Good day, everyone, and welcome to today's program. At this time, all participants are in a listen only mode. Later, you will have the opportunity to ask questions during the question and answer session. Please note this call may be recorded. I will be standing by should you need any assistance.
It is now my pleasure to turn the conference over to Mr. Lee McIntyre. You may begin, sir.
Good morning. Thanks to everybody on the phone as well as the webcast for joining us this morning for the Q2 results. Hopefully, everybody has had a chance to review the earnings release documents that are available on the website. So before I turn the call over to Brian and Bruce, let me just remind you we may make some forward looking statements. And for further information on those, please refer to either our earnings release documents, our website or our SEC filings.
So with that, Brian Moynihan, our CEO, for some opening comments before Bruce Thompson, the CFO, goes through the details. Fred? Thank you, Lee, and good morning, everyone, and thank you for joining us for our Q2 results. As you can see from our release, we reported $5,300,000,000 in after tax earnings this quarter, which is up from last quarter as well as more than double what we made last year. Not only were we pleased with the bottom line, but revenue was up and expenses were down comparatively against both periods.
Lots of things came together to achieve these results and we continue to work on all of these also. On the expense side, we told you that we achieved a new BAC cost savings back in the Q3 of last year. However, we didn't give up on our focus on expenses and you can see those in the results. It's the lowest non litigation expense base since 2,008. At the same time, we continue to invest in the future of this company.
Just to mention a few of these investments. We added sales specialists in our financial centers, up 3% versus last year. We had 3% to our financial advisors since last year, 4% to our commercial and business bankers. We've opened new financial centers in new markets that we previously didn't have coverage and we continue to upgrade those in other markets. In addition, we continue to invest in young new talent in our company.
We hired a number of teammates from college over 1200 and we have our intern program to over 1800 this summer. And we continue to invest as we have said in technology, so there was $3,000,000,000 we spent this year to continue to improve and drive our products and our capabilities in the company. As we are doing that, we continue to focus on our process improvement. Our simplify and improve effort continues to take hold and you saw that some of the effects of that this quarter. The goal of that program is to hold the cost, manage them well as the economy continues to recover and our revenues continue to recover.
Away from expenses, a few other highlights of the quarter. We saw our overall loan growth and balances from the Q1. We saw continued improvement in our net charge offs and credit quality. Our deposits and our consumer unit continue to grow even faster this quarter than prior quarters. We also built capital on tangible book value despite the OCI impact of higher rates.
We've returned over $1,300,000,000 to our shareholders through share repurchase and common dividends. And looking at the results this quarter, you can also see that we're making progress on our path to our long term targets for return on assets and return on tangible common equity. Bruce will take you through the business activity in the various pages in the slides with some highlights. This quarter again we averaged about 5,000 new customers a day to our mobile banking platform. But importantly, the team continues to make progress in bringing that platform into the company in multiple ways.
The example of that is this quarter, our digital channel sales were up 30% from last year in Q2. In addition to that, we continue to focus on our mortgage area, our direct to consumer mortgage and home equity originations improved 40% from a year ago. In the mass affluent space, our Merrill Edge product continues to have record assets and they're up 15% to over 122,000,000,000 dollars and that's on top of our investment brokerage services revenue teammates in U. S. Trust and Merrill Lynch that continues to grow.
We also continue to drive our 401 business. And this year we've added some of the industry's largest companies to our platform. So those are the trends in the business and Bruce will cover more later. From a broad economic standpoint, what do we see out there? Notwithstanding uncertainty in economies outside the United States, we see the U.
S. Economy continues to steadily improve. In our middle market business, our commercial businesses, our company's balance sheet is strong and they continue to draw loans at a higher rate than they did last quarter. Our consumers continue to spend on our debit and credit cards this quarter spending over $127,000,000,000 this quarter, up 3% from last year even with the downdraft in gas prices in the year over year comparison. Our industry leading research team under Kansas' leadership in Bank of America Research expects U.
S. GDP growth for the second half of the year to be 3% for each of those quarters and we see that in our statistics. Our company is well positioned to benefit from that continued health in the economy and we continue to this company to deliver for our customers, clients and for U. S. Shareholders.
With that, I'll turn it over to Bruce.
Thanks, Brian, and good morning, everyone. I'm going to start on slide 3 and let's go through the results. We recorded $5,300,000,000 of earnings in the 2nd quarter or $0.45 per diluted share. This compares to $0.27 a share in the Q1 of $2,015.19 in the Q2 of last year. A few items to note as you review the results.
In the second quarter, we had 6 $69,000,000 of positive market related adjustments in net interest income, primarily driven by premium amortization on our debt securities from higher long term rates. This provided quarter also included $373,000,000 in benefits from consumer real estate loans, which added $0.02 a share. One other item worth noting is the rep and warrant provision, which is a net $205,000,000 benefit this period. This was mostly associated with positive developments in legacy mortgage related matters, which I'll discuss later in the presentation. This added $0.01 to EPS.
Revenue on an FTV basis was $22,300,000,000 in the 2nd quarter and included the items that I just mentioned. Total non interest expense in the quarter was $13,800,000,000 and reflects lower litigation costs, lower LIS costs and good core expense LAS costs and good core expense controls compared
to both the Q1 of 2015 and the
Q2 of 2014. Provision for credit losses this quarter were $780,000,000 and included improved net charge offs on an adjusted basis as well as less reserve release compared to the first quarter of 2015. Return on tangible common equity this quarter was 12.8%. Return on assets was 99 basis points and the efficiency ratio was 62%. If we adjust those metrics for the few items I mentioned earlier, return on tangible common equity was 10.9%, return on assets was 85 basis points and the efficiency ratio was 65%.
On slide 4, the balance sheet was up less than 1% versus the Q1 of 2015 as loan growth and higher securities balances were offset by a decline in the ending balances within our Global Markets business. Loans on a period end basis were up reflecting good core loan activity. All of our loan categories showed growth from the Q1 of 2015 with the exception of consumer real estate, which declined from both discretionary activity as well as other one offs. Common shareholders' equity improved as solid earnings growth was partially offset by a $2,200,000,000 decline in OCI and $1,300,000,000 in capital return to common shareholders. We repurchased 49,000,000 shares for $775,000,000 and paid approximately $500,000,000 in common dividends this quarter.
Tangible book value increased to $15.02 and tangible common equity improved to 7.6%. If we look at lending activity on slide 5, our reported loans on an end of period basis increased for the first time since the Q3 of 2013, growing $8,500,000,000 from the Q1 or 4% on an annualized basis. Activity in our discretionary portfolio, which is reflected in the LAS and all other box, where we use consumer real estate loans to manage interest rate risk and the LAS unit where we have a home equity runoff portfolio together showed a decline from the Q1 of $15,000,000,000 The loan sales I mentioned earlier accounted for roughly half that amount and included certain loans with long term standby arrangements that were converted into securities. After we exclude this activity, our core loans increased $23,500,000,000 or 4% from the Q1 of 2015. Commercial lending was strong.
Among other initiatives, the management team challenged our corporate and commercial lenders for the past several quarters to more fully utilize their credit limits to drive responsible growth. In that light, Global Banking showed a continuation of loan growth from the end of the Q1 of 2015, growing $11,400,000,000 or 4% during the quarter from a mix of C and I across large corporate and middle market as well as growth in commercial real estate. Our Wealth Management business continues to experience strong demand in both securities based lending as well as consumer real estate and our consumer banking area grew both card and auto loans. If we move to regulatory capital on slide 6, under the transition rules, our CET1 ratio improved to 11.2 percent in the second quarter. If we look at our Basel III regulatory capital on a fully phased in basis, CET1 capital improved $1,100,000,000 driven by earnings, partially offset by the OCI decline, share repurchases and dividends.
