Bank of America Q1 Earnings Conference Call: Full Transcript

Operator:

Good day 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 registered to ask a question anytime 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 is being recorded.

It is now my pleasure to turn the conference over to Mr. Lee McEntire. Please go ahead sir.

 

Lee McEntire:Investor Relations:

Good morning. Thanks to everybody on the phone as well as the webcast for joining us this morning for the first quarter 2016 results. Hopefully, everybody has had a chance to review the earnings release the documents are available on our website.

Before I turn the call over to Brian and Paul, let me remind you we may make some forward-looking statements. For further information of those, please refer to either our earnings release docs or our website or the SEC filings.

Let me just remind you please limit the number of questions, so that we can get to everyone’s -- so that we can get through all the questions that everyone has and with that I am pleased to now turn it over to Brian Moynihan, our Chairman, CEO for some opening comments, before Paul Donofrio, our CFO goes through the details. Brian?

 

Brian Moynihan:Chairman of the Board and Chief Executive Officer:

Thank you, Lee and good morning to everyone. We want to thank you for joining us to review our first quarter results.

Today we reported $2.7 billion in earnings this quarter or $0.21 per diluted share. As you see in the results two large items impacted this quarter’s results, recorded negative market related NII adjustments for bond premium amortization. That adjustment alone costs us $0.07 per diluted share and we also recorded a $0.05 per share diluted share costs of seasonal retirement eligible incentives.

When you think about revenue, net interest income excluding that bond premium adjustment was $10.6 billion this quarter. This is improvement linked-quarter in year-over-year. Our loans are growing across the franchise and compared to the prior year are up 11% in our business segments. In addition, deposit growth remains very strong.

Our deposits were up $64 billion from last year or 6% to over $1.2 trillion. This growth reflects our progress to grow response within deepen relationships with all of our core customers.

Moving to non-interest income, it declined year-over-year of note the down draft in that was driven by capital market stimulated activities and to a lesser degree mortgage servicing and other fees as we continue to lined down our third party servicing book. However, the other banking sources non-interest income will relatively stable.

Switching to cost, we continue to drive cost down as company. Cost year-over-year in the first quarter were down 6%. FTEs were down 3%, that is $1 billion per quarter, $4 billion on annualized basis and if we focus just on the core cost excluding our LAS and litigation those were down $600 million a quarter from first quarter of last year of $2.4 billion annualized. We are going to keep driving those costs down as we continue move forward to 2016.

Turning to Slide 3 and looking at the business segment earnings. You can see the good year-over-year results, because of the operating leverage in those businesses. The only exception is the results in global banking which were negatively impacted by the increased earnings related reserves. The combination of business segments outside the all other group earned $4.5 billion in quarter one this year compared to $3.9 billion in quarter one of 2015.

Offsetting those earnings were the $1.9 billion loss in all other. That loss primarily reflects the two large adjustments I mentioned earlier and some legacy litigation cost. You could also see the returns and efficiency ratios for each of our segments and though with exception of LAS which came close to breaking even this quarter there and above the cost of capital.

Moving to Slide 4, during the first quarter there is lot of talk with the market volatility accompanied by and surrounding the question about global growth and a fewer looking the economic picture.

However, we don't see any evidence, but if, our customer base changing. Spending by consumers remains strong as up year-over-year over 4%. Loan demand remains solid throughout the franchise and we continued positioned our company to face any potential economic outcome.

When you think about this is important to remember work we've done over the past years to simplifying and strengthen our foundation. We remain a different company today than that which on last down turn. We start with a clear strategy to serve the core financial need to the customers. We've got another businesses, portfolios, products, and client relationships that don't meet the strategic goals.

We simplify the company in every area. We cut the number of legal entities in half and we also reduced cost through programs like New BAC. That produced out loan more than $8 billion in savings, annual savings and our SIM program which continues to operate today.

At the same we've continued invest in the areas we can grow. $3 billion in technology related growth initiatives, especially in areas of digital practices whether it's in consumer banking, commercial banking where we lead the industry with mobile and online platforms. We've also invested more in client base and teammates. Funding net investment through elimination of accuracy and simplification and elimination of management jobs.

We believe that we have to continue drive their productivity and we will continue to do so in 2016.

In the end when you think about all this it makes our company more reservable. As you all know we received a latest input from our regulators on a resolution plans yesterday. Those plans were filed 9 months ago and we've been busy works since the day they are filed to continue to eliminate the deficiency's and short comings stated in those plans and we will do by the October submission date.

As we move to Slide 5, you can also see the founder -- financial foundation that we build in this company. Equity and capital at record levels. Tangible book value per share the market of what we've shareholders are now stand at $16.17 and is approved over $5 a share over the last few years even as we taken the heads that are now larger behind us.

Our funding structure continues to improve, long-term debt has been cut dramatically, deposits have increased over 20% and all that most of that growth is coming through our consumer banking wealth management segments. Our loan book is now well balanced half consumer, half commercial and importantly the consumer piece is much more secured lending than it was before last crisis. As we look in global markets, but it’s on level 3 assets which are more risky with the total trading assets or far they are all down significantly over the last few year. So as you can see us simply our company and our operating structure.

As we look ahead to 2016, we remained focused on what we can control. We intend to keep driving the core customer activities you see in the loan and deposit and customer flow growth in each and every business. Focusing intently on a wealth and management global markets businesses to take advantages as markets were stabilized. We'll continue drive on focusing on cost and drive those costs down and we'll continue to drive to delivering more capital to you as we did in the first quarter as investors.

With that let me hand it over to Paul.

 

Paul Donofrio:Chif Financial Officer:

Thanks, Brian and good morning everybody and thanks for joining us. Starting on Slide 6, we present a summary of the income statements and returns of this quarter, highlighting comparisons to Q4 '15 as well as Q1 '15. Earnings this quarter were $2.7 billion or $0.21 per share. These earnings include the negative impact of the FAS 91 market related adjustment which reduced EPS by $0.07.

They also include $850 million of FAS 123 retirement eligible incentive expense which reduced EPS by $0.05. For comparative purposes, the Edward impact of these two same items in Q1 '15 reduced EPS by $0.08.

Revenue on FTE basis was $19.7 billion this quarter. Adjusted for FAS 91 revenue was $20.9 billion, a decline of $700 million from Q1 '15 on a similarly adjusted basis. This declined was driven by the reduction in sales and trading revenue and IB fees as well as mortgage banking income offset by improvement in adjusted NII. Expenses were $14.8 billion, approximately $1 billion or 6% lower than a year-ago, driven by good discipline across the entire company.

Before moving to the balance sheet I want to note an adjustment to the financial statements this quarter reclassifying some operating leases. We moved $6 billion of leases to other assets and we made conforming reclassifications to prior periods to improve comparability. This reclassification had no effect on net income. However, as a result of this reclassification quarterly NII is lowered by approximately $50 million, other income higher by approximately $180 million and depreciation expense is higher by about a $130 million.

While these changes are small and don't effect profit I wanted to note them so that you can more easily adjust your models.

Turning to Slide 7 and the balance sheet, total assets increased $41 billion from Q4, driven by higher global markets -- activity as well as increased cash. Deposits rose $20 billion from Q4, while loans increased $4 billion, driven by deposit in flows, liquidity rose to $525 billion time to required funding while down remains stronger three years and note that the first quarter included the $8.5 billion settlement payment to Bank of New York Mellon as trustee in the Article 77 suit which was reserved for over four year ago. Tangible common equity of $167 billion, improved $4.7 billion from Q4. On a per share basis, tangible book increased to $16.17, up 9% from Q1 '15.

Turning to regulatory metrics, as a reminder we report regulatory capital under the advanced approaches. Our CET1 transition ratio on a Basel 3 ended the quarter at 10.3% and really is only comparable to Q4 as prior periods will reported under the standardized approach prior to exit comparable run. On a fully phased-in basis CET1 capital improved $3.4 billion to $158 billion as improvements from earnings and OCI were partially offset by dividends and repurchases. Under the advanced approaches compared to Q4 '15, the CET1 ratio increased 30 basis points to 10.1% and is now above our fully phased-in 2019 requirement.

RWA decreased roughly $18 billion, driven by reductions related to retail exposures as credit quality improved.

We also provide our capital metrics under the standardized approach here our CET1 ratio improved to 11% with the same capital improvement as advanced but less of an RWA improvement given standardized is less were sensitive. Supplementary leverage ratios for both the parent and the bank continue to exceed US regulatory minimums that take effect in 2018.

