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Bank of America (NYSE:BAC)

Sanford C. Bernstein 29th Annual Strategic Decisions Conference Call

May 30, 2013 14:00 pm ET

Executives

Brian T. Moynihan – Chief Executive Officer

Analysts

John E. McDonald – Sanford C. Bernstein & Co., LLC

John E. McDonald – Sanford C. Bernstein & Co., LLC

Thanks, everyone. Thanks for joining us this afternoon. We’re happy to have Bank of America join us again. Brian Moynihan, Chief Executive Officer has been with us for – over the last couple of years, we’re happy to have him return, Brian, thank you very much for joining us again.

Brian T. Moynihan

Good to hear, John.

John E. McDonald – Sanford C. Bernstein & Co., LLC

The last couple of years we’ve heard you talk a lot about your efforts to put the legacy issues behind you, fortify the balance sheet, it seems like you’ve made a lot of progress on that. So maybe you want to set the table with some of the key points and you think would frame everything for us in terms of where you’ve been and where you focuses now?

Brian T. Moynihan

Sure. I think – as I think about our company, I think about three or four core tasks or core efforts that have been consistent, it’s just the – over the last few years what you are spending more time in shifting. And so if you think about it, we had to stabilize our revenue base. At the first time we have to deal with the mortgage, legacy issue is the second one. The third one is, we had to bring down our real cost structure, the rest of the cost structure, the core cost structure. And the fourth one is, while you are doing all of that you have to continue to invest in growth and make sure the franchise that comes out of the aftermath of crisis is a franchise you want.

So we’ve been working on all four and just to give a couple of spots and I’m sure you asked for the questions on it. On the stabilizing revenue, we run about $22 billion to $24 billion depending on the quarter and what’s going on the capital markets and revenue, and we’ve stabilized that level and we did that. If you think about the two components of revenue fee income and spread income, on spread income side, we did it really in two ways.

One is a lot of run-off portfolios are now getting small enough and their incremental impact is still large, but not large enough to push the margins down, and then also the deposit base has continued to grow very nicely, providing more and more low cost funds. But the real way we’ve also achieved, a lot of it is actually is we shrunk the company and took the cash flow from the company and reduced the debt footprint, that’s provided leverage. So we are about $10.5 billion of margin. It moves around with some of the markets aspects there, but it’s a pretty solid base.

When you go to the fee side, really that’s a couple of different buckets in the consumer side. We were here last year, the year before, we talked a lot about the impact year-over-year of the interchange or whatever the consumer Reg-E et cetera. That’s a large for the system now, and so that’s just growing our growth and so interchange is 30% of what it used to be or whatever the number is. So you don’t get as much incremental volume, but you are growing our growth.

On the Wealth Management, the business is in very good shape and running very well. So those pieces are growing nicely, and on trading, it’s really ebbs and flows of the market, I’m sure you will ask some questions. On the fee side, we’ve seen the things would get in the right place, so running a stable revenue.

That’s bring to the second question that we have been focused on, which is the mortgage legacy issues. There is two aspects of that. There is the risk issue, so the put backs and the litigation of all different sorts, and then there is the operating cost. And on the risk, we passed a couple of big milestones over the last couple of quarters; the Fannie Mae, the MBIA, and then the $8.5 billion settlement that we have on the private label securities throughout the money risk, which is going to trial and that starts Monday, and we’ll go through the trial and there will be decision sometime thereafter. That’s another big milestone and frankly that’s one of the last big milestones left and so that will fall in place then we settled that two years ago, so it’s been long time for the waiting to get to this point.

When you go the operating side, this gives us the expense leverage that you can see, that built near numbers and others over the next couple of years of mortgage. This is mortgage only. We had at the high point, $3.2 billion of quarterly operating cost to work the bad mortgage loans. We had $3.1 billion in the fourth quarter. We had $2.6 billion in the first quarter. We told you we’d get it down $1 billion from the $3.1 billion to $2.1 billion by the end of this year – this ‘13, so we are halfway through that. We have very good, high confidence that we’ll see that come down and the way we sort of make sure that we see the progress will lead to the financial P&L progresses, the headcount and the number of bad loans we have to work. At the high point, we are $1.6 million bad loans, 60 plus delinquent loans we are down to low $700,000.

And on the headcount at the high point, we are 58,000 people, 16,000 contractors, 42,000 employees, just working on the bad loans. I mean, if you think about that, it’s a lot of people. That was August of ‘12, I think, the high point was. We’re down to about 45,000 resources working on today. So we are seeing that come through. The P&L lag is because you got get the people sizing down and work done. So that’s sort of the mortgage legacy. When you get to the rest of the core cost in the company, that’s new BAC, we told you in a combination we get $8 billion expenses, about half of that is through the P&L as we speak. We get about another 25 percentage points this year and then the rest comes in ‘14 and ‘15, and we’re confident. We got the plans and we’re seeing that drop through.

There was a faster phase and then it leveled as we invested in the systems changes and things we need and that comes back down, so sort of it’s moving at a pace and if you look one thing in the core costs, you have to actually go back two years ago when we started and sort of see the linked years and you can see that’s coming down and getting to place where we get an efficiency ratio that this company needs to have, and so we’re working on that, and that’s just a whole bunch of ideas one after the other.

And the question then is, okay, you do all at that work, you get the cost structure down, stable revenues, how is the core franchise doing, how is it growing and so as we are doing all this, we have not stopped investing in a franchise or place for advance, so we shrank our company. We got out of the business that we didn’t want to be in, but the business we are in, we’ve been investing.

And so if you think about that, the easy way to think about that is what we did in mortgage. We got out of the correspondent business, sold some servicing assets, got the thing to size, and now we are growing. And so last year, we did about $15 billion of production. This year, we did about – in the first quarter of this year, we did about $24 billion, all retail. But how do we do that? We have a 1,000 more loan officers year-over-year to give you sense. So in those cost structure, we are paying the increase in those loan officers. We’re paying for small business bankers, what we call financial service advisors. I think financial advisor working our branch system with the Merrill Lynch teammates. We are investing in headcount and wealth management business, global commercial banking business, which are middle market business. We had a 50, 40 bankers so far this year. We have a goal at 50 and we’ll keep going from there. So we are investing in the franchise and people.

