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. You may register to ask a question at any time by pressing star and one on your touch-tone phone, and you may withdraw yourself from the queue by pressing the pound key. Please note this call may be recorded. I'll be standing by should you need any assistance. It is now my pleasure to turn the conference over to Mr. Lee McEntire. You may begin, sir.
Good morning. Thanks to everybody on the phone as well as the webcast for joining us this morning for the second quarter results. Hopefully, everybody's had a chance to review the earnings release documents that are available on the website. 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. With that, Brian Moynihan, our CEO, for some opening comments before Bruce Thompson, the CFO, goes through the details. Brian?
Thank you, Lee, and good morning, everyone, and thank you for joining us for our second quarter results. As you can see from our release, we reported $5.3 billion 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, revenue was up and expenses were down comparably 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 the New BAC cost savings back in the third quarter 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 2008.
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 added 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 record number of teammates from college, over 1,200, and we have our intern programs over 1,800 this summer. We continue to invest, as we have said, in technology. There was $3 billion 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. You saw some of the effects of that this quarter. The goal of that program is to hold the costs, 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 first quarter. We saw a continued improvement in our net charge-offs and credit quality. Our deposits and our consumer continued to grow even faster this quarter than prior quarters. We also built capital and tangible book value despite the OCI impact of higher rates. We returned over $1.3 billion to our shareholders through share repurchase and common dividends.
In 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. 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 the second quarter. Additionally, 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 billion.
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. In this year, we've added some of the industry's largest companies to our platform. 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 the uncertainty in economies outside the U.S., we see the U.S. economy continues to steadily improve. In our middle market business, our commercial businesses, our company's balance sheets are 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 billion 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 Candace's leadership in BofA Global 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 manage this company to deliver for our customers, clients, and for you as shareholders. With that, I'll turn it over to Bruce.
Thanks, Brian, and good morning, everyone. I'm going to start on slide three. Let's go through the results. We recorded $5.3 billion of earnings in the second quarter for $0.45 per diluted share. This compares to $0.27 a share in the first quarter of 2015 and $0.19 in the second quarter of last year. A few items to note as you review the results. In the second quarter, we had $669 million 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 a $0.04 benefit to EPS. The quarter also included $373 million 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 million benefit this period.
This was mostly associated with positive developments in legacy mortgage-related matters, which I will discuss later in the presentation. This added $0.01 to EPS. Revenue on an FTE basis was $22.3 billion in the second quarter and included the items that I just mentioned. Total non-interest expense in the quarter was $13.8 billion and reflects lower litigation costs, lower LAS costs, and good core expense controls compared to both the first quarter of 2015 and the second quarter of 2014. Provision for credit losses this quarter were $780 million 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 four, the balance sheet was up less than 1% versus the first quarter 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 first quarter 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 $2.2 billion decline in OCI and $1.3 billion in capital return to common shareholders.
We repurchased 49 million shares for $775 million and paid approximately $500 million 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 third quarter of 2013, growing $8.5 billion from the first quarter 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 in the LAS unit, where we have a home equity runoff portfolio together showed a decline from the first quarter of 2015 of $15 billion. 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 $23.5 billion or 4% from the first quarter 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 first quarter of 2015, growing $11.4 billion or 4% during the quarter from a mix of C&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 six.
Under the transition rules, our CET1 ratio improved to 11.2% in the second quarter. If we look at our Basel III regulatory capital on a fully phased-in basis, CET1 capital improved $1.1 billion, 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 first quarter of 2015. Under the advanced approaches, CET1 ratio increased from 10.1% to 10.4% as RWA improved by approximately $34 billion. Lower counterparty RWA drove this decline and was equally split between three factors. The first, lower derivative exposures mainly driven by movements in both rates as well as FX. Second, optimization through better collateral management and reductions in certain positions. 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 have previously communicated to you, at the end of the quarter, we estimate if we made the requested modifications, that our advanced approach's CET1 ratio would be approximately 9.3% at June 30th. 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 seven on funding and liquidity. Long-term debt of $243 billion was up $6 billion from the first quarter as issuances outpaced maturities.