Under the standardized approach, our CET1 ratio was steady at 10.3% as RWA was stable with the Q1 of 2015. Under the advanced approaches, CET1 ratio increased from 10.1% to 10.4% as RWA improved by approximately $34,000,000,000 Lower counterparty RWA drove this decline and was equally split between 3 factors. The first, lower derivative exposures mainly driven by movements in both rates as well as FX. 2nd, optimization through better collateral management and reductions in certain positions. And third, an increase in the population of trades eligible for modeled treatment.
The balance of the improvement was driven by lower levels of market risk. In regards to the Fed's requested modifications to models in order to exit the parallel run that we previously communicated to you. At the end of the quarter, we estimate if we made the requested modifications that our advanced approaches CET1 ratio would be approximately 9.3% at June 30. Moving to our supplementary leverage ratios. We estimate that at the end of the second quarter, we continue to exceed the U.
S. Rules that are applicable in 2018. Our bank holding company SLR ratio was approximately 6.3% and our primary bank subsidiary BANA was approximately 7%. If we turn to slide 7 on funding and liquidity. Long term debt of $243,000,000,000 was up $6,000,000,000 from the Q1 as issuances outpaced maturities.
As you can see from the maturity profile, we have $10,000,000,000 of parent company debt scheduled to mature in the rest of 2015 and will continue to be opportunistic in regards to issuance. Our global excess liquidity sources reached a record level during the quarter at $484,000,000,000 and now represent 23% of the overall balance sheet. The increase from the Q1 of GELS reflects a continued shift from discretionary loans into HQLA securities as well as the increased debt balances. Our parent company liquidity increased to $96,000,000,000 and our time to required funding improved to 40 months. At the end of the Q2, we estimate that the consolidated company was well above the 100% fully phased in 2017 requirement for the liquidity ratio.
We turn to slide 8 on net interest income. On a reported FTE basis was $10,700,000,000 an increase of $1,000,000,000 from the Q1 of 2015. Volatility in long end rates over the past few quarters has clearly caused some variability in our reported NII. The market related adjustment from our bond premium amortization this quarter was a benefit of $669,000,000 as rates rose 40 basis points in the quarter, while in the Q1 of 2015, we reported a negative $484,000,000 adjustment from a decline in rates in the period. If we adjust for those items, our NII declined approximately $100,000,000 from the Q1 of 2015 to just over $10,000,000,000 as the impact of lower discretionary balances and consumer loan yields more than offset the impact of 1 more day of interest.
At the end of the second quarter, an instantaneous 100 basis point parallel shift in increase in rates would be expected to contribute roughly $3,900,000,000 in NII benefits over the following 12 months and that's split roughly 60% to short end rates and 40% to long end rates. Given the movement higher in long end rates, our balance sheet did become less sensitive to long end rates compared to March 31 as we realized some of that sensitivity through PAS 91 in the second quarter. As you can see on slide 9, non interest expense was $13,800,000,000 in the second quarter and included $175,000,000 in litigation expense. Litigation expense did decline significantly from the Q2 of 2014 levels. We exclude litigation expenses were $13,600,000,000 in the quarter, a decline of $900,000,000 or 6% from the Q2 of 2014.
On balance, we're quite pleased with our year over year expense improvement even while we continue to invest in the franchise. In the Q3 of 2014, we wrapped up the new BAC cost savings initiatives. And several quarters later, we continue to see good progress on operating cost reductions in LAS as well as in other areas. Our headcount is down 7% compared to the Q2 of 2014. And as a reminder, we do expect to incur some costs associated with our CCAR resubmission through the balance of the year.
We go ahead and switch to asset quality on slide 10. Reported net charge offs were $1,100,000,000 versus $1,200,000,000 in the Q1 of 2015. Both periods include charge offs associated with the August 2014 DOJ settlement, which we had previously reserved for. If we exclude these impacts and a small impact from recoveries on NPL sales, our core net charge offs declined $75,000,000 from the Q1 of 2015 to $929,000,000 Loss rates on the same adjusted rates on the same adjusted basis improved to 43 basis points in the Q2 of 2015. U.
S. Consumer credit card delinquencies improved as well. And on the commercial front, we saw an uptick in NPLs and reservable criticized exposure from the Q1 driven by downgrades in our oil and gas exposures. Despite these downgrades, we feel good about our exposure in this area as they are well collateralized and most of these credits only had a one level migration on our risk rating scale. The 2nd quarter provision expense was $780,000,000 and we released a net $288,000,000 in reserves, which includes the utilization of previously accrued DOJ reserves.
Releases in consumer card and consumer real estate were partially offset by reserves right by reserve builds within the commercial loan growth area. Let's go ahead and move to the businesses on slide 11. Consumer Banking. Consumer Banking had earnings of $1,700,000,000 which was 4% greater than the Q2 of 2014 and 16% above the Q1 of 2015 level. This in turn generated a strong 24% return on allocated capital.
Within revenue, fees were up 2% from last year driven by higher card and higher mortgage banking revenue, but this growth was more than offset by a decline in net interest income. The decline in net interest income is a result of the allocated impact of our ALM activities as well as some compression in card loan yields. Provision decreased $44,000,000 from the Q2 of 20 improvement that we saw in both the credit card as well as the auto portfolios. Our non interest expense was down 4% from the Q2 of 2014 as we reduced the number of financial centers and associated costs and personnel. The cost of average deposits ratio is now less than 175 basis points and we have a 57% efficiency ratio within this segment.
This business is a good representation of how the company is doing more business while we continue to reduce expenses. We also continue to experience a shift in consumer behavior patterns away from branches and towards more self-service. For example, the number of mobile banking customers continues to grow and increase to more than 17,600,000 customers this quarter And these customers look to mobile devices for approximately 13% of all transactions all deposit transactions.
If we look at some
of the key drivers and trends within the Consumer area on slide 12, we remain a leader in many aspects of consumer banking doing business with roughly half of all U. S. Households. Let's look at card activity. Card income increased 5% from the Q2 of 2014 on strong sales and solid spend levels.
Card issuance reached almost 1,300,000 units in the quarter on increased sales efforts, while the average book FICO score was also strong. Average loan balances were down slightly from the Q2 of 2014 as we do see customers paying down more of the balances. Net charge offs declined from very low levels and were 2.7% in the 2nd quarter and risk adjusted margins remain high at roughly 9%. Mortgage banking income in this segment was up 8% from last year as originations had nice follow through from the elevated pipeline at the end of the Q1 as well as higher production margins. 1st quarter mortgage originations for the total company were $16,000,000,000 up 44% year over year and up 16% from the Q1 of 2015.
Home equity line and loan originations increased 23% to $3,200,000,000 from the year ago quarter and were stable with the Q1. Revenue improvement versus the Q2 of 2014 was driven by improved margins. Although the mortgage pipeline remains solid, it is down 15% from the end of the first quarter, driven in part by higher rates. Service charges were down modestly versus the Q2 of 2014. This fee line item does continue to be somewhat muted as we continue to open higher quality accounts and those accounts are carrying higher balances.
Compared to the Q2 of 2014, our average deposits of $545,000,000,000 are up $31,000,000,000 or 6 percent even as we lowered the rates paid, which now stands at 5 basis points. Lastly, while we are bringing down our overall headcount in this business, we continue to invest in the growth opportunity of our preferred client base and we've been increasing sales specialists in the financial centers and that's resulted in increased activity. If we turn to slide 13, Global Wealth and Investment Management produced earnings of $690,000,000 which was up 6% from the Q1 of 2015 level, but down 5% from the Q2 of 2014. Compared to the Q2 of 2014, solid fee growth was offset by lower net interest income, higher credit costs and modestly higher expenses, which resulted in a decline in year over year results. The allocation of the impact of our company's ALM activities more than offset the NII benefits that we had from solid loan growth within this space.