And then in technology, we put $3.6 billion of investment in the technology platform, that is not operating, that is solely technology initiatives about a $1 billion are going to get the cost up, because is that expense and the rest is going to sort of grow the business. And then products, and if you look at our product set, you can see us continuing to develop and add to the product equation. And whether that’s a 123 Credit Card, which is up to 4 million user, that’s what we’ve done in mobile, which has gone from 5 million users a couple of years ago to well past 13 million this month of users, active users, which is a huge change and allows us to reposition our branch franchise as lots of other examples are build out.

So the capital markets there is around the world are treasury service investment. So if you think about the four things, you have to stabilize the revenue to get the earning stream from the top line stabilize, bring the bottom line down, I know you said, both legacy expenses and core expenses and then we have to make sure that we have our franchise that we continue to win in the market and take market share, and that’s what we’ve been doing. The realty where we are will talk a lot about the fourth one, I hope, and less about the first the couple as we’ve gotten through a lot of the stuff, but I’m sure you have questions about that, John.

John E. McDonald - Sanford C. Bernstein & Co., LLC

Sure, thanks, Brian. So if we saw the expenses, you mentioned on the legacy asset servicing side, you went from $3.1 billion in the fourth, and you got down to $2.6 in the first, it’s a pretty big improvement quarter-to-quarter, it’s that lumpy? I mean used $500 million in one quarter

Brian T. Moynihan

Yeah.

John E. McDonald – Sanford C. Bernstein & Co., LLC

And using the same 500 for the next couple of quarters combined?

Brian T. Moynihan

Yeah, that’s in part, because there is and when we talk about those expense, we talk about the operating expense, so litigation is outside.

John E. McDonald – Sanford C. Bernstein & Co., LLC

Yeah.

Brian T. Moynihan

And that’s why they’re lumpy. When we negotiate the changes to the foreclosure look back we do we have because the consultants working that right away. And so that’s starting to come through. So there will be things like that, that are sort of easy and get to whereas working the loans down as literally a day-by-day amount of work that keeps going, then going down. We sold some servicing, but the P&L benefit has not actually in the P&L in the first quarter, yeah, because we didn’t sell to, we didn’t start transferring the loans yet, honestly it started to happen in May, and it will happen through the year.

So the guidance we’ve given is gets you to the point data if we bounce around a little bit in the interim just because there is different kinds of charges that go through and stuff that’s operating charges. But the reality is, you can see that head count provide you great confidence that as you watch come down each quarter, that the next quarters sort of build to go and then you played off, and so we’re comfortable to get there. But I wouldn’t assume that we’re going to speed it up, because we’ve got half of the first quarter (inaudible)

John E. McDonald – Sanford C. Bernstein & Co., LLC

Okay. And in terms of the MSR sales too early to tell how that’s going in terms of the smooth and some of the transfer, would you consider doing more of the MSR sales, or the way you want to be right now?

Brian T. Moynihan

We’re largely done, we have to go back to John, you would have remembered this where we split the bad for the products and services, we didn’t want to do versus the products and services we want to do back in early 2011. And so, if you take the LAS portion after all the sales were down about [three quarters of a million] and most of that really is just the work that just has to get done, it’s really not saleable so to speak. It’s for investors who we can’t sell and we just got to work it through and stuff like that. So I think we are largely done with servicing sales. And so, our servicing book will really now be performed for the transfers will be really down to sort of how much we originate versus how much we have on the books and we’re not quite delivering that and we got to keep working there.

John E. McDonald – Sanford C. Bernstein & Co., LLC

Mortgage companies have often shut for that macro heads and the balance between origination servicing. And so when rates rise and origination slows, you feel like you have that balance now?

Brian T. Moynihan

I’d say we are probably shy on origination side. If we think about we’re doing 100,000 units in the first quarter. So that’s not enough to take over the run-off and the good portfolio, which is $5 million and 20% odd right now, that will slow down honestly we think so with the rates moving, but we’re getting closer. We’re getting closer, but we are not going to do it the wrong way. We are not going to buy correspondent loans just to say we have a servicing book of certain size and so we got other business.

So it has to be built by the origination and the challenge in origination now is, as rates rise, we have a refi content obviously and heavily influenced by the HARP in the work we’re still doing there. But our purchase as we watch the months this quarter, it’s been rising pretty well. And so we just got to catch that and so the first order was to going back to the fourth quarter 2011, we first made a transition was to run through several, I think, it was $4 billion or $5 billion of leftover correspondent business. We covered that. Now, we have the couple of HARP up over time and that the team is working on.

John E. McDonald – Sanford C. Bernstein & Co., LLC

And this number that you were talking about going to $2.1 billion by the end of this year. Ultimately, if you actually be up $500 million number and that will take another year or two?

Brian T. Moynihan

Yes, yes, it will take us – that’s the end state. I think that’s in the 2015, just because we just got to keep working the way. We are doing, I mean, any investor, the rest assured, there is nothing important than we think that number pulled in as far as possible. So I’m not waiting around to say, what’s exactly the pace we’re doing it. But your earlier point was we have to transfer loans, while we have to handle the National Mortgage Servicing Settlement, task flow. We have to handle the customer as well, and that’s why you have to be careful you are not rushing this. And so we got to do just the right pace, but clearly we can get out from that timeframe and we look every day to how we can pull it forward, but it’s probably more pull forward a 2014 question of how comes through within a 2013, because this year, we don’t transfer the servicing almost for all the years. So the big – that piece doesn’t come out.

John E. McDonald - Sanford C. Bernstein & Co., LLC

So how much of the 2015 it could fall into the quarters?

Brian T. Moynihan

Yeah, there were 2014 pull forward, and that we’re working on.

John E. McDonald - Sanford C. Bernstein & Co., LLC

Yeah. And then on the new BAC side, you mentioned you are somewhere in the ballpark of $1 billion quarterly run rate.