As you can see from the maturity profile, we have $10 billion of parent company debt scheduled to mature in the rest of 2015, we'll continue to be opportunistic in regards to issuance. Our global excess liquidity sources reached a record level during the quarter at $484 billion and now represent 23% of the overall balance sheet. The increase from the first quarter 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 billion, and our time to required funding improved to 40 months. At the end of the second quarter, we estimate that the consolidated company was well above the 100% fully phased-in 2017 requirement for the liquidity ratio. We turn to slide eight on net interest income.
On a reported FTE basis, it was $10.7 billion, an increase of $1 billion from the first quarter 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 million as rates rose 40 basis points in the quarter. While in the first quarter of 2015, we reported a negative $484 million adjustment from a decline in rates in the period. If we adjust for those items, our NII declined approximately $100 million from the first quarter of 2015 to just over $10 billion as the impact of lower discretionary balances and consumer loan yields more than offset the impact of one more day of interest.
At the end of the second quarter, an instantaneous 100-basis-point parallel shift increase in rates would be expected to contribute roughly $3.9 billion in NII benefits over the following 12 months, 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 31st as we realized some of that sensitivity through FAS 91 in the second quarter. As you can see on slide nine, non-interest expense was $13.8 billion in the second quarter and included $175 million in litigation expense. Litigation expense did decline significantly from the second quarter of 2014 levels. If we exclude litigation, expenses were $13.6 billion in the quarter, a decline of $900 million or 6% from the second quarter of 2014.
On balance, we're quite pleased with our year-over-year expense improvement, even while we continued to invest in the franchise. In the third quarter of 2014, we wrapped up the New BAC cost savings initiatives, 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 second quarter of 2014. 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 $1.1 billion versus $1.2 billion in the first quarter 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 million from the first quarter of 2015 to $929 million. Loss rates on the same adjusted basis improved to 43 basis points in the second quarter of 2015. U.S. consumer credit card delinquencies improved as well. On the commercial front, we saw an uptick in NPLs and reservable criticized exposure from the first quarter, 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 1-level migration on our risk rating scale. The second quarter provision expense was $780 million, we released a net $288 million in reserves, which includes the utilization of previously accrued DOJ reserves.
Releases in consumer card and consumer real estate were partially offset 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 $1.7 billion, which was 4% greater than the second quarter of 2014 and 16% above the first quarter 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, 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 million from the second quarter of 2014, driven by the continued improvement that we saw in both the credit card as well as the auto portfolios. Our non-interest expense was down 4% from the second quarter 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, 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 17.6 million customers this quarter. These customers look to mobile devices for approximately 13% of 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 second quarter of 2014 on strong sales and solid spend levels. Card issuance reached almost 1.3 million 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 second quarter of 2014, as we do see customers paying down more of their balances. Net charge-offs declined from very low levels and were 2.7% in the second quarter, 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 first quarter, as well as higher production margins. First mortgage originations for the total company were $16 billion, up 44% year-over-year and up 16% from the first quarter of 2015. Home equity line and loan originations increased 23% to $3.2 billion from the year-ago quarter and were stable with the first quarter. Revenue improvement versus the second quarter 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 second quarter 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 second quarter of 2014, our average deposits of $545 billion are up $31 billion or 6%, even as we lowered the rates paid, which now stands at five 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 million, which was up 6% from the first quarter of 2015 level, but down 5% from the second quarter of 2014.
Compared to the second quarter 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 second 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 second quarter 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 $2.5 trillion, up almost $12 billion from the first quarter of 2015, driven by solid client balance inflows as well as improved market valuations. Long-term AUM flows were $9 billion 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 our 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 $1.3 billion, which is 14% on allocated capital. Earnings did decline 13% from the second quarter 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 second quarter 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 $1.5 billion, down 6% from the near record levels that we experienced during the second quarter 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 leveraged finance area. Equity underwriting was down 19% from what was a record level for our company in the second quarter 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 billion, 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 second quarter of 2014, we did see a favorable shift in mix with our non-interest-bearing deposits up over $20 billion and our interest-bearing deposits down $17 billion versus the second quarter 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 second quarter, earnings were $1 billion on revenues of $4.3 billion. We generated an 11% return on capital in this business during the quarter. Earnings were up modestly from the first quarter of 2015 levels, which included higher litigation, but down from the second quarter of 2014 as revenue declined.