Turning to Slide 8, we had solid loan and deposit growth in the quarter. Reported loans of $800 excuse me reported loans of $901 billion on ended period basis increased $4 billion from Q4, and are up $28 billion or 3% from Q1 '15. Loans in our primary lending segments were up $14 billion or 2% from Q4 which is 8% on an annualized basis.

We continue to see solid commercial loan growth in global banking and consumer banking we continue to see strong growth and consumer real-estate and vehicle lending. Lastly, in wealth management we also saw a continued growth in consumer real-estate. Loans outside the primary lending segments in LAS and all other were down $10 billion from Q4, driven by continued pay downs of first and second lean mortgages as well as loan sales. During the quarter we sold FHA loans totaling $2.7 billion and NPLs and other delinquent loans of roughly $1 billion, recording a small gain on sales in other income.

Turning to deposits, on an ending basis they reached $1.2 trillion this quarter. Growing $64 billion or 6% from Q1 '15. Growth was led by our consumer businesses. Consumer banking grew $43 billion or 8% year-over-year, GWIM grew nearly $17 billion, at 7% pace and global banking grew at a 3% pace.

Turning to asset quality on Slide 9, outside the energy sector credit quality is strong. Total net charge-offs were $1.1 billion in Q1 and Q4. We had some immaterial movements this quarter from minor adjustments but overall very little change in consumer losses. Commercial losses declined slightly from Q4 despite a slight increase in energy charged-offs.

Provision of $1 billion in Q1 was up a $187 million from Q4. While net charge-offs were flat total reserve lease declined as reserve leases and consumer were mostly offset by reserve increases in commercial driven by energy exposures.

On Slide 10, we provide credit quality data on our consumer portfolio. Net charge-offs declined $41 million from Q4. Consumer real-estate charge-offs benefited from continued portfolio improvement and fewer one-time items primarily collateral evaluation adjustments on the consumer real-estate. Adjusting for those items consumer net charge-offs will relatively flat versus Q4.

Delinquency levels and NPLs improved and reserve coverage remains strong.

Moving to commercial credit on Slide 11, net charge-offs improved $35 million. A decline in non-energy net charge-offs from Q4 more than offset a modest increase in energy losses. Energy charged-offs increased $17 million from Q4 to roughly a $100 million in the quarter. Given that asset quality outside the energy remains relatively stable.

Let's focus on energy; we continue to support our energy clients while managing lending limits and actively engaging with stress borrowers. Our overall committed energy exposures declined slightly from Q4, while utilized exposures were up by 100, excuse by $500 million.

As discussed last quarter within energy, we believe two sub-sectors we're finding them in marketing as well as vertically integrated which by the way tend to be large market cap and our -- supported. These two sub-sectors are less dependent on oil prices and therefore carry less within our exposures in E&P and oil field services.

Looking at our $7.7 billion utilized exposure to the higher risk E&P and oil field services clients, we saw a decline of $600 million from Q4 as payoffs and charge-offs more than offset drawdowns. In addition, this quarter we moved $1.6 billion of our energy exposure to reservable criticized and we added $525 million to our energy reserves. We made these adjustments based upon another quarter of not only low oil prices, but also volatile oil prices. This moves our energy reserve to just over $1 billion and while these reserves cover our full energy portfolio, they would represent 13% of our $7.7 billion E&P and oil field services exposures.

We believe that percentage is probably more relevant as you compare exposures across the industry.

Turning to slide 12, net interest income on an FTE basis was $9.4 billion. Included in our guidance this quarter was a FAS 91 negative $1.2 billion market related adjustment for bond premium amortization. This adjustment in Q1 '15 was a negative $500 million and including TRUPs related charges Q4 was also negative $500 million. Adjusted NII of $10.6 billion improved approximately $500 million compared to Q1 '15, excluding FAS 91 and improve $100 million from Q4 after also excluding the TRUPs charge.

Several factors contributed to the improvement from Q4. We had good commercial loan growth funded by deposits. We also had about $100 million and seasonal benefits in Q1. Offsetting these factors we had one less debt interest and lower divided on our federal reserve stock as required to contribute to the high way trust fund.

Lower long term rates also offset some of the benefit of the Fed rate hike in December pressuring NII. Lower long term rates was also the driver of increased asset sensitivity in the quarter. As of 331 in instantaneous 100 basis point parallel increase in rates is estimated to increase NII by approximately $6 billion over the subsequent year. About 40% of this estimated $6 billion increase comes from short-end rate improvement and the rest is from long-end rate improvement split equally between FAS 91 and reinvestment at higher rates.

Turning to Slide 13, non-interest expense was $14.8 billion in the quarter. That is $1 billion or 6% lower than Q1 '15, driven by good expense discipline across the company. Legacy asset cost excluding litigation, excuse me legacy asset servicing cost excluding litigation were $729 million this quarter, declining $292 million from Q1 '15 and $64 million from Q4. Litigation expense of $388 million was in line with Q1 '15 as we worked to resolve remaining legacy issues.

First quarter expense also included FAS 123 annual retirement costs of $850 million, slightly below Q1 '15. First quarter of both years also included about $300 million of seasonally elevated payroll tax expense. Adjusting for all these items -- the litigation, LAS, FAS 123, and the elevated payroll tax expenses were $12.5 billion. This decline up $600 million from Q1 '15 was driven lower revenue related cost associated with sales and trading and investment banking as well as revenue in our wealth management business.

The roll off of advisory retention awards put in place after the combination with Merrill-Lynch and lastly, same initiatives that are improving productivity and helping us lower cost so that we can continue to investment in growth. Our employee base is down 3% from Q1 '15 and increases in client facing professionals will more than offset by reductions in LAS and other operations staff.

Lastly before leaving, expense highlights I want to remind you that quarterly FDIC insurance expense is set to increase at the large banks until the deposit insurance firm reaches 1.35%. For us this will increase expense by approximately a $100 million pretax starting in Q3 '16. Okay turning to the business segments and starting with consumer banking on Slide 14, consumer earned $1.8 billion, 22% better than Q1 last year. These earnings reflect continued core customer growth coupled with strong expense management.

Loan of provisions expenses from continued improvement in asset quality also benefited the bottom line. This work generated strong 24% return on allocated capital. Note that allocated capital increased slightly for 2016 pursuing to our normal capital allocation reviews completed in Q1.

On Slide 15 , we focused on some important trends, first on the upper left we continue to lead the industry in a number of ways as you can see from the stats.

Revenue increased $242 million or 3% from Q1 '15 as NII growth more than offset lower non-interest income. Net interest income benefited from higher client balances. Non-interest income was down due to lower mortgage banking income offset by increases in card income, and service charges. We continue to see mortgage banking income come down given our strategy to book more of our originations on the balance sheet.

Expenses declined 2% from Q1 '15.

On the bottom left, you can see the year-over-year decline in FTEs as mobile banking growth continues to help us optimize our delivery network. Note while overall FTEs are down year-over-year sales specialist are up almost 900 from Q1 '15. Lastly, our deposit franchise continues to drive operating leverage. Our cost of deposits as a percent of average deposits continues to improve and now stands at a 171 basis points, which we believe is best in class in the industry.

Focusing on mobile banking users in the upper right for a minute, we added 910,000 net new mobile users this quarter. We now have nearly 20 million active users and deposit transactions from mobile devices now represents 16% of deposit transactions. Interestingly, this quarter we added more net new users than any quarter in the last few years and we continue to add new features and capabilities improving convenience and satisfaction. One way we've promoting adoption is by deploying digital ambassadors in our financial centers.

Digital ambassadors engaged with customers who come to our branches to transact. They educate these customers on alternatives to branch banking which are not only more convenient for them, but also less expensive for us. Digital sales, digital appointments, digital satisfaction all continue to achieve new highs. Focusing on client balances, you can see Merrill Edge brokers assets are up 7% from Q1 '15 on strong flows offset by lower valuations.

Moving to the bottom right of the page, note that loans were up 8% from Q1 '15 on strong mortgage and auto growth.

Okay moving Slide 16, this is a new page represent some statistics around loan growth and the quality of originations in our consumer segment. Starting with card with issued 1.2 million cards in the quarter which is a bit lower than the past few quarters. Average balances were impacted by the sale of a $1.7 billion non-strategic card portfolio late in Q4. Adjusting for that divestiture, loans were up from Q4.

Spending on credit card adjusted for divestitures was up 8% compared to Q1 '15. As we've discussed may times and shown here, we are originating high cycle loans that have produced very low loss rates and strong risk adjusted margins currently exceeding 9%.

