cash flow, and that's embedded in that valuation. We're carrying 92 basis points or so, which is a conservative value we believe. But embedded in that, in the performance in that last couple of quarters has been roughly $500,000,000 each quarter or $450,000,000 or so each quarter for that.
So, in that, we have to price through to the street for lack of better term because the increased amount of work you have to do to service the mortgage loan ultimately you have to get paid.
Last one. On reps and warranties, I think following the partial settlement with the GSEs, I and others might have thought with $5,000,000,000 plus in reserves, we might see a leveling off on the provision, but another $1,000,000,000 with over half going to the GSEs. I'm assuming that that's for the Fannie stuff that wasn't settled. And just curious on how you think about that as an annoying run rate that's with us for a few more quarters or you feel like what percent of the pipe are you through now on the GSEs?
Chuck? Sure. Glenn, there's a couple of dynamics going on here. We saw a slowdown in new repurchase request from the GSEs in the Q4, as you might imagine, as they were going through the settlement process. So there's a bit of a backlog that built up by them in the Q4 that I think we saw hit us in the Q1.
They also seem to be devoting more time to submitting claims and less time to resolving claims, which has tended to create a bit of an elevated level at the end of the Q1. So there's a bit of that going on. A substantial portion though of that of the provision associated with the GSEs related to HPI deterioration, which was kind of funny. Most of that I should say, most of the submissions I've been referring to were Fannie rather than Freddie. And in terms of where we are on the overall pipeline, we said last quarter we were in 70% to 75%.
I would say in terms of being all the way through with respect to GSEs, my guess is we're probably at the high end of that range now.
Okay. Thank you very much.
Thanks, Glenn.
And we'll take our next question from Matt O'Connor with Deutsche Bank. Your line is open. Please go ahead.
Good morning.
Good morning, Matt.
As we look at the mortgage hits in the Q1, are there any estimates of what the impact will be from Wednesday's regulatory enforcement actions that were announced in terms of whether it's value in the MSR or just higher foreclosure costs?
Think about that order being announced on Wednesday, but actually the work took place in October, November, December, the assessments and the supervisory work. So we've implemented and that's why we've been adding people. So the single point of contact, the requirements on the signing of affidavits and the foreclosure process, That's been embedded in our run rate as we've been building up. And so that did impact in both the Q4 and the Q1 evaluation of PMSR because we already were getting ahead of the things that we identified in the work that we did in self assessment and the regulators identified other improvements. So the run rate aspect that will have some elements to it, but a lot of it is in the system as we speak today.
Okay. So outside of potential penalties for you and all the other
bank regulatory penalties is the question. And then remember, this is the bank regulatory environment and we will have to make assessment as we get to the other people if we get there what other servicing requirements they may put on. But the core of what the bank regulatory requirements do, the look back and the other things are fairly consistent in our dialogues. But we'll see in terms of run rate cost based on that. But from a standpoint of bank regulators, the piece left open is the C and P question.
Okay. And then separately, but still staying on the mortgage topic here, as we think about the sensitivity some of these mortgage hits outside of credit to HPI declines, how much sensitivity is there, for example, if HPI is 5% worse than expected? What do you think that would mean to the mortgage putback hits and the litigation hits and some other moving pieces?
Yes. HPI is going to impact us in several areas. One of them being PCI, purchase credit impaired. It will impact us in terms of reps and warranties. And then, it also impacts us on the credit side with a loan.
And it not only requires what's going to happen to HPI this year, but also assumptions about how long a recovery takes. But if you did a shock this year of roughly 4% over all those portfolios I just mentioned, it would be probably about $1,500,000,000 But again, it assumes on purchase credit impaired that you've got the shock of 4% this year with a gradual increase in home prices over several years, but again, not returning to 4% increase in home prices until well into the second half of the decade.
And then what else for the other buckets like the mortgage and litigation, how much sensitivity is there to those areas?
That was in there as well.
Okay. And then just separately last thing, as we look at the net interest margin for the Q2, I think the guidance in March had been you bottomed out around 2.5%. Obviously, 1Q came in a lot better than that. Just wondering what the outlook is on the NIM percent and the net interest income dollars for 2Q?
Yes. We think it's we we obviously think that the Q2 will be down. Not clear that we're going to go down another 17 basis points to 2.50. We did have frankly better performance in the Q1 than we expected.