Year over year non interest income was up 4% on strong asset management results. Non interest expense was modestly higher in the 2nd quarter on the strength of our asset management fees as well as the continuing investment in client facing professionals. The year over year increase in provision reflects larger reserve release in the prior periods. Pre tax margin was 24% and the return on allocated capital remained strong at 23%. If we look at activity and drivers on slide 14, asset management fees continue to grow and are up 9% from the Q2 of 2014.
This was partially offset by sluggishness of transactional revenue in the brokerage business. We did increase our financial advisors by 6% over the last 12 months and we feel good about the number of advisors that are joining us from competitors. Client balances are above $2,500,000,000,000 up almost $12,000,000,000 from the Q1 of 2015, driven by solid client balance inflows as well as improved market valuations. Long term AUM inflows were $9,000,000,000 for the quarter and that's the 24th consecutive quarter where we've seen positive flows. As I mentioned earlier, we continue to experience strong demand in both securities based and residential mortgage lending areas and we reached a new record of our loans within this space during the quarter.
If we turn to slide 15. Global Banking earnings were $1,300,000,000 which is 14% on allocated capital. Earnings did decline 13% from the Q2 of 2014 as lower net interest expense was more than offset by lower net interest income, lower investment banking revenues and higher provision expense that was associated with the strong loan growth that we saw during the quarter. The year over year decline in net interest income reflects the allocation of our ALM activity and liquidity cost as well as some compression in loan spreads. Non interest expense did decline 3% from the Q2 of 2014 as lower litigation and other technology initiative costs were partially offset by investment in client facing personnel.
If we look at the trends on slide 16, we chart the components of revenue. Investment banking fees for the company were $1,500,000,000 down 6% from the near record levels that we experienced during Q2 of 2014. Advisory fees were up 5% during the quarter. Debt underwriting was relatively stable as increased activity in the investment grade and other products offset the declines that we saw within our leverage finance area. Equity underwriting was down 19% from what was a record level for our company in the Q2 of 2014.
Outside of Investment Banking fees, other banking revenue declined from lower leasing gains, partially offset by modestly higher treasury fees and card income. If we look at the balance sheet, loans on average were $301,000,000,000 up 4% from both the year over year and linked quarter periods. The growth was broad based across both corporate and commercial borrowers. Although average deposits were relatively stable versus the Q2 of 2014, we did see a favorable shift in mix with our non interest bearing deposits up over $20,000,000,000 and our interest bearing deposits down $17,000,000,000 versus the Q2 of 2014. This growth in non interest bearing balances was driven by a continuing focus on the growth within operating balances.
The decline in interest bearing balances was driven by targeted reductions in these low liquidity value deposits. Switching to Global Markets on slide 17. In the Q2, earnings were $1,000,000,000 on revenues of $4,300,000,000 We generated 11% return on capital in this business during the quarter. Earnings were up modestly from the Q1 of 2015 levels, which included higher litigation, but down from the Q2 of 2014 as revenue declined. Total revenue excluding net DVA declined from the 2nd quarter driven by lower equity investment gains, lower sales and trading results and lower investment banking fees.
If we exclude a $188,000,000 difference between periods on the sale of an equity investment, revenue was down 4% in the 2nd quarter. Non interest expense was reduced 5% from that same period in line with the revenue reductions. We focus on the sales and trading performance components on slide 18, sales and trading revenue of $3,300,000,000 ex net DVA is down 2% from the 2nd quarter 2014 levels. Compared to the same period a year ago, fixed sales and trading was down 9% and not unlike what we saw in the Q1 of 2015. Strength within the macro related products like FX, rates and commodities was offset by lower levels of activity within the credit product space.
And to remind you, our mix does remain more heavily weighted to credit products based on the size of our new issue business. Equities trading was up 13 percent year over year, driven largely by increased client activity within the Asia Pacific region as well as a strong performance within the derivative area. Slide 19 shows our legacy assets and servicing business, where we were profitable during the quarter given the net benefit in our rep and warrant provision. Revenue excluding this benefit did decline from the Q1 of 2015 on less favorable MSR hedge performance as well as lower servicing revenue. Litigation expense declined significantly from the Q2 of 2014.
Non interest expense ex litigation was roughly $900,000,000 this quarter, improving $122,000,000 from the Q1 of 2015 and five $26,000,000 going back to the Q2 of 2014. We remain on track to hit our 4th quarter goal of approximately $800,000,000 in LAS cost ex litigation. We were also pleased that during the quarter, our number of 60 plus day delinquent loans decreased to 132,000 units. That's down 14% from the Q1 and almost 50% from the prior period of last year. Before I move away from the mortgage space, let me mention an important development in our legacy mortgage exposures.
This quarter, there was a closely watched case in New York's highest court, which confirmed that the New York 6 year statute of limitation on filing rep and warrant claims begins to run at the time the reps and warranties are made and not at some later point in time. Based on our review of the relevant documents, we believe the vast majority of the bank's remaining slide 20, a significant $7,600,000,000 reduction in our gross outstanding private label claims as a result of certain claims now being time barred. This ruling also had positive implications on our weapon warrant provision as I mentioned as well as the range of possible loss above those reserves. You recall the RPL had been a range of up to $4,000,000,000 for several years and so that the top end of that range has now been reduced to up to $2,000,000,000 On slide 21, we show all other. The $637,000,000 of earnings this quarter resulted in a swing in profitability as a result of the improvement in the NII market related adjustment from quarter to quarter as well as the prior period inclusion of the annual retirement eligible incentive costs.
The loan sales I mentioned earlier are also included in revenue. Our effective tax rate for the quarter was 29% and I would expect the tax rate to be roughly 30% for the rest of 20 15, absent unusual items like the recent U. K. Tax reform proposals. Among the U.
K. Proposals were a reduction in the corporate tax rate, a surcharge tax on bank earnings and a reduction in the bank levy rate. Our preliminary read is that we could have a one time charge of several $100,000,000 later in this year to reprice our U. K. Deferred tax assets upon At this time on an ongoing basis, we expect the recurring tax impact to be modest.
Before wrapping up on this slide, let me remind you that our preferred dividends in the 3rd quarter should be $440,000,000 $330,000,000 in the 4th quarter of this year. So to wrap up as Brian started the presentation with, many things that our teams have been focused on for some time came together nicely this quarter and that enabled us to report more than $5,000,000,000 in earnings and move closer to our long term targets. Revenue reflected relative stability. We lowered cost. We grew loans nicely.
Our credit quality remains very good and we're focused on operating leverage within the business. The foundation of the company's balance sheet has never been stronger with record capital and record liquidity levels and we remain well positioned to benefit from a rising rate environment. With that, let's go ahead and open it up for Q and A.
Our first question is from Betsy Graseck from Morgan Stanley. Your line is open.
Hi, good morning. Good morning. The question I'm getting from people this morning is around the expenses. You showed some very nice improvement in core expenses coming down meaningfully Q on Q and year on year. And the question is, have we reached the end state here?
Or is there any further opportunity to bring down expenses from here?
I think that's in the broadest context. We continue to work expenses. We talked to all of each quarter, 18 straight quarter reduction in core operating expenses outside litigation, 15 straight quarter of 3,000 people or more reduction each quarter. So we just continue to apply technology to continue to long term produce expenses. So the goal we have in SIEM is to keep the expenses flat as revenue increases.
And if the world economic situation changes different what people are expecting, we'd have to look at it differently. But as you can see this quarter, that will result in a constant downward pressure given where we are in the economy.
Okay. And then on the reps and warranty side, you had what looks like a little bit of a true up based on this litigation decision. Is that the right way of reading it? Or is there potentially even more to come in the future as you go through these cases?
No. Clearly with the cases significant is this Betsy. We looked at and as we do every quarter, look at the REP and WAR provision. And you're right, it was a net benefit of $200,000,000 this quarter. I think the important thing, I think more than the $200,000,000 is if you look back on our slide 20 in the earnings materials, the effect of the decision led to 2 things that do reduce tail risk on a go forward basis.