Moving to vehicle lending, one see similar high quality low risk lending stats. Average booked cycles are around 780 and loss rates are low. Also the tender of these loans is relatively considerable as compared to the industry at nearly 90% of our loans are less than 73 months. Margins obviously earned its highest credit card, but average balances are going well across multiple channels within the business.

Our underwriting standards are producing similar results in consumer real-estate lending which is presented on the bottom of the page. Net loss rates on first lean mortgages have been negligible. Remember we begin booking these loans in the consumer segment in the first quarter of 2014 and the macro consumer environment has been healthy particularly for high cycle borrowers.

Turning to Slide 17, global wealth and investment management produced earnings of $740 million, up 13% from Q1 '15. Year-over-year, revenue was down but expenses declined more improving pretax margin to 26%. Overall revenue decline 2% from Q1 '15 as strong NII growth was more than offset by a lower market sensitive revenue. Asset management revenue decline on lower market values.

Transactional revenue was also down and continues to be impacted by the shifting of activity from brokerage to managed relationships as well as market uncertainty. NII benefited from solid deposit and loan growth. Non-interest expense in the first quarter of 2016 benefited from the fully amortized advisor retention awards given at the time of the Merrill-Lynch merger. We have not seen a notice filtration as a result of this.

Lower revenue related incentives also contributed to lower expense versus Q1 '15.

Moving to Slide 18, despite lower market levels we continued to see overall solid client engagement and we continue to invest in the business growing client facing professionals year-over-year. Client balances are $2.5 trillion, long term AUM flows were down this quarter as a result of market volatility which impacted client behavior. Average deposits grew $9 billion from Q4 and average loans also grew this quarter concentrated in consumer real-estate lending.

Turning to Slide 19, global banking earned $1.1 billion, down from both competitive periods as energy reserves wait on results. Despite this increased provision expense, global banking was able to deliver a 12% return on allocate capital and note that we allocated $2 billion more in capital to global banking for 2016, pursuing to our annual evaluation of allocated capital. Global banking continues to drive solid loan growth within its risk and client frameworks and this drove a nice increase year-over-year in NII, mitigated to some degree by spread compression. That NII improvement combined with revenue growth from credit cards and treasury fees partially offset a decline in investment banking and other marks on loans and hedges.

Non-interest expense compared to Q1 '15, reflects a decline in revenue related expense offset by the cost of adding sales professionals over the past 12 months.

Looking at trends on Slide 20 and comparing to Q1 last year, it was obviously a tough quarter for the capital markets with spikes and volatility causing declines in client activity. However, clients still have financing needs and here is where the diversity and strength of our franchise allows us to continue to look to deliver for them even when capital markets are less attractive. You can see that trend in our average loans to lease balances which increased again this quarter and are up 14% year-over-year. Growth in loans was broad based across CNI, CRE and leasing.

Although recently we have slow growth in CRE. Spread compression on average across all our customer sizes has moderated relative to a year-ago. Average deposits also increased from Q1 '15 up $11 billion or 4%. We've remained focused on our deposit mix which is strong with only 3% classified as 100% run-off balances.

On the other hand, total firm wide IB fees of $1.2 billion were down 22% from Q1 '15 with declines broad based across M&A, TCM and ECM.

Switching the global markets on Slide 21 and comparing Q1 last year, again the challenging market condition cost revenue compared to Q1 '15 to be down. The quarter included the benefited from the resolution of a litigation matter and we also had lower revenue related costs compared to Q1'15. All of this resulted in global markets reporting earnings just under $1 billion. Reported revenue was down year-over-year, but note that last year DVA negatively impacted revenue versus added to revenue this quarter.

Total revenue excluding DVA while up from Q4 was down 17% from Q1 last year on lower sales and trading revenue as well as global markets share of lower IB fees. Non-interest expense declined 23% from Q1 '15 driven by lower litigation. Adjusting for litigation expenses were down 9% as a result of lower revenue related expenses demonstrating a disciplined approach to compensation.

Moving to trends on the next slide and focusing on the components of our sales and trading performance. Sales and trading revenue up $13.3 billion excluding the DVA is up 25% from Q4 with improvement in both FICC and equity, but down 16% from Q1 last year. Versus Q1 '15 fixed sales and trading up $2.3 billion fall 17% reflecting a tough environment for credit related products as well as a tough comparison to a strong Q1 '15 and currencies. Equity trading was $1 billion declining 11% reflecting weaker trading performance in the challenging market environment.

Average trading assets continued to trend down as did were which remained at historically low levels.

Turning to legacy assets and servicing on Slide 23, this segment loss $40 million this quarter. I am not going to spend a lot of time here, as trends are consistent with past quarters. Revenue was down a bit from lower servicing fees as the portfolio of service loans declined. Revenue was also impacted by lower net hedging jobs.

As the portfolio shrinks, we continue to lower servicing costs particularly with respect to the delinquent loans. The number of 60 plus day delinquent first mortgage loans serviced continue to decline and is not only 88,000 units. Excluding litigation expense this quarter were $729 million dropping nearly $300 million from Q1 '15 and down $64 million from Q4.

On Slide 24, we show all other which reported a loss of $1.9 billion. Results were impacted by the $1.2 billion FAS 91 market related adjustments the FAS 123 seasonal retirement eligible incentive costs and litigation costs. The last year is higher than Q1 '15 for a number of reasons. First, the market related adjustment is more negative this year than last.

Second we had higher gains of sales of loans in Q1 '15 than this period. Third provision expense is higher as both periods had a benefit from provision , but this quarter that benefit was smaller than Q1 '15.
Lastly, litigation cost were higher this quarter versus Q1 '15 as we worked down legacy issues.

The effective tax rate for the quarter was about 28%, which is better than we expect for the full year absent any unusual items. One expected item that we want to bring to your attention is another UK tax rate reduction recently proposed in the Chancellor's budget. We expect this to be signed into long Q3 to will result in a tax charge of about $350 million to reduce the carrying value of our UK DTA. The vast majority of this charge will not impact regulatory capital.

Okay, so let me offer a few takeaways at finish. Given the market volatility, revenue growth was challenging this quarter. However, we compensated for this by managing expenses well. If we want to adjust this periods reported results for the non-cash FAS 91 market related NII amount and the FAS 123 costs earnings are largely in line with recent quarters.

You can see progress most clearly in our business segments which don't include these adjustments. Taken as a whole this segments not including all other improved earnings by 16% versus Q1 '15. The drivers of this improvement were solid loan and deposit growth across our customer groups.

Net charge-offs were largely unchanged as modest increases in energy were mitigated by other improvements. We strengthened our capital and liquidity and we returned $1.5 billion in common dividends and repurchase to shareholders. To Brian 's earlier point we have done years of work to simplify the company and reduce risk. With $167 billion intangible common equity, $12 billion in credit reserves, and twice the amount of liquidity were few years ago.

We believe we are well prepared to help customers and clients in good and bad times and we are focused on growing earnings in many different economic scenarios.

With that let's open it up to Q&A.

 

Question & Answer

 

 

Operator:

And at this time, if you would like to ask a question please press star and one on your touch tone telephone. You may withdraw question at any time by pressing the pound key. Once again to ask a question please press star and one on your touch tone phone. We can take our first question from Jim Mitchell with Buckingham Research.

Please go ahead.

 

Jim Mitchell:Buckingham Research:

Good morning. Just maybe let's focus my question on expenses and then I'll get back in the queue, but I think outside of incentive comp expenses generally were better than I was expecting and how much of that is simplify and improved and how much more do you think there is to do on some of these core expenses I guess number one.

 

Paul Donofrio:

Look about from Q4 to Q1 $300 million in core expense declined. A $100 million of that is the roll off of the amortization of the awards we gave to advisors around the Merrill-Lynch acquisition. $200 million of it is just good solid expense disciplined being driven by same and other initiatives. If you look at the discipline you are going to see expenses came down in nearly every category

 

Jim Mitchell:

And you think there is more to do there. Then I guess maybe on the context of your discussion around digitalization and consumer that seems like that could be a longer-term tailwind that do you guys agree and do you think that's a material mover or just more incremental?

 

Brian Moynihan:

Jim I think there is a lot there is a lot more to do here because at the end of the day adjusting the efficiency ratio for the two major adjustments which won't occurred next quarter. You getting the mid-66, 67 and we need to drive that down in the low 60's even with the realities in wealth management business not being as profitable on a big part of our revenue stream. But very return of capital beneficial so. So then if you flip and say how do we are going to get down there, you are exactly right if you look we drifted down even further this quarter a numbers of branches for a numbers of customers.