Okay. Thank you very much.
And we'll go next to the side of Betsy Graseck with Morgan Stanley. Your line is open. Please go ahead.
Hi, thanks a lot. A couple of follow ups on the Assured. Wanted to understand how much of the Assured relationship that you have has been settled at this point? I mean, you mentioned 1st and second liens were in this discussion, but it looked
to me like maybe only virtually all of the controversies between
virtually all of the controversies between our various companies and Assured, and that's contemplated in this settlement. Probably the only thing that is not contemplated would be those instances in which Bank of America or Countrywide or one of its affiliates might have sold a loan to another institution that then securitized that in a package of mortgages and then sold them to or then had them wrapped by Assured. So the way that transaction would occur, Assured would actually go to that 3rd party and assert a potential reps in warranty claim and then that third party in turn can come back to us. That aggregate exposure in terms of mortgages is about $1,500,000,000 That was not addressed in this nor have we really had much, if anything, in the way of claims asserted in that regard. But beyond that, we assured are basically done.
So is the do I interpret therefore that in your settlement, there's very little exposure or there's very little claims that you're making good on with regard to the seconds?
Yes. With respect to the seconds, we're done. We had provided almost $1,100,000,000 as of the end of December relating to 2nd lien exposure and we settled it basically what we had reserved for.
Okay. And then as we look towards the remaining claims that are outstanding, you indicated $7,000,000,000 to $10,000,000,000 is still your figure. So on a total basis, if we look at 4Q plus 1Q, the exposure would be higher by about $1,600,000,000 is that right?
No. I think the way to think about that Betsy is that we have reassessed what the overall exposure is to the non GSEs. You would expect with the settlement and with additional accruals that that 7% to 10% would go down. That's largely been offset by HPI deterioration.
Okay. And then lastly, the short press release had a discussion about max loss cap dollar amount and your dollar amount and theirs are very different. Is that because the probability of getting that max loss in your opinion is low?
No. I think the well, they may have a different view. I think theirs is around I saw an earlier draft of it. I didn't see the final one. My recollection is they are around that they're thinking about draws.
We're looking at the underlying reps of warranty exposure.
Got it. Okay, great. Super, thanks.
Thank you.
And we'll go next to the side of Paul Miller with FBR. Your line is open. Please go ahead.
Yes. Thank you very much. Going back to the AGO settlement, there's another big settlement there with some other monoline. Where you are and they're probably larger than probably the AGO. Can you address that a little bit?
Paul, I'm not sure what you're asking. Well, I
guess is the MBI. Isn't there another monoline, so when you guys for like $20,000,000,000 or something MBIA?
There are if you think about all the bottom lines, there's 6 companies. We've basically we settled with 2. We work with the other ones. It's NBI is the last one and that's a very complex relationship between us because of the across our company because of the development in our sales and trading business and it's out there we'll continue to work on.
And I would note Paul that Assured FSA Assured was really the only one of the monoline not suing us.
Okay. And then real quick, you mentioned I think in the presentation or in your that you started your foreclosures in non judicial states. Where are you with the judicial states like Florida? Have you started foreclosure processes in that state? Or where do you think can start?
We have started foreclosure process across the board. Across the board?
Yes. Thank you very much gentlemen.
Remember the difference between judicial and non judicial is you got to wait for the judicial process takes place and the judicial states and non judicial states it goes.
Okay. So you're up and running across the board. Thank you very
much. Thank you.
We'll go next to Moshe Orenbuch of Credit Suisse. Your line is open. Please go ahead.
Great, thanks. Two questions. The first is, you had good reduction in the loss rate on the credit card business, but I think what's interesting is the industry as a whole is kind of moving faster into lower levels. Can you talk a little bit about kind of what you think the pattern is going be there over the course of the next several quarters?
On the credit card specifically, Mike?
Yes. Credit card specifically.
Yes. From a high level, I'll have the team address the specifics, but from a high level, remember that we were higher than they were. And so, we're coming down at a good rate. It's just I think we got 200 basis points maybe or more above our peers. We got up to 14% charge off rate.