Total revenue, excluding net DVA, declined from the second quarter, driven by lower equity investment gains, lower FICC and sales and trading results, and lower investment banking fees. If we exclude $188 million difference between periods on the sale of an equity investment, revenue was down 4% from the second quarter. Non-interest expense was reduced 5% from that same period, in line with the revenue reductions. If we focus on the sales and trading performance components on Slide 18, sales and trading revenue of $3.3 billion ex net DVA is down 2% from the second quarter of 2014 levels. Compared to the same period a year ago, FICC sales and trading was down 9%. Not unlike what we saw in the first quarter 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.
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% 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 first quarter of 2015 on less favorable MSR hedge performance, as well as lower servicing revenue. Litigation expense declined significantly from the second quarter of 2014. Non-interest expense ex litigation was roughly $900 million this quarter, improving $122 million from the first quarter of 2015 and $526 million going back to the second quarter of 2014.
We remain on track to hit our fourth-quarter goal of approximately $800 million in LAS costs ex litigation. We were also pleased that during the quarter, our number of 60-plus day delinquent loans decreased to 132,000 units. That is down 14% from the first quarter 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 six-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 PLS representation and warranty obligations are governed by New York law.
As a result of the case ruling, you can see on Slide 20, a significant $7.6 billion 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 rep and 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 billion for several years, and the top end of that range has now been reduced to up to $2 billion. On Slide 21, we show all other. The $637 million 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 2015, 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 hundred million dollars later in this year to reprice our U.K. deferred tax assets upon enactment. At this time, on an ongoing basis, we expect the recurring tax impact to be modest. Before wrapping up on this set slide, let me remind you that our preferred dividends in the third quarter should be $440 million and $330 million in the fourth quarter of this year.
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 billion in earnings and move closer to our long-term targets. Revenue reflected relative stability. We lowered costs. We grew loans nicely. Our credit quality remains very good, and we are 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 us go ahead and open it up for Q&A.
At this time, if you'd like to ask a question, please press star and one on your touch-tone phone, and you may withdraw yourself from the queue at any time by pressing the pound key. Once again, it is star and one to ask a question. 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. The question is, have we reached the end state here, or is there any further opportunity to bring down expenses from here?
I think, Betsy, in the broadest context, we continue to work expenses. We talked to Ollie about each quarter, 18 straight quarter reduction in core operating expenses outside litigation. 15 straight quarter of 3,000 people or more reduction each quarter. We just continue to apply technology to continue to long-term reduce expenses. The goal we have in SIM 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. As you can see this quarter, that will result in a constant downward pressure given where we are in the economy.
Okay. 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? 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 warrant provision, and you're right, it was a net benefit of $200 million this quarter. I think the important thing, I think more than the $200 million, is if you look back on our slide 20 in the earnings materials, the effect of the decision led to two 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 million, which is a dramatic improvement from what we've seen historically. Second, as a result of the time barring of certain claims that the outstanding claims that we have, and keep in mind, these outstanding claims are based on original UPB, came down fairly significantly to just below $19 billion.
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. Then just one last question. You indicated the upside that you have in the event of a rate rise, $3.9 billion 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. Then just remind people that we were at $3.9 billion 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. 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, then just back to the expense side. The expense run rate that you've got right now is something that you think you can hold, at least if not improve from here. Is that fair?
Yeah. That's really your last question. We've been investing in headcount to open up our customer-facing capacity. I'd rather give you some of the statistics earlier. We're comfortable from a technology spend rate, from an investment in client-facing capacity, marketing, and everything. We're at a good run rate, there'd be downward pressure as headcount continues to come down through the application of technology across the platform with customers and internally. We're comfortable that we can continue to drive it and make no bones about it. This is what we work on every day.