The first is you can see the number of new claims that came in was just over $200,000,000 which is a dramatic improvement from what we've seen historically. And second, as a result of the time barring of certain claims that the outstanding claims that we have keep in mind these outstanding claims are based on original UPB came down fairly significantly to just below $19,000,000,000 So while it was nice to have the modest benefit that we did in the quarter, I think importantly on a go forward basis it does reduce the tail risk that's out there and we saw some of the benefits from that in the activity levels this quarter.
Okay. Thanks. And then just one last question. You indicated the upside that you have in the event of a rate rise $3,900,000,000 if the parallel shift is 100 basis points. The question is how you're thinking about dropping that to the bottom line.
Is there reinvestments that would take up some of that? Or are you at sufficient run rate and investment spend that you would be able to drop more to the bottom line?
I think that there's no question Betsy as we look at and I just remind people that we were at $3,900,000,000 for 100 basis point move. If you look at that roughly 60% of it's on the short end now, 40% of it's on the long end. And there's no question that we would expect to drop a significant portion of that to the bottom line if and when we see that 100 basis point move.
Okay. And then just back to the expense side. The expense run rate that you've got right now is something you think you can hold at least if not improve from here. Is that fair?
Yes. I think yes, we that's really your last question. We've been investing in headcount to open up our customer facing capacity. So I'd rather give you some of the specifics earlier. So we're comfortable from the technology spend rate from investment in client facing capacity, marketing and everything.
We're at a good run rate. So there'd be downward pressure as headcount continues to come down to the application of technology across the platform with customers and internally. So we're comfortable that we can continue to drive it and make some bones about it. This is what we work on every day and we like to put out a dollar target because frankly that tells the team we've made a goal and stop as opposed to just get better at it every day. So we just we are constantly working to improve the dynamics of revenue versus expense in this company.
Thanks a lot.
Thank you.
And we'll take our next question from Matt O'Connor from Deutsche Bank. Your line is open.
If we
look at the core net interest income ex the market related was down a little bit versus last quarter, but you're starting to see the loans reflect as you mentioned earlier. Do we start seeing stability in the core net interest income looking at the next quarter or 2? Or do we really need higher short term rates for that?
Thanks for the question.
It's a good question. I think if you look at we typically have a little bit of seasonal pressure in the second quarter on NII. So as we sit here today based on the curve, we would expect to see the core net interest income, which obviously excludes FAS91 move up from Q2 to Q3 and we'd expect further growth from Q3 to Q4.
Okay. And that's without any benefit from rates?
It's just based on the realization of what the existing curve is, which quite frankly we don't look at and our models don't show Fed funds going up until January of 2016. So there's not a lot of rate benefit in that at all.
Okay. And then on the discretionary book, you mentioned it came down a little bit when you look out on a combined securities mortgages basis? And I guess just we saw long term rates go up and some banks have been increasing the discretionary book with higher reinvestment rates or higher investment rates here. And what's the thought on bringing that book down as rates have gone up?
Two comments. I think the first is that when we talked about the discretionary balances coming down that's basically the whole loan portfolio as well as certain pieces of the home equity portfolio. So we referenced that those came down about $15,000,000,000 quarter over quarter half due to sales and half due to paydowns. We probably have one more quarter where you'll see some of the conversion of those loans to securities. But if you actually look at the amount of securities from a balance perspective, they went up a little bit Q1 to Q2 based on the conversion of those loans to securities.
And as we continue to see the deposit footprint grow, we will continue to invest and we're obviously mindful of the balance between increasing net interest income like I spoke about as well as being sensitive to OCI risk.
Okay. Thank you very much.
Thank you.
Our next question is from Jim Mitchell from Buckingham Research. Your line is open.
Hey, good morning.
Good morning.
Just a quick follow-up on
the NIM outlook. The yield curve I think Bruce last quarter you mentioned that the yield curve stayed where it was. You'd have about $600,000,000 of drag in NII over the next few quarters. Are you saying that that's pretty much changed with the steepening of the curve since April when you spoke last? And not only NII is growing but NIM should stabilize?
Or is it just sort of offsetting each other? Or are you getting a boost from that? How do we think about the yield curve versus your prior comment?
Yes.
I mean, I think as we look and snap forward, there are a lot of things that influence that number. One is obviously the ability and how much we've put the increase in deposits to work through growing loans. And clearly, we've seen during the Q2, we saw that loan growth move up, which is obviously a good thing, which lessens some of that sensitivity. And as we look at the amount and what we're doing from an investment portfolio, there's less to do during the second half of the year. So all in all, as we look at those different factors, it's why we're comfortable saying that we'd expect the core to increase both Q2 to Q3 as well as from Q3 to Q4.
Okay. Fair enough. And just on the capital side, when do you think the modifications become official and you exit the parallel run? How long do we think we have to wait for that? Is there anything that could change in terms of your expectation around I guess the 90 basis point hit to your CET1?
I think I'd say that we can't say too much about regulatory matters. I think given the updated disclosure we've given, you can assume that we're getting closer to having that resolved. You never know until you're ultimately done. But we feel very comfortable with the guidance of 9.3% factoring in the adjustments based on where we were at the end of the second quarter and we'll look to get that wrapped up sooner than later.
Okay. That's helpful. And just one last quick one on the $3,900,000,000 of sensitivity to higher rates, how much is FAS 91 related versus sort of core?
As I mentioned roughly 40% of its long end which is $1,500,000,000 of the amount and roughly half of that's FAS 91 and half of it's non FAS 91 related.
Okay. Thanks a lot.
Our next question is from John McDonald from Bernstein. Your line is open.
Hi, thanks. Bruce, just one more question on the rate sensitivity. The $3,900,000,000 move for 100 basis point parallel move, I assume that illustration is to 100 basis point move that's a shock or an instantaneous move in rates. Could you give us any feel for how that number would change if the move in rates is more gradual? The Fed is kind of saying, it'll probably go gradually.
How does that change if it's not instantaneous?
Well, I mean, ultimately over time if you get to the 100 basis point number you have that. I think your point is that if they move 25 basis points, is it 25% or is it more than 25%. And I think the thing that you have to keep in mind and we've talked about it a lot with what we would expect from a deposit repricing perspective that clearly you'd expect the first 25 to 50 basis points move up that we would not have to do much from a deposit perspective. So net net on a relative basis that should be a positive as you at the numbers.
Okay. And a clarification, where is the gain on consumer real estate loans? Is that in the mortgage banking line?
No. It's in other income. And it's reflected in the all other segment.
Okay. The mortgage banking income was very strong on the fee income line. Obviously, you had the rep and warrant in there. Was there anything else in there that helped on the mortgage banking line?
I would say that generally that the hedge results on the MSR were fairly decent in the quarter. And then like we said, there just wasn't much litigation during the quarter as well. So all of those things led to the results being where they are. But you're right that we've typically had 100 to 200 of rep and warrant provision and we had 200 benefits. So you get a sense of the magnitude of the swing on a comparable period basis.
Got it. Got it. Okay.
And then last question for me on the credit. Do you see the net charge offs kind of bouncing around the current level the 929,000,000 dollars And how you see it playing out in terms of provision reserve release relative to what you just did this quarter?
Yes. I think this quarter I think you're seeing kind of a continuation of what we've been talking about. And I want to be careful that we're I think we need to exclude DOJ both on the top as you did in your $929,000,000 number as well as in the reserve release. So if you back out what we had for DOJ, the reserve release was about 150, The charge offs of $929,000,000 were down roughly $75,000,000 And while this can bounce around a little bit, I think what you're likely to see over the next couple of quarters is probably a convergence where the charge offs and the provision number become more closely aligned. And I would just say that particularly on the consumer side, we continue to like what we see on credit.
And on the commercial side, you can see that the charge offs are virtually nil within the large corporate space. And again, there's nothing that we see out there that's going to change that materially.