Brian T. Moynihan

Yeah.

John E. McDonald – Sanford C. Bernstein & Co., LLC

Working its way to $2 billion over time, what are the remaining cost saves coming from, to go from that kind of $1 billion quarterly to $2 billion eventually?

Brian T. Moynihan

I mean, it’s a lot of things. It’s in our retail structure, we are continuing the planned optimization of retail branch structure. In our – in Tom Montag’s trading team, it’s the new system we’ve been building for the last couple of years, right now, we are running too. So you have the operating costs still in there from the other system. It will be very efficient for both, front office, middle office, and back office, and trading as one system through risk and you get to wipe out a lot of stuff.

Right now, we are in the middle of that, and so the build takes two more years, because we’re building by modules, installing it, and the team has done a great job, but you can’t take the other one out to get there, so you get that cost. And so data centers, the real estate, from beginning to end will go through over just our real estate footprint by almost 30 million square feet. It just takes time. That’s 15 of our buildings and one equivalent, that’s how much it is, but it takes time to actually negotiate the way you add up all this positions and get it done.

So most of – there is not a plan that says there is an airball or to be determined. Every idea is there and it’s a whole bunch of ideas and you can just see in place every quarter, and we are in that heavy sort of get the systems implementation done to get the savings out period right now, because it took you a while to think about the sort of finalize the plans for most of it, end of 2011, we put it in the schedule for 2012, we are building the systems, they are coming on as we speak in 2013, 2014, and then we get the benefits.

John E. McDonald – Sanford C. Bernstein & Co., LLC

And the rough idea there is to go from a $1 billion-ish now to nearly $1.5 billion by the end of this year?

Brian T. Moynihan

Yeah, and to $2 billion by mid ‘15.

John E. McDonald - Sanford C. Bernstein & Co., LLC

Mid ‘15?

Brian T. Moynihan

And a lot of front officers, one of the place that I have been pleased on expenses, if you look at our markets, the global markets – which are the pure markets not the corporate investment banking, you can see that if you watch the quarterly revenues, the time before broker and all the other stuff sort of came, we were running sort of, I think in the, it was $5 billion revenue quarter business. Now, it’s probably – it’s been $4.5 billion, $4 billion, $4.5 billion, but what we’ve done is move the break-even point down a $1 billion on the expense side.

So Tom and the team have done a great job, so if you look at the fourth quarter 2012 versus fourth quarter 2011, I think we had flat revenue and made $700 million more, so we’ve got the same sort of position, it’s pretty leverageable, and in the first quarter, you saw us make $1 billion bucks whatever by the revenue coming up. So those are fundamental changes, which, I think, if we start the $20 billion of revenue expense, the profit would be much different and the risk is down.

John E. McDonald - Sanford C. Bernstein & Co., LLC

I know you get this question a lot about the revenue impact from new BAC.

Brian T. Moynihan

Yeah.

John E. McDonald - Sanford C. Bernstein & Co., LLC

Is it something that you worry about, do you feel like you are adjusting the cost base revenues that have already left or there is still some risk of losing some revenues if you take these costs out?

Brian T. Moynihan

I don’t think there is a lot of risk left in a sense that we divested stuff we had, and so we are still transparent to do as far some of the wealth management, it was $1 billion in total revenue, there’s not that much left and P&L was neutral. And so there is some of that divested revenue that we have, but that’s – we’re largely done with that now. And so I don’t think there is a lot of risk from here forward if we executed the way we are supposed to.

The real revenue really was the rate structure impact in the company as repricing and everything over the last couple of years. So few years ago, we had $2 billion more NII a quarter than we had now part because of balances and like credit card and stuff were higher and the net profit wasn’t high, but the revenue was high, but the charge-offs were high. And part was because the rate structure was better, so you – it wasn’t then better, but it had been better just to run through. So we brought a balance sheet in the portfolio as a way in terms of duration.

So there is no– the interest rate risk is all the upside of rates raise, but if you think about that impact, we’re through the run off part, in part we start 50-some billion dollars of run off loans, but the marginal impact is much less now. And you can actually work against it, that but – so I don’t think it’s the new BAC issues now that’s replacing some of these run off portfolio and getting the loan balances in good shape especially on the consumer side.

John E. McDonald - Sanford C. Bernstein & Co., LLC

So you feel pretty good about keeping the revenue stable while you get these costs out?

Brian T. Moynihan

And that’s – ultimately, we got to grow and we are growing but just covered up by, if we got a round numbers or $100 billion home equity and about 45%, 50% are in the PCI category and things like that. They’re running off on purpose, that’s $4 billion, we produce $1 billion a quarter that trade, we decided to credit cost. That trade is still tough. It’s slowing down and getting better.

John E. McDonald - Sanford C. Bernstein & Co., LLC

The other big question that you got about the expense says is should we think about these falling to the bottom line, how much of them do need to be reinvested to grow the core business in the areas you’ve talked about?

Brian T. Moynihan

When I – when we give these number, we’re not, when we look at what people see and what we see overtime and we don’t say, well now you got to go out and adjust for inflation – this is a raw number, we’re saying, we can take the expense base down. So and part of that is because LAS, the work goes away, if you are not investing in growth. But the flip side of that would be are you investing in growth, that’s where I point to something like the $3.6 billion. Ultimately that number was $2 billion four, five years ago, it’s up to $3.6 billion. It probably settle down to $3 billion, because a lot of it is really one time in nature to get the thing I mean that’s a particularly strong increase, on a smaller company with less activities.

John E. McDonald - Sanford C. Bernstein & Co., LLC

Yeah

Brian T. Moynihan

And so I am confident in our run rate expense, we’re moving, towards efficiency ratios in the mid 50s if you sort of extrapolate. This is [not] efficiency ratios that other people don’t run at and we shouldn’t run at so

John E. McDonald - Sanford C. Bernstein & Co., LLC

All right

Brian T. Moynihan

I am confident that, the expense dollars are there to grow the business and drive it and we are more efficient and think like retail than the average competitor site. I’m confident there, but we aren’t giving any numbers and saying, but they will go and do something else.