The deposits were up, if you look at headcount and consumer we continue to reposition it towards the sales and relationship management side and the way from the transactional side and so, that digitization which is were $19.6 million mobile banking consumer customers and interesting enough we are growing on the online customer base and computer based customers grew over million customers from last year’s first quarter. So all that just drives more and more transactions and more and more cost structure in day-to-day transactional stuff into those environments and say just money overall and at 170 basis points either there is a time and that was 300 basis points 5, 6, 7 years-ago. We thought we got it into two the low twos to 20 to 40 and thought that was pretty good and now 170 my guess as we continue to push it down.

 

Jim Mitchell:

Okay. That's helpful, and may be just one ticky tacky question on the -- charge it wasn't clear is that an annual expense or is that going to be quarterly at a $100 million?

 

Paul Donofrio:

Maybe quarterly a $100 million beginning in Q3 until the fund gets up to its adequate level and then it will come down.

 

Jim Mitchell:

Okay. All right, great. Thank you very much.

 

Operator:

Our next question comes from Matt O'Connor with Deutsche Bank.

 

Matt O'Connor :Deutsche Bank:

Good morning.

 

Brian Moynihan:

Good morning.

 

Matt O'Connor:

Any outlook you can provide in terms of the potential for additional reserve bills related to energy we heard one bank yesterday talk about maybe another $500 million. Are there a lot of variability around that number that number they're planning to and obviously there buckets many years. But any thoughts if conditions same or there are now on additional reserve boost.

I mean just related look for additional reserve at least in the rest of portfolio given as you mention trends continue to grow strong or even improvements in some areas.

 

Paul Donofrio:

Sure. Look in terms of reserve bills we think the reserves we have right now or the right reserves for our portfolio. Bills and releases in the future are going to be based upon how company's adopt to the level and duration of low oil prices as well as our charge-offs and we think companies are adapting. In terms of reserve releases, we would expect leases in consumer but at a slower pace than we've seen in the past.

As we run-off our legacy portfolio and depended upon real estate market. Consumer leases would likely go to offset any bills in commercial.

 

Matt O'Connor:

Okay. Tough one and then just really kind of big picture from a regulatory point of view if I looked back to last year, you have had kind of some steps forward some steps backwards. Obviously had recent -- car that was net positive once you get the results back. We got the approval for the actual 1% buyback which I think some --a lot of investors you and ideas as positive you the living world issue that came up yesterday for you and move others and just very high level give some update on how you are feeling from the regulatory point of view and where the areas are that you feel like you still need to improve.

 

Brian Moynihan:

I think from global perspective we continue to implement all the rules and regulations of change over the last few years and importantly bulk wasn't implementation mid this year and lot of work has been done if you think about LCR, FLR, the core Basal and the changes we observe the advanced increases over the last year and are now were above the 10% advanced including $100 billion of more of RWA for the commercial assets and the app risk of capital $48 billion and so we've observed a lot to that into the run rate and I think we are now to the point of fine tuning company around the rules and regulations continue to optimizing and I think that we've obviously submitted the see car work.

We did tremendous amount of work just on the expense side that was another $40 million of incremental expenses quarter in the first quarter to continue to get plus using third parties to continue make sure we kept our run rate at best in class and so that's in being review as we speak and then we've got obviously as you spoke about the continuation of finishing up the resolution plan which we has probably spend at least a quarter billion dollars on external parties to help us within a lot of internal work and then I saw within the run rate as we speak in ultimately provide relief as we get through it.

So I think overall you've seen us implement most of the rules and optimize a company. We need to continue to do that or to provide some RWA opportunities in the future but continues take time. But we I think we are in pretty good shape and another question is just to finish of a couple of these key tasks on the resolution plan that you can see on president transparency you've got the same letter I got and so you know exactly what we have to do and we'll get it done.

 

Paul Donofrio:

Just to add may be two thoughts, one this is not an -- activity for us. This is be a-- and meeting the standard under the regulations that's one. Two is it’s not a group of people who are doing this, it's everybody in the company, it’s we have a significant it's really being led in many way by the line of business. We have got involvement from all of the support functions.

So it's become part of the culture of the company to get to right standards across all the regulations.

 

Operator:

And we can take our next question from Betsy Graseck with Morgan Stanley. Please go ahead.

 

Betsy Graseck:Morgan Stanley:

Hi. Good morning

 

Brian Moynihan:

Good morning, Betsy

 

Paul Donofrio:

Good morning, Betsy

 

Betsy Graseck:

Hey couple of questions, one is on the quality of the book you went through and I remind you that how much you've improve the quality of book in the consumer. Could you speak to that in the commercial as well as energy and then give us a sense is to whether or not you think that's embedded in the CCAR results I'm just trying to get an understanding of whether or not you think RWA you have to take could potentially come down as commercial roll.

 

Brian Moynihan:

So outside of on the commercial outside of energy and metals and mining we don't see issues with credit quality. We're obviously watching it very carefully but it feels very good outside of those two sectors. What is the second part of your question.

 

Paul Donofrio:

It's on the CCAR results.

 

Brian Moynihan:

Yes. Absolutely, so if you look at our CCAR results either on an absolute basis and on comparative basis you can see what a third party that's had things are losses would be you're going to see that again in a few months. And I think you can really see when you look at those results, how much we've improved the credit quality of the company of both across both consumer and commercial.

 

Betsy Graseck:

Do you think that can help in the buyback asked as you go through. It's not just a question about this year but just overtime?

 

Paul Donofrio:

Overtime, Betsy our view is that we can grow the company and grow responsibilities as we talked about. So there is opportunities for growth and that's on a consumer segment a lot of questions to get us how can you grow and keep your to credit discipline. You must be changing and see that the stuff coming on today is as strong as anything we put on. In the commercial you just assume as the same and so there is still plenty of opportunity for us to grow which is just good for earnings and prospects.

When you flip it to the other side of yes, our job from the major team was to set this company up to it would never have the kind of risk embedded in it that would lead us to difficult times in real recession -- the CCAR analysis and if you see the CCAR analysis overtime you see a loss content continue to come down and that should serve us in good stuff to be able to take our capital overtime as you said. And if you think about in the commercial book it’s things that commercial real-estate we have been very disappointed and what we inherited through all the deals and development loans all that's stuff is really non existed any consequent so we feel very good about the commercial book.

 

Betsy Graseck:

Okay and then just separately you talked a bit about the mobile user increase and I just wanted to get your senses is to the opportunities from here you've recently launched the new app with the mobile pay which you have been doing internally but now you can do externally. Could you give us a senses is to how that's resonating with clients. Is there any opportunities that here for you and are you going to marketing it little bit more aggressively going forward?

 

Paul Donofrio:

So, let's just framing from the overall top. Last year this quarter we had 17 million mobile users , this year we have 19.5 and as Paul said there is an interesting point the nominal rate of growth this quarter was one of the highest overhead. So even though smartphones are penetrated if you think you can kind of penetrate the customer base it’s still growing fast that's number one and as I said earlier that seen product company for long time you might you've to seen the flattering in the online the computer based banking for lot of better turn people come in through bankofamerica.com and that now is growing as fast normally or faster mobile which means people will also using in both sides and so that's one thing.

So the core activities growing and if you look at the activity in the core customer base in the card usage and both debit and credit card usage is at 4% plus year-over-year and that's good. The online mobile part of the spend is now up to 20% of the spend and is growing 50% per year versus the 4% or 4.5% growth on the total. So that's tremendous and you get longer categories just to give you sense just in the last week the growth rates in roll cards was 12% week-over-week growth in terms of volume and rolled to 100 -- 1000 cards came on. The payments usage was up 3% week-over-week so you see this just phenomenal growth rate are annualize that out that's a weakly gross rate the absence flows with holidays and everything else to think about that and you see that usage going up.

But mobile wallet payments are still less than 0.2% of the total payments made the past of Bank of America.

So you still have a lots of opportunity to convert activity to a platform which is more convenient for the customer and then the other thing we've and then a part of that you talked about is the new consortium to build the new P2P deployment for the banking system. We are up in operating net and we still have a few more months before the rest of their colleagues and consortium get up and then we'll start to push that out in the market heavily. I think it's a tremendous improvement over what we have today even though we have a fair amount volume on it today through credit exchange and that was an effort to get us all together so we can have a very and enough payment network. We've got the checkout work that's going on and we were pretty loading customers cards and their wallets were about as best we can tell 13%, 14% of our spend and these are checkout today.