So, we have more upside as this keeps coming down. The underwriting we did starting changing in 2,008 has outperformed in a not as good economic scenario 3 years later. And if you look at our emergence curves and stuff, we're getting strong performance in the latter part of 2008, clearly 2,009, 2010. So I think we have more room to go to improve frankly, largely because we had a deeper hole frankly. And so that's I'll let Neil or Chuck fill in exact reasons, but in a broad spirit is that we were dealing this issue that we just had a higher number start.
I think Brian summed it up as ours went bad first and we tightened the buy box and also came down very fast. Our early stage delinquencies during the quarter continue to improve nicely and we will see continued improvement going forward, but it will be at a slower pace. But if you look back over the past 4 or 5 quarters, our improvement
has been dramatic. So, if you think about it in broad context, we're sort of high 7s now and we should look to that. We've underwritten to hit a target of 5, 5.5 and frankly the performance of the portfolio we've been putting on in time periods I talked about has actually outperformed that. So this should be a continuous move. This was $13,000,000,000 in a single quarter at one point.
So we still got some room to improve, but it's come down dramatically.
On a separate issue, you talked a little bit about the capital generation and the deferred tax asset disallowance in the quarter is kind of keeping that lower than normal. But even absent that, it feels like given the level of earnings, we'd really like to see that pace pick up if you're really going to
get to
that 8% level in something less than 2 years. So could you talk a little bit about what plans you have over and above what the kind of the run rate of earnings? It seems like there would need to be somewhat more. And related to that, any thoughts you might have on the SIFI buffers that might be assessed
on you? If you look at the balance sheet that we showed you from last year Q1, this year Q1, you see the RWA coming down. But you have to remember, the thing about our company, the issue that we had to face is our Basel II implementation is still in process. And we had to get this dollar work right and that's one of the reasons why we've been pushing our expectation out of when this will all be ready to go to later this year, early next year, was that we need to get some work done. And part of that work is to continue to optimize the RWA calculation, the risk models and other things that will bring down RWA dramatically in our trading areas.
And that requires the systems work that's been going in and will continue to go in during the course of this year and the team working on that. That is a major piece of the equation. And then there's a lot of other pieces of equation. If you look at all the legacy assets sold and the private equity business being brought down. And so we're continuing to do that each quarter.
So we have a roadmap and it requires us to keep executing very well. And then the earnings generation, remember what's affecting the earnings is actually reductions in risk of a significant amount in terms of repurchase or even 303 portfolios and things like that. So you got to think of this a little bit mostly in terms of timing. Stuff we're pulling forward and taking now would have been stuff that we'd have taken over time. And so that helps us out.
But it really comes down to a lot of this is around the optimization of the balance sheet. If you think about us, we run about 65% of RWA to assets today. Our U. S. Peers that are on Basel II and then optimizing on the risk models and stuff are in the 50s and our outside United States peers are have been on it for a long time are in the 30s.
And so, there's a lot of work for us to do and that work is going on this year. And that's one of the bridges we have to have completed as we look to do the capital management we'd like to do for you as shareholders.
Just on the SIFI, any thoughts as to how and when we're going to hear about that?
1 ought to be over the course of summer here. We've obviously, by using the 8% target, we've sort of said it's going to be something. I think fundamentally, I think I'd go back to what we told you late last fall, those of you who saw at our conference where I talked about this. We will store that 100 basis points, that's $18,000,000,000 or $1.80 a share. If it's higher than that, just you can do the math.
We'll store that balance that capital on balance sheet. We'll be embedded in tangible value. You can't put it to work because if you do, then you have to need more. And so, if it's a higher number, we'll have to store more capital. But we'll let that play out.
I think in terms of broad policy, I think we've got enough risk based capital in this company and even more than we need. And I think we'll continue to work on our discussions in the broader policymakers about what the right answer is. But in fact, we've sort of accounted for 100 basis points that's higher than that we'll be storing the capital. But it's all yours. That's what we've been trying to clear.
It's not going anywhere. It's not doing anything. It's not making acquisitions. It's not being put in the business. It's all there.
And the good thing is even if it is a higher number, what we haven't talked to you a lot about is from we're trying to hit that 8%. Our math gets us there at the end of next year. But and that's as if Model 3 was fully implemented. If you think about a higher SIFI level, you really have 5, 6, 7 years to put it in. But importantly, what is not apparent to a lot of people is that the amount of optimization we actually have in latter years is still high because there are certain structured credit trades or certain runoff portfolio still stands about half its balance after a couple of years.