John E. McDonald - Sanford C. Bernstein & Co., LLC

And last thing on expenses a lot of this work and this expense, a lot of this work and this expense progress is visible if you look underneath, ex the litigation, ex some comp, and so I guess, on a – investors, we are going to see it all in basis. In the first quarter, it was an 18 handle on your $18 billion handle on your expenses all in, do you think we’ll get to the point now where we are going to start to see these coming down not excluding this and that, but all in?

Brian T. Moynihan

Yeah, and that’s why I think if you just – they all commonly on a core basis, so the (inaudible) component, the core component and then there is litigation, so you pushed outside, and in the first quarter, we have to build $800 million to $900 million of one-time a year compensation expense, we expense the stock. It’s granted as part of the (inaudible) of our time. So if you look at that, that first quarter versus last year first quarter, excluding all that, we’ve done a $1 billion in costs. That ebb and flow year-over-year it gets, as you move through 2012, you get low and low expense bases, but you’ve seen that almost linked quarter.

And so you’ll see us drop, but the comp cost is not there, the litigation cost comes down, you will see a lot of it come in, but I’m pretty confident if you see it. But if we are saying, we pick up a $0.5 billion, that’s a $125 million a quarter accumulating up, so it’s across the $17 billion, $18 billion of expenses, it’s there and just kind of works (inaudible).

John E. McDonald - Sanford C. Bernstein & Co., LLC

Yeah, okay. So switching over to NII, net interest income, you mentioned you’ve kind of stabilized that around $10.5 billion per quarter, what’s needed to kind of break out of that range?

Brian T. Moynihan

I mean, we clearly, we got all deposits and we are not, the pricing is so favorable, but it’s really loan growth at the end of the day. Well, from the two things that drive it, balances and then – and it’s spreads on those balances and rate environment. So on the balancing itself, our consumer loan portfolios are stabilizing would be the word, we are not stabilized. And so give the home equity example, the card is kind of getting the words flattened out, and so we need more in that, commercial has been fine.

When you off of that, it really narrows the interest rate environment, and so we are asset sensitive. We will manage a company that way from both. It’s the right thing to do from risk. It’s giving up current earnings potential whether the (Inaudible) CI risk in the future from a capital perspective and we’ve been keeping it pretty close, but if you look at our disclosure on a 100 basis points parallel rise, you see $3.5 billion to $4 billion of revenue impact, so that will help, but we are not standing still, we are waiting for deposits to be up $30 billion year-over-year. We are driving activity that will even be worth more than that to me.

John E. McDonald - Sanford C. Bernstein & Co., LLC

And then moving the tenure that helps somewhere around just some of the hedges you have in some of the market…

Brian T. Moynihan – CEO

Yes, these are, I said this – I think, one of your competitors wrote in a note today there has been four moves like this in the last two years or something like that, so I wouldn’t park any move in – when it move, but higher is better, but we’re – if you think about our reinvestment our securities portfolio, what we do is we invest it to help manage the duration of the overall company’s ALCO position and we swap a lot of it back in and see a memory, the investment rates or the mortgage rate and that’s where we get more and higher is better. I mean, that’s pretty simple. The short-term rates will help a lot on deposit value side and that’s not going anywhere it seems.

John E. McDonald - Sanford C. Bernstein & Co., LLC

You’ve shown a little progress on the loan growth front, obviously you’ve got to outrun your run-off book, but have you kind of open this figure a little bit and that you will for go forth (inaudible) and sounds like you opened up a little bit?

Brian T. Moynihan – CEO

I’d say the fair piece of that was when Basel 1 capital was sort of the issue to get that up after we took the charge in the second quarter of ‘11 and kind of working through to, didn’t get no earnings, we had to be more careful on sort of the commercial lending side and make sure the balance sheet was really precisely planned out.

Under Basel III, we’ve got tremendous room and so I think, yeah, we told people that they could, the commercial lending side especially, we told them to use, it’s not a credit question, we are putting on loans that are rating, an average rating, which is higher than, I think, I remember the type of things. So it’s not a credit, which is, it really was a balance question. We had to keep the balance sheet in shape as we manage the capital base the way it had to go, because we weren’t going to dilute people to make the cap because we knew we could make it. So that’s helped on the commercial.

On the consumer side, it’s not been the issue, it’s just demand and the demand of the creditworthy customer taking in and things like the small business. We did 30% more originations this first quarter this year versus fourth quarter last year, but it’s a $20 billion portfolio and up here a small business, so you are going to grow it, but it’s the impact in the (inaudible) loan portfolio going to be modest and so I think it’s the commercial loans are growing nicely. That’s more of the product that you’re seeing.

On the consumer side, it’s really not a credit appetite question, which is (inaudible) there. It’s really how many people are creditworthy and how long they will borrow when we take out the mortgage business obviously.

John E. McDonald - Sanford C. Bernstein & Co., LLC

Looking at some of the fee businesses, the markets feel pretty good lately, how do you feel about the capital markets environment that we’re in right now?

Brian T. Moynihan

It’s better than last year and so I think, just to give you a sort of a – where we see it so far. We’re almost two months through the quarter, but we’d be better in last year, down from the first quarter, the first quarter is always higher and better than last year. So we feel pretty good. And then the nice thing about us, our equities business has come up nicely and performed well and that gives us more balance. We’re running three times fixed income revenue to equities revenues, now it’s getting little more – it’s getting more balanced, which is – it’s good to have a more balanced business, so you win in all the markets, and so the capital markets business has been fairly strong. So we – it’s solid.

John E. McDonald - Sanford C. Bernstein & Co., LLC

And you’ve been able to hold your trading even while reducing (inaudible) and I guess, you mentioned at the Investor Day, a couple of years ago, you were talking about 18 to 20 kind of annualized and sounds like you still feel something in the 16 to 18 or 15, 16?