Okay. And on top of that, will the DOJ still be a factor for the next couple of quarters?
As it relates to that, I want to think John that it will be in the $100,000,000 type area as it relates to both charge off and reserve release. And then by the time we get to the Q4, it should virtually go away. It can bounce around a little bit, but it should largely be gone by the end of Q3.
But it pairs up, John. So the way you subtract this quarter continues. So it's a number. It's offset by a previously established reserve.
Got it. Okay. Thank you. Thank you.
And our next question is from Glenn Schorr from Evercore ISI. Your line is open.
Hi, thanks. 2 quick ones on the average balance sheet. When you look at the debt securities line, the yield went up some version of a lot from 2% to 3.2%. I'm assuming some of that is LAS loans converting. But could you give a little color on what drives that because the overall size of the book didn't change that much?
Yes. It's interesting. If you look year over year and you adjust for FAS 91 which shows up in the NII when you're looking back at the table that the yields were almost identical from the Q2 of 2014 to the Q2 of 2015 once you make that 91 adjustment.
Okay. Similar but different question. Inside the C and I book, the U. S. Commercial book, it was just a 4 basis point drop quarter on quarter, but there's growth there.
So I'm just curious the trade off between price and yield give up on the new loans you're putting on versus the responsible growth you talked about. It doesn't seem that bad. I'm just curious on what kind of yield you're putting new loans on?
Sure. I mean, I think when you look at commercial loan spreads, there are 2 things that those numbers reflect. I think that there's the first thing that which just from a macro perspective, there has been a little bit compression, although we're seeing it slow as it relates to just the competitive landscape and where loans are getting done. As it relates to your question about the new loans, the responsible growth, if you looked at the in particularly in the areas that picked up during the Q2, that on our risk rating scale they would translate to credits that tend to be in the strong BBB or A area. So they're largely investment grade type credits where we're extending it.
And if you look at average spreads in that area, they tend to be in the LIBOR plus 150 type area on average, which is a little bit lower than the average across the commercial platform. But as you can see the credit is clearly at the upper end.
So Glenn probably say, if you think about it, we're not on credit structure. We held our discipline on price. There's been pressure, but then you have to look at that on a full relationship basis with the other fees revenues you get from cash management stuff. We try to have our clients totally disciplined to it. But your observation is right.
There's a little pressure on those spreads due to that.
Okay. I definitely appreciate that last one is when you talk about the pushing for growth and you mentioned the different specialists in the branches, the business banking, the financial investment consultants. I'm curious what are you doing to incent them to encourage them? In other words are there actual incentives or do they get paid on the production?
Yes. In the sales context, there is there are incentives for production, but it has to be done the right way with the right customers and the right structure. So it is not it doesn't drive their behavior. It's different than those state of wealth management business in terms of the balance between incentives. But yes, they are paid to open the mortgage loan officers are paid to produce mortgages and to open up checking accounts and other things.
But it's really it's actually deploying the people and building the capacity to sell as we are reducing the need for services through all the automation that's going on and shifting that group of people. So that it's really just having more of them than think of it as incentive driven behavior. And then really then having information at the point of sale through our technology, offers have been made to people for credit cards and etcetera, so they can make the offer at the end that's already been made to them online or something. So it's coming to sales practices, more people and then just the discipline of the team, Tom, Gwen and Dina, nature of that than it would be incentive driven.
All right. Thanks very much.
And our next question is from Eric Wasserstrom from Guggenheim Securities. Your line is open.
Thanks very much. Just to follow-up a little bit on that last point. When I was trying to shift through the core loan growth numbers this morning, it looked like the core loan growth coming out of the institutional bank and the wealth management looks strong. But the I'm still unclear what the core level of growth was inside the consumer organization. And so I'm just trying to reconcile that with where the incremental hiring is occurring on the sales front.
So can you just clarify what the core level of consumer growth was?
Well, if you look at in the consumer on page 5, you can see the balances and you can see the you can see the balances and you can see the different pieces. We have changed the practice of how we book residential mortgages for our consumer customers that has an impact on that. But overall, you remember, they're still fighting a couple we're still fighting a couple of things in consumer. One is the card balances are finally stabilized and you saw from Q1, Q2 a slight uptick there. That's because we had a we've been hitting increasingly record sales of credit cards.
So I think we did about $1,300,000 this quarter, Bruce. That is again a record for us and since we changed the business model 6, 7 years ago. And if you look at the but if you look at things like the home equity balances and things like that, those are under pressure just because we're still seeing significant repayments even though we're producing a lot in that area. So if you look at that, you can see it's across the board just a little bit upside tilt in part the interplay between some of the runoff and the other category in the build up and residential. But they do a lot more than sell loans in that place.
And that's so the investment sales levels that drive that Merrill Edge. In fact, the FSAs and the branches that we deploy do $4,000,000 of notional on average a month of new investment products and building $4,000,000 to $5,000,000 They sell obviously accounts, net checking accounts this quarter. We're in a net checking account growth position even taking account the runoff from divestitures and other things. And then you have the loan side. So they are responsible for driving all that.
And so it shows up in the loan a little bit as also as no, that's why the fee category is stable in other areas.
And so do you have sensors or some sense maybe you can give us to how that investment in sort of front office staff is contributing to growth outside of the segment?
Well, for example, in the small business arena in the first half of the year, we did about $5,000,000,000 of originations. And what the world would define small business, we have across 2 divisions and they help grow that. Merchant services growth, they sell that goes into the business banking segment, the Global Banking segment. And they send about 20,000 customers a year into wealth management that literally Bakken and branch are wealthy and then get moved over and that helps our wealth management business. So you can't think of the you're right that sales force does what it does in segment, but it has a benefit across the board and then services a lot for all customers, business banking, commercial banking customers come into the branches, obviously, for the cash relative it's related to the cash management revenue.
So it is across the board and contributes in it. And so the good news is they are making more money than they made last year on their own, but they're still providing that services and capabilities across the platform.
And so and this is just my final question on this. With if we divorce just the runoff from some of the legacy assets that's still occurring, would you expect the core consumer asset growth to accelerate as a consequence of this investment? Or do you think that it's currently run rating?
As the runoff subsides in the consumer categories, this is consumer banking here and then you got the LAS piece the LAS home equities will continue to go down because frankly those are products we put in there because we decided not to do them. But in the consumer, you should see as it stabilizes, you'll see a little bit better loan growth. But remember, let's focus on the responsible part of responsive growth. We're not going to open up the credit card business in a way that will produce charge off later down the road that we won't be happy with. So we are driving that growth into the core strong credit quality that we want to have in this company.
And so I'd be careful about assuming it'll just leap to us because to do that you have to go into credit postures that we won't do.
And I would just add, Brian. I think if you look at home equity, it's a good example where if you look within the consumer banking space, during the Q2 of this year, the home equity originations of line amounts were about $3,200,000,000 that they were to loan to value less than 60%, FICO is deep into the 700s. And so there were more than $3,000,000,000 of those booked. That's number one market share. Roughly $1,500,000,000 of that was funded, but you do have some of the legacy stuff that's running off.
So I think when you wonder about activity levels and what's happening, I think you need to realize that with that number one share in what we're doing, it is growing. It's just that there's a runoff that mutes that effect.
Great. Thanks very much for the answers to all my questions.
Thank you.
Our next question is from Ken Usdin from Jefferies. Your line is open.
Thanks. Good morning. First question just on the RWAs, it looks like when you look at the reconciliation of these move to fully phased in, there's a little bit of a help on the advanced models this quarter. I just in a general sense, obviously, we still have that finalization to come. But what additional tweaks are you working on inside the models?
And what additional mitigation could we still see from here on the RWA
side? Yes. I mean, I think there are a couple of things. We're obviously working hard to move as many of the exposures from CEM treatment to IMM treatment, which generally has favorable benefit there. The second thing I talked about better collateral management as well as looking to work to do more compression and to net things out and we continue to see some benefit there.