That will provide additional positive momentum, none of which is core to our business. And so, we have a roadmap even 2013, 2014, 2015 that there's significant RWA optimization available to us largely if we can be there in a sense that these are structured trades are going to run off and other aspects are run off. So, I think if it goes a little higher, we have other optimization. And I think in terms of the shareholder view of that, I think we'd manage into it over time to be clear with you how we're building towards it that we got the risk capital on this company.
Thanks very much.
And we'll take our next question from the side of Ed Najarian with ISI Group. Your line is open.
Please go
ahead. Yes, good morning. In terms of the $1,600,000,000 settlement with Assured, could you just walk me through how that runs through the income statement? I'm looking at Page 21 and looking at the repurchase reserve. And I guess it's not clear to me how that's either coming out of the reserve or going to the income statement in some other way.
Sure. Well, think of this in 2 elements. We had provided $1,150,000,000 for 2nd lien exposure. So that was in our reserve as of the end of December. We will make a payment of approximately $1,100,000,000 in the Q2 and beyond in order to satisfy that.
So that $1,100,000,000 reserve is in was in the $5,400,000,000 ending balance of the rapid warranty liability and is in the $6,200,000,000
Okay. So it's going to be netted against the 6.2 next quarter?
Yes. We haven't made the we did not make the payments as of March 31. We signed the agreement yesterday with Assured. We will begin making payments coincident with the signing of that agreement and into the future. So that's one element of it.
We also entered into a reinsurance arrangement with respect to the 1st lien mortgages principally because there's very little experience associated with that. We had some modest reserves set aside for that, for a portion of that, but there's very little experience Assured has put back to us a relatively small number of those mortgages. And so rather than pay them for something that may never happen, we thought it was more prudent to enter into a reinsurance arrangement where we've taken a view as they have with respect to the how those drawdowns will occur and how we would how we might participate in those. And we estimated the cost of that reinsurance arrangement as we've said at about 500,000,000 dollars And that was accrued in the as a part of our consideration of the 1st quarter rep and warranty liability.
Okay. Thanks. And then maybe Brian can put some context around this secondary question. I mean, you mentioned that you feel like you're at sort of a core pre tax pre provision run rate of about $10,000,000,000 which as I go through your non recurring items, we get pretty close to that number as well. And then I sort of think about looking forward, this was a reasonably good trading quarter, you're going to have some net interest margin pressure at least in the second quarter and maybe lower net interest income.
And then we at least get about a $500,000,000 or maybe more a quarter hit from the implementation of the Durbin Amendment, although obviously that could get delayed, but at this point I guess we'll see. But that sort of brings me down to no more than an annualized run rate of about $38,000,000,000 $9,500,000,000 times 4. And so it strikes me as a challenge and maybe you can just walk me through some of the bigger items of how you think you're going to get to a $5,000,000,000 to $50,000,000,000 pre tax pre provision run rate because sort of the middle of that range is about a 25% increase from 38 $1,000,000,000 So I'm just maybe looking at context around that.
Sure. I think you got to maybe behind us, make sure your timeframe is right. We said that was beyond the 11 and 12 timeframe out there. So think about what would happen between now and then. You'd have the mortgage costs come down.
You'd have an interest rate environment change. And so we may do better next quarter. As Chuck said, we're 2.67 on the margin. We told you 250. We may do better mathematically and numbers will be higher.
But if rates rise and I assume that at some point the core estimates of market, our core estimates rates rise up to a modest fed funds rate of a couple of percentage points, that is hugely beneficial to our company and ought to push us back up to 2 $75,000,000 and higher in the margin. If you start to do the math on our size balance sheet, that's significant. So the cost structure comes down, that happens. And then on top of that, what we had a reason to go trading quarters, dollars 4,500,000,000 that is the run rate that Tom needs to produce on a quarterly basis. And if you look at the how that we're getting at now, it is all core customer driven business that is just coming through, coming through last year's elevated levels and last year's decline levels had more to do with sort of circumstances outside the control, but that's that.
Then if you go to the other core businesses, remember as economy grows, we've had no loan growth. We're continuing to run them down. The runoff portfolio, which cost us $1,800,000,000 $1,900,000 this quarter, half that number out there. So it's really continued credit cost, continued cost structure improvement. It's really the interest rate environment, not going crazy, but just improving a little bit, which really helps the core deposit business.