Brian T. Moynihan

Yeah, that’s it 15, 16, 17, I’d be careful about four, 4.5 quarter to get to 18, because of the seasonality and stuff but – and so I think we’re probably in that. We are moving around $4 billion up or down…

John E. McDonald - Sanford C. Bernstein & Co., LLC

Yeah.

Brian T. Moynihan

…versus those, we’re (inaudible) 4.5 or so push point, but that’s come down, but again, that’s the point about the break-even point. And if you look, I think, yeah, we’re making as much money for quarter in these businesses and we’re doing a lot really customer driven, since you would have that number we get out of the proprietary business and that was a $1 billion plus a year revenue and you got out of lot of things that other people have in those lines like our private equity is way down and its all help the capital, but that revenues through the systems. So it come and the team had done a good job of management risk well really in a client flow so, it’s never going to be a predictable business, but we’ve made money. We had a trading day last quarter and almost every trading, so you have more of the sort of throughput on top of the volatility which is good.

John E. McDonald – Sanford C. Bernstein & Co., LLC

On the mortgage front, have you ramped up to the point where you can get the production volume you’re looking for and what is that you are looking and do over time, ultimately want to get your mortgage share in line with your deposit share?

Brian T. Moynihan

I mean if we were doing good job, if we’re, say, direct to consumer business and we have all these customers and don’t have mortgages, so ultimately the figure that we sort of run into each other as a market share. We’ve got a lot of room to grow, equal run in our direct to retail basis around 4.5% to 5% and maybe a little over less than that the overall mortgage market that among the recent statistics, but clearly that could go up dramatically.

Now the problem is, this is not going to be straight-up, because the person got to do as I said, they replace all the software, but we have risen every single quarter and for last five quarters or six quarters and we’ve been adding a lot of people. We still got a lot of work to do to get that business to everyone in terms of effectiveness for this fee for the customer. Honestly we’re still, we added 3,000, 4,000 people year-over-year, so we’re down 15,000 when the company overall were up 3,500 in first mortgage fulfillment, not just top on that the sales, this is just to get the mortgage close on time. So we’re seeing good demand, rates moving now, we’ll have to see other impacts sort of it and we’re prepared to take expenses out, but it’s not going. But I think we (inaudible) sort of seen a back up in some of other banks we talked about are cooling off the last couple of weeks I assume it’s pretty…

Brian T. Moynihan

Yeah, ups or downs some, but I am not sure it’s – we shouldn’t see that as much as other people, because we are still climbing the ladder that is a pretty easy ladder to climb decline. And from a standpoint of market share and other client awareness, we build in the business system.

John E. McDonald – Sanford C. Bernstein & Co., LLC

Turning to credit quality, obviously still seems to be getting better. It seems like we could kind of overshoot normal as we improve, what’s your outlook?

Brian T. Moynihan

Yeah, I think, it sort of settling in 90 basis points to 100 basis points in charge-offs. If it improves, it’s going to be charge-offs – keep going down, but the assumption will be the economy better, then you have to probably reservedly supposed to often you have to sort of stabilize your reserve balance, but let’s go back to the fundamentals. What we see in the economy, John, is if we look at our customer spending patterns, there was a brief time in February, where they slowed down a little bit with all the stuff going on in and they went flat for first time since I’ve been CEO in the 3.5 years or so, where the year-over-year comparison was actually flattish for February.

They kicked back up in March and it’s kicked right back up, so in May, we are back up to, I think, 5% or 6% on debit and credit card spend, May 13 versus May 12, and so the consumer keep spending and the credit quality of portfolios keeps getting better. So we think 90 to 100 basis points, but I think, as you think about that there will times when you may go below that, but it’s really due to the fact that you are hitting the right part of curve and it will come back, but I think as people think about those types of levels that’s what they think about and then remember still have reserve releases that will ultimately will stop and we’ll get – the cash flow charge-offs will get back in sort of will come down and offset the reserve releases over time.

John E. McDonald – Sanford C. Bernstein & Co., LLC

And the provision outlook you’ve given seems to reflect a combination of charge-offs overshooting a little bit and reserve release still continuing?

Brian T. Moynihan

Yeah, John, we have that in our assessments, but I don’t know, I mean, that’s 13, I don’t know how much to think out, this will slow down.

John E. McDonald - Sanford C. Bernstein & Co., LLC

Yeah.

Brian T. Moynihan

Sometime over the next three, four, five, six quarters and it’s been coming down.

John E. McDonald - Sanford C. Bernstein & Co., LLC

Yeah.

Brian T. Moynihan

But the nice thing is charge-offs will come down like a $0.50 million a quarter and overcoming that right now.

John E. McDonald - Sanford C. Bernstein & Co., LLC

And overtime, you’ve talked about a 1% ROA, I mean, looking at your business mix now, does that seem like the right aspiration?

Brian T. Moynihan

I think, yes, because if you look at, if you think about our businesses in those categories we report, you have, if you look in the consumer businesses, then you have wealth management, global banking, global markets are the four core big segments we report.

Any (inaudible) say there is $1 billion plus in earning there, there is a $1 billion in earnings in global banking, there is a $1 billion in earnings from market and $700 million wealth management, yeah, will allow you $4 billion to $4.5 billion of earnings. So, I think, so what happened to it, well then you had the litigation charges, so as we bring that down, that run rate is already in the business, with this interest rate environment, with this economic environment, with this amount of expenses. So I think that’s the thing and the question is as we move through time, we got to just keep tightening up to that number and that’s what I think people are starting to see as we look at the numbers that becoming clear as those business perform.

John E. McDonald - Sanford C. Bernstein & Co., LLC

So, the big remaining event for you on the legal side is the approval of (inaudible) settlement.

Brian T. Moynihan

Yes.

John E. McDonald - Sanford C. Bernstein & Co., LLC

As you mentioned it will start next week with the hearing and, I guess, could take a couple of weeks or months to get that decided, but that’s really the biggest remaining item is that right?