We got a million plus cards will drive that for and if you put that all together you're seeing tremendous volume off of all these mechanisms in the month of March to give you example we had almost $60 billion of payments of the computer based platform and about $20 billion of the mobile base platform. So if you think about the size of that. Now giving all that you still spend about $8 billion cash at our ATMs in the month of March. That's quarter billion dollars a day or more.

So it's still you have that all the capabilities and that's we're billing towards and going back to I think Jims question earlier the cost structure keeps moving in favor as you keep driving this activity through.

 

Betsy Graseck:

I mean eventually you've got an elimination of checks and some of your bill pay cards since we go down as well I would assume.

 

Brian Moynihan:

Yes. That eventually is always word even today I think is about quarter million checks a day people take a picture in the sentiment on the mobile phones and that didn't exists three year-ago. But the still a quarter a million it would have to go away so it will be alright.

 

Betsy Graseck:

Okay with that's in line with expectations to bring down consumer expense ratio. I mean is that really the driver of getting the consumer expense ratio down is the back end on payments piece?

 

Brian Moynihan:

Yes. It's everything about payments processing payments, fraud losses discussion with customers about the payment the multiple payment that they could use and how they interface and so that is been a huge driver. Remember when from 6100 branches down to 4,600 or whatever today and the customer base is increased by 10% and the volume deposits is up by I think 30% to 40% and checking deposits are up dramatically. So I think year-over-year checking deposits were up 8% or 10% I think you right that.

So the activity level is growing up on a smaller and smaller base and that cost structure and retail is driven by two things the people which were increasing sales in relation management context and the in the physical plan and you're absolutely right driving all that out. As we entirely spend about a $1 billion you just moving cash around on our company. So less cash moving around say this month.

 

Betsy Graseck:

Okay and just remind us what your goal is to get the consumer expense ratio to?

 

Brian Moynihan:

The goals is to have a keep going down every day week, months, quarter, and I think that's the always things you got to be careful about -- my consume colleagues I think they are doing to better jobs so I keep putting pressure on them. So I am not going to get more goal that they think they have achieve something.

 

Betsy Graseck:

All right. Thank you.

 

Operator:

Our next question comes from John McDonald with Bernstein.

 

John McDonald:Bernstein:

Yes hi, good morning. I am just wondering about on the new interest income side. If you could talk a little bit about Paul what kind of outlook we should think about for the quarter on interest income that was 10.6 this quarter. If rates are relatively stable and we don't see any hike for a while how should that trend with all the puts and takes.

 

Paul Donofrio:

Sure, so look we hesitate to give guidance given the volatility rates that we have experienced. Guidance has not been that helpful in my opinion. But I'll give you a couple of thoughts, 10.6 if you think about may be as a launching off point given some of the seasonal NII gains we had in the Q1, I think a more reasonable launch plan would more like 10.5. Then you go to the second quarter, we have obviously go to deal with lower long-term rates second quarter is always a little bit seasonally lower for us.

So this progress there is going to be challenged but I think as you head to the third quarter and fourth quarter when you consider what where anything we can do on deposit growth and loan growth and if rates follow the path along the forward curve, we would expect to make progress in the latter half of the year.

 

Betsy Graseck:

Okay and you do get a day count help modest in the second quarter from the first two right? Should that help.

 

Brian Moynihan:

It's a leap year. So I think it's normally down two of the balance down one or flat, yes.

 

Betsy Graseck:

Go into second, okay. And then just on trading there was a core in the media from you this morning Paul saying March feel better in certain areas can you just give us a little color what changed in March on the trading fund to work out better has that carried over a little bit into April and how you thinking about the -- growth from the risk and revenue impact potentially as that comes up to spring?

 

Brian Moynihan:

Sure. So March sales I think a lot better than certainly January and February and April it’s really too early but April feels at least starting outline it’s more like March than it is like January and February. In terms of -- we are focused on our clients and customers they are going to need there's going to be volatility potentially around the vote and around any changes after the vote and we are working very closely with our customers to address kind of how they need to manage their risk. From our own company perspective we are -- you know we're going listen it's a UK decision we're going to after we find out what the decision is and understand it then I think we will react to it and do what we think is in the best interest of our customers and clients and shareholders and other constituencies.


Betsy Graseck:

Okay Thank you and in terms of March, what can you just any color on what got better what serve better which areas of the business could you help on that?

 

Brian Moynihan:

No I wouldn't say I think you heard from competitors that's Asia was a little better in March we're stronger in the US comparing to Asia we have a significant business there. But so there was some improvement out there but no I wouldn't have any more specifics on that.

 

Betsy Graseck:

Okay thanks.

 

Operator:

Our next question will come from Glenn Schorr with Evercore ISI.

 

Glenn Schorr: Evercore ISI

Hi thanks very much. On slide 12 you noticed the assets sensitivity increased a bunch from the prior quarter, you mentioned driven by the drop in long-end rates, could you talk through the how that actually works and then how much of the $6 billion is short end versus long end?

 

Brian Moynihan:

Sure 40% of the $6 billion is going to come from an increase in short-end rates and then the other 60% is split equally between FAS 91 and reinvesting at longer term rates. The FAS 91 piece is relatively straight forward, I mean we had a $1.2 billion declined in Q1 because interest rates went down 50 basis points we're going to reach trace that if they go back up.

 

Glenn Schorr:

Separate one, if you look at the ROA for year-on-year it's a large amount as a percentage basis from 59 down to 50. I am just curios I wouldn't think capital market weak capital markets in the quarter was the big driver if I guess the question is what's the big driver of it and are the new business you're putting on coming in that higher ROA so we should expect that to rise from here something not so crazy markets?

 

Paul Donofrio:

Look if you think about our ROA and you adjust for FAS 91 market related and I just been send with time the eligible expenses you're going to get into the mid-70s and then if you give us some credit for the progress we've made in LAS over last few years and continue that progress you're going to get even higher. From there it’s about growing loans, growing deposit, growing loans putting on like you said assets that in are accretive to what we have on books right now and importantly continuing to grind and work on expenses and so that's what we have to do.

 

Glenn Schorr:

Okay, one last tiny one is wealth management margins increased couple hundred basis points quarter-on-quarter, 500 year-on-year without the help of revenues, expenses were down a bunch you mentioned to hundred roll off of the previous amortized retention awards. What's the rest of the expenses inside wealth management because that's pretty good and it well that didn't have much revenue?

 

Brian Moynihan:

So it’s compensation related given the fact that revenue was a little weak because of all from markets. That's not the say we're not working on pretty down cost and that segment as well but specifically the answer of your question in Q1 that's what drove it.

 

Glenn Schorr:

Is that non production expenses meaning usually the comp stuff goes hand in hand with revenues .

 

Brian Moynihan:

Yes. It's not they are working on the other elements expense so you've got that right. But also remember as the NII increases there is not as much expenses attached that. So that's one of the operating leverage points in wealth management that we're losing a lot last year that we're going to get back as short term rates rise because there a heady deposit business.

Remember they alone of $260 billion of deposits in wealth management which and those deposits and loans continue to grow which continues of course more of core NII as well as whatever they think and is being a large investment management trust fee type company. But they are big banking there and the loans grow and that's going drive that up and that is marginally more profitable for the shareholders.

 

Glenn Schorr:

Okay, perfect. Thank you.

 

Operator:

our next question comes Paul Millar with FBR and Company.

 

Paul Millar: FBR and Company:

Hey, thank you very much guys. On the our adequacy asset on the you lowered your loans from 103,000 to 80,000 on the but the high touch servicing or default servicing. How much of that was sold or what you guys just working through the book?

 

Brian Moynihan:

I would classify as little to very little sold this quarter. It’s just working service loans the delinquent service loans down.

 

Paul Millar:

So is working it down and has the new stuff coming in is that still a material amount or is that been is that mainly done like you're not really getting a lot of new stuff coming into this bucket.

 

Paul Donofrio:

Very little from any production that was done after the crisis Paul as you could expect. So the delinquency statistics so really you still have modifications that the re-modification work going on because people have had modification for years or some portion go back in the situation and then you have juts the normal flow. But that number can you keeps working itself down and based on the quality of our portfolio should come down even significant word is it's just the grind now this is just you're working through if someone involves in the litigation take time it's just grinder work about that?

 

Glenn Schorr:

And then you said like in the quarter you disclose as very clearly that is about a $700 million on this, I mean where can we can be this kind of -- by the end of the year when does this really become immaterial you think.?