And then grinding on the growth of the franchise that we see in the revenue line based on the fees and other factors. And so the restructuring of consumer deposit accounts, which will be effective this year and the next year, you'll see and as we said, the expenses are unavoidable on the mortgage side now, but we'll get those out and then we'll work on the rest of it. So I think the bridge is around rates, expenses and then the economy. If you've said economy is going to go in decline, that's a different question. I assume the economy gets up to more of a trend growth of 3%, 3 point 5% type of numbers, you'll see the general earnings of the company lift because of loans and other things.
Okay. Thank you. And then last quick one. Over the last two quarters, the period end share count has gone up by approximately 50,000,000 a quarter. Is that a share creep up rate based on, I guess, employee comp that we should continue to think about?
Neil, why don't
you Yes. It's comp. It's pretty much comp. Okay.
And we should expect some kind of creep up like that each quarter, not just in
the Q1?
Ed, in the average shares, if you look at our at average shares, we also had 2 preferred issues that slipped into common in the
Q4 that pushed up the average
The mandatory for Burt's Bees. Correct. So I think Ed, what we haven't been able to do and we'll be able to do as we move down the road is the issue of being able to neutralize the comp related stuff, which was we get to the point where we can capital manage. We'll do that as one of the first things.
Okay. Okay. Thank you very much.
And we'll go next to the side of John McDonald with Stanford Bernstein. Your line is open. Please go ahead.
Yes. Hi. One more question on the Assured Guaranty. Chuck, are there reasons to believe that their success rate would be higher than claims you'll receive from other private investors perhaps that they have stronger rep and warranties or anything you can point to there?
No, I don't it's not a contractual issue, John. It's just keep in mind they're about a third of our home equity exposure and that second lien home equity exposure is probably some of your most riskiest stuff.
Okay. So just higher loss content due to the mix of the home equity?
Yes. Remember, yes, it's dominant part home equity here for this counterparty, whereas you get the private label, it's all really all first.
That's right.
Okay. And then as a reminder on in terms of Basel and dividends as a reminder for us, you said that you feel like you can get to the 8%, Basel 2.5% and 3%. Just over what timeframe was that? And is that assuming no phase in? Can you just remind us of what you're looking at for your outlook there?
What we said to you, it was 8% Tier 1 Basel III common at year end 2012. That's the goal Model 3 standards with no and so we're there above the standards depending on the city buffer discussion that would be phased in over time. But our goal is to hit that at the end of 2012.
Okay. And have you said anything about where you think you'll be on that by the end of this year?
We have not said on the Basel III level, but as Basel II and half becomes effective, we would be above 8% under those standards at that point, I think is what we said earlier. But we have not sort of given you pro form a and we'll continue to look at doing it.
Okay. And Brian is there any comment you can make regarding the dividend, the Fed process? Any specific areas where they were looking for more clarity where they wanted to see things get clearer before saying yes to your dividend increase request?
We didn't ask them for an increase until the latter part of this year because we knew we had to get the work done. I mentioned earlier around continue to get the systems integrated, the risk manager down and frankly taking care of some of the issues like we took care of this morning, clarity there. And so we continue to make progress in that. And that leads to but that's really the core issue is us getting a lot of getting the work done that we promised them to do in the context of implementing the risk management standards in the company. They've been in agreement with us, our work plans all the way along.
And it's their process and how we can resubmit and stuff is up to them. But on the other hand, I'd tell you that we have a clear path that we know what we need to get done and we're doing the work. And that's why we knew we had no chance and told you back in January we're not 1st part of this year because we knew we had to get this work done and they knew we had to get this work done.
Okay. And the last thing here, just could you explain again, you might have said that the greater disallowance of DTA in your regulatory capital ratios, what drove that?
Well, when we acquired Merrill Lynch, now it's 1 year in terms of the amount of in effect allowable DTA that we can include in our regulatory capital calculation.
Just so don't make the same mistake I keep making. I keep thinking we're making is this has nothing to do with the tax position. This is purely what you count in regulatory capital. And they went back to this during the height of crisis, remember, they widened the standard because of the reality of earnings streams. And now we've gone to the pre crisis standard, but the actual tax position is a separate question.