Brian T. Moynihan

Yeah, I mean, that’s the biggest because of GSE, we got all those and then you go to private label, so if you remember we just talk about round numbers to trillion, to trillion plus and with GSE, that we have one small piece that we have to finish negotiation on our legacy BAC portfolio, but other than that…

John E. McDonald - Sanford C. Bernstein & Co., LLC

GSE is generally done though?

(Multiple Speakers)

Brian T. Moynihan

Then you go to private label and this is effectively $400 billion of private label is covered by this. This is a big…

John E. McDonald - Sanford C. Bernstein & Co., LLC

Out of nine, al right, so it’s pretty much half.

Brian T. Moynihan

Out of $900 million, which half is – we sponsored a half, as of the other half, we didn’t sponsor and half – the other half we didn’t sponsor. So it is sort of four and two and two type of numbers to get there and so this covers a lot of it and we’d sell this two years ago and the trial go on I think – it starts Monday, it will go on for some period of time and when the decision comes I think people have to be careful this is [according] and they’ve got to do the work. So I am not sure exactly when it comes during the summer but hopefully

John E. McDonald - Sanford C. Bernstein & Co., LLC

And for those that are not as close to what your understanding is that the judge here is reviewing the settlement and whether the process was reasonable by which the parties arrived to it.

Brian T. Moynihan

We – it’s Bank of New York and the Plaintiffs, the parties. We pay the money, I guess, might be the best way to think about it but and I think it’s – we are confident, we wouldn’t done it this way if we didn’t think it [will come].

John E. McDonald - Sanford C. Bernstein & Co., LLC

And in terms of the monolines you also feel like with the MBIA settled that you feel pretty good that that’s mostly behind you

Brian T. Moynihan

Yeah that was – so that’s the other category of just the monolines and the RMBS, sort of securities risk in the monolines. MBIA I think was 60 plus percent of the rest of the story, issues and we have accruals and we’re working through the best and so I think we are settled on three or four the companies our of six now and rest we’re working through.

John E. McDonald - Sanford C. Bernstein & Co., LLC

One other question that comes up is that you have a number out there in terms of $4 billion of range of possible loss for additional provision rather make for legal issues and it doesn’t seem to go down you settle things like the MBIA and you put some other stuff but that number stays at four, so the question keeps coming at what will make that go down, it’s kind of conservatism or…

Brian T. Moynihan

I mean it’s come down, its unpredictability and its also there is things that factor into this – the cost is not something accrued for and but when you settle it actually factored in what you might pay and some of these – the cost of some of these litigations or such that you would say, you’d understand why you want to pay more than a theoretical value of it but you can accrue for that. You expense as you go through, so there is parts of that but it’s come down. It was almost twice that it was six or seven and some like that and so it has come down but yeah I think we just keep chipping away the stuff and that would be.

John E. McDonald – Sanford C. Bernstein & Co., LLC

The bigger picture is you do feel like this one [read in your] on that legal side and…

Brian T. Moynihan

The math shows you that…

John E. McDonald – Sanford C. Bernstein & Co., LLC

Yeah.

Brian T. Moynihan

And so and the good news is on the – there are definitive settlements, and so if you think about the slide we use a lot, we go down the categories, you are more settled in resolve as opposed to accrued for and the data about whether it’s in the dot line share, but not settled.

John E. McDonald - Sanford C. Bernstein & Co., LLC

So switching to the regulatory side of things a bit, can you give us your take on what’s going on (inaudible) and where you think the capital growth might end up and do you have a good sense of range of ballpark there?

Brian T. Moynihan

Well, I think, my colleagues have been up here asking the same question. Their idea is that no company should not be able to be liquidated and that’s the reason for living rules and it’s been a title 1 and title 2 and all the work around that. So we take that very seriously, we’ve been working on now for I guess two years probably. And used outside experts to make sure that we could propose in the time which we can’t [pass] or capital we compare that much that you do it, but who have it done.

So I think that’s building confidence and the fact that the potential for tax payer thing has gone at this point. And so I think so we believe that’s true. We are doing the work. We are following the rules. If you put that up the side, I think the capital levels that we now is 9.5% Basel III as of the first quarter 8.5% sort of our test are sufficient. And when you do the stress test you can see, the stress test is not a test to see if you survive the stress test is actually a test it says if you hit that way, would you be able to be participating and economy keep and not have to withdraw to get your capital.

If that’s the – what the test, and if you look at our industry, we can actually in the decoration as with these guys, this set of companies are now good enough shape that if the world have, what happen to the very stressful circumstance, they’d have enough capital they’d be able to continue to business, not shut down and hide so the whole economy had a bigger hit and we’re obviously in that category. So I feel confident that the capital is there. I feel confident that the dialogue is working through the system. Yes, people always going to be trying to make sure it can never happen again, and that’s what the dialog is about how can you make it never happen and the way we got to do that, so you can do this without disrupting the economy and that’s what our living world and all it works around.

John E. McDonald – Sanford C. Bernstein & Co., LLC

We have yet to hear from the regulators about the U.S. SIFI requirements and the global G-SIFI you got a lower requirement and buffer than some of the other largest banks. Do you take comfort in that or do you kind of really thinking that you might have to just be conservative and hold closer to where the other universal banks are?

Brian T. Moynihan

No, I mean, I think, at a 9.5 level, we’re 100 basis points off, even that gets (inaudible) all time so, looking out – no again sometime here as I think about that’s why I’m comfortable we are that we have enough cushion. In the capital, we start a lot of optimization and lot of work ahead of us behind us. The risk keeps coming down, because it was consumer risk while it’s trading. We are still leaking things off that we’re risk in that stuff that we have now and then, our (inaudible) results further we could buy $5 billion in common and redeem preferred and we’re going to, that we almost expose to more and more money so, you’ll have retain capital. So I don’t get worried about the rules.