 

Paul Donofrio:

Well, as we've told you, our target our next way station on improving this thing as 500 at the end of this year and we're well on way to get that property you're experience of this business that is not an acceptable number but I just need to keep them tracking it down.

What's interesting and if you look at the headcount that we show you in step, what is changing is their headcount down as in 9,800 or something like that 9,900 at the end of the quarter, so it's come down from a high 58,000 internal people plus external contractors dramatically. Now we've got to get some of the harder cross out meaning the systems and technology that was over build for a 12 million servicing portfolio the real-estate and that takes little harder work. So we are grind all that out so say 700 change to 500 change and ultimately we got to get it down to significantly that 500 to make it make sense as a servicing I think it's okay but actually be an effective servicing platform we should drive it down.

Your point about inventory or something this is becoming less and less of an event to us and so where we got to execute on in it's not going to have the impact on that $3.1 billion of quarterly cost few years ago.

 

Glenn Schorr:

$1.4 million of 60 plus

 

Paul Donofrio:

The 500 by year end that's our next goal and then when get there we'll give you another one that we're just -- like I said earlier to on the consumer side we got to keep moving this in the right direction and we have an idea where we get to but we want to make sure we get the first piece out.

 

Glenn Schorr:

Hey guys. Guys Thank you very much.

 

Operator:

Our next question comes from Eric Wasserstrom with Guggenheim.

 

Brian Moynihan:

Good morning Eric.

 

Eric Wasserstrom: Guggenheim:

Thanks very much. If I can just refer back to slide 16 for a moment. There is been lot of debate about the dynamics in the auto lending market about deterioration underwriting and the risks of larger amounts of used cars coming off of lease and could you give any granularity about what you're seeing sort of in lending across the -- spectrum and how you are anticipating that residual issue to play out?

 

Brian Moynihan:

Sure. Look just some perspectives; we are maintaining our market share and auto lending, but we are very focused on originating prime and super -- loans average -- course you can see on the page 78 and debt income ratios are all time at lows. Again we are not following the market from a structuring standpoint to the longer tenants 90% of our loans are 73 months or lower. So that's our strategy and I think if we stick to that we will be fine, we did pull forward from we have an opportunity this quarter to get more flow we have plan to do that in later quarters with pulled back volume to this quarter and we'll evaluate in future quarters.

 

 

Paul Donofrio:

And you asked a question about residual values, the volume of cars sold and what happens, we also as part of our stress testing our portfolios internal stress testing and also for the fast work we stress the collection the recognized collection value of cars down 40% and it's not it obviously add more losses while wouldn't you. But what really controls your losses is the quality portfolio and what runs through that calculation and that number is because of the high quality is very low. So we test that question you're asking which is what happens if residual values or used cars values continue fell dramatically.

The recessionary environment or something in and that's one of the thing we testing it's not a big number.

 

Eric Wasserstrom:

All right and when you say that you pulled forward some flow what do you mean by that?

 

Brian Moynihan:

The opportunity we have relationships were on flow side and when we see opportunities we can pull some of that and originations come for the brands that come online and they come through our relationships with the financial institutions who have relationship with dealers.

 

Paul Donofrio:

And duration of the dealers also.

 

Brian Moynihan:

And a direct relationship with dealers. So everyone see an opportunity to add some balances and if it's within our underwriting standards we will consider it.

 

Eric Wasserstrom:

And that was primarily on the indirect side.

 

Brian Moynihan:

Yes.

 

Eric Wasserstrom:

Got. Okay. Thanks very much for the color.

 

Operator:

Our next question is from Mike Mayo with CLSA.

 

Mike Mayo:CLS

Hi, my short question is, when will the return equity go into the double digit range. Look you have a good franchise and balance sheet, you are showing growth in loans, deposits, online banking, other areas and you're showing lower and better expenses, branches, headcount risk but it's not adding up. I mean your stock is 15% below tangible book value and this was yet one more quarter of mid-single digit ROEs and worse than appear efficiency. So my question is why is Bank of America less efficient than pear and is tough from the outside to know because you have $2 billion of expenses in other that's not allocated to the business lines.

What is your plan B , if rates don't go up and when will the ROE go into the double-digit?

 

Paul Donofrio:

Okay. Well hi Mike. Thank you. So I guess I would start by again just sort of understand the facts we if you adjust with FAS 91 and FAS 123 our return on tangible common equity be roughly 8.5% and again as I said, before we've made a lot of progress in LAS and you give us any credit for the progress we think we are going to make in the future we are going to be take that 8.5% even further.

We made I think -- so the key is we've going to continue to make progress on expenses or get to revenue segment but we going to continue make progress on expenses. And again I think we demonstrated that we can do that if you looked just year-over-year expenses were down a $1 billion or 6%, given that the Q1 '11 we taking quarterly expenses down core quarterly expenses down $2.5 billion. That's a $14 billion run rate. We've got a continue to that if you look this quarter at our consumer G1 segments you can see the operating leverage.

If you look at the whole company and you back of FAS 91 can see the operating leverage. So we've just going to continue to work on expenses. We're not sitting around waiting for rates to go up it would help if they did and that's where we focused on.

 

Mike Mayo:

Alright if I can follow up, despite all the progress that you've made and talked about the LAS expenses, you can talked about new BAC, you can talked about the quarterly expense rates since 2011. But your core EPS is still $0.33 this quarter and as we tough quarter, tough environment but still in that $0.35 range so despite all those expense savings, we're not seeing it in the core EPS number it's still around $0.35. So where did all those expense savings go or is this going to come through in future quarters and I know I have this question on many earnings calls and I also thank you Bank America for having that and Brian for having that opening ladder from the lead director in the annual report, Jack --says that you wanted to engage more with investors and so I do hope that he takes my question at the annual meeting to engage little bit more because I have asked this so many times, I've still feel like I have an answer that I understand, so just one more try added Paul just what where these expense savings going if EPS is still in the same range?

 

Brian Moynihan:

So they are going -- you sort of have identified the opportunity we have in a different market environment, if the judgment I think we have to make but a portion of these savings are going to increase growth in the future a portion are going to the bottom line. That's the ladder we can pull over extended period of time to adjust for the market environment, we've proven we can get the expenses out, if we wanted them all the drop to the bottom line we could do that but we need to invest in growth at the same time and we've got to balance that.

 

Mike Mayo:

No new BAC coming up or anything like that as just as I guess Brian you said you grind it out just be nice to see more of the progression is that you think its 2016 event 2017 event or will just when rates go we'll see more of it.

 

Brian Moynihan:

Look we are focused on driving down expenses every day, every quarter, every week, you can call it anything you want, we've got a lot of focus on this and I think you're going to continue to see progress. Our operating leverage on our adjusted basis this quarter was meaningful you can see it if you adjust for FAS91 revenue down 3% expenses down 6% we are getting the operating leverage. Look at the -- segment, look at the consumer segment. We are focused on it.

 

Mike Mayo:

All right. Thank you Paul.

 

Operator:

Our next question from Steven Chubak with Nomura. Please go ahead.

 

Steven Chubak: Nomura:

Hi, good morning. So I had a follow up to Glenn's earlier question on the wealth management margin. I just wanted to get a sense as to whether we should be thinking about that 26% margin that we saw in the quarter is a good jumping of point. Just given some of the challenge you had spoken to whether it be the higher margin NII growth and the action to the legacy -- and there is as oppose as it relates to that is our preparation efforts for things to just be a welcome plans potentially going to weigh on the margin in future quarters?

 

Brian Moynihan:

A couple of things for that. The 26% if you think back across the last year when we discussed this, we had the ATTP's in so a chunk of that said they had a chunk as good expense management I said earlier so the margin, net interest income stabilizing and improving even grown the balances now it's more stable. So I think it is a good starting point, it will in some cases it would help wouldn't go up a lot because that would mean asset management fees and other things are growing which attached more compensation less marginal profit which would be good news because the overall profit will grow better. But you should assume that's a level we should hold on to if in a relatively stable environment as we see this quarter starting out at.


When you go to the fiduciary, we've been working on that obviously just because it's the final rule and it came out recent we've more we're more looking on it. So, I don't think -- I think to extent that there is cost embedded net a lot of it's in the run rate and will be marginally yield in the run rate for next two quarters it's not a hugely substantial cost and if you even look we spend a lot time educating our teammates about doing if there are operational cost but I don't think it's material on the grand --.