We're likely 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. We are constantly working to improve the dynamics of revenue versus expense in this company.
Thanks a lot.
Thank you.
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, x the market-related marks, it 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 two, or do we really need higher short-term rates for that?
No. 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. As we sit here today, based on the curve, we would expect to see the core net interest income, which obviously excludes FAS 91, move up from Q2 to Q3, and we'd expect further growth from Q3 to Q4.
Okay, 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. There's not a lot of rate benefit in that at all.
Okay. Then on the discretionary book, you mentioned it came down a little bit when you look at a combined securities mortgages basis. 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. What's the thought on bringing that book down as rates have gone up?
Okay, 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. We referenced that those came down about $15 billion quarter-over-quarter, half due to sales and half due to pay downs. We probably have one more quarter where you'll see some of the conversion of those loans to securities. 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. As we continue to see the deposit footprint grow, we will continue to invest. We're obviously mindful of the balance between increasing NII, like I spoke about, as well as being sensitive to OCI risk.
Okay. Thank you very much.
Thank you.
Our next question is from James Mitchell from Buckingham Research. Your line is open.
Hey, good morning.
Good morning.
Just a quick follow-up on the NIM outlook. I think, Bruce, last quarter you mentioned if the yield curve stayed where it was, you'd have about $600 million 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? 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?
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 put the increase in deposits to work through growing loans. Clearly during the second quarter, we saw that loan growth move up, which is obviously a good thing, which lessens some of that sensitivity. 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. 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. 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. 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. We'll look to get that wrapped up sooner than later.
Okay. That's helpful. Just one last quick one on the $3.9 billion of sensitivity to higher rates. How much is FAS 91 related versus sort of core?
Sure. As I mentioned, roughly 40% of it is long end, which is a billion and a half dollars 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 $3.9 billion 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?
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%? I think that 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. Net on a relative basis, that should be a positive as you look at the numbers.
Okay. A clarification, where is the gain on consumer real estate loans? Is that in the mortgage banking line?
No, it's in other income.
Okay.
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, the hedge results on the MSR were fairly decent in the quarter. Then, like we said, there just wasn't much litigation during the quarter as well. All of those things led to the results being where they are. You're right that we typically add $1 to $200 of rep and warrant provision, and we add $200 benefits. You get a sense of the magnitude of the swing on a comparable period basis.
Got it. Okay. Then last question from me on the credit. Do you see the net charge-offs kind of bouncing around the current level, the $929 million? How do you see it playing out in terms of provision reserve release relative to what you just did this quarter?
Yeah, this quarter, I think you're seeing kind of a continuation of what we've been talking about. I want to be careful that I think we need to exclude DOJ, both on the top as you did in your 929 number, as well as in the reserve release. If you back out what we had for DOJ, the reserve release was about $150. The charge-offs of $929 million were down roughly $75 million. While this can bounce around a little bit, I think what you're likely to see over the next couple quarters is probably a convergence where the charge-offs and the provision number become more closely aligned. I would just say that, particularly on the consumer side, we continue to like what we see on credit. On the commercial side, you can see that charge-offs are virtually nil within the large corporate space.
There's nothing that we see out there that's going to change that materially.
Okay. On top of that, will the DOJ still be a factor for the next couple quarters?
As it relates to that, I want to think, John, that it will be in the $100 million type area as it relates to both charge-off and reserve release. By the time we get to the fourth quarter, it should virtually go away. It can bounce around a little bit, but it should largely be gone by the end of the third quarter.
It pairs off, John. The way you subtract this quarter continues. Even though it's a number, it's offset by a previously established reserve.
Got it. Okay. Thank you.
Thank you.
Our next question is from Glenn Schorr from Evercore ISI. Your line is open.
Hi. Thanks. Two 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. Could you give a little color on what drives that? The overall size of the book didn't change that much.
Yeah, 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 second quarter of 2014 to the second quarter of 2015 once you make that 91 adjustment.