I think 3rd as we continue to move out and we're largely through this, but as we continue to move out some of the non performing consumer real estate as well as the benefits of improved consumer credit quality. We're seeing benefits there. And there still are a few RMBS and other type positions that we'd expect to get benefit for over the next couple of quarters. So I'm not I think that this quarter was clearly a quarter between the activities that we undertook as well as what happened rates and FX perspective where we saw pretty good quarter over quarter improvement. And obviously that was not only in the markets business, but also in the consumer businesses.
I'd say Bruce the other thing, we have a healthy dose of operating capital due to the operating risk embedded from countrywide and other things that we have to figure out over time how we can work through the system because we we never did the activities in the company. But on the other hand, we had to deal with the cost of them and so both operating and general. So as you think about that longer term, we have to get a more rational view of that operating risk relative to the company we run today, which is different, but that will take time and working through the models there too.
Okay. And then my second question just relates to the Wealth Management business. And Bruce you alluded to there being a little bit of a slowdown on the revenue. So if
I look at the segment
or the line item on the income statement, there has been a deceleration, but advisor productivity looks a little bit lower and you've added a lot of people, you've added a lot of assets. So I'm just wondering what do we need to see to get a reacceleration of the revenue side in Brokerage and Wealth time lag relative to those additions? I think a couple of points and I think first that there's clearly
a building up of advisors particularly if we're bringing them in and training them that there's a ramp up
the net interest income
line that as I mentioned it looked the net interest income line that as I mentioned it looked a little bit muted. If you saw gross loan net interest income, you would see this increasing. So some of the push out of the ALM activities has muted the NII line a little bit. And then the third thing which you referenced that I do think is a little bit more of a trend that and I think is not only is somewhat consistent with some of the regulatory standards, which we're seeing more and more of the assets that we manage being managed on a long term basis where we're managing them. And so that's leading to growth in the asset management fees.
And the corollary to that is that you do have lower brokerage income, but net net you can see that we are growing in the segment and we feel good about the activity that we're seeing there. Yes. I'd say that a
few quarters we saw the margin the pre tax margin come down and you're seeing it start to turn back and go up and there's positive pressure out in the future on that after the end of this year because some of the deal stuff runs off quite a couple of points to margin. It's in the numbers this year, but won't be in the numbers next year. And then your point is the maturity of the investment cycle. So if you go back, we were adding these financial advisors, their books are coming in, they're building the books and as that maturity happens, you'll see it match a little better. But the encouraging signs, we're seeing the margin come back up.
And remember this business also benefits a lot by the rate changes too ultimately. It's a big bank, it's got $250,000,000,000 deposits, round numbers, a lot of loans. It has a lot of the same sensitivity of consumer bank does that people don't think of in this context. So as we think about the comp structure is in place, but there's an added deal piece that runs off. You're seeing the maturity cycle of the people coming up.
And the team is just working hard on the revenue expense management. We start to see some better signs that they got some work to do still.
Understood. Okay. Thanks guys.
Thank you.
Our next question is from Steven Chubak from Nomura. Your line is open.
Hey, good morning.
Good morning.
So I have a couple of questions on the topic of capital. The first is a follow-up to Ken's earlier question regarding RWA mitigation potential. And Bruce, I do appreciate the color you cited relating to all the mitigation opportunities on the horizon. I'm just trying to get a better sense given your efforts to grow the core loan portfolio, how we should be thinking about the trajectory in advanced RWAs maybe excluding the upward adjustment tied to regulatory guidance just to give us a sense as to what that trajectory should look like over the next couple of quarters?
Let's make the caveat that this assumes that we don't have a significant change one way or in market conditions because obviously there's a part of Basel III that's somewhat procyclical. But I think net net, if we do a good job of managing this the way that we would expect to, that absent any exogenous changes, we should be able in the institutional business, which is both Global Banking as well as Sales and Trading that we should be able to grow loans while at the same time having have reductions in the overall risk weighted assets that are attributed to that area. Now where you will probably see it be more dollar for dollar is obviously under standardized those loans tend to be every dollar of loan is a dollar of RWA. So you have to be a little bit careful between which method you're looking at.
Okay. But presumably the focus at least on your part is going to be on mitigating the advanced RWAs given that that appears to be your longer term binding constraint?
It's both, Bob, because you're right. As it relates to a ratio pro form a for this, it is the lower number. But keep in mind, you have to keep the focus on standardized as well because at least based on last year's CCAR as well as guidance that's out there, standardized is very important from a CCAR perspective.
No, understood. Okay. And then actually it's a great transition to my next question on the topic of GSIB surcharges where I'm sure you're aware there's been some discussion around the possibility of incorporating the surcharges within CCAR. And I was just hoping to get a better sense as to what contingency plans you might have in place if the surcharge were to be included? And are there opportunities that you see to sufficiently mitigate the G SIB indicators so that you could move into a lower bucket?
I think a couple of things on that front. The first is as it relates to GSIMS their application where they may or may not be At this point, while we participate in industry forums, I think that the supervisory area has been very transparent in sharing much of the same things that they share with us you're also aware of. So I think that the information is fairly disseminated amongst everyone. As it relates to contingency planning, it's really an ongoing continuation of what we did from 2013 to 2014, which if you recall is related to our quantitative CCAR results in a time frame where we didn't have significant levels of net income that our CCAR cushion grew significantly. And so what are we doing to focus on that?
On the investment portfolio, we're mindful of managing OCI risk given that it flows through the overall CCAR process. We continue to be very focused on moving out those loans and those assets that have higher loss content and at the same time making sure that the originations that we put on are of the highest quality. So we continue to focus on that. If you look at the overall risk that's being taken within the markets business, we're managing that so that there's not a surprise as it relates to that. And clearly, we continue to work hard to move out those exposures that have high loss content there.
So I think it's I would say it's really much more of a continuation of the work that we've been at for several years now. And we're mindful of making sure that we continue to push that stuff out at the same time that we're originating those things that will perform well as part of that overall exercise.
All right. Thanks Bruce. That detail is extremely helpful. And then one more quick final one for me. I was hoping you can give us an update on where your TLAC ratio sit today?
Yes. I think that the TLAC ratio as it relates to where we are and this assumes that we exclude stuff that's less than a year. I think that the TLAC ratio is roughly 21% at this point. We'll have to see the deducts that come in and out of that based on G SIB and other things. But I think we were just below 21% at the end of the quarter.
Okay, great. Thank you for taking my questions.
Thank you.
Our next question is from Brennan Hawken from UBS. Your line is open.
Good morning. Thanks for taking the question. Quick one on Wealth Management. Is it possible for you to quantify for us how much of your total Wealth Management client assets are in retirement accounts? And of that what percentage are advisory?
I'll let Lee get back to you. I don't have that off the top of my head in terms of I just don't have the impact on top of it.
Okay.
Just the whole idea there is just trying to get at the DOL proposal and maybe what could be potential downside even based on how it all gets finalized understanding that it's preliminary at this point?
Yes. At least we can pay you on that.
Okay. And then looking at the branch declines that you guys referenced earlier, sort of 5% year over year as a reasonable decline rate sustainable from here given the trends that you're seeing in your mobile platform? And could this potentially add additional juice to your expense declines beyond the business as usual type pushing that you've spent a lot of time talking about here on the call today?
So let's step back and make sure that we understand one thing is the idea is we're moving because the customers are moving and how they conduct business. So you've got to run your changes consistent with what they're doing. That's the baseline that you have to stick to because if you forget that you can overshoot or undershoot frankly. And so that being said, that's one point. The second point is in the 6,100 branches that we had at peak down to this level, there are multiple things we're doing, customer behavior changes, change in the configuration of the markets we attack, etcetera.