I think – but if you look at the amount of capital and put it to the stresses which we do literally everyday. 100 basis points for us is about $13 billion after-tax and that dimension sometimes get lost in the discussion, how much 100 basis points is and yes you have a $2.2 trillion balance sheet, $1.03 billion of (inaudible) but those kind of number in a time period and by the way and that would be what is well capitalized plus the buffer and from 9.5 to 5 or something like that in the stress test is 9.5 to 7.6 is $33 billion after tax. So these are, we build a lot of capital in the industry and I think that’s the good side of everything that’s happened here is the industry is lot more stable even in not the best time.

John E. McDonald - Sanford C. Bernstein & Co., LLC

So you mean even if we do get some additional supplementary leverage ratio and may be higher (inaudible) or domestic (inaudible), you feel like that the dialogue is being constructive and you will still be in a position in the next couple of years to return on capital.

Brian T. Moynihan

We are doing it now and I assume that we will stay in that condition. In LCR and things like that, we’ve made some of the dialogue about (inaudible) levels if you look at the math, we’re fine and so this will all work through, but I think, we can manage the company in that regard.

John E. McDonald - Sanford C. Bernstein & Co., LLC

So as you mentioned you got approval for a nice buyback conversation this year, what will it take for you to get confidence in the dividend request and how you think about the next couple years?

John E. McDonald - Sanford C. Bernstein & Co., LLC

Well, I think it’s confidence in the stability of earning stream because if you go back to 2010, we talked about, our view of capital was from a recurring earnings, dividend you want to pay sort of 30% and that some more quantified the way it works, but that was sort of our position on a theory that one of the risk is you get the dividend expectation so high that you can never slow it down, and then the rest of that was buyback sort of things.

So if you think about our first step was to get the right, do something with our capital and the next step is get the right to do with most of capital is already below the levels and then how do you do that, I think, really comes down to recurring earnings confidence in the earning stream and that quarters where cost savings are down and legacy issues are behind you that you wouldn’t be in a position that if you move the dividend and then had earnings quarter we had a settlement of suit that somehow you buy away, payout more than you earned or something like that and I think that time is coming out soon, and that’s what we got to work on.

So this is a process we’ll go the process, we’ll go through the process and the one thing I’ve learned after going through it now four times or whatever it is, is I will not get in the front of the process but – it is recurring earnings and that – but that’s no different from what the pressure we put on ourselves.

John E. McDonald - Sanford C. Bernstein & Co., LLC

Right, so that you’ve got the capital level to the point with the buyback is doable and have [success] within, so its really some work to do on that recurring earning streaming proving that consistency overtime.

Brian T. Moynihan

And then just – the $8.5 billion, how do I might get them through. It just an – more less, less tail risk and more and more predictability.

John E. McDonald - Sanford C. Bernstein & Co., LLC

How important are the swaps rules (inaudible) some of the market based regulatory reform that’s still kind of up in the air – is there big impact on you or is it

Brian T. Moynihan

It is – it all has an impact, I mean but I don’t think most of us believe, – is always we can do, we need to do for the customer, we treat the corporate customers and swaps or try – investors and swaps in and other activity – training activity whatever commodity whatever. As long as we can serve the need of the market I think we’re fine because if you are serving the needs of the market and have the capital and people need your capital and some buy some of the research and other things, with those people, you figure out a way that you can earn a reasonable return you can’t do it.

And so if we can’t do it with the amount of scale requires to – with systems implementations and risk management and obviously I am not sure a firm half our size or third our size could do it. So I think – I don’t have pure sight because nobody could because rules aren’t written yet, but we do have this confidence that, as the set of rules comes together that the participants on this institutional side of the rule making need each other enough to just built – those have to figure out way to make this all work.

That one, the second question is what is it? How do you make sure that doesn’t hurt people in terms of their ability – do what they need to do without necessarily (inaudible) the market and that’s some of the bilateral versus exchange stuff. So do I have precise number? No, have we been observing this as we speak out. We’ve been observing some of those changes and people’s behaviors are changing a lot more stuff is more liquid and gone to exchange and either all that stuff is going on. But the thing you know is, if we – to run our research teams to run our – have the capital trade to be able to take down a position or somebody divide up and get out the door do an underwriting that requires capital and people and talent.

And I think, if we can get paid for it, I don’t forget, I’m not sure if anybody can, and therefore I think who can do it and have to have the business, it’s what drives our economy, it’s why our business has recovered faster, it’s why our economies recovered faster, it’s why our bank interests have recovered faster, because we have a deep capital markets and deep participants.

And so I don’t mean the data that you’d say well if we don’t this quarter we do lose it. So that, yeah, you might, but the realities over time, we have $30 billion in business. We don’t return 15% on it. We’re going to have to start taking the capital, and that will not allow, investors are concerned. And you could say, well, somebody will better or worse, they will be, but it won’t be that different, it will be at the margin.

John E. McDonald - Sanford C. Bernstein & Co., LLC

There is nothing about the regulatory debates or some of (inaudible) that would make you worry about your ability to grow organically?

Brian T. Moynihan

I don’t think so, and we’ve been grown organically. I don’t think our footings from a pure gap basis change much. I think what happens as we keep taking for the next several years, we keep taking as it’s of. So if I double the size of the good home equity portfolio among the size I’m today with a lot better portfolio, and I don’t – doubling I think would be very difficult.

John E. McDonald - Sanford C. Bernstein & Co., LLC

Your earnings growth outlook that’s how it’s not predicated on a lot of balance sheet growth there?

Brian T. Moynihan

We get out there, this is the grind it out at our market shares and our size, year-over-year we grew deposits from the consumer business $30 billion odd organically. That just think of the size that relative to, and so there is a natural thing, so you just going to have to have good solid revenue growth in line with the economy and then real manage the expenses and risk quality produce the good bottom line. If we reach for growth, we’ll do, we did in the consumer credit area and then beaten a lot of it and that we’re not going to do.

John E. McDonald - Sanford C. Bernstein & Co., LLC

And on the payout ratio, the question here, do you know if there is a year-over-year cap on how much you can grow your payout ratio or is it still...

Brian T. Moynihan

You’ll find out next March whenever we find out. Handicapping those processes is something I’m not going to do.