Yes, which is 1 year. We're not losing any deferred tax benefits as an enterprise. It's what you can count in the regulatory capital calculation.
Okay. Carry forward from the merger, carrying forward.
Yes. And this was all contemplated in all the steps and everything we had.
So no you don't see risk of this happening again? It's kind of done?
No. We're down to the 1 year look forward period, which is the more traditional
one. Okay. Okay. Thank you. And one more quick thing on the expenses, Brian, do you have a longer term target?
And is that something you eventually think you'll talk about whether a $75,000,000,000 expense space or $70,000,000,000 or $65,000,000,000 is kind of the right number for the company? You bake something into the
Investor Day when
you talked about $45,000,000 to $50,000,000 like pre provision earnings. Is that
I think we gave you an efficiency ratio target of getting back down to 55%. And you can see across the quarters that the efficiency ratio is bouncing all over the place right now, 58% second quarter, 100% I think the 3rd quarter, 92%, 75%, but it's because the one times in and out. Remember, we're getting hits to revenue on these revenue mornings. They're actually revenue offsets, not expense. So, but the goal is we can see that as that just settles and that pushes down into the 60s and with all the work we're doing over the next couple of years, we push down to 55.
We express this this efficiency ratio because you got to be aware that as revenues rise, we want to deploy the expenses to continue to grow this franchise. So, we want to make sure we're matching the places that need to have them taken out of. Okay. Taking expenses out of the places that need to have them taken out of.
Okay, fair enough. Thank you.
And we'll go next to the side of Mike Mayo with CLSA. Your line is open. Please go ahead. A few clarifications. So
what did HPI do over the quarter? What had you expected? And what do you expect going forward?
As far as HPI going forward, we expect gradual improvement over the second half of the year, further deterioration deterioration next quarter, but not dramatic, but a gradual improvement over the balance of the year is where we're at.
As far as the deterioration
in the Q1, it's on a 3 month lag, but off the top of my
head, I want to say
we had about 1.5% for the quarter.
I'm sorry, that's what it went down?
That's correct.
And you had expected the guests to be stable or so?
Well, what you did, I mentioned a 3 month lag, so we had some catch up because of the Q4.
Okay. And as it relates to the dividend, I'm still not crystal clear on exactly what happened. You said all along you didn't expect a dividend increase till late this year. You go ahead and submit a capital plan with the dividend increase and then the Federal Reserve comes back and says, you're denied. I guess I just don't understand the procedure aspect.
I think the procedure aspect, I have to leave to the people who design the Federal Reserve design the process. But we asked them and I think the idea of improving something 6 months in advance of when we've done the work we need to do, I think that's what they basically said, keep doing the work and go on. And that's why I think it's a little bit hard to explain, but in our dialogues with them, the idea was to get the work done and then we get the approval if we get the work done right and continue to approve the company's prospects during the first half this year. The process they designed and the answer they gave us was what we disclosed. But I think the theme of my dialogues with the and they've been with us all the way is to get the work done and then we'll be ready to get approved, but they weren't going to approve it in advance of that work being done.
So you can still get your dividend increase by the year end?
We don't know what the process will be for resubmission, but as soon as when we figure that out, we can tell you. But would you say there's still a chance for a dividend increase? Yes.
Dividend increase by the end of the year?
We should pull back, Mike, and make sure. I said that we've got to get the process down. But if you step back, what we've tried to make clear to you guys is for 11% and 12% this is a modest dividend idea because we have to get to that 8% Basel III Tier 1 common level, which requires us to maintain most of the capital. And then after that, we're in a position to start returning the capital. But all the capital that we accumulate is in our change book value, is on the balance sheet and is going for the benefit of the shareholders.
We can't we're not using it to do anything else. So, I think whether we get the dividend in the Q2, Q3, Q4, Q1, Q1, whatever, next year, this year, I think what we're trying to be clear to you is that we need to we're doing the work we need to do. We've been repositioning this company, improving it. And as soon as we and the regulators and the process is set, we'll
let you know where we stand.
I'm sorry, last follow-up on that. So, but you will resubmit a capital plan that would at least propose a dividend increase by the end of the year. The question is whether or not it would get approved?