Okay. Similar but different question. Inside the C&I book, the U.S. commercial book, it was just a four basis point drop quarter-on-quarter. There's growth there. 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 think when you look at commercial loan spreads, there are two things that those numbers reflect. I think the first thing which just from a macro perspective, there has been a little bit of 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, in particular in the areas that picked up during the second quarter, that on our risk rating scale, they would translate to credits that tend to be in the strong triple B or single A area. They're largely investment grade type credits where we're extending it.
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. As you can see, the credit's clearly at the upper end.
Glenn, probably say, if you think about it, on credit structure, we held our discipline. On price, there's been pressure, you have to look at that on a whole relationship basis with the other fees and revenues you get from cash management and stuff. We try to have our client focus discipline do it. Your observation is right. There's a little pressure on those spreads due to that today.
Okay. I definitely appreciate that. Last one is when you talk about the pushing for growth, 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?
In the sales context, there are incentives for production, it has to be done the right way with the right customers and the right structure. It doesn't drive their behavior. It's different than, let's say, the wealth management business in terms of the balance between incentives. Yes, the mortgage loan officers are paid to produce mortgages and to open up checking accounts and other things. 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, shifting that group of people. It's really just having more of them than think of it as incentive-driven behavior.
Really, having information at the point of sale through our technology, offers have been made to people for credit cards and et cetera, so that you can make the offer again that's already been made to them online or something. It's coming to sales practices, more people, just the discipline of the team, Tom, Gwen, Dina, and Asia running that, than it would be incentive driven.
All right. Thanks very much.
Our next question is from Eric Wasserstrom of 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. I'm still unclear what the core level of growth was inside the consumer organization. I'm just trying to reconcile that with where the incremental hiring is occurring on the sales front. Can you just clarify what the core level of consumer growth was?
If you look in the consumer on page five, 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. It has an impact on that. Overall, we're still fighting a couple things in consumer. One is the card balances are finally stabilizing. You saw it from first quarter, second quarter, slight uptick there. That's because we've been hitting increasingly record sales of credit cards. I think we did about 1.3 million this quarter, Bruce. That is again, a record for us since we changed the business model six, seven years ago. 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.
If you look at that, you can see it is across the board, just a little bit upside tilt. In part, the interplay between some of the runoff in the other category and the buildup in residential. They do a lot more than sell loans in that place. The investment sales levels, that drives that narrow edge. In fact, the FSAs and the branches that we deployed do $4 million of notional on average a month of new investment products in building, $4 million-$5 million. They sell obviously checking accounts, net checking accounts this quarter. We are in a net checking account growth position, even taking into account the runoff from divestitures and other things. You have the loan side. They are responsible for driving all that.
It shows up in the loans a little bit, but it also is now that is why the fee category is stable in other areas.
Do you have a sense, or is there some sense maybe, Brian, you can give us to how that investment in front office staff is contributing to growth outside of the segment?
For example, in the small business arena, in the first half of the year, we did about $5 billion of originations. In what the world would define as small business, we have it across two divisions, and they help grow that. Merchant services growth. That goes into the global banking segment. They send about 20,000 customers a year into wealth management that literally walk in a branch, are wealthy, and then get moved over, and that helps our wealth management business. You are right, that sales force does what it does in segment, but it has a benefit across the board. It services a lot for all customers, business banking, commercial banking customers coming to the branches, obviously, related to the cash management revenue. It is across the board and contributes.
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.
This is just my final question on this. 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 Banking categories, this is Consumer Banking here, 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. In the consumer, you should see as it stabilizes, you'll see a little bit better loan growth. But remember, the focus on the responsible part, responsible 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. We are driving that growth into the core strong credit quality that we want to have in this company. I'd be careful about assuming it'll just leap to us, because to do that, you'd have to go into credit postures that we won't do.
Yeah. 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 second quarter of this year, the home equity originations of line amounts were about $3.2 billion. They were to loan-to-value less than 60%, FICO deep into the 700s. There were more than $3 billion of those booked. It's number 1 market share. Roughly a billion and a half of that was funded. But you do have some of the legacy stuff that's running off. I think when you wonder about activity levels and what's happening, I think you need to realize that with that number 1 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. Looks like when you look at the reconciliation of the move to fully phased in, there's a little bit of a help on the advanced models this quarter. 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?