 

Paul Donofrio:

Mike I am just add a little bit to that. I think from the very beginning we supported the fundamental objectives of the department of labor and if you look at our goals based strategy it delivers a lot of what we're getting but that's will in terms of investment or standard -- to one advisor platform which we successfully completed the transition to lot of clients this quarter. That's a great example of how we've been upfront to create an experience that is really transparent single fees schedule etcetera. That's a significant investment and we're getting to that investment through we are going to pay off here in terms of implementing this rule.

If you look at the roughly $2 trillion of GWIM client assets we have outside of deposits and loans we think the department of labor will probably impact less than 10% of that and certainly given the relation schedule. We wouldn't expect to see much of an impacted if any of that in 2016 and as we digest rules we will just have to evaluate how it's going to affect out years.

 

Steven Chubak:

Okay. So it's sound a lot of the incremental expenses right in the run rate and you don't anticipated much revenue disruption based on the final rule

 

Brian Moynihan:

correct that's correct

 

Steven Chubak:

Okay. Got it and maybe just focusing on the expenses pace within global markets. We're certainly pleased to see the absolute level of dollar expense was what I can see lowest level that we've over the last five years. So clearly some of the efforts that you highlighted to right size the cost base have been referred and as we think about the expense trajectory for this business what should we expect in an environment where they trading revenues are relatively stable or consistent with what we saw in the most recent quarter is that 2.4 or reasonable rate expectation?

 

Brian Moynihan:

We are going to continue to like every other segment we are going to continue to work on bringing our cost down in this segment as well I think there is lots of things we can do. From an operational standpoint possibility over the meeting on long term and we are focused on that. You are right here compensation expenses are significant and they're going be consistent with the revenue performance. I think we are disciplined this quarter in terms of compensation expense and saw that in the number.

 

Paul Donofrio:

Even adjusting as you Brain about in the press there is an it’s not a run rate yet it comes in next quarter because that happened mid-March. They have made major adjustments in size of platform in mid-March and give example we have equity sales people year-over-year down 60 or 70 on the base of despite down 15% to 20% at least. So add in that business continuous repositioned and Jim continue on the fixed income sides so that makes some measure investments to headcount. So we are hold down here you want this expense to go up because that means reference come back up so you have to be careful but the fundamental operating platform has embedded in the run rate cost actually continue to help us systems architecture, continue to drive there compliance of -- and that stuff is in the run rate so the chance of sort of the 9 compensation rated expenses moving a lot is not big deal the question is just how do you increment and keep management down.

 

Brian Moynihan:

As a remember just this quarter I'd just point out again that we did have little bit help from litigation we have reversal of the prior matter help on the expense line.

 

Steven Chubak:

Okay. And can you quantify how much of the benefit that provided, Paul?

 

Paul Donofrio:

We don't generally comment on those sorts of things, it was not a --

 

Steven Chubak:

Okay, got it and just one more final one for me, just on the investment banking side you talked about stability in March are continuing into April on the trading business when you're competitors talked about actually seeing some improving trends in the capital raising environment on in April versus always clearly a challenging quarter in 1Q and I know if you're seeing some improvement on the capital raising side as well and if you can give us an update just in terms of backlog for in some of the other pockets like M&A that would be helpful?

 

Brian Moynihan:

imagine the pipeline is looks great because everybody people need to transact they just haven't -- they just do it in the first quarter so, it's building up and where there is volatility like this the best thing our bankers can do is to be in front of CEOs and CFOs are doing that. There is going to be have to be financing activity at some point because clients need to finance and so our pipeline looks good. I wouldn't necessarily say we've seen any in the first days in April seen a dramatic increase in capital markets activity but there is so many lots of dialogue on the pipeline looks good again because I think it's lot of -- demand there.

 

Paul Donofrio:

Yes I think the simple thing to think about investment banking, and capital market side is the work trade ago we just if we continue to see this stability you'll see come through and that's our comments are really based on still stabilizing as we speak and so if that happens you expect to see start pulling through and it would be up from the quarter, on a quarter-over-quarter but yes there is still few more weeks of stability and you have to see for people actually pull the trigger and financing the stuff.

 

Brian Moynihan:

Obvious the market right now are stable people can finance if they want to I think it’s just a question as why instead of CEO's and Boards just to make ensure that the stability we're seeing right now is something that they can count on as they go to market

 

Operator:

And we can take our next question from Ken Usdin with Jefferies please go ahead.

 

Ken Usdin: Jefferies:

Thanks, good morning. Brian where did the uptick you said that there is really been no meaningful change in the customer base you know activity and then following on your comments about stable capital markets you're growing the core loan book now double-digit sales 11% I'm just wondering how much of that is the environment holding up how much of that is still kind of the opening from reasonable growth and just your outlook in terms of customer behavior on the lending side?

 

Brian Moynihan:

I think the other thing Ken, is that you have to remember that for a long period of time we're fighting with the run-off for the non-core assets which are now small enough that we could actually overcome. So there are lot of quarters for the core activity was growing but you couldn't find it because if you look at slide you can see sort of the all other we just did the investment portfolio really mortgages and the LAS assets are now small quarter-to-quarter run-off, but I think it's all across the board I mean I think in the segments we focusing on consumer side prime super prime there is strong activity mortgages you can see the origination volumes this quarter were solid I think if you think the home activity is kicked back up a little bit again because people see home equity and house the auto business is strong with flow with how many units get sold because that's the nature of the business although I think we can gain share because our share on our direct to consumer business was very low we did even do it two years ago and now we are up to $100.5 billion or more a quarter. So I think from a consumer side the card business because we've now sold through all the portfolios we have to sell. I think you should see stable instruct to see better year-over-year comparables and we've had the last several years obviously a last big portfolio one out in the fourth quarter.

And so I think we feel good and if you look at the online customers the credit worthy customers that we deal with are they have to borrow and we are lending to them and if going on commercial as Paul said earlier I think you would expect the CRE we slow we want to careful on CRE so we are doing very fundamental in structured loans. But in CNI and a nice moves in business banking is not a huge business for us frankly. But they finally are making through their runs, their run offs and that's good. And so I think across all those businesses you should see it may not grow as fast as normally it has.

Two years ago we had the international book grow in corporate we slow that down based on our judgments about risk and so I think it's a pretty balanced growth and so the question always is do you have to comprise your credit standard of growth, no we don't because you can see that and then secondly is our opportunity actually get growth and the answer is yes if but in that's good hard work.

 

Ken Usdin:

Yes. Brian last point, how much opportunity actually without pointing to compromising. But how much more big opening can you still do to your point about the post crisis that tightening up internally are you still underwrite is that all or you still have to be somewhat careful about where we are in this stage of the economic cycle being that were 7 plus years into an expansion?

 

Brian Moynihan:

We have to be careful and that's why I think we want to show you some of the, the two three basis principals that you have to follow one is we had the balance of portfolios between commercial and consumer. Second we had to give consumer to secured portfolios dominating versus unsecured both credit card and other loans that we put us behind in a tough situation last time and then third you got maintain your individual quality of underwriting consumer its more formulated and commercial more deals selection and customers selection. But if you look at it let me I will just give you the simplest way to think about this. We have moved probably from 8 out of 10 mortgage holders who are absolutely within our credit box absolute we do business with giving the mortgage to somewhere else to maybe seven.

So we still got seven more to without talking about expanding the credit primers in our mortgage business when I order.

So you think of that is demonstration point that you can over and over again. So there is plenty of market share out there and one of the things Kane we will looking at as we look across our 90 yard markets in the United States there are areas we have we have tremendous opportunity to expand our market share where the Franchise just wasn't balanced. Some area to franchise the well of franchise businesses high percentage in some places low the little market businesses very high market very strong good market shares in certain markets and third of that in another markets and so where we are deploying these people is also based on our view of which markets so it’s going into that market hiring talent using this massive customer capability we have to go drive it again target the exact customers we want. So even on a geographic basis well it’s the positive business and expanding some of those markets also commercial lending business in otherwise there is opportunity without comprising credit.

 

Paul Donofrio:

As Brian said that's fine those added sales professional to go into they're going in markets where we think you have synergies across a commercial GWIM and consumer.

 

Ken Usdin:

Okay. Got it so in some you think this 10% plus kind of primary lending is still achievable from that's what it sounds like from what you're saying.

 

Brian Moynihan:

Well I think we have been told people focus more mid-single digits type of numbers given 2% growth I want 2% growth economy is opposed to 10%. So but the core business is growing faster and then we are still running off but we told people to focus in at that level.

 

Ken Usdin:

Okay understood thanks guys

 

Operator:

Our next question from Nancy Bush with NAB Research

 

Brian Moynihan:

Good morning Nancy.