So there are lots of elements. So now you're more in a business as usual ongoing practice, which will really be driven more by the customer behavior as opposed to some viewpoints we have about markets and arranging the franchise. So I'd expect that they will continue to work themselves down. I wouldn't predict a steady rate, because it's a very complex equation. But then let's flip to what's really going on.
As Bruce talked about earlier, we have 17,600,000 mobile users. We have 31,000,000 bank computer banking users. That number is actually growing again for a while. This kind of fly is actually growing. So it's interesting that that's happening.
16% of all our sales are all digital now. About 6% of the sales of digital, which is computers and mobile are mobile and that's growing at 300%. So it's catching up. And then you get things that are interesting because it goes to the efficiency of your branch. There are about 10,000 appointments scheduled in the mobile device a week at the branch, which then allows us to have a more efficient branch structure.
Even though we may have less, we may have bigger branches because you have more sales going on. And so I think about that, that's up from 2,000 last year Q2, 10000 times a week now and growing at that rate implied there. People are scheduling appointment to come see us, which is a lot better experience for us and then to help serve them. So that allows us to have our staffing levels done. Bruce referenced the checks deposited or 13% of all the checks.
So the activity of all this is critical to that question. So I won't give you a 5% reduction or 4% reduction. I think mathematically derived what we've done, but I'd be careful about assuming it will be that ratable, but it will be more based on behavior change. But the key is our customer scores have gone up overall and even in the mobile channels, we've gone up year over year 1,000 basis points on our mobile channel top to box satisfaction. So it will be a complex thing.
It's an integrated pool of capabilities, phones, online, ATAs and branches and you'd expect it to be pressure going down. But remember, we were early into this and we've if you think about 1400 branches, that's bigger than a lot of companies out there already out of the system. So we've been at this for a long time and but we'll do it the right way because if you push too hard you're up to the clients.
That's helpful color, Brian. Thanks. And then last one for me. You made reference earlier to a couple points margin from the employee forgivable loan amortization dropping off next year. Is that is next year sort of a bump in the trend?
Or is that indicative of potential further declines in forgivable loans as they continue to roll off? And does it assume some level of counter pressure or offsetting pressure from continued recruiting? And maybe a little update on the recruiting environment for FAs would be helpful.
Yes. What I'm referencing is discrete away from the entire recruiting process. This is a it was set up at the time of the transaction for a group of people at that time. And it just came in over the years and it stopped this last year, but it goes away. Forget the loan practice and all the other stuff and recruiting is a whole different thing.
But for John and Keith, thanks and the teams, they're successfully recruiting on the experience level. The attrition for the top 2 quintile financial advisors is at an all time low. I think again it's running at 2% or something like that. So we're retaining those and then we're recruiting at both experience level. But importantly, what is obvious to us is to drive the amount of client need here and drive against the client need, which is huge and underserved in our belief.
We had to create more advisors in our art in the whole out there. And so we've really worked hard on the PM, what they call the PMD program, which is basically bringing people in the business who may have experienced other firms, but bring them into our firm and also other industries into our firm. And that is now reaping benefits to us. We've been working on it for 2 or 3 years to retool it and drive it. So you should expect our advisor count to go up and our productivity may come down per advisor.
But frankly, there's a lot of business where remember our advisor productivity is 1,000,000 and some. So bringing it down a little bit to get a lot more growth and a lot more growth in advisors would not be would be a great trade for our company. So our recruiting is strong. We're net doing a decent job at the sort of higher end that you hear a lot about. That is not a big part of the advisor count, several 100 a year, like in a couple 200, 300.
But what's going to drive our advisor and capabilities to serve our clients is the broader build out of the teams, which the BFAs and the PMDs have worked at the branches in some cases and work with people. And that should redound our benefit over time, although it's have a little drag on an investment.
Great. Thanks for that.
Our next question is from Marty Mosby from Vining Sparks. Your line is open.
Thank you. I wanted to ask about the Asset and Liability Management. When you look at the market adjustments that you had of $669,000,000 this quarter, As rates go up, there's less and less impact from that. How much is remaining in the next 50 basis points in just the prepayment speed slowing down?
Yes. I don't have 50 basis points Marty, but the number we quoted was on a 100 basis point move the FAS ninety one benefit would be $775,000,000
Okay. Perfect. And then when you're talking about the being able to see the margin go up in the back half of the year because of the current steepness of the yield curve, does that include some utilization in the sense of increasing your securities portfolio while you invest some of the liquid assets you have on the balance sheet?
There's clearly some of that because we would expect as we go forward with the composition of the balance sheet that there'll be incremental cash to that's generated. Obviously, some of that goes into loan growth and some of it goes into the investment portfolio. So embedded in that those comments is an assumption that there'll be a little bit more to be invested.
And money in general range $10,000,000,000 $20,000,000,000 $30,000,000,000 What's the again any kind of rule of thumb there?
I would think of it as on the low end of that during the Q3 and a comparable amount in the 4th. And there's one other thing that I did want to correct that I said earlier that if you look at the securities balances yields, the stability that we saw once you adjust for FAS 91 was Q1 to Q2. Got you.
And lastly, this is a nuance, but when you look at your trading activity, typically in the past when I had a trading activity in the bank that I was managing, when you have a steepening of the yield curve, you get some pickup because you're getting the current long term yield funded by short term rates. The rate on the trading activity account did not go up this quarter, but averaging into the next quarter would you expect some benefit there?
I think if you look at I think the important thing is that there's so that rate tends to manifest itself in the market based NII. There are a lot of things that drive that when rates move around as much as they have. But I don't think there's any question that over time as you're in an increasing rate environment that there is a part of the yield component that flows through NII that you would expect to get a little bit better.
I'm just more focused on the steepness versus the flattening of the yield curve. A steeper yield curve typically brings a little better spread on the trading account?
It would. But the question is it works its way through. But if you look across long periods of time, it's relatively constant. Okay. Thanks.
Our next question is from Nancy Bush from NAB Research. Your line is open.
Hi, good morning. Guys, just another liquidity issue. Can you just tell us what's on deposit? What excess deposits you've got with the Fed now? And what your plans are for those going forward?
Thank you. At any one point in time, it can move around, but you should assume it's comfortably above $100,000,000 $100,000,000 excuse me, that's on the Fed in any one night during the quarter. And I think that when you look at where we are with LCR where we are at both the parent as well as the bank that I think and $484,000,000,000 of overall liquidity which is a record that we feel we're in a reasonable place. And I don't see significant changes going forward, Nancy.
Okay. You mean overall liquidity or liquidity on deposit with the Fed?
Probably both.
Okay. That's a lot of liquidity. My second question Brian is for you. I mean you've gone through a lot of change over the past few years and this transition to mobile, etcetera, etcetera. But one of the things I still get from talking to people are persistent gripes about service quality, particularly in the mortgage company.
Can you just tell us what your internal polling or whatever shows in terms of improvements in credit quality and how you feel about that entire subject?
Well, I think in the mortgage business, for example, on bank originators, we're number 1 in J. D. Power survey. I think we're number 2 or 3 overall mortgage companies. So I think in terms of originating mortgage loans, a guy named Steve has gotten that platform settled in and you'll get momentary spikes where the refi is a bump up and things slow down from a get the loan done.
From a keeping our credit quality where we want it, that ends up with us having some noise around people we don't get mortgages. So we did of the $15,000,000,000 or what we did this quarter, 30% of it was low and moderate income, so we're still serving that segment. But again, we are not pushing for credit terms in mortgage. And I think you'd understand why, Nancy.
Yes. But how about just more the issue of service quality at the branches, etcetera?
Well, if you look, our customer scores continue to rise almost on a monthly basis in the broadest context of our brand and part of that's due to what happens to the brand, part of it's also due to just less stuff going on about the company. And that's gone from the low point in the Q4 of 2019 and it's rose fairly steadily. So it's been in fact that within 95% of where it was at its highest point in 2,005 and 2006. So that was satisfied. And if you actually go to the customers actually get served, we measure all the channels, which we measure with tens of thousands customers at least in a month, you find that those scores continue to go up in the top 2 box score.