I think there are a couple 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 third is 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. There still are a few RMBS and other type positions that we'd expect to get benefit for over the next couple quarters.
I think that this quarter was clearly a quarter between the activities that we undertook as well as what happened from a rates and FX perspective, where we saw pretty good quarter-over-quarter improvement. 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 never did the activities in the company, but on the other hand, we had to deal with the cost of them. Both operating and general. As you think about that longer term, we have to get to a more rational view of that operating risk relative to the company we run today, which is different, but that'll take time and working through the models there too.
Okay. My second question just relates to the wealth management business. Bruce, you alluded to there being a little bit of a slowdown on the revenue. If I look at the segment or the line item on the income statement, there has been a deceleration. Advisor productivity looks a little bit lower, and you've added a lot of people, you've added a lot of assets. I'm just wondering, what do we need to see to get a re-acceleration of the revenue side in brokerage and wealth management? Is it just a time lag relative to those additions?
A couple points on that. 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 in productivity that occurs. I don't think there's any question. The second thing that I do think is important is that when you look at 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. Some of the push out of the ALM activities has muted the NII line a little bit.
The third thing which you referenced that I do think is a little bit more of a trend that I think 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. That's leading to growth in the asset management fees. 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.
I'd say that a few quarters, we saw 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 of some of the deal stuff runs off. We'll add a couple of points to margin. It's in the numbers this year, but won't be in the numbers next year. Your point is the maturity of the investment cycle. 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. The encouraging sign is we're seeing the margin come back up. Remember, this business also benefits a lot by the rate changes too, ultimately. It's a big bank.
It's got $250 billion of deposits, round numbers, a lot of loans, and it has a lot of the same sensitivity a consumer bank does that people don't think of in this context. As we think about the cost 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, and 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.
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. 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 in market conditions because obviously there's a part of Basel III that's somewhat pro-cyclical. 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 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. You have to be a little bit careful between which method you're looking at.
Okay. 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 because you're right. As it relates to a ratio pro forma for this, it is the lower number. 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, that 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. 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 GSIB indicators so that you could move into a lower bucket?
I think a couple things on that front. The first is as it relates to G-SIBs, their application where they may or may not be used. 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. 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. 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. 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. Clearly we continue to work hard to move out those exposures that have high loss content there. I would say it's really much more of a continuation of the work that we've been at for several years now. 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. One more quick final one from me. I was hoping you can give us an update on where your TLAC ratio sit today.
Yeah, 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 GSIB and other things. 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? Of that, what percentage are advisory?
We'll let Lee get back to you on that. I don't have that off the top of my head. I just don't have that fact off the top of my head.
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.
Yeah. It leaves me for you on that.
Okay. Looking at the branch declines that you guys referenced earlier, should we count on the 5% year-over-year as a reasonable decline rate, sustainable from here, given the trends that you're seeing in your mobile platform? 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?
Let's step back and make sure that we understand one thing, is the idea is that we're moving because the customers are moving in how they conduct business. 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. That being said, that's one point. The second point is in the 1,600 branches that we had at the peak down to this level, there were multiple things we were doing. Customer behavior changes, changing the configuration of the markets we attack, et cetera. There are lots of elements. 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.
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. Let's flip to what's really going on. As Bruce talked about earlier, we have 17.6 million mobile users. We have 31 million computer banking users. That number is actually growing again. For a while, it was kind of flat. It's actually growing. 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. You get things which 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 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 in them. If you think about that's up from 2,000 last year, second quarter. 10,000 times a week now and growing at that rate implied there. People are scheduling appointments to come see us, which is a lot better experience for us and them to help us serve them. That allows us to have our staffing levels down. Bruce referenced the checks deposited are 13% of all the checks. The activity of all this is critical to that question. I won't give you a 5% reduction, a 4% reduction. I think you can mathematically derive what we've done, but I'd be careful about assuming it'll be that ratable, but it'd be more based on behavior change.