 

Nancy Bush: NAB Research:

Good morning. Brian I think we've all over the last few years has been trying to find banking normal and it's proving hard to find because we're going to strike of some of those that maybe first quarter what we saw in the first quarter in terms of volatility and continued low rates et cetera et cetera is banking normal at least for the foreseeable future and under that scenario if you believe that would you have begun to look at take a second look at your businesses again and will there be any sort of reallocation of capital going forward and are there businesses you might want to exit?

 

Brian Moynihan:

I am not sure you can consider first quarter banking normal in a sense that we still have extra cost we got to get out here Nancy that we're continue work down litigation was elevate in the quarter from more the normalized level that we feel we can achieve and things like that but leave at a aside you know the basic principles we continuously look at the franchise to see about optimization. So we generally people ask that question they are thinking about couple of different areas; one is the markets area, we showed you the markets profitable returns in this business, but if you get into the supplement you will see you can never call markets business your annuity business but what drives our business is really a connection between the issuer clients to commercial borrowers and commercial clients and investor clients that we serve and to do that in an our wealth management business because that's a group of people rely on the research platform. If you look we have interconnected that is massive whether to buy, let's get proprietary trading and things like that the whole the real business is driven at that and so if you we taken a balance sheet from time probably nearly to $800 billion or more may be closer to trillion down to $500 billion and the revenues of had stabilize in I think that's a good place for us to be, number research plant in the world, number one in US this year, the ability use it wealth management, the ability to use it to inform our corporate customers.

So, we look at how we pair way things and look at it, so in the international business we paired back there is 800 to 1,200 people that were down size and markets and banking in the first quarter, so we it's not in or out it's more how do we keep pairing at back and so if you look across there we always look at that question we continue to look at it. But right now we really like to franchise in the connectivity between the franchise of all the different elements focused on markets, focused on wealth management, focused on the core business and I think now the question is with low rates, we just have to grind the cost down and that's going to come out of really all the pieces and while just kind of you could go out at it had a fairly high level and drive it now it's really incrementally by the year end and taking it out and that's why you see that constant improvement of core cost of $2 billion run rate first quarter last first quarter this year not is working at it just takes more time because 130 million square feet of real-estate down to 80 million going to 70 million is a lot of work to get out that real-estate.

 

Nancy Bush:

Alright, just as an add on, and looking at cost in the consumer bank I mean and you look at your mobile penetration and how it's going up et cetera, et cetera, I mean is there sort of a magic number in terms of mobile transactions, mobile penetration just the whole use of mobile in your company where I think you've been a leader that will lead a sort of a step down in branches I mean are we sort of on this, threshold of being able to take branches down yet another however many?

 

Brian Moynihan:

Well I think the if you think of branches and think about of offices as opposed to the historical notion of price where you transact. The question how many have is going to be how many relationship mangers you need and how many places they have to seat and so what we have done is consolidated branches in bigger so the share numbers so we add 6100 or 4600 each year we repositioned 200 or 300 of them I mean it’s what we are doing is getting out of the smaller branches in building in the bigger branches.

So we consolidated 3 into 1 and build up that franchise in US trust people work management people, small business sales people.

So what we are actually if you think about real-estate question, the number is not as important as the full and that marginally driving the profit and you can get a the lot sales people for square inch the lot of customer activity per square inch that's where we are going. And so you are going to see some of the new prototypes that we deployed. You can see place like Denver would now third branch and we will continue to build out that are much look much more like sales office then what people visions of the changes branch but it going to the earlier question Nancy I don't know where to stops. I am not saying I am trying hiding answer I have it just the if you want to hear last year and we were and you said 17 million mobile users that's good penetration.

Its $2 million more a year later and as computer base banking is up million and half or something like that which is kind of remark on top it. So we don't know where this goes but we are going to be pushing ahead following our clients and making sure we stay with him. The same time our customer satisfaction of scores are now reaching the all-time high which means the way we are doing that work for them and you've given me your feedback about our customer focus and capabilities over the years but the back to high ever been and that's importantly managing that transition carefully and that's we got keep doing.

 

Nancy Bush:

Okay. Thank you.

 

Paul Donofrio:

I just want to add couple of thoughts as Brian said. I think the branches are going to become not a destination where people come to transact but destination when people come because they need to product to service because have been changing their live they need to start to saving for their kid's college or they need a new, they need a mortgage or they need credit cards and its more about they're coming there because of some life event or because of some product reserves they need not for everyday transaction banking. We'll still have the branches that can do that to people go for that but I think overtime people recognized the convenience and safety of doing these things online, doing electronic on paper and the branches will become or organizing our branches for that become destinations for people who need help with their financial lives.

 

Nancy Bush:

Thank you.

 

Operator:

Our next question comes from Marty Mosby with Vining Sparks. Please go ahead.

 

Marty Mosby: Vining Sparks:

Thanks. I wanted focused on mortgage banking and the retention of those loans more on the balance sheet then continuing to pushing GWIM is that is regulatory driven or you really kind of looking for that higher retention rate because you’re looking for some assets that have duration. So is that one of the better maybe option adjusted yield that you get at this point.

 

Brian Moynihan:

The Marty you can come at the fairly straight forward way which is we have a trillion two in deposits and we have $900 billion in loans and if we put our own mortgages on the balance sheet. We know the quality we know the customer and we know that the servicing cost ultimately be a lot less how we're doing it. If we buy third party loans or in the it's sort of to extract the we got investment something we have invest substantially in treasurers we have to back to mortgages and mortgage-backed securities and so the question is -- someone else when you are producing your own so it's really very pragmatic view we want to control our destiny and mortgage going forward so that the customer we look and originate the mortgage was is a customer’s we service for is a customer we have the asset quality with and there is no third party involve, so it's more driven by us just getting their own controlling our own destiny.

 

Marty Mosby:

And a follow-up to that if you look at the impact of that on the business segment you actually are increasing the portfolio by about 30% which is showing that retention, however if you look at all other it's more than over -- that growth. You have about $45 billion reduction and kind of getting back to Mike's question about where is the benefits going just the reduction and all other that almost $50 billion of loans over $1 billion for the NII that is kind of going away where as you're having to do and invest and spend money that generate the 30% growth in the business. So it is the run off still part of where some of the leakages that we're hoping to get and now the improvements and growth that you're showing in the core and when does that what's left is about a $100 billion when is that finally done so that you wouldn't have that leakage anymore?

 

Brian Moynihan:

Well we used to -- there is an element that just as we used to booked that retain piece in the central area we start doing that, that's showing the changeover so you got to think about little bit together. But I mean it's consistent with our peers most people have the consumer businesses booked to they retain we just didn't do that for years. But remember those you guys remember you guys take the whole balance sheet if you look at the loan category, the money comes out of the center because of liquidity demands and rules it's goes into treasuries and other securities which are not in that chart because they are not loans, -- carriers and treasuries and that's still has a yield to it not as dominated as much as mortgages but has the yield to it. That has been driven more by the liquidity demands in LCR than it is by anything else which is the centralize portfolio we gone for 100 billion liquidity four or five year-ago to $500 billion so that has a cost to it in that in prior years that could an invest in high yielding assets but not mortgages don't count for liquidity.

 

Marty Mosby:

Thanks

 

Paul Donofrio:

And again look for the facts are we've been growing overall, so year-over-year including those segments which as you point out for by our strategy are running out faster, we're still growing the overall balance sheet.

 

Operator:

And we'll take our last question as a follow up from Betsy Graseck with Morgan Stanley.

 

Betsy Graseck: Morgan Stanley:

It's a follow up on mortgage. So I think one of your supplier or one of your partners mentioned you're going to be pulling back some of the servicing to yourself and I just wanted understand is do you have to do anything to build for that book a business or is this already something that's in your run rate on the expense side and we're going to brining an incremental revenues on the mortgage servicing side?

 

Brian Moynihan:

It's marginally will be absorbed, if you think about it the total number of loans is relatively small the total they'll go on to platform a very little change.

 

Betsy Graseck:

Okay and is just the beginning of pulling it all over?

 

Brian Moynihan:

I think I would just say that we're trying to be consistent with our strategy of controlling our own destiny

 

Betsy Graseck:

Okay, alright that's great.

 

Operator:

And it appears we have no further questions and ladies and gentlemen this will conclude today's Bank of America earnings announcement call. We thank you for your participation you may now disconnect and have a great day.

 

Brian Moynihan:

Thank you.

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