The capital plan is a 2 year look. We have all the submissions in it for 2 years and we'll resubmit that when the process allows you to.
All right. Then separately, as far as the piece dividend, you said several times over the call, in a couple of years, in a couple years, you have a new process in place to take a look at expenses. I'm just wondering if we'll see a little bit more of the efficiency pickup over the next couple of quarters. I know a lot of it's dependent on credit. But aside from credit, what confidence can you give us that you have an eye on expenses quarter after quarter even after acknowledging the international small business FA investments?
Well, take a look at the headcount across the last few quarters. This quarter, on a period to period, we're 0.3% change on 288,000 people. If you look at that, it was at 700 total human beings, 2,700 adds in the home loan investment to work on that we geared up during the quarter to continue to work on that, 2,000 down the rest of the company, including net of all the investments we made. So we're managing the heads down in the places. Barbara, as we talked about earlier, just announced on the production side of mortgage company, we're down 3,500 people, 2,000 contractors.
We obviously would take the contractors first. So as you think about we're managing these expenses down as we speak, but running through those expense lines or litigation expense and other things which throw it out on a given quarter, count we're bringing down, which is the number one thing we can control and drive to while we're making investments. We added many small business bankers, 200 FAs and things like that in the same quarter where overall heads were flattish and we added 2,700 people. So we're working on it every day. We're not waiting for the white smoke to rise from this process, and we continue to drive at it.
The 50 branch closings in the quarter, the 2.60 on the all in cost of all the call centers, all the online to our deposits. So that challenge, you'd ask anybody in the industry that are close to that. Was talking to somebody who told me they're 4.25%, 4.5%. It's a thing to scale in this business, but we keep grinding at that. That's down 4 basis points.
Everywhere we can, we process that will help us accelerate that.
And then last question, the syndicated loans are hot recently. What were your fees from being an arranger on syndicated loans? And how much did the syndicated loans help your loans in Global Banking?
We'll get back on that. I don't know that off the top of my head. We are one of the leaders in that business and I've always been.
All right. Thank you.
Given the time constraint, we will allow one more question.
And we'll take our final question from Vivek Juneja with JPMorgan. Your line is open. Please go ahead.
Hi. Couple of questions just on trading. Tom Montag talked about being down 15 to 20 at the Investor Day. Can you give a little more color as to what happened in March that you've done a little bit more than that, which categories changed? Secondly, on IB, it seems like your market share and volumes has moved up faster than freeze.
Can you seems like there's a couple of big deals you got into. Can you talk about what's going on on fees in that respect?
I'd say as you think about it, 15%, 20% down that Tom talked about up to $8,000,000,000 Obviously, it was still in the quarter. You had to see what took place in March and there's been some stuff in and out. But on the other hand also as we went through March the DDA and other things which was fairly significant would have taken the last month of the quarter. But overall, if you think about from the Q4 to the Q1, we doubled the fixed income revenue and the equity revenue went up by 40%, 50%, 60%. So, he's had a reasonable rebound.
When you go to investment banking fees, I don't account what people pay us. So, the lead tables are having had that group for a couple of years. I talked to him about when somebody pays us, I know I've got cash. That's the interesting part of the business. And I think we did about $1,500,000,000 steady with the Q4 last year, which had some good activity, up from $1,200,000,000 last year Q1, and we continue to have a strong and robust pipeline.
And have you seen some of the offerings going out on the IPOs and things like that, and we expect us to continue to improve those fees. But we got $1,500,000,000 in fees and every quarter for the last 8 or 9 we've been second based on fees received and expect that my guess is that will continue.
And on the trading side, Brian, if you just break that down a little bit by product, credit products versus rates, FX derivatives, securitized for us. Can you give some color as to how you did on that year on year linked quarter? And in terms of March, what got weaker, which category?
We'll get Lee or Kevin to fill some of that in for you. But in broad state, in the place that we still need to make improvements in the commodities business, that's one of the difference between us and some of our peers. But on the other hand, we've done a good job in the rates and currencies and other areas. So it's really one of the big differences between just gross dollar amount between us and others is our commodities business is just smaller and not performing so well. And so we'll legal can fill you in some of the details, but overall that's one of the big easy identifiable differences.
Okay. Thanks.
Thank you, everyone. And look forward to seeing you next quarter.
This concludes today's conference call.