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. It'll be a complex thing. It's an integrated pool of capabilities, phones, online, ATMs, and branches, and you'd expect it to be pressure going down. Remember, we were early into this, and if you think about 1,400 branches, that's bigger than a lot of companies out there already out of the system. We've been at this for a long time, but we'll do it the right way because if you push too hard, you'll upset the clients.
That's helpful color, Brian. Thanks. Last one for me. You made reference earlier to a couple points margin from the employee forgivable loan amortization dropping off next year. 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? Does it assume some level of counter pressure or offsetting pressure from continued recruiting? 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 was set up at the time of the transaction for a group of people at that time, it just came in over the years, it stopped just last year, but it goes away. The forgivable loan practice and all the other stuff in recruiting is a whole different thing. For John and Keith Banks and the teams, they're successfully recruiting on the experience level. The attritions for the top 2 quintile financial advisors is at an all-time low. I think, again, it's around 2% or something like that. We're retaining those, we're recruiting at both experience levels. Importantly, what is obvious to us is to drive the amount of client need here, drive against the client need, which is huge and underserved in our belief.
We had to create more advisors out there. We've really worked hard on what they call a PMD program, which is basically bringing people in the business who may have experience at other firms, but bring them into our firm and also other industries into our firm. That is now reaping benefits to us because they've been working on it for two or three years, retool it, and drive it. You should expect our advisor count to go up, and our productivity may come down per advisor. Frankly, there's a lot of business where, remember, our advisor productivity is $1 million and some. Bringing it down a little bit to get a lot more growth in advisors would be a great trade for our company. Our recruiting's strong.
We're net doing a decent job at sort of the higher end that you hear a lot about. That is not a big part of the advisor count, several hundred a year.
200, 300. What's going to drive our advisor and capability to serve our clients is the broader build-out of the teams, which the BFAs and the PMDs that work at the branches in some cases and work with people. That should redound to our benefit over time. Although it's had a little drag on profitability right now because it's 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 million 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?
Yeah, I don't have 50 basis points, Marty, but the number we had quoted was on a 100 basis point move, the FAS 91 benefit would be $775 million.
Okay, perfect. Then when you're talking about 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 that's generated. Obviously, some of that goes into loan growth, and some of it goes into the investment portfolio. Embedded in those comments is an assumption that there'll be a little bit more to be invested.
Any general range, $10 billion, $20 billion, $30 billion? Any kind of rule of thumb there?
I would think of it as on the low end of that during the third quarter and a comparable amount in the fourth. 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. 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 the important thing is 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. 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, the question is it works its way through. 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. Could 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?
At any one point in time, it can move around, but you should assume it's comfortably above $100 billion that's on the Fed end in any one night during the quarter. I think that when you look at where we are with LCR, where we are at both the parent as well as the bank, I think in $484 billion of overall liquidity, which is a record that we feel we're in a reasonable place. I don't see significant changes going forward, Nancy.
Okay. You mean in 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. You've gone through a lot of change over the past few years and this transition to mobile, et cetera. 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?
I think in the mortgage business, for example, if on bank originators, we're number one in J.D. Power survey, and I think we're number two or three overall mortgage companies. I think in terms of originating mortgage loans, a guy named Steve Boland who runs that for us has gotten that platform settled in, and you'll get momentary spikes where the refis will bump up and things slow down from a get the loan done. From keeping our credit quality where we want it, that ends up with us having some noise around people we don't get mortgages. We did of the $15 billion or whatever we did this quarter, 30% of it was low to moderate income, we're still serving that segment. Again, we are not pushing for credit terms in mortgage, and I think you'd understand why, Nancy.
Yes. How about just more the issue of service quality at the branches, et cetera?
Well, if you look, our customer scores continue to rise.
Almost on a monthly basis in the broadest context of brand. Part of that's due to what happens to brand, part of it's also due to just less stuff going on about the company. That's gone from the low point in the fourth quarter 2009, and it's rose fairly steadily since then. In fact, within 95% of where it was at its highest point in 2005 and 2006. That we're satisfied. If you actually go to the customers actually get served, when we measure all the channels, which we measure with tens of thousands of customers a week and 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, including mortgage.