John E. McDonald - Sanford C. Bernstein & Co., LLC

Not a good risk free word on that. Questions about here about the efficiency ratio and the ROA target in terms of rate. So how dependent is the mid-50s efficiency ratio on higher rates and what kind of efficiency ratio you think would be achievable in a low rate environment?

Brian T. Moynihan

Neither one of those are dependent on a lot of rate structure other than its sort in the market. So we look out three years in terms of sort of the real financial planning exercise and we follow the curve. And so I think that short-term rates are really plugged, I don’t know if it’s moved; rates are plugged in the 15. So we are not – we are dependent on the rate move for those kinds of numbers.

This is – we had $80 billion in expenses, a couple year of $72 billion, this thing has been dropping and we are in, we got to drop it significant this year and then again and that all was placed in and that will, if you take the $20 billion to $24 billion of revenue, you start to get to those kind of efficiency ratios and that assumes no real change in the economic environment other than what stood in the market, slightly better HPI. HPI is better and a point will get slightly better and it drives to 2.5% growth rate next year or something like that. We don’t make assumptions that are different than markets.

John E. McDonald - Sanford C. Bernstein & Co., LLC

A couple of questions in here about again the same theme and do we think the leaving Wells liquidity capital can really end the perception needing a build out and?

Brian T. Moynihan

I mean, I think, if you look at what the stress test says under Basel I in that denominator and all the math that went into in a scenario, which is pretty severe. People come through with enough capital to continue the line in stuff, I think you are sort of, you got an answer to the question, but there is always going to be some sort of circumstances, nobody is going fathom where the world has got off the cliff, but the (inaudible) and set of circumstances, which is better than we’ve ever seen it worse.

That scenario as you know sort of worsened ‘08 and quite a great depression, the people have, I think, the lowest number was – about 57 or something like other than in LA, so the whole industry has more capital under a much more rigorous test year-over-year in terms of the calculation, you know the denominator change and other thing is a significant change in the math and so I think that’s the good side of all this is you got the level of capital and liquidity in our industry.

So it does it, so it just give us some of the snapshot, we’re $2.7 trillion, $2.8 trillion of the hike, we are $2.2 trillion, $2.1 trillion something, we are $60 billion in equity, we are 130 in Tier 1 equity. We’re about a 110 in liquidity, and we’re 300 to 400. This isn’t across ten years, this is across from 109 to now, that change allows us to absorb a lot of gross in the design of this process, but also it’s allowed us to – depth of footprint and other things.

John E. McDonald - Sanford C. Bernstein & Co., LLC

A question here about how valuable your deposit customer base is and what are the mobile banking and as you transition the branches to kind of a new age of utilization and younger generation of customers and what are your advantages there now, and how long is it going to take you to kind of transform that?

Brian T. Moynihan

Well, so let’s talk about what goes on in banking today. Just to give you some statics, so we have 30 million, the 50 million households in the consumer, 30 million odd checking households, we have 30 million online enabled customers, we have $13 million mobile enabled customers. It’s only recently that you are allowed to be a mobile customer without being an online customer. So you had to sign up for both, so that was a growth. Basically, everyday, its 10,000 new customers sign onto this a day. We moved $2 billion of money a week off of people pressing buttons on their smartphone or iPad, not on the computer, that’s way, that’s $14 billion a week.

The ATM still spit out a $0.25 billion of cash a day. They’re 16,000 of them. We have this new ATM that has a teller pop up when you want it that we’re working through in some markets. The branch structure, the high point was 6,100. It’s now down to 5,400. In 2007, we had 45% more deposits, 10% more customers and whatever 700 less branches than from today, and so this change is going on dramatically and we’re mining that change to be able to bring our cost per deposit down consistently quarter by quarter by quarter to we’re running at 230 something, 240 or something like that down from the 330 four, five years ago. 330 basis points as the percent of operating cost for branches, phone, mobile everything over the deposits and as you think about of your cost of goods sold, then how much you have to pay the customer. In our case, 13 basis points in that and how do we make money on that.

So we are moving that rate that is unbelievable and so every time we think mobile is going to slow down, another three $0.25 million comes through in the quarter, I mean, just, and so at some point, it has to stop theoretically because first they doesn’t account with us, why would they have their mobile banking, but it hasn’t stopped yet. But the activity level is amazing and what it does it gives you ability to serve groups of customers in a way that is very good for them without the operating infrastructure we used to have. So in the loan – below median income customer what we found out from the research we done is that two thirds or more have a mobile phone and today we sent 22 million texts a month telling people to balance us well, to help them manage your money.

And so to think about that going on that intimacy and then all the different techniques they can use itself how to order checks whatever, it really takes the cost structure down. And so we’re still on the early days of how much impact this could have. So you see the systems sort of going into service oriented capabilities, which is an ATM, the tower versus ATM and mobile online and in sales oriented capabilities which our destination branches are bigger, but all the specialists – now we have about 2,500 to 3,000 branches, and the sales in those branchs were 10 times the other branches. So just – and so that movement we are making is massive.

John E. McDonald – Sanford C. Bernstein & Co., LLC

And we’re just starting on and see you put a lot of them...

Brian T. Moynihan

No, we just started – we had 100,000 people in this business five or six years and we have 55 now. So you’ve already made a big move the question is how much big it is. And so, a lot of maybe see around the retail businesses just that constant management of that change and then stand like with a customer, because you can’t – could have the customer by the way. The most mobile oriented customers we have also still come to branches like here, so you really have to have both sides. But it’s different than the computer was, because computer cost people money and they had to get Internet connection, they had to sit probably, and it’s much more intimate, it’s real time.

John E. McDonald – Sanford C. Bernstein & Co., LLC

(Inaudible)

Brian T. Moynihan

And already have it, and that it’s just much more, we’ll have to do much more with consumer especially the modern income consumer in terms of making sure they know where they are to get a moment.

John E. McDonald – Sanford C. Bernstein & Co., LLC

Brian, thanks very much. We appreciate the time today.

Brian T. Moynihan

Okay, thanks, John.

Question-and-Answer Session

[No Q&A session for this event]

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