I think we're in the 70s to 80s of the various channels and including mortgage. So I think because you just have a lot of customers, you'll find out that once in a while we're bumping up in our jobs to fix them when we do. But if you think about it, we've added mortgage production, checking accounts net new, credit cards net and that's the ramification of having good service and driving it and the team just continues to work on it. We're not perfect and we'll always get better. But I think if you look at it over the last 3 or 4 years, it just continues to get better.
All right. Thank you.
And by the way, if you look at our deposit growth, it continues to accelerate in over the top of CDs continuing to run off year over year of $10,000,000,000 So we're up $31,000,000,000 in deposits in consumer year over year. I think it is and CDs were probably down $10,000,000,000 or so. So think about that, if people didn't like us a lot, they wouldn't be giving us their core checking account and that is happening more and more every quarter. And that will serve as well as rates change because we are a hugely primary focused checking account company in the broad mass market business, which is different than the past.
All right. Good to hear. Thank you.
And our next question is from Mike Mayo from CLSA. Your line is open.
Hi. I just wanted to follow-up on Betsy's question at the start talking about expenses being at a run rate or maybe going lower. The expenses are down $400,000,000 year over year. But if you look at your 4 business lines, the revenues are down twice that implying a lot of the rest is coming through the other line. So I guess I'm just wondering how much more there is to cut or should cut if the expenses are down again $400,000,000 but the revenues in the 4 business lines are down $800,000,000 how do you balance that trade off?
Yes. I think the first thing that you have to keep in mind Mike when you quote the numbers within the business is on a year over year basis you have 2 significant things happening. You've had FAS 91 and a significant movement in rates as it relates to push out of those charges as well as we push the LCR out to the businesses that from a reported segment perspective that has a significant impact. And so I think as we've gone through the presentation that the numbers that I would focus on are very much what's going on within the segments looking at the fee income lines because there is activity from a net interest income perspective of greater activity within the businesses. So I'd be a little bit careful with that characterization.
And I think in that context I'd go back to Brian's initial comments, which we continue to push hard. We're adding client facing personnel across the company. At the same time, we're reducing aggregate headcount and that's leading to declines in the expense numbers and we're very, very focused on continuing to keep that balance as we go forward.
Okay. Just to understand, because I'm just looking at your slides, slide 17 and the other slides in your presentation today. I looked at the related to Gwin, Global Banking, Global Markets, Consumer Banking. I took Q2 of 2015 versus Q2 of 2014 and looked at the delta in revenues and that's how I got the $800,000,000 decline. So you would say which adjustments should we make from that?
Let's just we'll take GWIM because I've got that number off the top of my head. Mike, I think year over year the difference in GWIM NII allocation due to sort of unfundamental things is Bruce how much I'll take? Yes.
Let's just go through relative to the Q2 of 2014, you've got consumer from an overall NII impact was more than $200,000,000 G WIM was, as Brian said, roughly 130,000,000 dollars Overall Investment Bank or Global Banking was a couple of 100,000,000 and then yet de minimis amounts within markets and LAS.
So that is nothing more than us, the change in allocation method. It's because of LCR and other things becoming important. So we pushed down the businesses to get the behavior of the business aligned with the parent. So this is why you have to be a little careful about micro assessing these movements because things change in those methodologies year over year and we don't put back and restate this. We didn't do it last year.
Okay. I'll follow-up on that. So I just are you comfortable? Are you satisfied with the revenue progression that you've had no matter how you take a look at it?
Mike, we are satisfied that we are starting to see the hard work of all our teammates come through, but we're not satisfied in the sense that we expect better performance on both the revenue expense dynamic in future. We said that we'll keep working at. But if you look at it over the last several quarters, we'll see the stability in revenues, but continued work on expenses both in the dollars, but also the headcount. 15 straight quarters, 3,000 more person reductions per quarter is a pretty strong record to show that we're disciplined in the cash and bookings.
And then a separate question. I think it's the first time you've listed ROA and ROE on the first page of your press release. And should we read anything into that that you're more focused on achieving these targets with a specific time frame or kind of what changed?
It may be the pagination. It's been listed in our documents So we're focused on those goals and we've told you that each time you ask the question.
And then lastly, just I know I've asked this question before. Is there a specific time frame that you can commit to achieve your ROA and ROE goals?
Mike, as I told you, Daniel, meeting me there with a few other people asking the questions on this question. We had the building blocks in place to get us to where we are and we consider building blocks fall in to get us to our goals and there are external factors, the rate increase and stuff that are you see the market currently exchanged just in the last 15 days this quarter and has moved around dramatically. So we're going to our control elements, we continue to drive and we see the progression towards over the next several quarters. Yes.
And I think Mike, just to be clear, we talked about 100 basis points and 12% to 14% return on tangible common equity. Obviously at 99 basis points we're bumping right up against that. And I think what's important is as you look to the path to what we've talked about, we're basically there in the Q2. You could say you had the $700,000,000 in FAS 91, to $400,000,000 of loan sale gains and a couple of $100,000,000 from rep and warrant provision. But what I think is interesting and as you look at the past there, if you look at and assume the 100 basis point parallel shift in the yield curve, what that would mean in the quarter as well as if we ultimately get to where our LAS expense goals are, you're back you're basically back to all other things being equal where we were this quarter.
So what was articulated as something where you couldn't see a path or a way to get there, I think it was a step forward this quarter as far as seeing how we can get there.
All right. Thank you.
And we'll take our final question from Christopher Wheeler from Atlantic Equity. Your line is open.
Yes. Good morning, gentlemen. And I'm sorry to delay the subject of costs again. But I was just trying to square away what you said I think to Betsy's question at the very beginning. To what you said at the conference back in May when you actually said that if trading revenues didn't pick up you'd have to adjust costs further.
And I just wondered where you were on that because obviously trading revenues were down about 2% year on year I think in the quarter. And I'm having to assume that the start of the quarter has been pretty bumpy with Greece in China. So could you just talk a little bit about how you see that? But perhaps also talk a little bit about how you might address that situation in Global Markets and Global Banking in respect of the U. S.
Business and the international businesses, because it is very clear that the U. S. Business seems to be offering more opportunities not just because they're more buoyant, but also because you're seeing European banks play a lesser role. And obviously seeing 3 of the big banks get new CEOs in the last few weeks, I hardly imagine they're going to be allocating more capital to Investment Banking. Thank you.
Let me take a stab at it. I think there are a couple of parts to that question. The first is and I think you referenced that what would you do if global market expenses were lower on a go forward basis. I think this quarter was reflective of the way you'd expect us to manage it, which is the pure sales and trading number was down 2% and total expenses within the segment were down 5%. So I think some of what Brian communicated in May, you saw evidence of that happening during the quarter.
The second thing that I would say is that it's obviously earlier in the quarter, but I wouldn't draw any conclusions as to overall performance based on the volatility that we've seen during the 1st couple of weeks to the negative. And then third, I think that your question was and is just that with what's going on within some of the European banks as well as changes in management and questions around capital, how does that translate and what are you seeing in the U. S. Business? I think what I'd say is that we obviously have significant share in the U.
S. Business. We're looking to do a better job of that. And I think that as you look at some of the loan growth that we've seen that it's reflective of the fact that we're deepening in the U. S.
But just as importantly that loan growth is not only in the U. S, it's throughout Europe. There's been a little bit in Latin America and there's been growth in Asia Pac. So we are looking to use some of these market opportunities as a basis to deepen and look to grow the overall Global Banking segment.
Thanks very much. Thank you.
Thank you everyone. That's the last question. We look forward to talk to you next
quarter. This does conclude today's program. You may now disconnect at any time.