I think because you just have a lot of customers, you'll find out that once in a while we bump it up and our job is to fix them, and we do. If you think about it, we've added mortgage production, checking accounts net new, credit cards net. 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. I think if you look at it over the last three or four years, just continue to get better.
All right. Thank you.
By the way, if you look at our deposit growth, it continues to accelerate over the top of CDs continuing to run off year-over-year of $10 billion. We're up $31 billion in deposits in consumer year-over-year, I think it is. CDs were probably down $10 billion or so. Think about that. If people didn't like us a lot, they wouldn't be giving us their core checking account. That is happening more and more every quarter. That will serve us well as rates change because we are a hugely primary focus checking account company in the broad mass market business, which is different than the past.
All right. Good to hear. Thank you.
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 million year-over-year. If you look at your four business lines, the revenues are down twice that, implying a lot of the rest is coming through the other lines. I guess I'm just wondering how much more there is to cut or if you should cut if the expenses are down again, $400 million, but the revenues in the four business lines are down $800 million. How do you balance that trade-off?
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 two 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. I think as we've gone through the presentation, 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. I'd be a little bit careful with that characterization. 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. 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 four slides related to GWIM, Global Banking, Global Markets, Consumer Banking. I took second quarter of 2015 versus second quarter of 2014 and looked at the delta in revenues, and that's how I got the $800 million decline. You would say which adjustments should we make from that?
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 these sort of unfundamental things is, Bruce, how much is that?
Let's just go through relative to the second quarter of 2014, you've got Consumer from an overall NII impact was more than $200 million. GWIM was, as Brian said, roughly $130 million. Overall investment bank or Global Banking was a couple of hundred million, and then you have de minimis amounts within Markets and LAS.
That is nothing more than us changing the allocation method. It's because of LCR and other things becoming important. We pushed down the businesses to get the behavior of the businesses aligned with the parent. This is why you have to be a little careful about micro assessing these movements because things change in those methodologies year-over-year. We don't go bust back and we say because we didn't do it last year.
Okay. I'll follow up on that. 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. We're not satisfied in the sense that we expect better performance on both the revenue expense dynamic in the future. We'll keep working at it. If you look at it over the last several quarters, what we've seen is 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 on cutting inputs.
A separate question. I think it's the first time you've listed ROA and ROE on the first page of your press release. Should we read anything into 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 consistently, Mike.
Do you have-
We're focused on those goals, and we've told you that each time you've asked the question.
Lastly, I know I've asked this question before, is there a specific timeframe that you can commit to to achieve your ROA and ROE goals?
Mike, as I told you at the annual meeting, we were there with a few other people asking us questions on this question. We had the building blocks in place to get us to where we are, and we can see the building blocks falling in place to get us to our goals. There are external factors, the rate increases and stuff, that you see in the market curve that's changed just in the last 15 days since quarter end, has moved around dramatically. We're going to our control elements. We continue to drive them. We see the progression towards the next several quarters like we told you.
I think, Mike, let's just be clear. We talked about 100 basis points and 12%-14% return on tangible common equity. Obviously, at 99 basis points, we're bumping right up against that. I think what's important is, as you look to the past to what we've talked about, we're basically there in the second quarter. You could say you had the $700 million in FAS 91, the $400 million of loan sale gains, and a $200 million from rep and warrant provision.
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 a quarter, as well as if we ultimately get to where our LAS expense goals are, you're basically back to all other things being equal where we were this quarter. 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.
We'll take our final question from Christopher Wheeler from Atlantic Equities. Your line is open.
Yes. Good morning, gentlemen. I'm sorry to raise the subject of costs again. 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 address costs further. I just wondered where you were on that, because obviously trading revenues were down about 2% year-on-year, I think, in the quarter. I'm having to assume that the start to the quarter has been pretty bumpy with Greece and China. 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?
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. Obviously, seeing three 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 parts of 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%. 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 first couple of weeks to the negative.
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. 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. 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.
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 so much. Thank you.
Thank you. Well, thank you, everyone. That is the last question. We look forward to talking to you next quarter.
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